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
Project
cost

Possible reduction
in cost
Cost of change

Project life
cycle phases

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

Projected cost
Actual cost Variance

Variance Lower Boundary

R&D
Phase I

Qualification
Phase II

Time

Development
Phase III

Parameters for Variances

Analysis
Question

Answer

Acronym

How much work

should be done ?
How much work
is done?

Budgeted cost of work

scheduled
Budgeted cost of work
performed

BCWS

How much did the "is

done" work cost?
What was the total job
supposed to cost?
What do we now
expect the total job

Actual cost of work

performed (actuals)
Budget at completion
(total budget)
Estimate at completion
or latest revised estimate

ACWP

to cost?

BCWP

BAC
EAC
LRE

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
Also see table 15-3

Subtask 2: All contractual fund were budgeted. A cost over run , as

ACWP >BCWO. Milestone was completed later than schedule

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

Activity

%
Complete

BCWS

BCWP

ACWP

100

1000

1000

1200

50

1000

500

700

1000

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

Analysis of Project Status

Activity

%
Complete

BCWS

BCWP

ACWP

100

1000

1000

1200

50

1000

500

700

1000

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

Analysis of Project Status

Activity

%
Complete

BCWS

BCWP

ACWP

100

1000

1000

1200

50

1000

500

700

1000

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

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)

800

800

800

Cases for Comparing

Planned Vs Actual Performance
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
PlannedThis
earnedis one
Actuals
Actual Earned
schedule
also.
of the worst
Case
Value(BCWS)
(ACWP)
value(BCWP)
possible cases.
2

800

600

400

Cases for Comparing

Planned Vs Actual Performance
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.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

800

400

600

Cases for Comparing

Planned Vs Actual Performance
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.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

800

600

600

Cases for Comparing

Planned Vs Actual Performance
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.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

800

800

600

Cases for Comparing

Planned Vs Actual Performance
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
Plannedcurve.
earned
Actuals
Actual Earned
Case
6

Value(BCWS)

(ACWP)

value(BCWP)

800

800

1000

Cases for Comparing

Planned Vs Actual Performance
Case 7: We are operating at 100 percent efficiency and work
is being accomplished ahead of schedule. Costs are being
maintained according to budget.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

800

1000

1000

Cases for Comparing

Planned Vs Actual Performance
Case 8: Work is being accomplished properly,
and costs are being underrun
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

800

600

800

Cases for Comparing

Planned Vs Actual Performance
Case 9: Work is being accomplished properly,
but costs are being overrun.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

800

1000

800

Cases for Comparing

Planned Vs Actual Performance
Case 10: Costs are being overrun while underaccomplishing the plan. Work is being
accomplished inefficiently. This situation is
very bad.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

10

800

1000

600

Cases for Comparing

Planned Vs Actual Performance
Case ll: Performance is ahead of schedule,
and the costs are lower than planned. This
situation results in a big Christmas bonus.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

11

800

600

1000

Cases for Comparing

Planned Vs Actual Performance
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 Planned
in schedule.
earned
Actuals
Actual Earned
Case
12

Value(BCWS)

(ACWP)

value(BCWP)

800

1200

1000

Cases for Comparing

Planned Vs Actual Performance

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.
Case

Planned earned
Value(BCWS)

Actuals
(ACWP)

Actual Earned
value(BCWP)

13

800

1000

1200

Summary Variance
Calculated for both labor and material
Find total price variance for direct labor and
rate cost variance
Planned price/
unit
Actual units
Actual price
/unit
Actual cost

Direct Material Direct Labor

$ 30.00
$ 24.30
17,853
$31.07

9,000
$26.24

$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.