Chapter 15 Cost Control

1. Chapter 15Cost Control

2. 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

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

4. 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

5. WHEN TO IMPLEMENT A COST MANAGEMENT SYSTEM Possible cost reductions Cost of change PROJECT COSTS CONCLUSION A cost management system should be implemented right at the beginning of the life cycle of the project. PROJECT LIFE CYCLE PHASES

6. PLANNING AND BUDGETING WBS Element Work Package Work packages Org M G R WP______ORG_______ Description of task_____ ____________________ Sched: Start____Stop__ Budget:______________ Org Org

7. Sources Of Additional Funding • Funded contract change • Management reserve • Undistributed budget (money waiting to be allocated)

8. Cost Data • Labor • Material • Other direct charges • Overhead

9. VARIABLES FOR VARIANCE ANALYSIS • BUDGETED COST FOR WORKED SCHEDULED (BCWS) IS THE BUDGETED AMOUNT OF COST FOR WORK SCHEDULED TO BE ACCOMPLISHED PLUS THE AMOUNT OF LEVEL OF EFFORT. • BUDGETED COST FOR WORK PERFORMED (BCWP)IS THE BUDGETED AMOUNT OF COST FOR COMPLETED WORK, 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.” • 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

10. 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.

11. 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.

12. COST VARIANCE CALCULATION A NEGATIVE VARIANCE INDICATES A COST OVERRUN CV = BCWP - ACWP

13. SCHEDULE VARIANCE CALCULATION SV = BCWP - BCWS A NEGATIVE VARIANCE INDICATES A BEHIND SCHEDULE CONDITION

14. VARIANCE PERCENTS SV SCHEDULE VARIANCE % = (SVP) COST VARIANCE % = (CVP) X 100 BCWS CV X 100 BCWP

15. 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

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

17. 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

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

19. ESTIMATE AT COMPLETION (EAC) ACWP EAC = Budget at completion X BCWP (BAC) The estimate at completion is the best estimateof 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.

20. Cost Problems • Poor estimating techniques and/or standards, resulting in unrealistic budgets • Inadequate work breakdown structure • No management policy on reporting and control practices • Poor work definition at the lower levels of the organization