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Chapter 15 Cost Control

Chapter 15 Cost Control. Do Project Managers Control Costs, Monitor Costs Or Both?. 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.

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Chapter 15 Cost Control

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  1. Chapter 15Cost Control

  2. Do Project Managers Control Costs, Monitor Costs Or Both?

  3. 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

  4. 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

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

  6. 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

  7. 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

  8. Possible cost reductions WHEN TO IMPLEMENT A COST MANAGEMENT SYSTEM 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

  9. Partitioning The Budget

  10. The Work Authorization Form

  11. Work Authorization Form WBS: 31.03.02 Work order no: D1385 Date of original release:03 Feb 01 Date of revision: 18 March 01 Revision number: C Cost Work Work Centers Hours Cost Starts Ends Description - Test Material 2400 150 R4500 1 Aug 15 Sept - Processing 2610 160 R7500 - Final inspection 2621 140 R3500 - Packaging 2623 46 R 750 - Delivery 2624 R 350 Project office authorization signature:________________

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

  13. COST ACCOUNT CHANGE NOTICE (CACN) 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 ________

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

  15. Cost data collation and reporting flow chart Actuals Monthly Total Program Effort BCWP Labor Weekly Labor Reports Computer ACWP MCCS Comparison reports To All Execs Inventory Accounts BCWS Variance Report

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

  17. Types of Budgets • Distributed budget • Management budget • Undistributed budget • Contract changes

  18. Variance Analyses

  19. 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.” • 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

  20. 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.

  21. 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.

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

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

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

  25. 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

  26. Trend Analyses

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

  28. 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

  29. 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?

  30. 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.

  31. REPORTING INTERVALS • Depends on the type of organization and characteristics of the projects. • Project-driven organization - weekly. • Non-project-driven organization - monthly

  32. Cost Account Variance Analysis Report Cost account no/cam Reporting level WBS/Description As of Cost performance data Variance At completion Budget Var. EAC BCWS BCWP ACWP SCHED COST 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.

  33. 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.

  34. ANALYSIS Scheduled (BCWS) Performed (BCWP) Budgeted cost for work Budget - 6 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 MA M J J AS O N D

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

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

  37. Estimated Cost At Completion

  38. 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.

  39. PROGRESS REPORTING 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?

  40. Monthly Project Report 1. VARIANCE ANALYSIS (Cost in Thousands) 1 June 1997 Budgeted Budgeted Cost Milestone Cost Work Work Actual Variance, % Subtask Status Scheduled Performed Cost Schedule Cost 1Completed 100 100 100 0 0 2 Completed 50 50 55 0 -10 3Completed 50 50 40 0 20 4Not Started 70 0 0 -100 -- 5 Completed 90 90 140 0 -55.5 6 Not started 40 0 0 -100 -- 7 Started 50 50 25 0 50 8Not started 0 0 0 -- -- Total 450 340 360 -24.4 -5.9

  41. 2. ESTIMATE AT COMPLETION (EAC) EAC = (360/340) X 579,000 = $613,059 Overrun = 613,059 - 579,000 = $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.

  42. 5. MILESTONE REPORT Milestone/ Scheduled Projected Actual Subtask Completion Completion Completion 1 4/1/97 4/1/97 2 5/1/97 5/1/97 3 5/1/97 4/23/97 4 7/1/97 7/1/97 5 6/1/97 6/1/97 6 8/1/97 8/1/97 7 9/1/97 9/1/97 8 10/1/97 10/1/97

  43. 6. ACTIVITY REPORT Current PotentialCorrective ProblemImpact 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 statement results. of work on 6/15/97.

  44. Status Reporting Is More Than Just A Computer Printout.

  45. Intranet Status Reporting

  46. Reporting Favorable Status

  47. Reporting Unfavorable Status

  48. DATA ACCUMULATION WBS Budget BCWS SCHED VAR Organization BCWP COST VAR ACWP

  49. Cutting The Budget

  50. Financial Close-Out

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