1. Project Management Cost Control

2. Outline Introduction Understanding Control The Operating Cycle
Cost Account Codes
Budgets
The Earned Value Measurement System（ EVMS）
Variance and Earned Value

3. Outline The Cost Baseline Justifying the Costs
The Cost Overrun Dilemma
Recording Material Costs Using Earned Value Measurement
The Material Accounting Criterion
Material Variances : Price and Usage
Summary Variances

4. Outline
Status Reporting
Cost Control Problems

5. Introduction Do project managers control costs, monitor costs or both?
Cost control is not only “monitoring” costs and recording data, but also analyzing the data in order to take corrective action before it is too late.

6. Cost Management Cost estimating Cost accounting Project cash flow
Company cash flow
Direct labor costing
Overhead rate costing
Others, such as incentives, penalties, and profit-sharing

7. Cost And Control System
PLANNING
WORK
AUTHORIZATION
AND RELEASE
DATA
COLLECTION
AND REPORTING
COST
ACCOUNTING
CUSTOMER AND
MANAGEMENT
REPORTING
PHASE I
PHASE II
PHASE III
PHASE IV
PHASE V
PLANNING
OPERATING CYCLE
CYCLE

8. Cost Control Requirements
Measure resources consumed
Measure status and accomplishments
Compare measurements to projections and standards
Provide the basis for diagnosis and re-planning

9. Cost Control Activities
Contract receipt (if applicable)
Work authorization for project planning
Work breakdown structure
Subdivided work description
Schedules
Planning charts
Budgets

10. Cost Control Requirements
Thorough planning of the work to be performed to complete the project
Good estimating of time, labor, and costs
Clear communication of the scope of required tasks
A disciplined budget and authorizations of expenditures
Timely accounting of physical progress and cost expenditures
Periodic re-estimation of time and cost to complete remaining work

11. Cost Control Requirements (Continued)
Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion

12. Purposes of Cost Control (1/2)
Verification
The objectives have been successfully translated into performance standards
The performance standards are, in fact, a reliable representation of program activities and events
Meaningful budgets have been established such that actual versus planned comparison can be made

13. Purposes of Cost Control (2/2)
Decision making via three reports
The project plan, schedule, and budget prepared during the planning phase
A detailed comparison between resources expended to date and those predetermined.
A projection of resources to be expended through program completion

14. When to Implement a Cost Management System
Possible cost
reductions
Cost of change
PROJECT
COSTS
PROJECT LIFE CYCLE PHASES
CONCLUSION
A cost management system should be implemented right at the beginning of the life cycle of the project.

15. Ability to Influence Cost

16. Cost Account Intersection

17. Cost Account Code Breakdown

18. Work Authorization Form
WBS: Work order no: D1385
Date of original release: Feb 97
Date of revision: March 97
Revision number: C
Cost Work Work
Centers Hours Cost Starts Ends
Description
- Test Material R Aug Sept
- Processing R7500
- Final inspection R3500
- Packaging R 750
- Delivery R 350
Project office authorization signature:________________

19. Planning and Budgeting
WBS Element
Work Package
Work packages M G R
Org
WP______ORG_______
Description of task_____
____________________
Sched: Start____Stop__
Budget:______________
Org
Org

20. CACN No. _____________ Revision to Cost Account No
CACN No. _____________ Revision to Cost Account No. ____________ Date ___________
DESCRIPTION OF CHANGE:
____________________________________________________________________________________
REASON FOR CHANGE:
__________________________________________________________________________________
Requested Budget Authorized Budget
Labor Hours _________________ _________________ Period of performance
Materials _________________ _________________ From _____________
ODCS _________________ _________________ To _____________
BUDGET SOURCE:
Funded Contract Change
Management Reserve
Undistributed Budget
Other _________________
INITIATED BY: ____________________________ APPROVALS: Program Mgr. ________
Prog. Control ________
COST ACCOUNT CHANGE NOTICE (CACN)

21. Sources Of Additional Funding
Funded contract change
Management reserve
Undistributed budget
Other (e.g. profits)

22. Cost data collation and reporting flow chart
Actuals
Monthly Total
Program Effort
BCWP
Labor
Weekly Labor
Reports
ACWP
Computer
MCCS Comparison
reports To All Execs
Inventory
Accounts
BCWS
Variance Report
ACWP: Actual Cost for Work Performed
BCWP: Budgeted Cost for Work Performed
BCWS: Budgeted Cost for Work Scheduled
MCCS: Management Cost and Control System

23. Cost Data
Labor
Material
Other direct charges
Overhead

24. Weekly Labor Report Example

25. Types of Budgets Distributed budget Management budget
Undistributed budget
Contract changes

26. Variance Analyses

27. Variances
The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished.
The scheduling variance provides a comparison between planned and actual performance but does not include costs.

28. Variables for Variance Analysis
Budgeted Cost for Worked Scheduled (BCWS) is the budgeted amount of cost for word scheduled to be accomplished plus the amount of level of effort or apportioned effort scheduled to be accomplished in a given time period.
Budgeted Cost for Work Performed (BCWP) is the budgeted amount of cost for completed word, plus budgeted for level of effort or apportioned effort activity completed within a given time period. this is sometimes referred to as an “earned value.”

29. Variables for Variance Analysis
Actual Cost for Work Performed (ACWP)
is the amount reported as actually expended in completing the work accomplished within a given time period.
Cost Variance = BCWP – ACWP
Schedule/Performance Variance
= BCWP - BCWS

30. Measurements
Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results.
Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.

31. Cost Variance Calculation
CV = BCWP - ACWP
A Negative Variance Indicates A Cost Overrun

32. Schedule Variance Calculation
SV = BCWP - BCWS
A Negative Variance Indicates
A Behind Schedule Condition

33. Variance Percents SV SCHEDULE VARIANCE % = X 100 (SVP) BCWS
COST VARIANCE % =
(CVP)
X 100
BCWS CV
X 100
BCWP

34. Permitted Variances May be Dependent on Such Factors as :
Life cycle phase
Length of life cycle phase
Length of project
Type estimate
Accuracy of estimate

35. Variance Control for Example Program

36. Project Variance Analysis
VARIANCE UPPER BOUNDARY
PROJECTED COST $
ACTUAL COST VARIANCE
VARIANCE LOWER BOUNDARY
R&D
QUALIFICATION
DEVELOPMENT
PHASE I
PHASE II
PHASE III
TIME

37. Performance Index BCWP Cost Performance Index = (CPI) ACWP
Schedule Performance Index =
(SPI)
ACWP
BCWP
BCWS

38. Performance Index Example

39. Management Reserve
Defined as the difference between the contracted cost for projected performance to date and the budgeted cost.
It is to cover the unforseen events within a defined project scope, but is used for unlikely major events.

40. Management Reserve CONTRACTED COST MANAGEMENT ACTUAL COST RESERVE $
RELEASED BUDGET
TIME

41. Integrated Cost/schedule System

42. Information Requirements
Budgeted cost for work scheduled (BCWS)
Budgeted cost for work performed (BCWP)
Actual cost for work performed (ACWP)
Estimated cost at completion
Budgeted cost at completion
Cost and schedule variances/explanations
Traceability

43. Variance Analysis Questions
What is the problem causing the variance?
What is the impact on time, cost, and performance?
What is the impact on other efforts, if any?
What corrective action is planned or under way?
What are the expected results of the corrective action?

44. Variance Reporting
Variance reporting is accomplished at each reporting interval. However, the variance threshold reports are exception reports and occur only when the variances exceed the upper and lower boundaries of the project variances envelope.

45. Reporting Intervals
Depends on the type of organization and characteristics of the projects.
Project-driven organization - weekly.
Non-project-driven organization - monthly

46. Cost Account Variance Analysis Report
Cost account no/cam
Reporting level
WBS/Description
As of
Cost performance data
Variance
At completion
BCWS BCWP ACWP SCHED COST
Budget
EAC
Var.
Month to date ($)
Contract to
date ($k)
Problem cause and impact
Corrective action (including expected recovery date)
Cost account Date Cost center Date WBS element Date Date
Mgr Mgr Mgr.

47. The 50/50 Rule
Half of the budget for each element is recorded at the time that the work is scheduled to begin and the other half at the time the work is scheduled to be completed.
For a project with a large number of elements the amount of distortion from such a procedure is minimal.

48. Analysis Budgeted cost for work Scheduled (BCWS) Performed (BCWP) 8
Cost account budget = 100
(thousands) 8 14 12 10
Work packages 12 8
BCWS = 38
BCWP = 49
SCHED. VARIANCE = +11 12 10 8
50-50 rule used for work in process
J F M A M J J A S O N D

49. Using The 50-50 Rule 4,000 TIME LINE 10,000 LEGEND 12,000 COMPLETED
NOT COMPLETED
6,000
BCWS = 34,000
BCWP = 33,000
6,000
BAC = 52,000
10,000
TIME

50. Earned Value Status Reporting
TIME LINE
BCWS SV
ACWP CV
CUMMULATIVE COST, $
BCWP
TIME

51. Progress Reporting 1. Where are we today (time and cost)?
Progress reporting needs to answer four fundamental questions:
1. Where are we today (time and cost)?
2. Where will we end up (time and cost)?
3. What are the present and future risks?
4. Are there any special problems that need to be addressed and what can management do to help?

52. Estimate At Completion (EAC)
ACWP
EAC = X
Budget at completion
BCWP
(BAC)
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.

53. Monthly Project Report
1. VARIANCE ANALYSIS (Cost in Thousands) June 1997
Budgeted Budgeted Cost
Milestone Cost Work Work Actual Variance, %
Subtask Status Scheduled Performed Cost Schedule Cost
Completed
Completed
Completed
Not Started
Completed
Not started
Started
Not started
Total

54. 2. ESTIMATE AT COMPLETION (EAC)
EAC = (360/340) X 579,000 = $613,059
Overrun = 613, ,000 = $34,059
3. COST SUMMARY
Costs are running approximately 5.9% over budget due to higher salaried labor.
4. SCHEDULE SUMMARY
The 24.4% behind schedule condition is due to subtasks 4 and 6 which have not yet begun due to lack of raw materials and the 50/50 method for booking costs. Overtime will get us back on schedule but at an additional cost of 2.5% of direct labor costs.

55. 5. MILESTONE REPORT
Milestone/ Scheduled Projected Actual
Subtask Completion Completion Completion
/1/ /1/97
/1/ /1/97
/1/ /23/97
/1/ /1/97
/1/ /1/97
/1/ /1/97
/1/ /1/97
/1/ /1/97

56. Current Potential Corrective
6. ACTIVITY REPORT
Current Potential Corrective
Problem Impact Action
(a) Lack of raw Cost overruns and Overtime is scheduled.
materials behind schedule We will try to use lower
condition salaried staff. Raw
materials are expected
to be on dock next week.
(b)Customer un May need add Customer will provide
happy with test itional planning us with revised results statement of work on /15/97.

57. Status Reporting
Status Reporting Is More Than Just A Computer Printout
Intranet Status Reporting
Reporting Favorable Status
Reporting Unfavorable Status

58. Data Accumulation Budget Organization WBS BCWS BCWP ACWP SCHED VAR
COST
VAR
ACWP

59. Cost Problems
Poor estimating techniques and/or standards, resulting in unrealistic budgets
Out-of-sequence starting and completion of activities and events
Inadequate work breakdown structure
No management policy on reporting and control practices
Poor work definition at the lower levels of the organization

60. Cost Problems (Continued)
Management reducing budgets or bids to be competitive or to eliminate “fat”
Inadequate formal planning that results in unnoticed, or often uncontrolled, increases in scope of effort
Poor comparison of actual and planned costs
Comparison of actual and planned costs at the wrong level of management
Unforeseen technical problems

61. Cost Problems (Continued)
Schedule delays that require overtime or idle time costing
Material escalation factors that are unrealistic

62. Cost Control and Report Flow

63. Graphical Status Reporting

64. Program Interrelationships(1/7)
Program Manager
Functional Manager
Relationship
Makes or approves all decisions that affect the contractually committed target time, cost, and performance requirements or objectives of the program
Assembles and furnished the information needed to assist the program manager in making decisions. Submits to the program manager all proposed changes that affect program cost, schedule targets and technical requirements and objectives through the program team member
Management controls, contract administration, budgeting, estimating, and financial controls are a functional specialty. The program manager utilizes the services of the specialist organizations. The specialists retain their own channels to the general manager but must keep the program manager informed through the program team member.

65. Program Interrelationships(2/7)
Program Manager
Functional Manager
Relationship
Approves all engineering change control decisions that affect the contractually committed target time, cost, and performance requirements or objectives of the program. Establishes program budgets in conjunction with the cognizant program team members; monitors and negotiates changes.
Implements engineering change decisions by the program manager.
Advises him of any resulting programming impasses and negotiates adjustments through the program team member.
In all matters pertaining to budget and cost control, the program manager utilizes the services of the program team member repressenting the cognizant financial control organization.

66. Program Interrelationships(3/7)
Program Manager
Functional Manager
Relationship
Authorizes release of the budget and work authorization for the performance of approved work, and negotiates any intradirectorate reallocation above section level with the affected functional organizations through the program team members.
Within the allocated budget, provides manpower skills, facilities, and other resources pertaining to his functional specialty to the degree and level necessary to meet program schedule, cost, and technical performance requirements of the contract.

67. Program Interrelationships(4/7)
Program Manager
Functional Manager
Relationship
Requests the assignment of program team members to the program, and approves the release of the team member from the program.
Coordinates with the program manager on the selection and assignment of a program team member to the program or release of the program team member from the program.
Program manager does not fire functional personal. Program team members should not br removed from the program without the concurrence of the program manager.

68. Program Interrelationships(5/7)
Program Manager
Functional Manager
Relationship
Establishes report requirements and controls necessary for evaluation of phases of program performance consistent with effective policies and procedures.
Works in concert with other functional organizations to ensure that he and they are proceeding satisfactorily in the completion of mutually interdependent program tasks and events.
Insofar as possible, program controls must be satisfied from existing data and controls as defined by division policies and procedures.

69. Program Interrelationships(6/7)
Program Manager
Functional Manager
Relationship
Measures and evaluates performance of tasks against the established plan. Identifies current and potential program. Decides upon and authorizes corrective action.
Follows up all activities of his organization to ensure satisfactory performance to program requirements. Detects actual or potential problems. Takes timely corrective action in his organization, and when such problems involve interface with other functional organization, notifies them and coordinates the initiation of mutually satisfactory remedial action. Keeps the program manager advised (through the program team member) of conditions affecting the program, existing, or expected problems solved, and corrective action required or performed.
The program manager directs or redirects activities of functional organizations only through the cognizant program team member. Functional managers are responsible for the performance of their organizations. Functional managers do not implement decisions involving increased total program costs, changes in schedule, or changes in technical performance without prior approval of the program team members and the program manager.

70. Program Interrelationships(7/7)
Program Manager
Functional Manager
Relationship
Apprises the program team members and/or functional organizations of program changes affecting their function.
Assures the establishment, coordination, and execution of support program to the extent required or pemitted by the contract.
This includes such programs as value engineering, data management, and configuration management.

71. Problem Areas in Cost Control
Organization:
- Inadequate Work Breakdown Structure
- Poor work definition at working levels
- Lack of formal system procedures
Planning and budgeting:
- Inadequate forward planning
- Over-allocation of budget
- Poor integration of budget, schedule, work authorization

72. Problem Areas in Cost Control
Accounting:
- Inability to account for cost of material on applied basis
Analysis:
- Determination of status not based on work package completion
- Comparison of actual vs. planned costs at improper level
Revisions:
- Failure to maintain valid measurement baseline

73. Cost Problems Per Phase
Proposal Phase
Failure to understand customer requirements
Unrealistic appraisal of in-house capabilities
Underestimating time requirements

74. Cost Problems Per Phase
Planning phase
Omissions
Inaccuracy of the work breakdown structure
Misinterpretation of information
Use of wrong estimating techniques
Failure to identify and concentrate on major cost elements
Failure to assess and provide for risks

75. Cost Problems Per Phase
Negotiation phase
Forcing a speedy compromise
Procurement ceiling costs
Negotiation team that must “win this one”

76. Cost Problems Per Phase
Contractual phase
Contractual discrepancies
SOW different from RFP requirements
Proposal team different from project team

77. Cost Problems Per Phase
Design phase
Accepting customer requests without management approval
Problems in customer communications channels and data items
Problems in design review meetings

78. Cost Problems Per Phase
Production phase
Excessive material costs
Specifications that are not acceptable
Manufacturing and engineering disagreement