PROJECT COST CONTROL

BY – SOURABH MODGIL

PROJECT COST MANAGEMENT

Project cost management includes the processes required to ensure that the project is completed within an approved budget.

Project cost management may be defined as management of the processes involved in planning, estimating, and controlling costs so that the project can be completed within the approved budget.

IT INCLUDES THREE FACTORS

Cost Estimating

Cost Budgeting

Cost Control

Cost Estimating

Developing an approximation or estimate of the costs of the resources needed to complete a project.

Includes identifying and considering various costing alternatives.

Cost Budgeting

Allocation of overall cost estimates to individual work items in order to establish a cost baseline for measuring project performances.

Cost Control

Controlling changes to the project budget. Influencing the factors which create changes to the cost baseline

to ensure that changes are beneficial. Determining that the cost baseline has changed with in

acceptable units Managing the actual changes when and as they occur.

Objectives of cost control

To have a knowledge of the profit and loss of the project throughout the duration of the project.

To have a comparison between the actual project performance and that conceived in the original project plan.

Provides feedback data on actual project performance to future project planning

Tools and techniques of cost control

Earned value management Estimate to complete Forecasting Cost variance Cost performance index

Earned value management

The earned value technique uses the cost control contained in the project management plan to assess project progress and the magnitude of any variations that occur. The earned value technique involves developing these key values for each schedule activity, work package, or control account.

It compares the amount of work that was planned with what was actually earned with what was actually spent to determine if cost and schedule performance are as planned.

Planned value (PV)-PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time.

Earned value (EV)-EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period.

Actual cost (AC)-AC is the actual cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g. direct hours only, direct cost only, or all costs including indirect costs).

Estimate to complete

The PV, EV, and AC values are used in combination to provide performance measures of whether or not work is being accomplished as planned at any given point in time. The most commonly used measures are cost variance (CV) and schedule variance (SV). The amount of variance of the CV and SV values tend to decrease as the project reaches completion due to compensating effect of more work being accomplished. Predetermined acceptable completion can be established in the cost management plan.

Forecasting

Forecasting includes making estimates or predictions of conditions in the project’s future based on the information and knowledgeable available at the time of the forecast. As the project progresses, the forecasts are adjusted.

Formula: BAC=total cumulative PV t the completion Forecasting technique parameters to assess the cost or the amount of

work to complete schedule activities is called the EAC. 

Cost variance

CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at the completion (BAC) and the actual amount spent.

Formula: CV=EV-AC these two values, the CV and SV, can be converted to efficiency

indicators to reflect the cost and schedule performance of any project.

Cost performance index

A CPI value less than 1.0 indicate accost overrun of the estimates. A CPI value greater than 1 indicates a cost under-run of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator.

Formula: CPI=EV/AC CPI is widely used to forecast project costs at completion.

Thankyou