MEC-3

Control Costs

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

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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

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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

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Cost Baseline & Management Reserve

PV

AC

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Project Budget & Cost Baseline

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 Simple CBS &
Project
Budget Project Budgeting

Management
Reserve

Cost
Baseline

Control
Accounts

Work
Packages

Activities
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 Simple CBS &
Project
Budget 3,050 Project Budgeting

Management Figures at bottom are

Reserve 500
Contingency Reserve
for that Activity or
Work Package
Cost
Baseline 2,550

Control
1,900 650
Accounts

Work 700 750 350 550

Packages 75 100

135 220 260 250 360

Activities
15 30 40 50 90
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 Control Schedule Inputs & Outputs

1. PCMP (PMP)
1. WPI
2. Cost Baseline (Budget)
2. Change Request
3. WPD (D&M PW) Control
3. PMP Updates
4. OPA Costs
4. PD Updates
5. Proj Funding
5. OPA Updates
Requirements
6. Cost Forecasts

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Control Costs Inputs
Input Details
PCMP 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 • Projected Expenditures
Requirements • Anticipated Liabilities

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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

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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

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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

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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) Current Cost
Performance
- Cost Variance (CV)
- Cost Performance Index (CPI)
- Estimate At Completion (EAC)
- Estimate To Complete (ETC) Forecast Cost
- Variance At Completion (VAC) Performance
- To Complete Performance Index (TCPI)
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EVM – Simplified Example
Procurement Project
• 200 heavy duty concrete security blocks. This
is Project Scope
• Total Cost: Rs 2,000K. This is BAC
• Management Reserves @ 7.5%
• 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 15
EVM Cost Performance - Simplified Example
2400

2200 PROJ BUDGET = 2,000+150 = 2,150

2000
MGT RES @ 7.5% = 150
2000
BAC = 2,000
1800

1600

1400
Rs in Thousand

1200
1000
1000 PV
900
AC
800
800 CV
l in e EV
se
Ba
600 st
Co

400

200
Time in Days
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

CV = 800K-900 = -100
CPI = 800/900 = 0.89 16
 EVM Cost Performance - Simplified Example
2400

2200 PROJ BUDGET = 2,000+150 = 2,150 2000 2000

MGT RES @ 7.5% = 150
2000
BAC = 2,000
1800

1600

1400
Rs in Thousand

1200
1000
1000 PV
900
AC
800 CV
800 l in e EV
se
Ba
st
600 Co

400

200
Time in Days
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

CV = 800K-900 = -100
CPI = 800/900 = 0.89 17
EVM Cost Performance - Simplified Example
2400 2250
EAC
2200 PROJ BUDGET = 2,000+150 = 2,150

VAC
2000 2000
MGT RES @ 7.5% = 150
2000
BAC = 2,000
1800

Funds Remaining
Work Remaining
1600

ETC
1400
Rs in Thousand

1200
1000
1000 PV
900
AC
800
800 CV
l in e EV
se
Ba
600 st
Co

400
TCPIBAC = (2,000-800)/(2,000-900) = 1.09

200 TCPIEAC = (2,000-800)/(2,250-900) = 0.89

Time in Days
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

CV = 800K-900 = -100 EAC = 2,000/.89 = 2,250 VAC = 2,000-2,250 = -250

CPI = 800/900 = 0.89 ETC = 2,250-900 = 1,350 18
Finding EV
1. Portioning BAC on the basis of Fraction of Work Completed
2. 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?
3. 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

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Further Look at the EAC
1. Performance Based EAC
EAC = BAC = 2,000/0.89 = 2,250
CPI

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

EAC = AC + (BAC – EV ) = 900 + (2,000 – 800) = 2,100

4. What has been Spent + Budget for Remaining Work modified by

Cost & Schedule Performance

EAC = AC + (BAC – EV) = 900 + 1,200/(0.89 x 0.80) = 2,588

CPI x SPI

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EVM - General Template for Schedule & Cost Monitoring, Evaluation &
Forecast
EAC

VAC
BAC

Funds Remaining
ETC

Work Remaining
CV
SV
AC
PV
Baseline Proj Estimated Proj
EV SV Duration Duration

At Completion
Schedule
Variance

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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 BUDGET for the TOTAL PROJECT
(BAC)
Cost Variance (CV) = EV-AC Difference between ACCOMPLISHED WORK &
PLANNED WORK (+ under, - over budget)
Cost Performance Index = EV/AC Comparison of ACCOMPLISHED WORK with
(CPI) PLANNED WORK (ACCOMPLISHED WORK as
fraction or % of PLANNED WORK)
(>1 under, <1 over budget)

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

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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

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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)

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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
Variance FAVOURABLE if respective
ACTUAL RATE or QTY < STD RATE or QTY, & vice versa
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Basic Definitions

Fixed Attribute Differing Attributes Variance

Actual Quantity of Actual & Standard MRV
Material Purchase Costs
Standard Cost of Material Actual & Standard MUV
Quantities of Material
Actual Number of Man Actual & Standard Labour LRV
Hours Labour Employed Rates
Standard Labour Rate Actual & Standard LEV
Number of Man Hours
Labour Employed

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Variance Analysis – General Template

Actual Qty Actual Qty Standard Qty

X X X
Actual Rate Standard Rate Standard Rate

AQ x (SR-AR) = MPV MUV = SR x (SQ-AQ)

or or
LRV LEV

Net Effect

• MRV/LRV FAVOURABLE if: Actual Rate < Std Rate

• MUV/LEV FAVOURABLE if: Actual Qty < Std Qty
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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 Actual Qty Std Qty
x x x
Actual Cost Std Cost Std Cost
900 bags 900 bags 1,000 bags
x x x
Rs 500 per bag Rs 400 per bag Rs 400 per bag
= Rs 450,000 =Rs 360,000 =Rs 400,000
MRV MUV
Rs 90,000 (U) Rs 40,000 (F)
Net Effect

Rs 50,000 (U)
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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 Actual Qty Std Qty
x x x
Actual Cost Std Cost Std Cost
Act Effort Act Effort Std Effort
x x x
Act Lab Rate Std Lab Rate Std Lab Rate
200x80 man-days 200x80 man-days 200x100 man-days
x x x
Rs 600 per man-day Rs 500 per man-day Rs 500 per man-day
= Rs 9,600,000 = Rs 8,000,000 = Rs 10,000,000
LRV LEV
Rs 1,600,000 (U) Rs 2,000,000 (F)
Net Effect
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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
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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

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Trend Analysis
Regression Analysis

• Performance improving or deteriorating? • Forecast

Variance Trend Performance Index Trend

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Software Tools
• MS Project 2010 (Exercise Files)

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