Project Management

Cost Control

Project Management

Cost Control

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

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

OutlineOutline15. Status Reporting

16. Cost Control Problems

15. Status Reporting

16. Cost Control Problems

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

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

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

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

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

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

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

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

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

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

Ability to Influence Cost

Cost Account Intersection

Cost Account Code Breakdown

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

Planning and Budgeting

Work packages

WBS Element

MGR

Org

Org

Org

Work Package

WP______ORG_______Description of task_________________________Sched: Start____Stop__Budget:______________

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)

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)

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

Cost DataCost Data

LaborMaterialOther direct chargesOverhead

LaborMaterialOther direct chargesOverhead

Weekly Labor Report Example Weekly Labor Report Example

Types of BudgetsTypes of Budgets

Distributed budgetManagement budgetUndistributed budgetContract changes

Distributed budgetManagement budgetUndistributed budgetContract changes

Variance Analyses

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.

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.”

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

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.

Cost Variance Calculation

A Negative Variance Indicates A Cost Overrun

CV = BCWP - ACWP

Schedule Variance Calculation

SV = BCWP - BCWS

A Negative Variance IndicatesA Behind Schedule Condition

Variance Percents

SCHEDULE VARIANCE % = (SVP)

COST VARIANCE % = (CVP)

SVBCWS X 100

CVBCWP X 100

Permitted Variances May be Dependent on Such Factors as :

Life cycle phaseLength of life cycle phaseLength of projectType estimateAccuracy of estimate

Variance Control for Example Program

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

$

Performance Index

Cost Performance Index = (CPI)

Schedule Performance Index = (SPI)

BCWPACWP

BCWP

BCWS

Performance Index Example

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.

Management ReserveManagement Reserve

CONTRACTED COST

RELEASED BUDGET

ACTUAL COST

TIME

MANAGEMENTRESERVE

$

Integrated Cost/schedule SystemIntegrated Cost/schedule System

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

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?

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.

Reporting Intervals

Depends on the type of organization and characteristics of the projects.

Project-driven organization - weekly.Non-project-driven organization - monthly

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.

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.

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

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

Earned Value Status ReportingEarned Value Status Reporting

SV

CV

BCWS

BCWP

ACWP

TIME LINE

CU

MM

UL

AT

IVE

CO

ST

, $

TIME

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?

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)

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

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.

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

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.

1. Status Reporting Is More Than Just A Computer Printout

2. Intranet Status Reporting

3. Reporting Favorable Status

4. Reporting Unfavorable Status

Status Reporting

Data Accumulation

WBS

Org

aniz

atio

n

BCWS

BCWP

ACWP

BudgetSCHED

VAR

COST VAR

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

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

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

Cost Control and Report FlowCost Control and Report Flow

Graphical Status ReportingGraphical Status Reporting

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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”

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

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

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