Control Costs

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MEC-3

Agenda

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Cost Baseline Project Funding Requirements Inputs to Control Cost Outputs from Control Cost Tools & Techniques for Controlling Cost

Cost Baseline

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Approved Version of the Time Phased Cost Budget for the Project (Spending Plan indicating how much money is approved for the Project and when the Funds are required – the Cash Flow Plan)

Excludes Management Reserves Developed as a summation of the approved budgets for

the different Schedule Activities

Project Funding Requirements

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Forecast Project Costs to be paid that are derived from the Cost Baseline for Total or Periodic Requirements

Includes Projected Expenditures plus Anticipated Liabilities

Management Reserves are not part of the Cost Baselines but they are part of the Project Funding requirements. Therefore, the difference between the Cost Baseline and Funding requirement at Project completion is Management Contingency Reserve

Cost Baseline & Management Reserve

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PV

AC

Project Budget & Cost Baseline

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Simple CBS & Project Budgeting

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Activities

Work Packages

Control Accounts

Cost Baseline

Management Reserve

Project Budget

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22030

26040

25050

36090

13515

700 750 35075

550100

1,900 650

2,550

500

3,050

Work Packages

Control Accounts

Cost Baseline

Management Reserve

Project Budget

Activities

Figures at bottom are Contingency Reserve for that Activity or Work Package

Simple CBS & Project Budgeting

Control Schedule Inputs & Outputs

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Control Costs

1. PCMP (PMP)2. Cost Baseline (Budget)3. WPD (D&M PW)4. OPA

1. WPI2. Change Request3. PMP Updates4. PD Updates5. OPA Updates5. Proj Funding

Requirements6. Cost Forecasts

Control Costs Inputs

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Input Details

PCMP How the Project Costs will be Controlled

Project Budget Cost Baseline

WPD • Activities that have Started• Activities’ Progress• Finished Deliverables• Costs Incurred

OPA • Cost Control-related Policies, Procedures & Guidelines• Control Cost Tools• Monitoring & Reporting Methods

Project Funding Requirements

• Projected Expenditures• Anticipated Liabilities

Control Cost Outputs 1/2

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Output Details

WPI CV, SV, CPI, SPI values for WBS components, in particular the Work Packages and Control Accounts

Change Request Based on Cost Variance Analysis, Recommendations for:• Changes to Baselines (Cost, Scope etc)• Corrective, Preventive Actions & Defect Repairs

PMP Updates Based on Change Requests, projected Changes to:• Cost Baseline viz Activity Cost Estimates etc• PCMP, such as changes to Control Thresholds, or specified

Levels of Accuracy reqd in managing the Project’s Cost, or Changes based on Stakeholders’ feedback

PD Updates • Cost estimates• Basis of estimates

Control Cost Outputs 1/2

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Output Details

OPA Updates • Causes of Variances• Corrective Action chosen and the Reasons• Financial Databases• Other types of lessons learned from Project Cost Control

Cost Forecast EAC, ETC, VAC, TCPI for the Remaining Project

Control Costs Tools & Techniques

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Tool Category Tools

Performance Reviews • EVM• TCPI• Forecasting• Variance Analysis• Trend Analysis• Reserve Analysis

Project Management Software e.g. MS Project

Earned Value Management (EVM)

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• Tool to determine both Cost & Schedule Variances• Key Terms (Some common with Schedule Variance, others specific

to Schedule Variance: - Budget At Completion (BAC)- Planned Value (PV)- Earned Value (EV)- Actual Cost (AC)- Cost Variance (CV)- Cost Performance Index (CPI)

Current Cost Performance

Forecast Cost Performance

- Estimate At Completion (EAC)- Estimate To Complete (ETC)- Variance At Completion (VAC)- To Complete Performance Index (TCPI)

Considerations• 80 blocks should have cost: 80 x Rs 10K = Rs 800K. This is EV• At the end of Day 10, 100 blocks should have been delivered, which

would have cost: 100 x Rs 10K = Rs 1,000K. This is PV• These 80 blocks actually invoiced/cost Rs 900K. This is AC

EVM – Simplified Example

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Procurement Project• 200 heavy duty concrete security blocks• Total Price: Rs 2,000K. This is BAC• Rs 10K per block; 200 blocks deliverable in 20

days @ 10 blocks per day. This is Cost Baseline• 7.5% Reserved for the UUs. This is Mgt Res• Contract Type: Cost Reimbursable

Situation at the end of Day 1080 blocks delivered; Contractor invoiced Rs 900K for these 80 blocks

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EVM Cost Performance - Simplified Example

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 250

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

1000

2000

800

2000

900

2250

Time in Days

Rs in

Tho

usan

d

EAC PROJ BUDGET = 2,000+150 = 2,150

VAC

ETC

MGT RES @ 7.5% = 150

VAC = 2,000-2,250 = -250 CV = 800K-900 = -100 CPI = 800/900 = 0.89

EAC = 2,000/.89 = 2,250 ETC = 2,250-900 = 1,350

Wor

k Re

mai

ning

AC EV

PV

Cost Baseline

Fund

s Re

mai

ning

TCPIBAC = (2,000-800)/(2,000-900) = 1.09

TCPIEAC = (2,000-800)/(2,250-900) = 0.89

BAC = 2,000

Finding EV

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1. Portioning BAC on the basis of Fraction of Work Completed2. Evaluating Work Completed on the basis of Baselined Cost per

UnitExample:On a certain project, 220 km of oil pipeline was to be laid, in 50 weeks, at a Cost of 2,000 monetary units (mu). Today, at the end of Week-20, 88 km has been laid. What is the EV?3. EV = Fraction of Work Completed x BAC

= 88 km/220 km x 2,000 mu = 800 mu

2. EV = Work Completed x Cost per Km= 88 km x 2,000 mu/220 km = 800 mu

Earned Value Management - General Template

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PVAC

SV

SV

EV

CV

Overall Schedule Slippage

ETC

Wor

k Re

mai

ning

Fund

s Re

mai

ning

VAC

Term Formula What it means

Planned Value (PV) As of today, the estimated value of the WORK PLANNED to be done

Earned Value (EV) As of today, the estimated value of the WORK ACTUALLY ACCOMPLISHED?

Budget at Completion (BAC)

BUDGET for the TOTAL PROJECT

Cost Variance (CV) = EV-AC Difference between ACCOMPLISHED WORK & PLANNED WORK (+ under, - over budget)

Cost Performance Index (CPI)

= EV/AC Comparison of ACCOMPLISHED WORK with PLANNED WORK (ACCOMPLISHED WORK as fraction or % of PLANNED WORK) (>1 under, <1 over budget)

EVM for Cost Performance – Present Status

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Term Formula What it means

Estimate At Completion (EAC)

•BAC/CPI•AC + (BAC-EV)•AC + (BAC-EV) CPI x SPI

As of today, how much is the TOTAL PROJECT COST Expected to be?

Estimate To Complete (ETC)

EAC-AC As of today, how much MORE the Project will Cost?

Variation At Completion (VAC)

BAC-EAC How much OVER or UNDER BUDGET the Project will be at Completion

To-Complete Performance Index (TCPI)

(BAC-EV) (BAC-AC)*

• CPI of the Remaining Work• Ratio of WORK REMAING to MONEY

REMAINING• * Denominator based on BAC or EAC

EVM for Cost Performance – Forecast

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Variance Analysis – Another Dimension

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•While Budgeting, Materials & Human Resources are Costed using Standard Rates & Quantities

• Should these Rates or Quantities change during the Project Life Cycle, Cost Performance would be affected favourably or unfavourably

• Variance Analysis quantifies the effect of Variance between the Standard and Actual Rates & Quantities for Materials used and Labour employed on a Project

• Variance is expressed as a Monetary Quantity and suffixed FAVOURABLE or UNFAVOURABLE/ADVERSE depending on its effect on Cost Performance

Variance Analysis – Another Dimension

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• Variance Analysis is an interplay of 4 Attributes:- Standard Rate- Standard Quantity- Actual Rate- Actual Quantity

• This course will only introduce the subject through the following types of Variances:- Material Cost/Rate Variance (MCV/MRV- Material Usage Variance (MUV)- Labour Wage Rate Variance (LRV)- Labour Efficiency Variance (LEV)

Basic Definitions

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Material Rate Variance (MRV)• Variance due to difference in Actual & Standard Costs on Actual

QuantityMaterial Usage Variance (MUV)• Variance due to difference in Actual & Standard Quantities at

Standard Cost/Rate

Labour Wage Rate Variance (LRV)• Variance due to difference in Actual & Standard Labour Rates on

Actual Man HoursLabour Efficiency Variance (LEV)• Variance due to difference in Actual & Standard Quantities Man

Hours at Standard Labour Rate

Variance FAVOURABLE if respective ACTUAL RATE or QTY < STD RATE or QTY, & vice versa

Basic Definitions

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Fixed Attribute Differing Attributes VarianceActual Quantity of Material

Actual & Standard Purchase Costs

MRV

Standard Cost of Material Actual & Standard Quantities of Material

MUV

Actual Number of Man Hours Labour Employed

Actual & Standard Labour Rates

LRV

Standard Labour Rate Actual & Standard Number of Man Hours Labour Employed

LEV

Variance Analysis – General Template

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Actual QtyX

Actual Rate

Actual QtyX

Standard Rate

Standard QtyX

Standard Rate

MPVor

LRV

MUVor

LEV

Net Effect

• MRV/LRV FAVOURABLE if: Actual Rate < Std Rate• MUV/LEV FAVOURABLE if: Actual Qty < Std Qty

Variance Analysis – Example 1

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On a certain construction project, first slab has been poured. For this activity, 1,000 bags of cement had been planned, at the standard rate of Rs 400 per bag. The cement was purchased @ Rs 500 per bag and 900 bags were consumed in the pouring. Carry out Variance Analysis and its Overall Effect on Project Cost Performance.

Actual Qtyx

Actual Cost

Actual Qtyx

Std Cost

Std Qtyx

Std Cost

900 bagsx

Rs 500 per bag= Rs 450,000

900 bagsx

Rs 400 per bag=Rs 360,000

1,000 bagsx

Rs 400 per bag=Rs 400,000

Rs 90,000 (U) Rs 40,000 (F)

Rs 50,000 (U)

MRV MUV

Net Effect

Variance Analysis – Example 2

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On a certain construction project, HR Assignment Plan assigned 200 unskilled workers, on a particular activity, for 100 days, on a daily wage of Rs 500. Due to countrywide escalating inflation no worker was available for less than Rs 600 per day. The activity actually took 80 days to complete. Carry out Variance Analysis and its Overall Effect on Project Cost Performance.

Actual Qtyx

Actual Cost

Actual Qtyx

Std Cost

Std Qtyx

Std Cost

200x80 man-daysx

Rs 600 per man-day= Rs 9,600,000

200x80 man-daysx

Rs 500 per man-day= Rs 8,000,000

200x100 man-daysx

Rs 500 per man-day= Rs 10,000,000

Rs 1,600,000 (U) Rs 2,000,000 (F)

Rs 400,000 (F)

LRV LEV

Net Effect

Act Effortx

Act Lab Rate

Act Effortx

Std Lab Rate

Std Effortx

Std Lab Rate

Reserve Analysis

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• Reserve Analysis is used to monitor and control the status of Contingency and Management reserves for the Project to determine if these Reserves are still needed or if Additional Reserves need to be requested

• Reserve Analysis is all about Using, Reducing or Eliminating Contingency Reserves, as more precise information about the Project becomes available

• As work on the project progresses, these Reserves may be used as planned to cover the cost of Risk Mitigation events or other Contingencies. For example on Rework for some Project Deliverables which fail Quality

•Or, if the probable Risk Events do not occur, the unused Contingency Reserves may be Reduced or Removed from the project budget to free up resources for other projects or operations

Reserve Analysis

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•When an amount of Management Reserve is used to fund unforeseen work, the amount of Management Reserve used is added to the Cost Baseline, thus requiring an approved change to the Cost Baseline

Trend Analysis

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Variance Trend Performance Index Trend

Regression Analysis

• Performance improving or deteriorating? • Forecast

Software Tools

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•MS Project 2010 (Exercise Files)