Download - Project Management Cost Control
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Project Management
Cost Control
Project Management
Cost Control
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OutlineOutline1. Introduction
2. Understanding Control
3. The Operating Cycle
4. Cost Account Codes
5. Budgets
6. The Earned Value Measurement System(EVMS)
7. Variance and Earned Value
1. Introduction
2. Understanding Control
3. The Operating Cycle
4. Cost Account Codes
5. Budgets
6. The Earned Value Measurement System(EVMS)
7. Variance and Earned Value
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OutlineOutline8. The Cost Baseline
9. Justifying the Costs
10. The Cost Overrun Dilemma
11. Recording Material Costs Using Earned Value Measurement
12. The Material Accounting Criterion
13. Material Variances : Price and Usage
14. Summary Variances
8. The Cost Baseline
9. Justifying the Costs
10. The Cost Overrun Dilemma
11. Recording Material Costs Using Earned Value Measurement
12. The Material Accounting Criterion
13. Material Variances : Price and Usage
14. Summary Variances
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OutlineOutline15. Status Reporting
16. Cost Control Problems
15. Status Reporting
16. Cost Control Problems
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Do project managers control Do project managers control costs, monitor costs or both?costs, monitor costs or both?Cost control is not only “monitoring” costs and recording data, but also analyzing the data in order to take corrective action before it is too late.
IntroductionIntroduction
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Cost ManagementCost Management
Cost estimatingCost accountingProject cash flowCompany cash flowDirect labor costingOverhead rate costingOthers, such as incentives, penalties, and
profit-sharing
Cost estimatingCost accountingProject cash flowCompany cash flowDirect labor costingOverhead rate costingOthers, such as incentives, penalties, and
profit-sharing
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Cost And Control SystemCost And Control System
PLANNING
WORK
AUTHORIZATION
AND RELEASE
DATA
COLLECTION
AND REPORTING
COST
ACCOUNTING
CUSTOMER AND
MANAGEMENT
REPORTING
PHASE I PHASE II PHASE III PHASE IV PHASE V
OPERATING CYCLE CYCLE
PLANNING
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Cost Control RequirementsCost Control Requirements
Measure resources consumedMeasure status and accomplishmentsCompare measurements to projections and
standardsProvide the basis for diagnosis and re-
planning
Measure resources consumedMeasure status and accomplishmentsCompare measurements to projections and
standardsProvide the basis for diagnosis and re-
planning
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Cost Control ActivitiesCost Control Activities
Contract receipt (if applicable)Work authorization for project planningWork breakdown structureSubdivided work descriptionSchedules Planning chartsBudgets
Contract receipt (if applicable)Work authorization for project planningWork breakdown structureSubdivided work descriptionSchedules Planning chartsBudgets
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Cost Control RequirementsCost Control RequirementsThorough planning of the work to be performed to
complete the projectGood estimating of time, labor, and costsClear communication of the scope of required tasksA disciplined budget and authorizations of
expendituresTimely accounting of physical progress and cost
expendituresPeriodic re-estimation of time and cost to complete
remaining work
Thorough planning of the work to be performed to complete the project
Good estimating of time, labor, and costsClear communication of the scope of required tasksA disciplined budget and authorizations of
expendituresTimely accounting of physical progress and cost
expendituresPeriodic re-estimation of time and cost to complete
remaining work
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Cost Control Requirements (Continued)
Cost Control Requirements (Continued)
Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion
Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion
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Purposes of Cost Control (1/2)Purposes of Cost Control (1/2)Verification
The objectives have been successfully translated into performance standards
The performance standards are, in fact, a reliable representation of program activities and events
Meaningful budgets have been established such that actual versus planned comparison can be made
VerificationThe objectives have been successfully
translated into performance standardsThe performance standards are, in fact, a
reliable representation of program activities and events
Meaningful budgets have been established such that actual versus planned comparison can be made
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Purposes of Cost Control (2/2)Purposes of Cost Control (2/2)Decision making via three reports
The project plan, schedule, and budget prepared during the planning phase
A detailed comparison between resources expended to date and those predetermined.
A projection of resources to be expended through program completion
Decision making via three reportsThe project plan, schedule, and budget
prepared during the planning phaseA detailed comparison between resources
expended to date and those predetermined.A projection of resources to be expended
through program completion
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When to Implement a Cost Management System
CONCLUSION
A cost management system should be implemented right at the beginning of the life cycle of the project.
Possible costreductions
Cost of change
PROJECTCOSTS
PROJECT LIFE CYCLE PHASES
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Ability to Influence Cost
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Cost Account Intersection
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Cost Account Code Breakdown
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Work Authorization Form
Description Cost Work WorkCenters Hours Cost Starts Ends
- Test Material 2400 150 R4500 1 Aug 15 Sept - Processing 2610 160 R7500- Final inspection 2621 140 R3500- Packaging 2623 46 R 750- Delivery 2624 R 350
Project office authorization signature:________________
WBS: 31.03.02 Work order no: D1385
Date of original release: 03 Feb 97 Date of revision: 18 March 97 Revision number: C
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Planning and Budgeting
Work packages
WBS Element
MGR
Org
Org
Org
Work Package
WP______ORG_______Description of task_________________________Sched: Start____Stop__Budget:______________
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CACN No. _____________ Revision to Cost Account No. ____________ Date ___________
DESCRIPTION OF CHANGE:________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
REASON FOR CHANGE:______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Requested Budget Authorized BudgetLabor Hours _________________ _________________ Period of performanceMaterials _________________ _________________ From _____________ODCS _________________ _________________ To _____________
BUDGET SOURCE: Funded Contract Change Management Reserve Undistributed Budget Other _________________INITIATED BY: ____________________________ APPROVALS: Program Mgr. ________ Prog. Control ________
COST ACCOUNT CHANGE NOTICE (CACN)
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Sources Of Additional FundingSources Of Additional FundingFunded contract change
Management reserve
Undistributed budget
Other (e.g. profits)
Funded contract change
Management reserve
Undistributed budget
Other (e.g. profits)
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Cost data collation and reporting flow chart
Actuals
Labor
ACWP
InventoryAccounts
BCWP
Computer
BCWS
Monthly TotalProgram Effort
Weekly Labor Reports
MCCS Comparisonreports To All Execs
Variance ReportACWP: Actual Cost for Work Performed
BCWP: Budgeted Cost for Work Performed
BCWS: Budgeted Cost for Work Scheduled
MCCS: Management Cost and Control System
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Cost DataCost Data
LaborMaterialOther direct chargesOverhead
LaborMaterialOther direct chargesOverhead
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Weekly Labor Report Example Weekly Labor Report Example
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Types of BudgetsTypes of Budgets
Distributed budgetManagement budgetUndistributed budgetContract changes
Distributed budgetManagement budgetUndistributed budgetContract changes
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Variance Analyses
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VariancesVariances
The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished.
The scheduling variance provides a comparison between planned and actual performance but does not include costs.
The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished.
The scheduling variance provides a comparison between planned and actual performance but does not include costs.
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Variables for Variance AnalysisBudgeted Cost for Worked Scheduled (BCWS)
is the budgeted amount of cost for word scheduled to be accomplished plus the amount of level of effort or apportioned effort scheduled to be accomplished in a given time period.
Budgeted Cost for Work Performed (BCWP) is the budgeted amount of cost for completed word, plus budgeted for level of effort or apportioned effort activity completed within a given time period. this is sometimes referred to as an “earned value.”
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Variables for Variance AnalysisActual Cost for Work Performed (ACWP)
is the amount reported as actually expended in completing the work accomplished within a given time period.
Cost Variance = BCWP – ACWP
Schedule/Performance Variance = BCWP - BCWS
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Measurements Measurements Measurable efforts: discrete increments of
work with a definable schedule for accomplishment, whose completion produces tangible results.
Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.
Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results.
Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.
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Cost Variance Calculation
A Negative Variance Indicates A Cost Overrun
CV = BCWP - ACWP
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Schedule Variance Calculation
SV = BCWP - BCWS
A Negative Variance IndicatesA Behind Schedule Condition
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Variance Percents
SCHEDULE VARIANCE % = (SVP)
COST VARIANCE % = (CVP)
SVBCWS X 100
CVBCWP X 100
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Permitted Variances May be Dependent on Such Factors as :
Life cycle phaseLength of life cycle phaseLength of projectType estimateAccuracy of estimate
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Variance Control for Example Program
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Project Variance AnalysisProject Variance Analysis
R&D QUALIFICATION DEVELOPMENTPHASE I PHASE II PHASE III
VARIANCE LOWER BOUNDARY
ACTUAL COST VARIANCE
PROJECTED COST
VARIANCE UPPER BOUNDARY
TIME
$
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Performance Index
Cost Performance Index = (CPI)
Schedule Performance Index = (SPI)
BCWPACWP
BCWP
BCWS
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Performance Index Example
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Management ReserveManagement Reserve
Defined as the difference between the contracted cost for projected performance to date and the budgeted cost.
It is to cover the unforseen events within a defined project scope, but is used for unlikely major events.
Defined as the difference between the contracted cost for projected performance to date and the budgeted cost.
It is to cover the unforseen events within a defined project scope, but is used for unlikely major events.
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Management ReserveManagement Reserve
CONTRACTED COST
RELEASED BUDGET
ACTUAL COST
TIME
MANAGEMENTRESERVE
$
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Integrated Cost/schedule SystemIntegrated Cost/schedule System
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Information RequirementsInformation Requirements
Budgeted cost for work scheduled (BCWS)Budgeted cost for work performed (BCWP)Actual cost for work performed (ACWP)Estimated cost at completionBudgeted cost at completionCost and schedule variances/explanationsTraceability
Budgeted cost for work scheduled (BCWS)Budgeted cost for work performed (BCWP)Actual cost for work performed (ACWP)Estimated cost at completionBudgeted cost at completionCost and schedule variances/explanationsTraceability
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Variance Analysis QuestionsVariance Analysis Questions
What is the problem causing the variance?What is the impact on time, cost, and
performance?What is the impact on other efforts, if any?What corrective action is planned or under
way?What are the expected results of the
corrective action?
What is the problem causing the variance?What is the impact on time, cost, and
performance?What is the impact on other efforts, if any?What corrective action is planned or under
way?What are the expected results of the
corrective action?
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Variance Reporting
Variance reporting is accomplished at each reporting interval. However, the variance threshold reports are exception reports and occur only when the variances exceed the upper and lower boundaries of the project variances envelope.
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Reporting Intervals
Depends on the type of organization and characteristics of the projects.
Project-driven organization - weekly.Non-project-driven organization - monthly
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Cost Account Variance Analysis Report
Cost account no/camWBS/Description
Cost performance data Variance
Reporting levelAs of
At completionBudget EAC Var. BCWS BCWP ACWP SCHED COST
Month to date ($)Contract to date ($k)
Problem cause and impact
Corrective action (including expected recovery date)
Cost account Date Cost center Date WBS element Date DateMgr. Mgr. Mgr.
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The 50/50 Rule
Half of the budget for each element is recorded at the time that the work is scheduled to begin and the other half at the time the work is scheduled to be completed.
For a project with a large number of elements the amount of distortion from such a procedure is minimal.
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J F M A M J J A S O N D
AnalysisBudgeted cost for work Scheduled (BCWS)
Performed (BCWP)
Budget - 6
8 14
12
10
12
8
12
10
8
Work packages
Cost account budget = 100 (thousands)
BCWS = 38BCWP = 49SCHED. VARIANCE = +11
50-50 rule used for work in process
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Using The 50-50 RuleUsing The 50-50 Rule
4,000
10,000
12,000
4,000
6,000
6,000
10,000
TIME
TIME LINE
COMPLETED
NOT COMPLETED
LEGEND
BCWS = 34,000BCWP = 33,000 BAC = 52,000
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Earned Value Status ReportingEarned Value Status Reporting
SV
CV
BCWS
BCWP
ACWP
TIME LINE
CU
MM
UL
AT
IVE
CO
ST
, $
TIME
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Progress Reporting Progress reporting needs to answer four
fundamental questions:
1. Where are we today (time and cost)?
2. Where will we end up (time and cost)?
3. What are the present and future risks?
4. Are there any special problems that need
to be addressed and what can
management do to help?
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Estimate At Completion (EAC)
EAC = ACWPBCWP
X Budget at completion
The estimate at completion is the best estimate of the total cost at the completion of the project.
The EAC is a periodic evaluation of the status of the project - usually on a monthly basis or until a significant change has been identified.
(BAC)
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Monthly Project Report 1. VARIANCE ANALYSIS (Cost in Thousands) 1 June 1997 Budgeted Budgeted Cost Milestone Cost Work Work Actual Variance, % Subtask Status Scheduled Performed Cost Schedule Cost
1 Completed 100 100 100 0 0
2 Completed 50 50 55 0 -10
3 Completed 50 50 40 0 20
4 Not Started 70 0 0 -100 --
5 Completed 90 90 140 0 -55.5
6 Not started 40 0 0 -100 --
7 Started 50 50 25 0 50
8 Not started 0 0 0 -- --
Total 450 340 360 -24.4 -5.9
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2. ESTIMATE AT COMPLETION (EAC)EAC = (360/340) X 579,000 = $613,059Overrun = 613,059 - 579,000 = $34,059
3. COST SUMMARYCosts are running approximately 5.9% over budget due to higher salaried labor.
4. SCHEDULE SUMMARYThe 24.4% behind schedule condition is due to subtasks 4 and 6 which have not yet begun due to lack of raw materials and the 50/50 method for booking costs. Overtime will get us back on schedule but at an additional cost of 2.5% of direct labor costs.
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5. MILESTONE REPORTMilestone/ Scheduled Projected Actual Subtask Completion Completion Completion 1 4/1/97 4/1/97 2 5/1/97 5/1/97 3 5/1/97 4/23/97 4 7/1/97 7/1/97 5 6/1/97 6/1/97 6 8/1/97 8/1/97 7 9/1/97 9/1/97 8 10/1/97 10/1/97
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6. ACTIVITY REPORT Current Potential Corrective
Problem Impact Action (a) Lack of raw Cost overruns and Overtime is scheduled.
materials. behind schedule We will try to use lower
condition. salaried staff. Raw
materials are expected
to be on dock next week.
(b)Customer un- May need add- Customer will provide
happy with test itional planning. us with revised results. statement of work on
6/15/97.
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1. Status Reporting Is More Than Just A Computer Printout
2. Intranet Status Reporting
3. Reporting Favorable Status
4. Reporting Unfavorable Status
Status Reporting
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Data Accumulation
WBS
Org
aniz
atio
n
BCWS
BCWP
ACWP
BudgetSCHED
VAR
COST VAR
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Cost ProblemsCost ProblemsPoor estimating techniques and/or
standards, resulting in unrealistic budgetsOut-of-sequence starting and completion of
activities and eventsInadequate work breakdown structureNo management policy on reporting and
control practicesPoor work definition at the lower levels of
the organization
Poor estimating techniques and/or standards, resulting in unrealistic budgets
Out-of-sequence starting and completion of activities and events
Inadequate work breakdown structureNo management policy on reporting and
control practicesPoor work definition at the lower levels of
the organization
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Cost Problems (Continued)Cost Problems (Continued)Management reducing budgets or bids to be
competitive or to eliminate “fat”Inadequate formal planning that results in
unnoticed, or often uncontrolled, increases in scope of effort
Poor comparison of actual and planned costsComparison of actual and planned costs at the
wrong level of managementUnforeseen technical problems
Management reducing budgets or bids to be competitive or to eliminate “fat”
Inadequate formal planning that results in unnoticed, or often uncontrolled, increases in scope of effort
Poor comparison of actual and planned costsComparison of actual and planned costs at the
wrong level of managementUnforeseen technical problems
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Cost Problems (Continued)Cost Problems (Continued)
Schedule delays that require overtime or idle time costing
Material escalation factors that are unrealistic
Schedule delays that require overtime or idle time costing
Material escalation factors that are unrealistic
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Cost Control and Report FlowCost Control and Report Flow
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Graphical Status ReportingGraphical Status Reporting
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Program Interrelationships(1/7)Program Interrelationships(1/7)Program Manager
Functional Manager Relationship
Makes or approves all decisions that affect the contractually committed target time, cost, and performance requirements or objectives of the program
Assembles and furnished the information needed to assist the program manager in making decisions. Submits to the program manager all proposed changes that affect program cost, schedule targets and technical requirements and objectives through the program team member
Management controls, contract administration, budgeting, estimating, and financial controls are a functional specialty. The program manager utilizes the services of the specialist organizations. The specialists retain their own channels to the general manager but must keep the program manager informed through the program team member.
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Program Interrelationships(2/7)Program Interrelationships(2/7)Program Manager Functional
ManagerRelationship
Approves all engineering change control decisions that affect the contractually committed target time, cost, and performance requirements or objectives of the program. Establishes program budgets in conjunction with the cognizant program team members; monitors and negotiates changes.
Implements engineering change decisions by the program manager.
Advises him of any resulting programming impasses and negotiates adjustments through the program team member.
In all matters pertaining to budget and cost control, the program manager utilizes the services of the program team member repressenting the cognizant financial control organization.
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Program Interrelationships(3/7)Program Interrelationships(3/7)Program Manager
Functional Manager
Relationship
Authorizes release of the budget and work authorization for the performance of approved work, and negotiates any intradirectorate reallocation above section level with the affected functional organizations through the program team members.
Within the allocated budget, provides manpower skills, facilities, and other resources pertaining to his functional specialty to the degree and level necessary to meet program schedule, cost, and technical performance requirements of the contract.
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Program Interrelationships(4/7)Program Interrelationships(4/7)Program Manager
Functional Manager
Relationship
Requests the assignment of program team members to the program, and approves the release of the team member from the program.
Coordinates with the program manager on the selection and assignment of a program team member to the program or release of the program team member from the program.
Program manager does not fire functional personal. Program team members should not br removed from the program without the concurrence of the program manager.
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Program Interrelationships(5/7)Program Interrelationships(5/7)Program Manager
Functional Manager Relationship
Establishes report requirements and controls necessary for evaluation of phases of program performance consistent with effective policies and procedures.
Works in concert with other functional organizations to ensure that he and they are proceeding satisfactorily in the completion of mutually interdependent program tasks and events.
Insofar as possible, program controls must be satisfied from existing data and controls as defined by division policies and procedures.
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Program Interrelationships(6/7)Program Interrelationships(6/7)Program Manager
Functional Manager Relationship
Measures and evaluates performance of tasks against the established plan. Identifies current and potential program. Decides upon and authorizes corrective action.
Follows up all activities of his organization to ensure satisfactory performance to program requirements. Detects actual or potential problems. Takes timely corrective action in his organization, and when such problems involve interface with other functional organization, notifies them and coordinates the initiation of mutually satisfactory remedial action. Keeps the program manager advised (through the program team member) of conditions affecting the program, existing, or expected problems solved, and corrective action required or performed.
The program manager directs or redirects activities of functional organizations only through the cognizant program team member. Functional managers are responsible for the performance of their organizations. Functional managers do not implement decisions involving increased total program costs, changes in schedule, or changes in technical performance without prior approval of the program team members and the program manager.
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Program Interrelationships(7/7)Program Interrelationships(7/7)Program Manager Functional
ManagerRelationship
Apprises the program team members and/or functional organizations of program changes affecting their function.
Assures the establishment, coordination, and execution of support program to the extent required or pemitted by the contract.
This includes such programs as value engineering, data management, and configuration management.
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Problem Areas in Cost Control Organization:
- Inadequate Work Breakdown Structure
- Poor work definition at working levels- Lack of formal system procedures
Planning and budgeting:
- Inadequate forward planning- Over-allocation of budget- Poor integration of budget, schedule, work authorization
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Problem Areas in Cost Control Accounting:
- Inability to account for cost of material on applied basis
Analysis:
- Determination of status not based on work package completion- Comparison of actual vs. planned costs at improper level
Revisions:- Failure to maintain valid measurement baseline
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Cost Problems Per PhaseCost Problems Per Phase
Proposal PhaseFailure to understand customer requirementsUnrealistic appraisal of in-house capabilitiesUnderestimating time requirements
Proposal PhaseFailure to understand customer requirementsUnrealistic appraisal of in-house capabilitiesUnderestimating time requirements
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Cost Problems Per PhaseCost Problems Per Phase
Planning phaseOmissionsInaccuracy of the work breakdown structureMisinterpretation of informationUse of wrong estimating techniquesFailure to identify and concentrate on major
cost elementsFailure to assess and provide for risks
Planning phaseOmissionsInaccuracy of the work breakdown structureMisinterpretation of informationUse of wrong estimating techniquesFailure to identify and concentrate on major
cost elementsFailure to assess and provide for risks
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Cost Problems Per PhaseCost Problems Per Phase
Negotiation phaseForcing a speedy compromiseProcurement ceiling costsNegotiation team that must “win this one”
Negotiation phaseForcing a speedy compromiseProcurement ceiling costsNegotiation team that must “win this one”
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Cost Problems Per PhaseCost Problems Per Phase
Contractual phaseContractual discrepanciesSOW different from RFP requirementsProposal team different from project team
Contractual phaseContractual discrepanciesSOW different from RFP requirementsProposal team different from project team
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Cost Problems Per PhaseCost Problems Per Phase
Design phaseAccepting customer requests without
management approval Problems in customer communications
channels and data itemsProblems in design review meetings
Design phaseAccepting customer requests without
management approval Problems in customer communications
channels and data itemsProblems in design review meetings
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Cost Problems Per PhaseCost Problems Per Phase
Production phaseExcessive material costs Specifications that are not acceptableManufacturing and engineering disagreement
Production phaseExcessive material costs Specifications that are not acceptableManufacturing and engineering disagreement