PROJECT COST
MANAGEMENT AND
CONTROL
DR. ALI RAZA KHOSO
COST MANAGEMENT
• Cost management involves; PLANNING, BUDGETING,
ESTIMATING and CONTROLLING cost.
• COST ESTIMATING: Approximation of cost of resources
• COST BUDGETING: Aggregating the estimating cost to create
project baseline.
• COST CONTROLLING: Identifying factors responsible for variance
and changes in cost
PROJECT COST CONTROL CYCLE
Project S-Curves
Project Cost Management
• Various decisions in a project would impact cost such as frequent
Design Review by many parties, involving third party for supervision
etc.
• The important term is LIFE CYCLE COSTING.
• Concept of value engineering can also help in reducing cost.
Project Cost Management
• Project financial performance is based on Return on Investment, return
period, cash flows analysis etc.
• In smaller projects where scope is limited, cost estimating is tightly
linked with cost budgeting.
• Cost control is much easier in early phases of project life cycle.
Cost Management Plan
Units of measures
Each unit such as days/week, hours/day, lump sump etc for different
resources should be clearly defined.
Organizational Links
Activities shall be divided in WBS, and a team should be made on each
WBS.
An account should be linked with respective WBS for proper cost
controlling.
Cost Management Plan
Contingency
• Certain percentage should be assigned.
Control Threshold
• Threshold or certain allowed variation limits should be clearly
mentioned
Earned Value Management Technique
• Apply EVM techniques to monitor cost.
PROJECT
COST
MANGEMENT
PROCESS
Cost Estimating
• Developing approximation of cost of resources to complete entire project.
• Cost estimation should include RISKS.
• Must add allowance for ADDITIONAL WORKS.
• The cost estimate is a continuous process, in the beginning only rough
estimate can be done i.e. Rough Order of Magnitude may be a range of -
50% to +100%
• Later estimate may be more accurate upto precision level of -10% to +15%.
• Must include cost of all resources such as Staff, Labour, Equipment,
Materials, additionally inflation, risks, rework/additional work
Cost Estimating Input
• Enterprise Environmental Factors:
• Cost estimate depends on market conditions, demand and supply,
purchasing in bulk or not, availability of materials etc.
• Cost also depends on commercial suppliers, Govt. rates, market rates,
in cash or debt method etc.
• Organizational Process
• Previous records available or not, any template, sheets, thumb rules,
rough estimations, history etc.
Cost Estimating Input
• Project Team Knowledge
• Expertise of project team, surveys, data, past records etc.
• Lesson learned
• Post project reports, risks, cost variation records, cost saving
techniques etc.
Cost Estimating Input
• Need of project, justification, current boundaries of project shall be
clearly defined.
• Scope directly connected with project budget.
• Must consider insurances, performance bonds, securities, permits,
license etc. while defining budget and estimates
• WBS Dictionary
• Create: Work packages, assigned budget, linked an account code,
responsible organization, work statement
Cost Estimating Input
• Project Schedule:
• Activities durations, linked with cost of labours, staff, equipment etc.
• Link project schedule with Material, Equipment, Labour, Staff
schedule to estimate project cost
• Consider interest rate i.e. KIBOR
• Risk Register
• Opportunity or Threat?
• Impact on time/cost?
Cost Estimating Tools and Techniques
1. Analogous Estimating:
From similar previous records
Good when limited project detail is available
Accuracy depends on similarity with previous projects and skills of
cost estimator
2. Resource Cost Rates:
Details activities and their cost such as unit rates, bulk material rates,
cost per cubic ft or sq. ft, Schedule rates/market rates
Cost Estimating Tools and Techniques
3. Bottom Up Estimating
Calculating individual work package cost and summing up such as foundation
cost+ super structure + finishing
4. Parametric Estimating
Consider historical data and later link with other parameters such as
foundation type, quality of finish.
New items with old data to estimate project cost such as per square cost
5. Project Management Software
Assign activities, define/assign resources and calculate estimated cost as per
activities
Cost Budgeting
Aggregating all cost
Looking reserves of firm
Overviewing scope of project
Funding sources identification
Partnership and other percentage systems
Cost Budgeting
• Creating a baseline of cost looking at estimated cost
• Baselines helps in monitoring project cost
• Baseline cost should slightly more than estimation to compensate
risks/unforeseen situations
Cost Control
• Focusing on factors influencing cost change
• Informing/Agreement of all parties on cost variations of
activities
• Manage cost overrun from authorized funds
• Compensate overrun from other activities or
methods/materials/design change/scope modifications
Performance Measurement Analysis
• To monitor and control cost its important to measure magnitude of
variances
• Earned value analysis compares cumulative budgeted cost of work
performed (earned) at the original allocated budget amount to both
the budgeted cost of work scheduled (planned) and to the actual
cost of work performed (actual).
• Earned value technique uses baseline cost and measure cost
variation
Earned Value Management
Earned Value Management (EVM) recognizes that it is
necessary to jointly consider the impact of time, cost,
and project performance on current project status.
Earned Value (EV) directly links all three
primary project success Metrics (cost,
schedule, and performance).
Earned Value Analysis
• EVA is an industry standard way to:
• measure a project’s progress,
• forecast its completion date and final cost, and
• provide schedule and budget variances along the way.
• Provides an “Early Warning”
Extra time or budget can be requested
Earned Value Analysis
• Planned Value (PV): PV is the budgeted cost of work schedule to be
completed on an activity of WBS at any given time (How much work
(person-hours) you planned to have accomplished at a given point in
time (this is from the WBS in your plan).
• Actual Cost (AC): Total cost incurred in accomplishing work on the
the schedule activity or WBS during a given time period (How much
work (person-hours) you have actually spent at a given point in time)
Earned Value Analysis
• Earned Value (EV): EV is the budgeted amount for the work actually
completed on the schedule activity or WBS during a given time period
• The value (person-hours) in terms of your base budget of what you
have accomplished at a given point in time (or, % complete X Planned
Value
Earned Value Analysis
• Cost Variance (CV): EV-AC
• At the end of project, CV shows difference between the budget at
completion (BAC) and the actual amount spent.
• A comparison of amount of work performed during a given period of
time to what was scheduled to be performed.
• A negative variance means the project is under cost overrun.
Earned Value Analysis
• Schedule Variance (SV)= EV-PV
• This is always zero at the end of project as all earned values are equal
to planned value by the end of project.
• A comparison of the budgeted cost of work performed with actual
cost.
• A negative variance means the project is scheduled overrun.
Earned Value Analysis- EXAMPLE
Earned Value Analysis
• Cost Performance Index (CPI)
• A CPI value lesser than 1 means cost overrun
CPI=EV/AC
Schedule Performance Index (SPI)
This predicts time overrun
SPI=EV/PV
S CURVE (performance monitoring)
Earned Value Milestones
Project Performance Reviews
• Variance Analysis:
Comparing actual project performance to planned or expected one
• Trend Analysis:
Examining project performance over time to assess improvement
• Earned Value Analysis:
• Comparing planned performance to actual performance
EVA- EXAMPLE
• A $10,000 software project is scheduled for 4 weeks.
• At the end of the third week, the project is 50% complete and the actual costs to
date is $9,000.
• Planned Value (PV) = $7,500
• Earned Value (EV) = $5,000
• Actual Cost (AC) = $9,000
What is the project health?
• Schedule Variance
• = EV – PV = $5,000 – $7,500 = - $2,500
• Schedule Performance Index (SPI)
• = EV/PV = $5,000 / $7,500 = .66
• Cost Variance
• = EV – AC = $5,000 - $9,000 = - $4,000
• Cost Performance Index (CPI)
• = EV/AC = $5,000 / $9,000 = .55
• Objective metrics indicate the project is behind schedule and over budget.
• On-target projects have an SPI and CPI of 1 or greater
Forecasting Costs
• If the project continues at the current performance, what is the true cost of the
project?
• Estimate At Complete
= Budget At Complete (BAC) / CPI
= $10,000 / .55 = $18,181
• At the end of the project, the total project costs will be $18,181
Establish Ranges to Guide Traffic Light Status
• Traffic Light status is useful in conveying overall project with one color
• Establish objective SPI and CPI ranges to determine the true project color.
• Green [1.0 - .95]
• Yellow [.94-.85]
• Red [.84, 0]
EVA- EXAMPLE
• PLANNED VALUE= 18 + 10 + 16 + 6 = 50
• •EARNED VALUE = 18 + 8 + 14 + 0 = 40
• •ACTUAL COST = 45 (from your project tracking)
• Therefore:
• Schedule Variance = EV-PV = 40 - 50 = -10 (behind schedule)
• Schedule Performance Index = 40 / 50 = 0.8, or 80% of plan (a B-, at best)
• Cost Variance = EV-AC = 40 - 45 = -5
• Cost Performance Index = 40/45 = .89, or you’re getting an 89¢ return on every $1.00 (or,
person-hour) spent on this project
EVA- EXAMPLE
• Plans to spend $100K in each of first 4 weeks (baseline budget, per
documented plan)
• Actuals, at end of week 4 show: $325K spent PV = $400K ($100K x 4)
• AC = $325K
• What conclusions can you draw?
• Under budget?
• Is project on schedule?
EVA- EXAMPLE
• Suppose EV is $300K How is this determined?
• What conclusions now? SV = EV – PV
• SV = $300k - $400K = -$100K Behind schedule, but what does the $100K in
variance really mean?
• Means project is behind schedule by $100K (spent this much amount to
compensate loss)
• CV = EV – AC = $300K - $325K Over budget by $25K
Performance Index Trends
