MEC-3 Control Costs

Agenda Cost Baseline Project Funding Requirements Inputs to Control Cost Outputs from Control Cost Tools & Techniques for Controlling Cost Agile, Waterfall

Cost Baseline Approved Version of the Time Phased Cost Budget for the Project (Spending Plan indicating how much money is approved for the Project and when the Funds are required – the Cash Flow Plan) Excludes Management Reserves Developed as a summation of the approved budgets for the different Schedule Activities Agile, Waterfall

Project Funding Requirements Forecast Project Costs to be paid that are derived from the Cost Baseline for Total or Periodic Requirements Includes Projected Expenditures plus Anticipated Liabilities Management Reserves are not part of the Cost Baselines but they are part of the Project Funding requirements. Therefore, the difference between the Cost Baseline and Funding requirement at Project completion is Management Contingency Reserve Agile, Waterfall

Cost Baseline & Management Reserve PV AC Agile, Waterfall

Project Budget & Cost Baseline Agile, Waterfall

Simple CBS & Project Budgeting Management Reserve Cost Baseline Control Accounts Agile, Waterfall Work Packages Activities

Simple CBS & Project Budgeting 3,050 Management Reserve Figures at bottom are Contingency Reserve for that Activity or Work Package 500 Cost Baseline 2,550 650 Control Accounts 1,900 Agile, Waterfall 700 350 75 750 550 100 Work Packages 135 15 220 30 260 40 250 50 360 90 Activities

Control Costs Inputs & Outputs PCMP (PMP) Cost Baseline (Budget) WPD (D&M PW) OPA WPI Change Request PMP Updates PD Updates OPA Updates Control Costs Proj Funding Requirements 6. Cost Forecasts Agile, Waterfall

Control Costs Inputs Input Details Project Cost Management Plan How the Project Costs will be Controlled Project Budget Cost Baseline WPD Activities that have Started Activities’ Progress Finished Deliverables Costs Incurred OPA Cost Control-related Policies, Procedures & Guidelines Control Cost Tools Monitoring & Reporting Methods Project Funding Requirements Projected Expenditures Anticipated Liabilities Agile, Waterfall

Control Cost Outputs 1/2 Output Details WPI CV & CPI values for WBS components, in particular the Work Packages and Control Accounts Change Request Based on Cost Variance Analysis, Recommendations for: Changes to Baselines (Cost, Scope etc) Corrective, Preventive Actions & Defect Repairs PMP Updates Based on Change Requests, projected Changes to: Cost Baseline viz Activity Cost Estimates etc PCMP, such as changes to Control Thresholds, or specified Levels of Accuracy reqd in managing the Project’s Cost, or Changes based on Stakeholders’ feedback PD Updates Cost estimates Basis of estimates Agile, Waterfall

Control Cost Outputs 1/2 Output Details OPA Updates Causes of Variances Corrective Action chosen and the Reasons Financial Databases Other types of lessons learned from Project Cost Control Cost Forecast EAC, ETC, VAC, TCPI for the Remaining Project Agile, Waterfall

Control Costs Tools & Techniques Tool Category Tools Performance Reviews EVM TCPI Forecasting Variance Analysis Trend Analysis Reserve Analysis Project Management Software e.g. MS Project Agile, Waterfall

Earned Value Management (EVM) Tool to determine both Cost & Schedule Variances Key Terms (Some common with Schedule Variance, others specific to Schedule Variance: Budget At Completion (BAC) Planned Value (PV) Earned Value (EV) Actual Cost (AC) Cost Variance (CV) Cost Performance Index (CPI) Current Cost Performance Agile, Waterfall Forecast Cost Performance Estimate At Completion (EAC) Estimate To Complete (ETC) Variance At Completion (VAC) To Complete Performance Index (TCPI)

EVM – Simplified Example Procurement Project 200 heavy duty concrete security blocks. This is Project Scope Total Cost: Rs 2,000K. This is BAC Rs 10K per block; 200 blocks deliverable in 20 days @ 10 blocks per day. This is Cost Baseline Contract Type: Cost Reimbursable Situation at the end of Day 10 80 blocks delivered; Contractor invoiced Rs 900K for these 80 blocks. This is WPD Analysis (WPI) 80 blocks should have cost: 80 x Rs 10K = Rs 800K. This is EV At the end of Day 10, 100 blocks should have been delivered, which would have cost: 100 x Rs 10K = Rs 1,000K. This is PV These 80 blocks actually invoiced/cost Rs 900K. This is AC Agile, Waterfall

EVM Cost Performance - Simplified Example PROJ BUDGET = 2,000+150 = 2,150 MGT RES @ 7.5% = 150 BAC = 2,000 PV AC CV EV Cost Baseline CV = 800K-900 = -100 CPI = 800/900 = 0.89

EVM Cost Performance - Simplified Example PROJ BUDGET = 2,000+150 = 2,150 MGT RES @ 7.5% = 150 BAC = 2,000 PV AC CV EV Cost Baseline CV = 800K-900 = -100 CPI = 800/900 = 0.89

EVM Cost Performance - Simplified Example EAC PROJ BUDGET = 2,000+150 = 2,150 VAC MGT RES @ 7.5% = 150 BAC = 2,000 Funds Remaining Work Remaining ETC PV AC CV EV Cost Baseline TCPIBAC = (2,000-800)/(2,000-900) = 1.09 TCPIEAC = (2,000-800)/(2,250-900) = 0.89 CV = 800K-900 = -100 CPI = 800/900 = 0.89 EAC = 2,000/.89 = 2,250 ETC = 2,250-900 = 1,350 VAC = 2,000-2,250 = -250

Finding EV Portioning BAC on the basis of Fraction of Work Completed Evaluating Work Completed on the basis of Baselined Cost per Unit Example: On a certain project, 220 km of oil pipeline was to be laid, in 50 weeks, at a Cost of 2,000 monetary units (mu). Today, at the end of Week-20, 88 km has been laid. What is the EV? EV = Fraction of Work Completed x BAC = 88 km/220 km x 2,000 mu = 800 mu 2. EV = Work Completed x Cost per Km = 88 km x 2,000 mu/220 km = 800 mu Agile, Waterfall

Further Look at the EAC 1. Performance Based EAC = 2,000/0.89 = 2,250 BAC CPI EAC = 2. What has been Spent + What more to be Spent on Remaining Work EAC = AC + ETC = 900 + 1,350 = 2,250 3. What has been Spent + Budget for Remaining Work = 900 + (2,000 – 800) = 2,100 EAC = AC + (BAC – EV ) 4. What has been Spent + Budget for Remaining Work modified by Cost & Schedule Performance Agile, Waterfall (BAC – EV) CPI x SPI EAC = AC + = 900 + 1,200/(0.89 x 0.80) = 2,588

At Completion Schedule Variance EVM - General Template for Schedule & Cost Monitoring, Evaluation & Forecast PV AC SV EV CV At Completion Schedule Variance ETC Work Remaining Funds Remaining VAC BAC EAC Baseline Proj Duration Estimated Proj Duration Agile, Waterfall

EVM for Cost Performance – Present Status Term Formula What it means Planned Value (PV) As of today, the estimated value of the WORK PLANNED to be done Earned Value (EV) As of today, the estimated value of the WORK ACTUALLY ACCOMPLISHED? Budget at Completion (BAC) BUDGET for the TOTAL PROJECT Cost Variance (CV) = EV-AC Difference between ACCOMPLISHED WORK & PLANNED WORK (+ under, - over budget) Cost Performance Index (CPI) = EV/AC Comparison of ACCOMPLISHED WORK with PLANNED WORK (ACCOMPLISHED WORK as fraction or % of PLANNED WORK) (>1 under, <1 over budget) Agile, Waterfall

EVM for Cost Performance – Forecast Term Formula What it means Estimate At Completion (EAC) BAC/CPI AC + ETC AC + (BAC-EV) CPI x SPI As of today, how much is the TOTAL PROJECT COST Expected to be? Estimate To Complete (ETC) EAC-AC As of today, how much MORE the Project will Cost? Variation At Completion (VAC) BAC-EAC How much OVER or UNDER BUDGET the Project will be at Completion To-Complete Performance Index (TCPI) (BAC-EV) (BAC-AC)* CPI of the Remaining Work Ratio of WORK REMAING to MONEY REMAINING * Denominator based on BAC or EAC Agile, Waterfall

Variance Analysis – Another Dimension While Budgeting, Materials & Human Resources are Costed using Standard Rates & Quantities Should these Rates or Quantities change during the Project Life Cycle, Cost Performance would be affected favourably or unfavourably Variance Analysis quantifies the effect of Variance between the Standard & Actual Rates & Quantities for Materials used and Labour employed on a Project Variance is expressed as a Monetary Quantity and suffixed FAVOURABLE or UNFAVOURABLE/ADVERSE depending on its effect on Cost Performance Agile, Waterfall

Variance Analysis – Another Dimension Variance Analysis is an interplay of 4 Attributes: Standard Rate Standard Quantity Actual Rate Actual Quantity This course will only introduce the subject through the following types of Variances: Material Cost/Rate Variance (MCV/MRV) Material Usage Variance (MUV) Labour Wage Rate Variance (LRV) Labour Efficiency Variance (LEV) Agile, Waterfall

Basic Definitions Material Rate Variance (MRV) Variance due to difference in Actual & Standard Costs on Actual Quantity Material Usage Variance (MUV) Variance due to difference in Actual & Standard Quantities at Standard Cost/Rate Labour Wage Rate Variance (LRV) Variance due to difference in Actual & Standard Labour Rates on Actual Man Hours Labour Efficiency Variance (LEV) Variance due to difference in Actual & Standard Quantities Man Hours at Standard Labour Rate Agile, Waterfall Variance FAVOURABLE if respective ACTUAL RATE or QTY < STD RATE or QTY, & vice versa

Basic Definitions Fixed Attribute Differing Attributes Variance Actual Quantity of Material Actual & Standard Purchase Costs MRV Standard Cost of Material Actual & Standard Quantities of Material MUV Actual Number of Man Hours Labour Employed Actual & Standard Labour Rates LRV Standard Labour Rate Actual & Standard Number of Man Hours Labour Employed LEV Agile, Waterfall

Variance Analysis – General Template Actual Qty X Actual Rate Actual Qty X Standard Rate Standard Qty X Standard Rate AQ x (SR-AR) = MPV or LRV MUV or LEV = SR x (SQ-AQ) Net Effect Agile, Waterfall MRV/LRV FAVOURABLE (+) if: Actual Rate < Std Rate MUV/LEV FAVOURABLE (+) if: Actual Qty < Std Qty

Variance Analysis – Example 1 On a certain construction project, first slab has been poured. For this activity, 1,000 bags of cement had been planned, at the standard rate of Rs 400 per bag. The cement was purchased @ Rs 500 per bag and 900 bags were consumed in the pouring. Carry out Variance Analysis and its Overall Effect on Project Cost Performance. Actual Qty x Actual Cost Std Cost Std Qty 900 bags x Rs 500 per bag = Rs 450,000 900 bags x Rs 400 per bag =Rs 360,000 1,000 bags x Rs 400 per bag =Rs 400,000 Agile, Waterfall MRV MUV Rs 90,000 (U) Rs 40,000 (F) Net Effect Rs 50,000 (U)

Variance Analysis – Example 2 On a certain construction project, HR Assignment Plan assigned 200 unskilled workers, on a particular activity, for 100 days, on a daily wage of Rs 500. Due to countrywide escalating inflation no worker was available for less than Rs 600 per day. The activity actually took 80 days to complete. Carry out Variance Analysis and its Overall Effect on Project Cost Performance. Actual Qty x Actual Cost Std Cost Std Qty Act Effort x Act Lab Rate Std Lab Rate Std Effort 200x80 man-days x Rs 600 per man-day = Rs 9,600,000 200x80 man-days x Rs 500 per man-day = Rs 8,000,000 200x100 man-days x Rs 500 per man-day = Rs 10,000,000 Agile, Waterfall LRV LEV Rs 1,600,000 (U) Rs 2,000,000 (F) Net Effect Rs 400,000 (F)

Reserve Analysis Reserve Analysis is used to monitor and control the status of Contingency and Management reserves for the Project to determine if these Reserves are still needed or if Additional Reserves need to be requested Reserve Analysis is all about Using, Reducing or Eliminating Contingency Reserves, as more precise information about the Project becomes available As work on the project progresses, these Reserves may be used as planned to cover the cost of Risk Mitigation events or other Contingencies. For example on Rework for some Project Deliverables which fail Quality Or, if the probable Risk Events do not occur, the unused Contingency Reserves may be Reduced or Removed from the project budget to free up resources for other projects or operations Agile, Waterfall

Reserve Analysis When an amount of Management Reserve is used to fund unforeseen work, the amount of Management Reserve used is added to the Cost Baseline, thus requiring an approved change to the Cost Baseline Agile, Waterfall

Trend Analysis Performance improving or deteriorating? Forecast Regression Analysis Performance improving or deteriorating? Forecast Variance Trend Performance Index Trend Agile, Waterfall

Software Tools MS Project 2010 (Exercise Files) Agile, Waterfall