class 7 - project cost control and ev

8/3/2019 Class 7 - Project Cost Control and EV

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Monitoring your ProjectMonitoring your ProjectProject Cost ControlProject Cost Control

InstructorInstructor

Roger deRoger de PeizaPeiza


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Agenda

CostManagement

Cost Budgeting

Cost Control

Learning Goals

1. Cost Control

2. Earned Value Management


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Attendance


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Agenda

CostManagement

Cost Budgeting

Cost Control Cost Control


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Agenda

CostManagement

Cost Budgeting

Cost Control

Cost Control

Cost control is concerned with:

Influencing the factors that create changesto the cost baseline to ensure that changesare agreed upon

Determining that the cost baseline haschanged

Managing the actual change when and asthey occur


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Agenda

CostManagement

Cost Budgeting

Cost Control

What does Cost Control include?

1. Monitoring cost performance to detectand understand variances from the plan

2. Ensuring that all appropriate changes arerecorded accurately in the cost baseline

3. Preventing incorrect, inappropriate orunauthorized changes from beingincluded in the cost baseline

4. Informing appropriate stakeholders of

authorized changes5. Acting to bring expressed cost within

acceptable limits


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Agenda

CostManagement

Cost Budgeting

Cost Control

Cost Control Processes

Inputs

Cost baseline

Project funding

requirements

Performancereports

Work performance

information

Approved change

requests

Project

management plan

Tools and Techniques

Cost change control

system

Performance

measurement

analysis

Forecasting

Project performance

reviews

Project management

software

Variance

management

Outputs

Cost estimates

updates

Cost baseline update

Performance

measurement

Forecasted

completion

Requested changes

Recommended

corrected actions

Organizational

process assets

(updates)

Project management

plan (updates)


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Agenda

CostManagement

Cost Budgeting

Cost Control

Work completion

In order to have effective project controls, itis imperative that the project team haveaccurate measurements of the workperformed for each scheduled task.

If this information is not available, no oneknows if there is over or under spending onthe project's budget.


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Agenda

CostManagement

Cost Budgeting

Cost Control

Examples ofWork Completion Rules

0/100 Rule

20/80 Rule

50/50 Rule


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Agenda

CostManagement

Cost Budgeting

Cost Control

0/100 Rule

Assume that 0 percent of the taskis complete until the entire task isfinished

Using the 0/100 Rule requires avery conservative approach.


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Agenda

CostManagement

Cost Budgeting

Cost Control

20/80 Rule

Once the task is started, the projectoffice assumes that 20 percent ofthe task is complete

When the task is finished, theremaining 80 percent is added tothe amount completed

This method is very cautious, but isless conservative than the 0/100Rule


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Agenda

CostManagement

Cost Budgeting

Cost Control

50/50 Rule

Probably the most popular methodof showing a task's progress is the50/50 Rule.

This assumes that once the task hasbegun, 50 percent of the task iscompleted

When the task is completed, theremaining 50 percent is added tothe amount completed


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Agenda

CostManagement

Cost Budgeting

Cost Control

Cost Control InputChange requests

Request for changes in the scope ofwork

May occur in many forms:

Oral or written

Direct or indirect

External or internally initiated

Legally mandated or optional

Changes may increase or decreasethe budget


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Agenda

CostManagement

Cost Budgeting

Cost Control

Cost Control ToolsCost Change Control System

A system that defines procedures by whichthe cost baseline may be changed

Includes:

Paperwork

Tracking systems

Approval levels needed for authorizingchanges


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Agenda

CostManagement

Cost Budgeting

Cost Control

Cost Control ToolsPerformance measurements

Helps access the magnitude of any variationsthat do occur

An important part of cost control is to

Determine what is causing the variance

Decide if the variance needs corrective action

Earned ValueAnalysis is useful important to costcontrol


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Break


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Agenda

CostManagement

Cost Budgeting

Cost Control

What is Earned Value?

The PMBOK defines earned value asa method of reporting project statusin terms of both cost and time.

It is the Budgeted Cost ofWorkPerformed (BCWP) regardless of theactual cost incurred.


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Agenda

CostManagement

Cost Budgeting

Cost Control

Another definition of Earned Value?

According to Dr. David Frame, theearned value approach allows theproject to examine cost andschedule variances concurrently,enabling them to take a holisticview of project progress.


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Agenda

CostManagement

Cost Budgeting

Cost Control

The 3 fundamental building blocks of theEarned Value technique

PV

Planned Value

or

Budget Cost of Work Scheduled (BCWS)

AC

Actual Cost

or

Actual Cost of Work Performed (ACWP)

EV

Earned Value

orBudgeted Cost of Work Performed (BCWP)


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Agenda

CostManagement

Cost Budgeting

Cost Control

Planned Value (PV)

The Planned Value (PV) is the budgetedcost for the work scheduled to becompleted on an activity

It is the same as the planned budget orhow much was budgeted to perform acertain function

PV is also called the Budgeted Cost ofWork Scheduled (BCWS)


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Agenda

CostManagement

Cost Budgeting

Cost Control

The Cost PerformanceMeasurement Baseline

The BCWS may also be referred to asthe Cost Performance MeasurementBaseline.

The BCWS shows budget costs relativeto time and quantities for the purposeof comparison, analysis and forecasts ofcosts

The BCWS is typically shown graphicallycomparing budget costs relative to time


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Agenda

CostManagement

Cost Budgeting

Cost Control

Actual cost (AC)

AC is the amount it actually costs toperform the task.

AC is also called the Actual Cost ofWork Performed (ACWP).


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Agenda

CostManagement

Cost Budgeting

Cost Control

Establishing a variance

The concepts of PV and AC offerplanned and actual measurements

When actual is subtracted fromplanned, a variance is established.

With the third element, EV orBCWP, the concept of earned valueis introduced.


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Agenda

CostManagement

Cost Budgeting

Cost Control

Earned Value (EV)

EV is the amount of money that was budgetedfor the work that has been completed so far

EV is also called the Budgeted Cost ofWorkPerformed (BCWP)


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Cumulative Cost Curve

Cost

Duration

Totalproject

Planned

Cost

Measured

Period

SV = EV - PV

CV = EV - AC

PV

EV

AC


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Exercise

The Fence Part 1Determine the PV, AC and EV


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Agenda

CostManagement

Cost Budgeting

Cost Control

The Cost Variance

To calculate the Cost Variance (EV-AC) in the example above, supposethat the AC was $6,000.

The EV is the value of the work todate, and the AC is the cost toperform the work.

Using these figures and applying theabove variance formula, there is apositive variance of $2,000.


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Agenda

CostManagement

Cost Budgeting

Cost Control

What does this mean?

The positive variance indicates acost under-run when it is shown byitself.

However, variance must take intoaccount the schedule of thecompletion of the project, which atthis point in time is behindschedule.


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Agenda

CostManagement

Cost Budgeting

Cost Control

The schedule variance

The schedule variance is calculatedas follows:

SV = EV - PV

Therefore in our example:

SV = $8,000 - $10,000 = -$2,000


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Agenda

CostManagement

Cost Budgeting

Cost Control

Interpreting SV

One must compare the work that wasplanned to what was actuallyaccomplished.

Since the project's PV was $10,000 andits earned value is now $8,000, or acompletion of only 80 percent duringthe planned time frame, the value ofthe time schedule slippage is $2,000.

This variance is a negative value,therefore it implies that the project isbehind schedule.


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What does it all mean?

+Schedule

Variance

-Schedule

Variance

+ Cost Variance

- Cost Variance

The project is within budget

but behind schedule

Either the task has

not started or it has

started and not

enough resources

have been applied.

The project is over budgetand behind schedule

The project is within budget

and ahead of schedule

The project is over budget

but ahead of schedule

Money may have been

spent to crash the

project.


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The Interpretation

CostVariance

ScheduleVariance

Interpretation

+ -The project is within budget but behindschedule

Either the task has not started or it has

started and not enough resources have beenapplied.

- -The project has overrun its budget and isbehind schedule.

- +The project is ahead of schedule but is over

budget. Money was probably spent to crash the

schedule

+ +The project is within budget and ahead ofschedule


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Agenda

CostManagement

Cost Budgeting

Cost Control

The SV and CV percent

100*100*%PV

PVEV

PV

SVSV

!!

Provide an idea of how much the project isdeviating from the plan.

To calculate the SV and CV percent use theseformulas:

100*100*%EV

ACEV

AC

CVCV

!!


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Agenda

CostManagement

Cost Budgeting

Cost Control

Cost and Schedule Performance Index

Another important concept is that ofCost andSchedule Performance Index.

These two formulas explain how efficiently thework has been accomplished.


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Agenda

CostManagement

Cost Budgeting

Cost Control

The Cost Performance Index (CPI)

The Cost Performance Index (CPI) is the ratioof Earned Value to Actual Cost (EV/AC).

Cost Performance Index (CPI) = EV/AC

The cumulative CPI (the sum of all individualEVs divided by the sum of all individual ACs) iswidely used to forecast project cost atcompletion


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Agenda

CostManagement

Cost Budgeting

Cost Control

The magnitude of a possible cost overrun

To predict the magnitude of apossible cost overrun, the followingformula is used:

Projected Cost At Completion =

Original Cost Estimate / CPI


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Agenda

CostManagement

Cost Budgeting

Cost Control

CPI explained

Suppose the value of the work is worth $750(EV).

It cost $800 to perform the work (AC).

This means that every dollar spent will provide93.73 cents worth of work.

This ratio can then be applied to project thepossible costs overrun.

If the original project cost estimate was $10,000,divided by the calculated CPI of .9373 =$10,669, or a possible $669 overrun.


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Agenda

CostManagement

Cost Budgeting

Cost Control

The Schedule Performance Index (SPI)

The Schedule Performance Index (SPI) is theratio of budgeted cost work performed tobudgeted cost of work scheduled (BCWP/BCWS)

Schedule Performance Index (SPI) =EV/PV

In some applications areas, the SchedulePerformance Index is used to forecast the projectcompletion date.


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Agenda

CostManagement

Cost Budgeting

Cost Control

SPI interpreted

An interpretation of the SPI is that if $500 worthof work (EV) is performed, and the value ofwork schedule is $400 (PV), each dollar ofscheduled work generated $1.25 worth of work,or a ratio of 25.

This ratio tells us that for every day of workscheduled, the project is .25 days ahead ofschedule at the point the analysis wascompleted.


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Agenda

CostManagement

Cost Budgeting

Cost Control

What does CPI and SPI say about projectperformance

If the CPI is equal to 1.0, there is perfectperformance.

If CPI > 1.0, means cost under run, there isexceptional performance.

If CPI is < 1.0, means cost overrun, theperformance is poor.

This same generalization is true for the SPI.


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Agenda

CostManagement

Cost Budgeting

Cost Control

Budgeted at Completion (BAC)

Budgeted at Completion (BAC) is the sum of allthe budgets (PV) allocated to the project or theproject baseline, i.e. this is what the total effortof the project should cost.


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Agenda

CostManagement

Cost Budgeting

Cost Control

Estimated at completion (EAC)

The EAC [(AC/EV) X BAC] or [BAC/CPI] isdefined as either the hour or dollar amount thatprovides a realistic appraisal of the workperformed.

According to Dr. Kerzner, it is the sum of alldirect and indirect costs to date plus theestimate of all authorized work remaining.

In other words, the EAC is what the totalproject is expected to cost.


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3 Ways of Calculating EAC

EAC = Actuals to date

plus a new estimate forall remaining work.

This approach is most oftenused when past performanceshows that the originalestimating assumptions were

fundamentally flawed, or thatthey are no longer relevantdue to a change inconditions.

EAC = Actuals to dateplus remaining budget.

This approach is most oftenused when current variancesare seen as atypical and theproject management team'sexpectation is that similarvariances will not occur in thefuture.

EAC = Actuals to date plusthe remaining projectbudget modified by aperformance factor, oftenthe CPI.

This approach is most oftenused when current variancesare seen as typical of futurevariances.


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Agenda

CostManagement

Cost Budgeting

Cost Control

The Variance at Completion (VAC)

Using the EAC, the Variance at Completion(VAC) can be calculated.

VAC = BAC - EAC

The VAC provides the best estimate of the

total cost at the completion of the project.


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How to remember all of this

Question Answer Acronym

How much work shouldbe done?

Planned Value orBudgeted cost of work

scheduled

PV or BCWS

How much work is

done?

Earned Value or

Budgeted cost of workperformed

PV or BCWP

How much did the workcost?

Actual Cost or

Actual cost of workperformed

AC or ACWP

What was the total jobsupposed to cost?

Budget at completion BAC

What do we now expectthe total job to cost

Estimate at completionor latest revised

estimate

EAC


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Agenda

CostManagement

Cost Budgeting

Cost Control

Class Exercise

The Fence Part 2

Complete the rest


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Agenda

CostManagement

Cost Budgeting

Cost Control

The Cumulative Cost Curve

The Cumulative Cost Curve or S curve is anothereffective monitoring tool in controlling the budget

This chart provides the cumulative expendituresof the project.

The cost curves for the planned and actual resultsare graphically shown.


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Cumulative Cost Curve

Cost

Duration

Totalproject

Planned

Cost

MeasuredPeriod

SV = BCWP -

BCWS

CV = BCWP -

ACWP

BCWS

BCWP

ACWP


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Agenda

CostManagement

Cost Budgeting

Cost Control

The End

Thank youThank you

class 7 - project cost control and ev

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