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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