Financial Aspects

UNIT 14 FINANCIAL ASPECTS

Objectives

After studying this unit, you should be able to understand, in the context of project
execution:

• the features required in the accounting systems the essential aspects of fund and
expenditure management
• the concept of control, and the factors that affect project costs
• the PERT-COST system and variance/performance analyses of a project for cost
and performance control
• the significance & use of S-curves.
Structure
14.1 Introduction
14.2 Accounting System
14.3 Implementing the Financing Plan
14.4 Authorisation of Expenditure
14.5 The Concept of Control
14.6 Factors affecting Control of Project Cost
14.7 The PERT-COST System
14.8 Project Control Curves (or S Curves)
14.9 Variance Analysis Approach to Cost Control
14.10 The Performance Analysis Approach
14.11 Integrated Cost/Schedule Graph
14.12 Summary
14.13 Self Assessment Exercises
14.14 Further Readings

14.1 INTRODUCTION
In previous units we have studied about planning for projects, including planning for
their various aspects. We have also studied about the sources of finance available for
project implementation and the methodologies for their procurement. In this unit we
will examine issues to be kept in mind while actually procuring funds and while
using them.

14.2 ACCOUNTING SYSTEM

A good accounting system is a sine-qua-non for the success of any organised
business activity. It is no less so for project management which involves execution of
diverse and complex tasks in a tight time-frame through the involvement of a number
of persons and agencies. The accounting system has to be designed to particularly
meet the requirements unique to each project. The classification of receipts and
expenditures must be structured into "head of accounts" in such a manner that
financial information sought by various entities - internal and external - may be
readily and economically compiled.
In so far as implementation of the financing plan for a project is concerned, only a
few heads of account would be relevant: These usually relate to Capital (equity and
preference shares, loans and debentures, etc.), Discount or Premium on shares,
Brokers' Commission, Preliminary Expenses; and Bank Accounts, However, when
we consider 33
Implementation and physical aspects of the project, a number of other account heads shall be needed to
Control allow for proper categorisation of the expenditures incurred. All these are context-
dependent and have to be carefully planned by the owner in the beginning itself.
Introducing changes in mid-stream is in-advisable, being both cumbersome and likely
to affect normal pace of work.
Some typical broad heads of account used in this area are given below. Some of these
may be combined or even broken down further into suitable categories as required.
Land
Buildings
Plant & equipment
Vehicles
Furniture & Fittings etc.,
Depreciation for asset accounts
Capital Works-in-Progress
Preliminary Expenses
Loans and Advances granted
Cash and Bank balances
Current Liability heads
Deferred Revenue expenditure
In case a project is implemented through a "turn-key" contractor who would hand
over the completed project against payments released to him as per agreement, the
owner's accounting system naturally becomes simpler. The burden of control then
largely shifts to the contractor.
At this stage of project management some basic points relating to the accounting
procedure are relevant :
First, In so far as requirements under the Companies act are concerned, no profit and
loss account need be prepared unless a project is completed and starts incurring
"revenue expenditure". The balance sheet has however to be prepared and shall show
the balances under above-mentioned heads of account.
Second, the cost of acquisition of a capital asset would include all expenditures
which are incurred for bringing the asset into productive existence. This would cover
the basis procurement cost inclusive of taxes, freight and insurance, and all costs of
erection and supervision. Thus, basically, all project-related expenditure on
equipments, materials supplies, salaries, wages, transportation, interest, power, water
etc. incurred during the implementation stage is capital expenditure and has to be
charged to either specific asset accounts or to the works-in-progress account.
Third, the accounting system must ensure that all relevant expenditure data are
captured and compiled speedily, accurately, and at a reasonable cost. No type of
expenditure transaction should be allowed to go unreported, particularly advance
payments and adjustment transactions. Accumulation of costs on the Work
Breakdown Structure (WBS) would go a long way in integrating cost and
performance management. As you know, WBS breaks down a project (or a
programme comprising several projects) into smaller, measurable, and managerially
useful constituents having well defined scope. These are so woven into a logical tree-
hierarchy that the elements at any level are fairly independent and combined together
yield the more meaningful higher level constituent useful for controlling performance
as well as costs. A simple WBS could, for example, be organised as follows.

34
The various work elements and the heads of accounts (a.k.a. codes of accounts) Financial Aspects
should have a clear logical relationship to facilitate budgetary and output controls. In
fact, properly designed WBS and Accounts Code structure can immensely enhance a
management's capability by enabling it to speedily utilize past, or present data from
one set of projects for improved formulation or control of others, for evaluation of
bids, or even for making bids. Needless to say, the coding structure needs to be
designed keeping the operating environment and users in mind. It may for example
differ considerably (especially in term of the degree of sophistication) in manual
versus computerised environments.
14.3 IMPLEMENTING THE FINANCING PLAN
In Unit 9 we learnt how the financial requirements of a project are determined and
appropriate sources tied up. When giving effect to the financing plan, the project's
finance manager must keep in mind the following basic tenets:
a) Procurement of funds involves certain costs in the form of cash outflows.
b) Idle funds always incur direct or indirect (opportunity) costs, which grow with
time at a compounded rate.
c) Deployment of funds into productive avenues is the only way to counter the
costs mentioned at "b" above.
d) Varying amounts of cash must be readily available to meet different liabilities
as the project progresses. Failures may give rise to their own costs in the form
of interest payments, demurrage, penalties, drop in quality, delay in completion
of (and hence in earnings from) the project, and various missed opportunities.
What it all amounts to is that requirements of thuds must be matched as closely as
possible with the availability of the lowest-possible-cost funds, over the entire
duration of the project, and idle funds should be kept to the minimum. This makes it
imperative that the project's cash requirements are forecast as accurately as possible.
We will briefly consider this aspect in one of the Sections that follow.
14.4 AUTHORISATION OF EXPENDITURE
When implementing a project, money is spent on a wide variety of items. For
example, some would be spent on office equipments, supplies and furnishings etc. for
the project office(s). Salaries would have to be paid to the managers, supervisors, and
various office staff engaged in connection with the project. Payments would also be
made, whether as advances, "on-account" payments, or as price-escalations, to
construction contractors and to suppliers of plant, equipment, and construction
materials. Periodic payments of wages to labourers is an essential feature of any
construction project. Charges have to be also paid, first for obtaining connections for
water, electricity, gas etc. and subsequently for their consumption.
Though a suitable accounting structure may exist for ensuring that all these items are
duly segregated at the level of detail considered necessary by the project
management, that by itself is not enough to either ensure smooth expenditure
transactions or enforce effective control over expenditures vis-à-vis the project
budget. It is equally important to have in place a framework which determines who
will authorise what type of expenditure and upto what limit. A suitable scheme of
delegation of financial powers has therefore to be evolved to ensure that depending
upon the need and factors like frequency,, nature and value of a transaction,
employees at different levels are allowed to authorise expenditures within well-
defined limits.
We have considered in an earlier unit the methodology followed for estimating the
cost of the project and for the formulation of an appropriate project budget (also
known as capital budget). This takes care of the requirement of resources allocation
amongst various project activities (and/or functions). As far as possible, such a
budget should
a) be consistent with the objectives of the project
b) be consistent with the functions and quality standards of the project,
c) be realistic, i.e. be neither an over-estimate nor an under-estimate. 35
Implementation and d) smoothly integrate with the accounts classification system, and
Control
e) provide for the estimate of expenditure plus provisions for contingency and
escalation for each activity. (This would help make realistic forecasts of costs
since inflation may affect different activities differently)
During the implementation stage the budget become a yardstick for ensuring that the
project expenditure stays on course.. The scheme of expenditure authorisation that is
devised by the project management therefore must incorporate a check to the effect
that no authorisation for any expenditure is given (or at least given effect to) by any
employee unless suitable provision for the expenditure is available vis-à-vis the latest
approved Budget ' under the relevant head of account. This can contribute
considerably towards controlling project expenditures provided the accounting and
information dissemination processes (MIS) are efficient and well organised.
Activity 1
How is capitalization of project expenditure trated in accounting? What are the usual
capitalization heads and what is their significance?
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14.5 THE CONCEPT OF CONTROL

As you know, control is an integral part of any management process which comprises
of planning, organizing, actuating and controlling. Fundamental to control is the
existence of a norm (the "should be") with which the measured results of actual
actions (the "what is") are compared. The north has, of necessity, to be _both
appropriate and right to ensure that the effort, at control yield the desired results.
With a properly selected norm, significant adverse deviations constitute a signal for
undertaking analysis and for initiating necessary corrective action. In so far as project
expenditure is concerned a basic none would appear to be the sanctioned costs of the
project; which in turn are based on the estimated costs for the project. (Note : There
is a slight complexity involved in selection of normative values during the execution
of the project, which shall be elaborated later in Section 14.7)
Now, the faster- an adverse cast variation is noticed, analysed, and acted upon, the
better the chance of ensuring that unfavourable deviations of the project's cost from
the permissible sanctioned amount are minimal. For effective control,` therefore, up-
to-date and precise costing and performance data must be available at brief interval,
of time. Further, the :management structure should be so trim and well-knit as to be
able to respond speedily and decisively: The essence of control is illustrated in figure
I.

Fig. 1 : What Constitutes Control

Having explored the basic features of a control process, it is time to recognise the
distinction that 'exists between factors which can be controlled by the owner, or
36 project
manager, and those which cannot be. Realisation of this difference helps one to focus Financial Aspects
one's energies only on the former and thus be more productive. It must however be
noted that this classification is not rigid. Projects are managed in a dynamic
environment and it may so happen that what was an uncontrollable factor yesterday
becomes controllable today. The owner or manager who is not alert to such changes
in likely to lose touch with important aspects of managerial reality. Finally, even if a
factor is uncontrollable, its impact on costs may be amenable to control. We will
illustrate this with an example. Suppose a firm is procuring technology as well as
major plant and equipments from USA. The project cost in rupees will be directly
influenced by the foreign exchange rate (between the rupee and the dollar) over
which the owner has no control. He may however adopt a suitable hedging strategy to
greatly curtail his foreign exchange risk and thus save the project cost horn erratic
fluctuations.

14.6 FACTORS AFFECTING CONTROL OF PROJECT

COST
a) General
Irrespective of the size and nature of a project, one basic objective of the owner is to
complete it to the specifications in time and at the lowest cost. In other words, time,
performance and cost constitute the triad which demands to be managed in an
integrated manner. Now a project's total cost is made up of various components
which are incurred at different times starting from the stage of feasibility study
through commissioning and take-over. What is often not realised, however, is that the
very capability of the owner to control the cost declines over the project's life cycle.
Figure 2 shows this relationship. You will observe that the greatest scope for
containing the overall project cost exists at the stage of feasibility study, when all
possible options are open to the owner. Thereafter, the potential for cost reduction
steadily declines through the stages of design, engineering, etc. before encountering a
steeper decline during the construction phase when most orders already stand placed
and it is impractical, if not impossible, to reverse the decisions already taken.

Fig. 2 : Potential for reducting project cost as a function of time.

Please note that the message from this diagram is not that efforts need not be made
for cost control, in the later stages of a project's life cycle. On the contrary, once the
basic decisions on site, process, technology, design, and construction methodology
have been taken, it is all the more important for the project manager to make all-out
efforts at cost containment till the project concludes.
It is often assumed that the main role for controlling costs is only that of the
management. This is not true. Real cost control demands cost consciousness right
from top management to the lowest levels of the project organisation. All must be
properly motivated towards cost control to make it successful. Ensuring such
motivation, constitutes and important responsibility of the management.
Another common confusion relates to what constitutes control. Often a manager may
.act in a mariner which amounts to substituting reporting for control; whereas the
former is in fact only an instrument for control. 37
Implementation and b) Contracts
Control
An important factor which affects project costs and the owner's capacity to control
them is the nature of agreement(s) entered into with the construction contracter(s).
Such agreements usually assume one of the following five forms.
a) Firm Fixed Price or Lump Sum (FFP)
b) Fixed Price Plus (FPP)
c) Schedule of Rates (SR)
d) Fixed Fee costs (FFC)
e) Cost Plus (CP)
In an FFP contract, the owner agrees to pay a definite sum of money to the contractor
for assuming full risk and responsibility for completing the work to prescribed
drawings and specifications. This type is usually resorted to when the project is well
defined in terms of both scope and cost. It involves little effort at control of costs on
the part of the owner, but is somewhat costlier since the contractor would cover his
risks by increasing the tender price.
Fixed Price Plus agreements involve a provision for paying either escalation or
incentive fee to the contractor in addition to the fixed price. The former type is
normally used when the project is well defined but involves uncertainties in costs of
inputs over its relatively long gestation period. It stipulates periodic (upward or
downward) adjustment of the fixed price in accordance with a formula which
normally incorporates specified cost indices for labour, material, fuels and lubricants.
The adjustments may be upward or downward depending upon the changes in the
indices. The incentive fee version, on the other hand, provides for paying definite
amounts as incentive fee for measurable performance improvements relating, say, to
cost, duration, and quality. It is particularly useful when cost estimates or project
'specifications are not sufficiently precise for adopting an FFP contract. In both these
version the cost control effort required by the owner is more than in the FFP type, but
is still quite moderate.
The Schedule-Of-Rate contract incorporate unit prices offered by the successful
bidder for must elements of the work roughly quantified by the owner in the "bill or
quantities". The contractor raises bills for work performed at regular intervals.
Amounts in these bills are arrived at by multiplying measured quantities of the
specified items of work with their corresponding unit prices as laid down in the
contract. The owner however releases payments to him based on the quantities of
work ascertained through a thorough physical verification (re-measurement) of the
work claimed to have been performed. For this reason such contracts are also known
as remeasure contracts. The owner has to make considerable efforts to reduce delays
and to control costs in such cases. This is particularly so if the project's gestation
period extends beyond two to three years. Furthermore, the owner has to ensure not
only that all work performed by the contractor(s) is measured regularly and
accurately, but also that such measurements are made according to a standard
methodology and are acceptable to the contractor(s).
The cost plus fixed fee contracts are usually used where the project costs,
specifications, and processes are quite uncertain. These stipulate that the owner pay
the contractor a fixed amount (or percentage) of fee in addition to the cost actually
incurred by him. These place the burden of cost verification and control on the owner
and tend to reward, if not actually encourage, inefficiency on the part of the
contractor. The owner has to be constantly alert to ensure that the contractor performs
efficiently and his cost records and data are both accurate and correctly complied.
A better version of the cost plus type of reimbursement is the target cost contract. In
it the two parties agree at the very outset to a target cost. Any increase or decrease in
the actual cost vis-à-vis the target cost is shared between the parties as an adjustable
fee calculated in accordance with a previously agreed formula. Often, the maximum
and minimum limits for such fee are also laid down.
c) Changes in Scope
The very purpose of conducting a feasibility study and then going in for detailed
process and engineering design is to eliminate, as far as possible, any scope for mid-
stream
38
changes in the planned work programme. Such changes are not only troublesome to Financial Aspects
implement, invariably they also result in large cost increases. And yet it is a rare
project indeed in which changes in scope do not occur during implementation. These
have however to be rigorously controlled to minimise dislocations in project cost,
duration, and quality. This can be done by insisting that, like for the main projects,
every single proposal for change in scope in ruthlessly analysed in terms of-
• description
• justification of the need,
• alternatives considered
• requirements of plant, equipment, and other resources,
• schedule for implementation, and
• financial implications on the project.
d) Delays
Delays, also called time over-runs, are a major factor for project costs going through
the roof. Projects in the public sector in developing countries have been particularly
susceptible to large delays for various reasons. Studies conducted by (the then)
Bureau of Public Enterprises, Government of India, indicated the following six major
causes for delays in project completion in Indian public enterprises :
1) Inadequacies including unrealistic cost and time estimation in techno-economic
feasibility reports.
2) Weaknesses in project management organisation.
3) Delay in selection of the detailed engineering, consultants.
4) Indigenisation of equipment without advance planning.
5) Non-availability of power, steel, cement, etc.
6) Labour unrest.
From the list it is evident that but for the last two, all other factors lie within' the
domain of control of the owner. You may like to have another look at figure 1 of this
Unit at this stage.
The government of India has set up, in 1985, the Ministry of Programme
Implementation (now called the Department of Programme Implementation - DPI)
with the sole objective of independently monitoring large scale public sector projects
funded by the Central government. In its annual report for the year 1994-95, the DPI
has stated that several projects get delayed and though "some of the factors may be
beyond the control of the enterprises in some sectors the project management is not
satisfactory". Analysing the delays observed in government funded projects in 16
sectors of the economy the report lists the following factors as most important :
a) acquisition of land
b) constraints of funds, particularly owing to thin dispersal of Limited resources
over a large number of projects.
c) slow progress of civil works by contractors.
d) delayed award of contracts:
e) delayed supply of equipment
f) slow progress in engineering, release of design drawings, erection, and
commissioning of equipment
g) delays in government clearances; law and order problems, and inadequate
infrastructure.
39
Implementation and Activity 2
Control
Think- of the he relationship between time and costs and describe the advantages if
we speed up project implementation.

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14.7 THE PERT-COST SYSTEM

Use of network, techniques like CPM and PERT is essential for large projects. As
you know, these involve the preparation of a detailed schedule of construction and
allied activities and its translation into a network- diagram after considering
precedence requirements. For practical reasons the activities .are generally delineated
in such a manner that none has a duration of more than three weeks: The diagram
shows the critical path and also the “slacks” available at different "nodes".

Initially, the Programme Evaluation and Review Technique (PERT) focussed only on
the time management aspect of a project. It was in 1962 in the USA that a PERT cost
system was developed to control costs. It involves assignment of costs to individual
project activities rather than to functions or organisational units as in traditional cost
accounting systems. Low cost activities are usually grouped together for this purpose.
This system uses the following two sets of data for activity-wise cost control.

a) Estimates of costs for activities (or groups of activities)

b) Actual costs for the same activities/groups.

It is in estimating the activities' costs that the greatest difficulty in. encountered. This
usually involves estimating the material costs, labour costs, and expenses, besides
supervisory and administrative overheads that call be attributed to each activity (or a
group for activities). However, once this has been done, the evaluation of a project's
progress is possible on the more transparent basis of completed activities, rather than
on the traditional basis of estimating percentage physical progress and comparing it
with expenditures. Usually, activities are so chosen that the expenditure on each may
be assumed to occur relatively uniformly over its duration.

We had mentioned in Section 11.3 about the need to have reliable estimates of cash
requirements. Such projections for the project can be easily derived on, say, a
monthly basis using the activity-wise cost estimates. This helps the owner or manager
in planning his cash flows so as to minimise financial costs. For an example, study
the bar chart in figure 3 below.

Fig. 3 Estimating monthly cash requirements using activity bar chart.

40
In our discussions so far we have assumed that the activities commence on the "early Financial Aspects
start" dates. Cost estimates can however, be built up using the "late start" timings as
well. Plotting these two sets of cumulative costs against time would yield two curves
which together enclose the zone of feasible budgets for a given project duration
without any resources restrictions (i.e. without crashing, etc.). This is depicted in
figure 4.

Fig. 4 : Zone of feasible budgets for a given project duration.

During the implementation of the project, the following information is periodically

ascertained from WBS/activity-based cost recording and accounting system.
a) Cumulative actual cost to date.
h) Budgeted (estimated) cost to date.
c) Value of actual work done to date, based on cost estimates.
From these, cost over-runs (when a exceeds c) or cost-runs (when c exceeds a) can be
computed a percentage using the formula given below. Figure 5 shows the
relationship between these three different variables and the cost over-run.

Fig. 5 : The concept of cost over-run

14.8 PROJECT CONTROL CURVES (OR S-CURVES)

In section 14.7 be had used a detailed bar chart derived from a PERT plan, in which
expenditure on each activity had been estimated on a monthly basis. The cumulative
totals of monthly- expenditure estimates derived this way indicate the "value" of
work 41
Implementation and planned to be done upto different dates. When these totals are plotted against time
Control they yield the typical project control curve having the shape of "S" (see fig 6). Now,
if the cumulative values of actual work done are similarly plotted against time, we get
another S-Curve showing the "performed value". Thus, these curves based on
financial data alone can help the management in monitoring the progress of the
project by depicting raider - or over-spending and delays, etc.

Fig. 6 : "S" curves for planned and actual values

14.9 VARIANCE ANALYSIS APPROACH TO COST

CONTROL
This is the traditional approach to controlling project costs. It involves ascertaining,
periodically, variations between the actual and the budgeted costs, both for the
periods and cumulatively. The lesser the variation the more "controlled" the project is
supposed to be. The approach is not considered suitable for effective project control
since it neither gives any clue to the owner about the value of work already done, nor
does it help him in knowing the direction in which the project is heading.

14.10 THE PERFORMANCE ANALYSIS APPROACH

Performance analysis constitutes an improvement over the variance analysis
approach. Use of the technique involve, certain terms and concepts which need to be
first understood. These are explained below.

1) Budgeted Cost of Work Scheduled (8CWS): Budgeted cost of work scheduled is

the sum of the budgets for all work scheduled to be done (including in-process
work), plus an appropriate portion of the budget for overheads for the relevant
time period.

2) Budgeted Cost of Work Performed (BCWP) : This is the sum of the budgets for
work packages (including in-process work) or their- portions actually completed,
plus an appropriate portion of the overheads budget for the relevant time period.
BCWP is also referred to as "earned value". The earned value concept assigns
"base budget units" (in man-hours or rupees) for work to be performed for every
measurable WBS element in the execution of the project.

Each activity is time-phased using the target schedule. This should include quantities,
work to be performed, man-hours and budget value.

Conventional cost reporting (see Section 11.8 above) compares budgets with actual
expenditures and slippages in schedule with agreed schedule. The concept of canned
value, on the other hand, looks at the value of the actual work performed in base
budget units regardless of the actual costs incurred, and hence puts the comparison on
42 a more rational basis.
3) Actual Cost of Work Performed (ACWP) : This is the sum of the direct costs Financial Aspects
actually incurred and the indirect costs applied in accomplishing the work
performed within a given time period.
4) Budgeted Cost of Total Work (BCTW) : This is the sum of budgeted costs of all
activities plus the overheads for the entire projects.
5) Cost Variance (CV) equals the Budgeted Cost of Work Performed (BCWP) less
the Actual Cost of Work Performed (ACWP).
CV = (BCWP - ACWP)
Adverse (negative) cost variances indicate cost over-rums, and hence, if CV exceeds
the threshold level prescribed by the management, it should be analysed to identify
possible causes such as technical problems, inaccuracies in original estimates, lower
productivity, and unanticipated increases in equipment, material or labour costs.
The cost variance can also be expressed as a percentage (CVP):
CV
CVP=
BCWP
6) Schedule Variance (SV) is equivalent to the Budgeted Cost of Work Performed
(BCWP) minus Budgeted Cost of Work Scheduled (BCWS)
SV = BCWP - BCWS
The Schedule Various measures the schedule progress of the project in monetary
units rather than time units, Its relationship to time is thus not directly recognizable.
The SV can however be converted into time units by measuring the horizontal
distance between the point representing the data date on the BCWP curve and the
horizontal projection of the point on the BCWS curve.
A negative schedule variance indicates slippages (behind schedule status), and hence
a value exceeding the threshold level should be analysed to ascertain the underlying
reasons. Like for the CV, the Schedule Variance can also be expressed in a
percentage form :
SV
SVP=
BCWS

By comparing the values of BCWS and BCWP on the one hand, and of BCWP and
ACWP on the other, w e can easily determine whether the project is on, behind, or
ahead of schedule, and whether it is on cost, or having a cost over-rum or under-run
on the date of analysis. Thirteen different types of relationship are possible amongst
the values of these three parameters. The following table. lists all these cases based
on hypothetical values of the parameters, and indicates the broad conclusions about
performance and cost that can be derived therefrom.
BCWS BCWP ACWP Remarks

100 80 60 Behind Schedule, Under Cost

100 80 80 Behind Schedule, On Cost
100 80 90 Behind Schedule, Over Cost
100 80 100 Behind Schedule, Over Cost
100 80 120 Behind Schedule, Over cost
100 100 80 On Schedule, Under Cost
100 100 100 On Schedule, On Cost
100 100 120 On Schedule, Over Cost
100 120 80 Ahead of schedule Under Cost
100 120 IW Ahead of' schedule Under Cost
100 120 110 Ahead of schedule Under Cost
100 120 120 Ahead of schedule On Cost
100 120 140 Ahead of schedule Over Cost 43
Implementation and 7) Cost Performance Index (CPI) : This is defined as the ratio of BCWP to ACWP.
Control A value less than 1 indicates cost over-run and a value greater than 1 signifies
cost under-run (i.e., the work is costing less than budgeted).

BCWP
CPI=
ACWP

8) Schedule Performance Index (SPI) : This is defined as follows.

BCWP
SPI=
BCWS

A value less than 1 indicates slippages and greater than 1 that the project is
progressing ahead of schedule.

9) Accounting Variance (AV): This is equal to the Budgeted Cost of Work

Scheduled minus the Actual Cost of Work Performed.

AV = BCWS - ACWP

The conventional cost control reporting used to be based on this parameter only. It is
however not a reliable indicator of actual progress. For example, a large negative
variance (AV) could occur both when a project is progressing ahead of schedule, and
when significant cost inefficiencies and wastes arise.

You may have by now observed that Cost Variance, Schedule Variance, and
Accounting variance bear a simple relation to one another. What is that? For
confirmation, see figure 7.

10) Estimated Duration at Completion (EDAC) : This can be calculated using the SPI
as follows :

Original Planned Duration

EDAC =
S.P.I.

Using the OPD and EDAC, the project manager can forecast the project time over-
run, if ally, as follows :

Projected time over-run = (EDAC - OPD)

11) Estimate at Completion (EAC): The manager is also in a position to make a

forecast of the cost of the project at its completion (assuming the present trends
continue) using the formula-

BCTW
EAC = ----------- = (ACWP/BCWP) CPI
×Total Budget

From this the projected cost over-run (aka Variance at Completion, or VAC) can also
be computed.

Projected cost over-run = ECAC - BCTW

BCTW
= - BCTW = BCTW (1/CPI - 1)
CPI

Analysis of the cost over-run (or VAC) may reveal causative factors such as changes
in scope, incorrect estimate at completion, engineering design changes, low
productivity, or wastes.
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Using the Approach Financial Aspects

Analysis of a project's performance using this approach is today greatly facilitated by

ready-made computer software packages. The manager can thus keep a close watch
on various parameters and initiate action as soon as adverse trends come to his notice.
Such action may involve re-scheduling, re-deployment of resources, or extension of
the target date. In fact, using a computer, the manager should be able to choose the
best possible course of action by looking at different alternatives and carrying out
performance analysis for each.
Finally, it must be kept in mind that the analysis can yield good results for remedial
action only if the original plan and various data about costs and work activities are
reasonably accurate and are not distorted by sporadic singular features.

14.11 INTEGRATED COST/SCHEDULE GRAPH

Integrated cost schedule graph is shown in Fig.7. The graph depicts the three
variances (described in the previous Section) on a particular data date. From the
graph one can ascertain "projected cost to completion" alongwith forecast of "delays
at completion" and “cost overrun at completion”.

Fig. 7. The integrated cost/schedule graph

14.12 SUMMARY
In this unit we studied the salient aspects of financial management in so far as they
relate to implementation and control of projects. We saw the importance of having a
proper system of accounting' and budgeting, and of using the approach of
performance analysis for not only cost control but also overall monitoring of the
project's progress. We also learnt the use of S-curves in monitoring the performance
as well as cost of projects.

14.13 SELF - ASSESSMENT EXERCISES

1. What are the pitfalls in the traditional method of cost accounting & expenditure
control in projects?
2. “Scheduling of projects shared be so organised as to facilitate planning of cash
flow and fund management.” Comment.
3. Elaborate on the concept of 'l arced Value of the Budget' in PERT/COST
system.
4. Once we switch over to PERT/COST system, can we do away with time-based
project control. Explain with reasons.
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Implementation and
Control 14.14 FURTHER READING
1. Project Management for Snrall and Medium, Size Businesses - Harold
Kerzner and Hans Thamhain; Van Nostrand Reinhold Co.; New York; USA.

2. Project Management Handbook, Edited by Dennis Lock Gower Technical

Press Ltd.; UK; 1987.

3. Managing Construction Projects; Edited by AD Auster and RH Neale; ILD;

Geneva; 1984.

4. Projects - Preparation, .4ppraisal, Budgeting and Implementation; Prasanna

Chandra; Tata McGraw Hill Publishing Co. Ltd; New Delhi; 1987.

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