Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Learning Goals 1.Cost Control 2.Earned Value Management

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Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control Cost control is concerned with: –Influencing the factors that create changes to the cost baseline to ensure that changes are agreed upon –Determining that the cost baseline has changed –Managing the actual change when and as they occur

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control What does Cost Control include? 1.Monitoring cost performance to detect and understand variances from the plan 2.Ensuring that all appropriate changes are recorded accurately in the cost baseline 3.Preventing incorrect, inappropriate or unauthorized changes from being included in the cost baseline 4.Informing appropriate stakeholders of authorized changes 5.Acting to bring expressed cost within acceptable limits

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control Processes Inputs Cost baseline Project funding requirements Performance reports Work performance information Approved change requests Project management plan Inputs Cost baseline Project funding requirements Performance reports Work performance information Approved change requests Project management plan Tools and Techniques Cost change control system Performance measurement analysis Forecasting Project performance reviews Project management software Variance management Tools and Techniques Cost change control system Performance measurement analysis Forecasting Project performance reviews Project management software Variance management Outputs Cost estimates updates Cost baseline update Performance measurement Forecasted completion Requested changes Recommended corrected actions Organizational process assets (updates) Project management plan (updates) Outputs Cost estimates updates Cost baseline update Performance measurement Forecasted completion Requested changes Recommended corrected actions Organizational process assets (updates) Project management plan (updates)

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control Input Performance reports Performance reports provide information on project scope and cost performance. –Which task is completed and which have not been –Which budget item has been met and which has not been Performance reports may also alert the project team to issues that may cause problems in the future

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Work completion In order to have effective project controls, it is imperative that the project team have accurate measurements of the work performed for each scheduled task. If this information is not available, no one knows if there is over or under spending on the project's budget.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Examples of Work Completion Rules 0/100 Rule 20/80 Rule 50/50 Rule

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control 0/100 Rule Assume that 0 percent of the task is complete until the entire task is finished Using the 0/100 Rule requires a very conservative approach.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control 20/80 Rule Once the task is started, the project office assumes that 20 percent of the task is complete When the task is finished, the remaining 80 percent is added to the amount completed This method is very cautious, but is less conservative than the 0/100 Rule

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control 50/50 Rule Probably the most popular method of showing a task's progress is the 50/50 Rule. This assumes that once the task has begun, 50 percent of the task is completed When the task is completed, the remaining 50 percent is added to the amount completed

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control Input Change r equests Request for changes in the scope of work May occur in many forms: –Oral or written –Direct or indirect –External or internally initiated –Legally mandated or optional Changes may increase or decrease the budget

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control Tools Cost Change Control System A system that defines procedures by which the cost baseline may be changed Includes: –Paperwork –Tracking systems –Approval levels needed for authorizing changes

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost Control Tools Performance measuremen ts Helps access the magnitude of any variations that do occur An important part of cost control is to –Determine what is causing the variance –Decide if the variance needs corrective action Earned Value Analysis is useful important to cost control

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Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control What is Earned Value? The PMBOK defines earned value as a method of reporting project status in terms of both cost and time. It is the Budgeted Cost of Work Performed (BCWP) regardless of the actual cost incurred.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Another definition of Earned Value? According to Dr. David Frame, the earned value approach allows the project to examine cost and schedule variances concurrently, enabling them to take a holistic view of project progress.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The 3 fundamental building blocks of the Earned Value technique PV Planned Value or Budget Cost of Work Scheduled (BCWS) AC Actual Cost or Actual Cost of Work Performed (ACWP) EV Earned Value or Budgeted Cost of Work Performed (BCWP)

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Planned Value (PV) The Planned Value (PV) is the budgeted cost for the work scheduled to be completed on an activity It is the same as the planned budget or how much was budgeted to perform a certain function PV is also called the Budgeted Cost of Work Scheduled (BCWS)

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The Cost Performance Measurement Baseline The BCWS may also be referred to as the Cost Performance Measurement Baseline. The BCWS shows budget costs relative to time and quantities for the purpose of comparison, analysis and forecasts of costs The BCWS is typically shown graphically comparing budget costs relative to time

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Actual cost (AC) AC is the amount it actually costs to perform the task. AC is also called the Actual Cost of Work Performed (ACWP).

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Establishing a variance The concepts of PV and AC offer planned and actual measurements When actual is subtracted from planned, a variance is established. With the third element, EV or BCWP, the concept of earned value is introduced.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Earned Value (EV) EV is the amount of money that was budgeted for the work that has been completed so far EV is also called the Budgeted Cost of Work Performed (BCWP)

Cumulative Cost Curve Cost Duration Total project Planned Cost Measured Period SV = EV - PV CV = EV - AC PV EV AC

Exercise The Fence – Part 1 Determine the PV, AC and EV

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The Cost Variance To calculate the Cost Variance (EV- AC) in the example above, suppose that the AC was $6,000. The EV is the value of the work to date, and the AC is the cost to perform the work. Using these figures and applying the above variance formula, there is a positive variance of $2,000.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control What does this mean? The positive variance indicates a cost under-run when it is shown by itself. However, variance must take into account the schedule of the completion of the project, which at this point in time is behind schedule.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The schedule variance The schedule variance is calculated as follows: SV = EV - PV Therefore in our example: SV = $8,000 - $10,000 = -$2,000

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Interpreting SV One must compare the work that was planned to what was actually accomplished. Since the project's PV was $10,000 and its earned value is now $8,000, or a completion of only 80 percent during the planned time frame, the value of the “time” schedule slippage is $2,000. This variance is a negative value, therefore it implies that the project is behind schedule.

What does it all mean? + Schedule Variance - Schedule Variance + Cost Variance - Cost Variance The project is within budget but behind schedule Either the task has not started or it has started and not enough resources have been applied. The project is over budget and behind schedule The project is within budget and ahead of schedule The project is over budget but ahead of schedule Money may have been spent to crash the project.

The Interpretation Cost Variance Schedule Variance Interpretation + - The project is within budget but behind schedule Either the task has not started or it has started and not enough resources have been applied. -- The project has overrun its budget and is behind schedule. - + The project is ahead of schedule but is over budget. Money was probably spent to crash the schedule ++ The project is within budget and ahead of schedule

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The SV and CV percent Provide an idea of how much the project is deviating from the plan. To calculate the SV and CV percent use these formulas:

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Cost and Schedule Performance Index Another important concept is that of Cost and Schedule Performance Index. These two formulas explain how efficiently the work has been accomplished.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The Cost Performance Index (CPI) The Cost Performance Index (CPI) is the ratio of Earned Value to Actual Cost (EV/AC). Cost Performance Index (CPI) = EV/AC The cumulative CPI (the sum of all individual EVs divided by the sum of all individual ACs) is widely used to forecast project cost at completion

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The magnitude of a possible cost overrun To predict the magnitude of a possible cost overrun, the following formula is used: Projected Cost At Completion = Original Cost Estimate / CPI

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control CPI explained Suppose the value of the work is worth $750 (EV). It cost $800 to perform the work (AC). This means that every dollar spent will provide cents worth of work. This ratio can then be applied to project the possible costs overrun. If the original project cost estimate was $10,000, divided by the calculated CPI of.9373 = $10,669, or a possible $669 overrun.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The Schedule Performance Index (SPI) The Schedule Performance Index (SPI) is the ratio of budgeted cost work performed to budgeted cost of work scheduled (BCWP/BCWS) Schedule Performance Index (SPI) = EV/PV In some applications areas, the Schedule Performance Index is used to forecast the project completion date.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control SPI interpreted An interpretation of the SPI is that if $500 worth of work (EV) is performed, and the value of work schedule is $400 (PV), each dollar of scheduled work generated $1.25 worth of work, or a ratio of 25. This ratio tells us that for every day of work scheduled, the project is.25 days ahead of schedule at the point the analysis was completed.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control What does CPI and SPI say about project performance If the CPI is equal to 1.0, there is perfect performance. If CPI > 1.0, means cost under run, there is exceptional performance. If CPI is < 1.0, means cost overrun, the performance is poor. This same generalization is true for the SPI.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Budgeted at Completion (BAC) Budgeted at Completion (BAC) is the sum of all the budgets (PV) allocated to the project or the project baseline, i.e. this is what the total effort of the project should cost.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Estimated at completion (EAC) The EAC [(AC/EV) X BAC] or [BAC/CPI] is defined as either the hour or dollar amount that provides a realistic appraisal of the work performed. According to Dr. Kerzner, it is the sum of all direct and indirect costs to date plus the estimate of all authorized work remaining. In other words, the EAC is what the total project is expected to cost.

3 Ways of Calculating EAC EAC = Actuals to date plus a new estimate for all remaining work. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed, or that they are no longer relevant due to a change in conditions. EAC = Actuals to date plus remaining budget. This approach is most often used when current variances are seen as atypical and the project management team's expectation is that similar variances will not occur in the future. EAC = Actuals to date plus the remaining project budget modified by a performance factor, often the CPI. This approach is most often used when current variances are seen as typical of future variances.

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The Variance at Completion (VAC) Using the EAC, the Variance at Completion (VAC) can be calculated. VAC = BAC - EAC The VAC provides the best estimate of the total cost at the completion of the project.

How to remember all of this QuestionAnswerAcronym How much work should be done? Planned Value or Budgeted cost of work scheduled PV or BCWS How much work is done? Earned Value or Budgeted cost of work performed PV or BCWP How much did the work cost? Actual Cost or Actual cost of work performed AC or ACWP What was the total job supposed to cost? Budget at completionBAC What do we now expect the total job to cost Estimate at completion or latest revised estimate EAC

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control Class Exercise The Fence – Part 2 Complete the rest

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The Cumulative Cost Curve The Cumulative Cost Curve or S curve is another effective monitoring tool in controlling the budget This chart provides the cumulative expenditures of the project. The cost curves for the planned and actual results are graphically shown.

Cumulative Cost Curve Cost Duration Total project Planned Cost Measured Period SV = BCWP - BCWS CV = BCWP - ACWP BCWS BCWP ACWP

Agenda ‒ Cost Management ‒ Cost Budgeting ‒ Cost Control The End