Chapter 15 Cost Control. Cost Management Cost estimating Cost estimating Cost accounting Cost...

Chapter 15Chapter 15

Cost ControlCost Control

Cost ManagementCost Management• Cost estimatingCost estimating• Cost accountingCost accounting• Project cash flowProject cash flow• Company cash flowCompany cash flow• Direct labor costingDirect labor costing• Overhead rate costingOverhead rate costing• Others, such as incentives, penalties, Others, such as incentives, penalties,

and profit-sharingand profit-sharing

Cost Control Cost Control RequirementsRequirements• Measure resources consumedMeasure resources consumed• Measure status and accomplishmentsMeasure status and accomplishments• Compare measurements to projections Compare measurements to projections

and standardsand standards• Provide the basis for diagnosis and re-Provide the basis for diagnosis and re-

planningplanning

Cost Control Cost Control Requirements Requirements (Continued)(Continued)

• Frequent, periodic comparison of Frequent, periodic comparison of actual progress and expenditures to actual progress and expenditures to schedules and budgets, both at the schedules and budgets, both at the time of comparison and at project time of comparison and at project completioncompletion

WHEN TO IMPLEMENT A COSTWHEN TO IMPLEMENT A COST MANAGEMENT SYSTEM MANAGEMENT SYSTEM

CONCLUSIONCONCLUSION

A cost management system should be implemented right at A cost management system should be implemented right at the beginning of the life cycle of the project.the beginning of the life cycle of the project.

Possible costreductions

Cost of change

PROJECTCOSTS

PROJECT LIFE CYCLE PHASES

PLANNING AND BUDGETING

Work packages

WBS Element

MGR

Org

Org

Org

Work Package

WP______ORG_______Description of task_________________________Sched: Start____Stop__Budget:______________

Sources Of Additional Sources Of Additional FundingFunding• Funded contract changeFunded contract change

• Management reserveManagement reserve

• Undistributed budget (money waiting to Undistributed budget (money waiting to be allocated)be allocated)

Cost DataCost Data• LaborLabor

• MaterialMaterial

• Other direct chargesOther direct charges

• OverheadOverhead

VARIABLES FOR VARIANCE ANALYSISVARIABLES FOR VARIANCE ANALYSIS• BUDGETED COST FOR WORKED SCHEDULED (BCWSBUDGETED COST FOR WORKED SCHEDULED (BCWS)) IS THE BUDGETED IS THE BUDGETED

AMOUNT OF COST FOR WORK SCHEDULED TO BE ACCOMPLISHED PLUS THE AMOUNT OF COST FOR WORK SCHEDULED TO BE ACCOMPLISHED PLUS THE AMOUNT OF LEVEL OF EFFORT.AMOUNT OF LEVEL OF EFFORT.

• BUDGETED COST FOR WORK PERFORMED (BCWP)BUDGETED COST FOR WORK PERFORMED (BCWP) IS THE BUDGETED IS THE BUDGETED AMOUNT OF COST FOR COMPLETED WORK, PLUS BUDGETED FOR LEVEL OF AMOUNT OF COST FOR COMPLETED WORK, PLUS BUDGETED FOR LEVEL OF EFFORT OR APPORTIONED EFFORT ACTIVITY COMPLETED WITHIN A GIVEN EFFORT OR APPORTIONED EFFORT ACTIVITY COMPLETED WITHIN A GIVEN TIME PERIOD. THIS IS SOMETIMES REFERRED TO AS AN “EARNED VALUE.”TIME PERIOD. THIS IS SOMETIMES REFERRED TO AS AN “EARNED VALUE.”

• ACTUAL COST FOR WORK PERFORMED (ACWP)ACTUAL COST FOR WORK PERFORMED (ACWP) IS THE AMOUNT REPORTED IS THE AMOUNT REPORTED AS ACTUALLY EXPENDED IN COMPLETING THE WORK ACCOMPLISHED AS ACTUALLY EXPENDED IN COMPLETING THE WORK ACCOMPLISHED WITHIN A GIVEN TIME PERIOD.WITHIN A GIVEN TIME PERIOD.

• COST VARIANCECOST VARIANCE = BCWP – ACWP = BCWP – ACWP

• SCHEDULE/PERFORMANCE VARIANCESCHEDULE/PERFORMANCE VARIANCE = BCWP - BCWS = BCWP - BCWS

VariancesVariances• The The cost variancecost variance compares deviations compares deviations

only from the budget and does not only from the budget and does not provide a measure of comparison provide a measure of comparison between work scheduled and work between work scheduled and work accomplished.accomplished.

• The The scheduling variancescheduling variance provides a provides a comparison between planned and actual comparison between planned and actual performance but does not include costs.performance but does not include costs.

Measurements Measurements • Measurable effortsMeasurable efforts:: discrete increments discrete increments

of work with a definable schedule for of work with a definable schedule for accomplishment, whose completion accomplishment, whose completion produces tangible results.produces tangible results.

• Level of effortLevel of effort:: work that does not lend work that does not lend itself to subdivision into discrete itself to subdivision into discrete scheduled increments of work, such as scheduled increments of work, such as project support and project control.project support and project control.

COST VARIANCECOST VARIANCE CALCULATION CALCULATION

A A NEGATIVENEGATIVE VARIANCE VARIANCE INDICATES A COST INDICATES A COST

OVERRUNOVERRUN

CV = BCWP - ACWP

SCHEDULE VARIANCE SCHEDULE VARIANCE

CALCULATION CALCULATION

SV = BCWP - BCWS

A NEGATIVE VARIANCE INDICATESA BEHIND SCHEDULE CONDITION

VARIANCE VARIANCE PERCENTSPERCENTS

SCHEDULE VARIANCE % = (SVP)

COST VARIANCE % = (CVP)

SVBCWS X 100

CVBCWP X 100

Project Variance Project Variance AnalysisAnalysis

R&D QUALIFICATION DEVELOPMENTPHASE I PHASE II PHASE III

VARIANCE LOWER BOUNDARY

ACTUAL COST VARIANCE

PROJECTED COST

VARIANCE UPPER BOUNDARY

TIME

$

Management Management ReserveReserve

CONTRACTED COST

RELEASED BUDGET

ACTUAL COST

TIME

MANAGEMENTRESERVE

$

Information Information RequirementsRequirements

• Budgeted cost for work scheduled (BCWS)Budgeted cost for work scheduled (BCWS)

• Budgeted cost for work performed (BCWP)Budgeted cost for work performed (BCWP)

• Actual cost for work performed (ACWP)Actual cost for work performed (ACWP)

• Estimated cost at completionEstimated cost at completion

• Budgeted cost at completionBudgeted cost at completion

• Cost and schedule variances/explanationsCost and schedule variances/explanations

• Traceability Traceability

Earned Value Status Earned Value Status ReportingReporting

SV

CV

BCWS

BCWP

ACWP

TIME LINE

CU

MM

UL

AT

IVE

CO

ST

, $

TIME

ESTIMATE AT COMPLETION ESTIMATE AT COMPLETION (EAC)(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)

Cost ProblemsCost Problems• Poor estimating techniques and/or Poor estimating techniques and/or

standards, resulting in unrealistic standards, resulting in unrealistic budgetsbudgets

• Inadequate work breakdown Inadequate work breakdown structurestructure

• No management policy on reporting No management policy on reporting and control practicesand control practices

• Poor work definition at the lower Poor work definition at the lower levels of the organizationlevels of the organization