Cost Control

Cost control ==> Good cost management

Cost management
cost estimates
cost accounting
project cash flow
company cash flow
direct labor cost
over head cost
others
Cost reduction analysis
Iceberg syndrome:
cost of change exceeds original cost of project
Possible reduction
in cost
Cost of change
Project life
cycle phases
Project
cost
Budget, variance and earned
value
Variance:
any schedule, technical performance or cost
deviation from specific plan
Used to verify budgeting and scheduling system

Budget, variance and earned
value
Variance measurements
Measurable efforts
discrete increments of work, with definable schedule
for accomplishment, producing tangible results
Level of efforts
work that does not lend itself to subdivision in
discrete schedule increment work
Type of variances
Budgeted cost of work schedule: BCWS is
the budgeted amount of cost for work
scheduled to be accomplished plus the
amount or level of efforts
Budgeted cost of work performed: BCWP is
the budgeted amount of cost for completed
work plus budgeted for level of efforts
completed within given time period, (earned
value)
Type of variances
Actual cost of work performed: ACWP :is
the amount reported as actually expended in
completing the work accomplished within a
given period
Variances Calculation
Cost Variance
CV = BCWP -ACWP
a negative value = cost over run
Schedule variance = BCWP - BCWS
a negative value indicate behind schedule condition
Cost variance percent = CVP = CV/BCWP
Schedule variance percent = SVP = SV/BCWS
Variances Calculation
Cost performance index
CPI = BCWP/ ACWP
Schedule performance index
SPI = BCWP/BCWS
If CPI or SPI= 1 perfect performance
CPI or SPI > 1 exceptional performance
CPI or SPI <1 poor performance
Variances Calculation
$
Variance upper boundary
Variance Lower Boundary
Actual cost Variance
Projected cost
Phase I
R & D
Phase II
Qualification Development
Phase III
Time
Parameters for Variances
Analysis
Question Answer Acronym
How much work Budgeted cost of work BCWS
should be done ? scheduled
How much work Budgeted cost of work BCWP
is done? performed
How much did the "is Actual cost of work ACWP
done" work cost? performed (actuals)
What was the total job Budget at completion BAC
supposed to cost? (total budget)
What do we now Estimate at completion EAC
expect the total job or latest revised estimate LRE
to cost?
Calculating BCWP
Major problem with Variance Analysis
BUDGETED COST FOR WORK PERFORMED
Methods available
Use $$$ value regardless of % complete
No matter how much task is completed if the
project is 20% in time then 20% $ should be
BCWP
Calculating BCWP
50/50 Rule
Half of the budget is recorded at the start of the
scheduled work and half at completion
Advantages
Eliminate the calculation of % complete
Calculating BCWP
0/100
Usually for small activities
Value is earned at the end of the activity
Milestone
Long work / activities
Value is earned at the completion of milestone.
% complete
Long work duration with no milestone
Value earned is the reported % of the budget
Calculating BCWP
Cost formula (80/20)
Variation of % complete for long duration work
Equivalent unit
Similar unit work
Earnings are in completed unit not in labor
Level of effort
Based on passage of time
Used for managers and supervisors work
Value earned is based on time expanded over
schedule time
Measured in terms of resources consumed
Analysis of Project Status
Earned value is more effective if used at
higher levels of tasks.
Subtask 1: All contractual fund were budgeted. Cost/performance
was completed on time as indicated by milestone position
Subtask 2: All contractual fund were budgeted. A cost over run , as
ACWP >BCWO. Milestone was completed later than schedule
Also see table 15-3
Analysis of Project Status
Subtask 3: Cost was under run, WHY?
Subtask 4: Work not yet started
Analysis of Project Status
Subtask 5: Scheduled work completion but $50,000 cost overrun
Subtask 6: Work has not yet started. Behind schedule
Analysis of Project Status
Subtask 7: 25% completed
Subtask 8: Not started
Analysis of Project Status
Budget at Completion:
Sum of all budgets (BCWS).
Estimate at Completion
$$$ or Hours
Realistic appraisal of the work when performed
Sum of all direct and indirect cost to date and the
estimates of all remaining work
EAC = cumulative actual + estimate to complete
Analysis of Project Status
Estimate at Completion
Done periodically
Gives the best estimate of total cost at
completion
Variance at Completion
VAC = BAC - EAC
Analysis of Project Status
Formula I. EAC =(ACWP/BCWP)*BAC
=(1900/1500)*(3000)=$3800.
Assume constant burn rate for the remaining project
Best formula, if burn rate is calculated periodically
Activity
%
Complete
BCWS BCWP ACWP
A 100 1000 1000 1200
B 50 1000 500 700
C 0 1000 0 0
Analysis of Project Status
Formula II EAC =(ACWP/BCWP)* work completed + Actual (or revised)
and in progress cost of work
packages not yet
begun
=(1900/1500)*(2000)+$1000=$3533.
Assume, that work not yet started will complete at
planned cost
Activity
%
Complete
BCWS BCWP ACWP
A 100 1000 1000 1200
B 50 1000 500 700
C 0 1000 0 0
Analysis of Project Status
Formula III EAC = [Actual to date] + [All remaining work to be at planned cost
including remaining work in progress ].
= 1900+[500+1000]=$3400.
Assume remaining work is independent of burn rate
Unrealistic
Activity
%
Complete
BCWS BCWP ACWP
A 100 1000 1000 1200
B 50 1000 500 700
C 0 1000 0 0
Cases for Comparing
Planned Vs Actual Performance
Case 1: This is the ideal planning situation where
everything goes according to schedule.
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
1 800 800 800
Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
2 800 600 400
Case 2: Costs are behind schedule, and the program appears
to be under-running. Work is being accomplished at less than
100 percent, since actuals exceed BCWP. This indicates that a
cost overrun ran be anticipated. This situation grows even
worse when we see that we are 50 percent behind schedule
also. This is one of the worst possible cases.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
3 800 400 600
Case 3: In this case there exists good news and bad news.
The good news is that we are performing the work efficiently
(eff1ciency exceeds 100 percent). The bad news is that we are
behind schedule.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
4 800 600 600
Case 4: The work is not being accomplished according to
schedule (i.e., is behind schedule), but the costs are being
maintained for what has been accomplished.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
5 800 800 600
Case 5: The costs are on target with the schedule, but the
work is 25 percent behind schedule because the work is being
performed at 75 percent efficiency.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
6 800 800 1000
Case 6: Because we are operating at 125 percent efficiency,
work is ahead of schedule by 25 percent but within scheduled
costs. We are performing at a more favorable position on the
learning curve.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
7 800 1000 1000
Case 7: We are operating at 100 percent efficiency and work
is being accomplished ahead of schedule. Costs are being
maintained according to budget.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
8 800 600 800
Case 8: Work is being accomplished properly, and costs are
being underrun

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
9 800 1000 800
Case 9: Work is being accomplished properly, but costs are
being overrun.


Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
10 800 1000 600
Case 10: Costs are being overrun while under-accomplishing
the plan. Work is being accomplished inefficiently. This
situation is very bad.
Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
11 800 600 1000
Case ll: Performance is ahead of schedule, and the costs are
lower than planned. This situation results in a big Christmas
bonus.

Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
12 800 1200 1000
Case 12: Work is being done efficiently. and a possible cost
overrun can occur. However, performance is ahead of
schedule. The overall result may be either an overrun in cost
or an underrun in schedule.
Cases for Comparing
Planned Vs Actual Performance
Case
Planned earned
Value(BCWS)
Actuals
(ACWP)
Actual Earned
value(BCWP)
13 800 1000 1200
Ca.se 13: Although costs are greater than those budgeted,
performance is ahead of schedule, and work is being
accomplished very efficiently. This is also a good situation.

Summary Variance
Calculated for both labor and material
Find total price variance for direct labor and
rate cost variance
Direct Material Direct Labor
Planned price/
unit
$ 30.00 $ 24.30
Actual units 17,853 9,000
Actual price
/unit
$31.07 $26.24
Actual cost $554,630 $236,200


Summary Variance
Total price variance for direct labor
= Actual units * ( BCWP - ACWP )
= 17,853 * ($30.00 - $31.07)
= $ 19,102.71
Labor rate cost variance
= Budgeted rate - Actual rate
= $24.30 - $26.24
= $ 1.94
Status Reporting
Brief
Contain
Variance analysis
Estimate at completion
Cost summary
Schedule summary
Milestone report
Event report
Cost Control Problems
Causes
Poor estimates, resulting in unrealistic budgets
Inadequate brake down of work
No management policy for reporting and
control
Unforeseen problems, technical and non
technical
Schedule delays, etc.
Cost Control Problems
Cost over-run Causes
Failure to underestimate customer requirement
Underestimating
Work brake down
Misinterpretations of information
Failure to assess and provide risk
Forcing compromises
etc.