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Project Cost Control

Project cost management involves three key processes: cost estimating, cost budgeting, and cost control. Cost budgeting develops a cost baseline by allocating the overall cost estimate to work items over time. Cost control monitors cost performance and informs stakeholders of changes affecting costs. Earned value management (EVM) integrates scope, time, and cost data by comparing the budgeted cost of work performed (earned value) to the actual cost and planned value to analyze schedule and cost variances and determine if the project is on budget and on schedule.

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Chuah Cheong Jin
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125 views

Project Cost Control

Project cost management involves three key processes: cost estimating, cost budgeting, and cost control. Cost budgeting develops a cost baseline by allocating the overall cost estimate to work items over time. Cost control monitors cost performance and informs stakeholders of changes affecting costs. Earned value management (EVM) integrates scope, time, and cost data by comparing the budgeted cost of work performed (earned value) to the actual cost and planned value to analyze schedule and cost variances and determine if the project is on budget and on schedule.

Uploaded by

Chuah Cheong Jin
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Project Cost Management

Project Cost Management


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

Cost Budgeting
Allocating the overall cost estimate to individual work
items to establish a baseline for measuring performance.

Cost Control
Controlling changes to the project budget.

Cost Budgeting
Cost budgeting involves allocating the project cost
estimate to individual work items over time.
The WBS is a required input for the cost budgeting
process because it defines the work items.
Important goal is to produce a cost baseline:
A time-phased budget that project managers use to
measure and monitor cost performance.

Cost Control
Project cost control includes:
Monitoring cost performance.
Ensuring that only appropriate project changes are
included in a revised cost baseline.
Informing project stakeholders of authorized changes to
the project that will affect costs.

Earned Value Management


(EVM)
EVM is a project performance measurement technique
that integrates scope, time, and cost data.
Given a baseline (original plan plus approved changes),
one can determine how well the project is meeting its
goals.
One must enter actual information periodically to use
EVM.

Earned Value Management


Terms

Planned Value (PV)

budgeted cost of work scheduled or budget


is that portion of the approved total cost estimate planned to be
spent on an activity during a given period.

Actual cost (AC)


actual cost of work performed
is the total of direct and indirect costs incurred in accomplishing
work on an activity during a given period.

Earned Value (EV)


budgeted cost of work performed
is an estimate of the value of the physical work actually
completed.

Rate of Performance
Rate of performance (RP)
is the ratio of actual work completed to the percentage
of work planned to have been completed at any given
time during the life cycle of the project or activity.
For example, suppose the compressor installation was
halfway completed by the end of week 1. The rate of
performance would be 50 percent because by the end of
week 1, the planned schedule reflects that the task
should be 100 percent complete and only 50 percent of
that work has been completed.

Earned Value Management


Terms

Schedule Variance (SV)

SV = EV - PV
Negative indicates project is behind schedule. Zero indicates on
schedule. Positive indicates project is ahead of schedule.

Schedule Performance Index (SPI)


SPI = EV/PV
Less than one indicates project is behind schedule. One indicates
on schedule. More than one indicates project is ahead of
schedule.

Earned Value Management


Terms

Cost Variance (CV)

CV = EV - AC
Negative indicates project is over budget. Zero indicates on
budget. Positive indicates project is under budget.

Cost Performance Index (CPI)


CPI = EV/AC
Less than one indicates project is over budget. One indicates on
budget. More than one indicates project is under budget.

Earned Value Management


Terms

Budget at Completion (BAC)

Project budget
Total amount of money originally planned to spend on the project.

Estimate at Completion (EAC)


As the project progresses, there may be variations into the final
actual cost. EAC is a way to estimate the planned cost at the project
finish.
EAC = BAC/ CPI if project continues to spend at the same rate up
to now
EAC = AC + (BAC EV) if future expenditures will occur at the
original forecasted amount. (i.e. no nore delays of the same kind in
future)
EAC = AC + [(BAC-EV)/(SPI*CPI)] if current cost & schedule
performance will impact future cost performance.

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Earned Value ManagementExample

Simple Illustration

9 crystallizers each having a budgeted cost of RM 60,000 are


expected to be completed in 12 weeks.
Planned Value (PV)
By the end of week 4, 3 crystallizers should be completed, the PV is
RM180,000.

Earned Value (EV)


By the end of week 4, only 2 crystallizers are completed, the EV is
RM120,000.

Actual Cost (AC)


By the end of week 4, say RM150,000 was spent, the AC is
RM150,000.

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Earned Value ManagementExample

EVM is based on monitoring these 3 aspects along the project in


order to reveal the health of the project using the following
indices:
Schedule Variance (SV = EV - PV). In this case is 120,000-180,000
= - RM 60,000 (achieved less than what planned -behind schedule)
Schedule Performance Index (SPI = EV/ PV). In this case is
120,000/ 180,000 = 0.67 (behind schedule)
Cost Variance (CV = EV AC). In this case is 120,000-150,000
= - RM 30,000 (achieved less than spent over budget)
Cost Performance Index (CPI = EV/ AC). In this case is
120,000/150,000 = 0.8 (over budget)

Both SV and SPI / CV and CPI give similar information on


schedule/ budget but the indices give more insights into the
actual performance with a meaningful comparison.

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Earned Value ManagementExample


Budget at Completion (BAC)
BAC in this case is RM60,000 X 9 = RM 540,000

Estimate at Completion (EAC)


Scenario 1 If project continues to spend at the same rate up to now. The reason for
delay is likely to continue (e.g. labour is less skilled)
EAC = BAC / CPI
= 540,000 / 0.8 = RM 675,000
Scenario 2 If future expenditures will revert to original forecast. I.e. no more
delays of the same kind in future.
EAC = AC + (BAC EV)
= 150,000 + (540,000 120,000) = RM 570,000
Scenario 3 If both current cost & schedule performance will impact future cast
performance.
EAC = AC + [(BAC-EV)/(SPI*CPI)]
= 150,000 + [(540,000-120,000)/0.67*0.8)] = RM 933,582

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Earned Value Calculations for a


One-Year Project After Five
Months

14

Earned Value Chart for


Project after Five Months
If the EV
line is
below the
AC or PV
line, there
are
problems
in those
areas.

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