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8/3/2019 Class 7 - Project Cost Control and EV
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Monitoring your ProjectMonitoring your ProjectProject Cost ControlProject Cost Control
InstructorInstructor
Roger deRoger de PeizaPeiza
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Agenda
CostManagement
Cost Budgeting
Cost Control
Learning Goals
1. Cost Control
2. Earned Value Management
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Attendance
8/3/2019 Class 7 - Project Cost Control and EV
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Agenda
CostManagement
Cost Budgeting
Cost Control Cost Control
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Agenda
CostManagement
Cost Budgeting
Cost Control
Cost Control
Cost control is concerned with:
Influencing the factors that create changesto the cost baseline to ensure that changesare agreed upon
Determining that the cost baseline haschanged
Managing the actual change when and asthey occur
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Agenda
CostManagement
Cost Budgeting
Cost Control
What does Cost Control include?
1. Monitoring cost performance to detectand understand variances from the plan
2. Ensuring that all appropriate changes arerecorded accurately in the cost baseline
3. Preventing incorrect, inappropriate orunauthorized changes from beingincluded in the cost baseline
4. Informing appropriate stakeholders of
authorized changes5. Acting to bring expressed cost within
acceptable limits
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Agenda
CostManagement
Cost Budgeting
Cost Control
Cost Control Processes
Inputs
Cost baseline
Project funding
requirements
Performancereports
Work performance
information
Approved change
requests
Project
management plan
Tools and Techniques
Cost change control
system
Performance
measurement
analysis
Forecasting
Project performance
reviews
Project management
software
Variance
management
Outputs
Cost estimates
updates
Cost baseline update
Performance
measurement
Forecasted
completion
Requested changes
Recommended
corrected actions
Organizational
process assets
(updates)
Project management
plan (updates)
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Agenda
CostManagement
Cost Budgeting
Cost Control
Work completion
In order to have effective project controls, itis imperative that the project team haveaccurate measurements of the workperformed for each scheduled task.
If this information is not available, no oneknows if there is over or under spending onthe project's budget.
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Agenda
CostManagement
Cost Budgeting
Cost Control
Examples ofWork Completion Rules
0/100 Rule
20/80 Rule
50/50 Rule
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Agenda
CostManagement
Cost Budgeting
Cost Control
0/100 Rule
Assume that 0 percent of the taskis complete until the entire task isfinished
Using the 0/100 Rule requires avery conservative approach.
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Agenda
CostManagement
Cost Budgeting
Cost Control
20/80 Rule
Once the task is started, the projectoffice assumes that 20 percent ofthe task is complete
When the task is finished, theremaining 80 percent is added tothe amount completed
This method is very cautious, but isless conservative than the 0/100Rule
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Agenda
CostManagement
Cost Budgeting
Cost Control
50/50 Rule
Probably the most popular methodof showing a task's progress is the50/50 Rule.
This assumes that once the task hasbegun, 50 percent of the task iscompleted
When the task is completed, theremaining 50 percent is added tothe amount completed
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Agenda
CostManagement
Cost Budgeting
Cost Control
Cost Control InputChange requests
Request for changes in the scope ofwork
May occur in many forms:
Oral or written
Direct or indirect
External or internally initiated
Legally mandated or optional
Changes may increase or decreasethe budget
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Agenda
CostManagement
Cost Budgeting
Cost Control
Cost Control ToolsCost Change Control System
A system that defines procedures by whichthe cost baseline may be changed
Includes:
Paperwork
Tracking systems
Approval levels needed for authorizingchanges
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Agenda
CostManagement
Cost Budgeting
Cost Control
Cost Control ToolsPerformance measurements
Helps access the magnitude of any variationsthat do occur
An important part of cost control is to
Determine what is causing the variance
Decide if the variance needs corrective action
Earned ValueAnalysis is useful important to costcontrol
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Break
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Agenda
CostManagement
Cost Budgeting
Cost Control
What is Earned Value?
The PMBOK defines earned value asa method of reporting project statusin terms of both cost and time.
It is the Budgeted Cost ofWorkPerformed (BCWP) regardless of theactual cost incurred.
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Agenda
CostManagement
Cost Budgeting
Cost Control
Another definition of Earned Value?
According to Dr. David Frame, theearned value approach allows theproject to examine cost andschedule variances concurrently,enabling them to take a holisticview of project progress.
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Agenda
CostManagement
Cost Budgeting
Cost Control
The 3 fundamental building blocks of theEarned Value technique
PV
Planned Value
or
Budget Cost of Work Scheduled (BCWS)
AC
Actual Cost
or
Actual Cost of Work Performed (ACWP)
EV
Earned Value
orBudgeted Cost of Work Performed (BCWP)
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Agenda
CostManagement
Cost Budgeting
Cost Control
Planned Value (PV)
The Planned Value (PV) is the budgetedcost for the work scheduled to becompleted on an activity
It is the same as the planned budget orhow much was budgeted to perform acertain function
PV is also called the Budgeted Cost ofWork Scheduled (BCWS)
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Agenda
CostManagement
Cost Budgeting
Cost Control
The Cost PerformanceMeasurement Baseline
The BCWS may also be referred to asthe Cost Performance MeasurementBaseline.
The BCWS shows budget costs relativeto time and quantities for the purposeof comparison, analysis and forecasts ofcosts
The BCWS is typically shown graphicallycomparing budget costs relative to time
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Agenda
CostManagement
Cost Budgeting
Cost Control
Actual cost (AC)
AC is the amount it actually costs toperform the task.
AC is also called the Actual Cost ofWork Performed (ACWP).
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Agenda
CostManagement
Cost Budgeting
Cost Control
Establishing a variance
The concepts of PV and AC offerplanned and actual measurements
When actual is subtracted fromplanned, a variance is established.
With the third element, EV orBCWP, the concept of earned valueis introduced.
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Agenda
CostManagement
Cost Budgeting
Cost Control
Earned Value (EV)
EV is the amount of money that was budgetedfor the work that has been completed so far
EV is also called the Budgeted Cost ofWorkPerformed (BCWP)
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Cumulative Cost Curve
Cost
Duration
Totalproject
Planned
Cost
Measured
Period
SV = EV - PV
CV = EV - AC
PV
EV
AC
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Exercise
The Fence Part 1Determine the PV, AC and EV
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Agenda
CostManagement
Cost Budgeting
Cost Control
The Cost Variance
To calculate the Cost Variance (EV-AC) in the example above, supposethat the AC was $6,000.
The EV is the value of the work todate, and the AC is the cost toperform the work.
Using these figures and applying theabove variance formula, there is apositive variance of $2,000.
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Agenda
CostManagement
Cost Budgeting
Cost Control
What does this mean?
The positive variance indicates acost under-run when it is shown byitself.
However, variance must take intoaccount the schedule of thecompletion of the project, which atthis point in time is behindschedule.
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Agenda
CostManagement
Cost Budgeting
Cost Control
The schedule variance
The schedule variance is calculatedas follows:
SV = EV - PV
Therefore in our example:
SV = $8,000 - $10,000 = -$2,000
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Agenda
CostManagement
Cost Budgeting
Cost Control
Interpreting SV
One must compare the work that wasplanned to what was actuallyaccomplished.
Since the project's PV was $10,000 andits earned value is now $8,000, or acompletion of only 80 percent duringthe planned time frame, the value ofthe time schedule slippage is $2,000.
This variance is a negative value,therefore it implies that the project isbehind schedule.
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What does it all mean?
+Schedule
Variance
-Schedule
Variance
+ Cost Variance
- Cost Variance
The project is within budget
but behind schedule
Either the task has
not started or it has
started and not
enough resources
have been applied.
The project is over budgetand behind schedule
The project is within budget
and ahead of schedule
The project is over budget
but ahead of schedule
Money may have been
spent to crash the
project.
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The Interpretation
CostVariance
ScheduleVariance
Interpretation
+ -The project is within budget but behindschedule
Either the task has not started or it has
started and not enough resources have beenapplied.
- -The project has overrun its budget and isbehind schedule.
- +The project is ahead of schedule but is over
budget. Money was probably spent to crash the
schedule
+ +The project is within budget and ahead ofschedule
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Agenda
CostManagement
Cost Budgeting
Cost Control
The SV and CV percent
100*100*%PV
PVEV
PV
SVSV
!!
Provide an idea of how much the project isdeviating from the plan.
To calculate the SV and CV percent use theseformulas:
100*100*%EV
ACEV
AC
CVCV
!!
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Agenda
CostManagement
Cost Budgeting
Cost Control
Cost and Schedule Performance Index
Another important concept is that ofCost andSchedule Performance Index.
These two formulas explain how efficiently thework has been accomplished.
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Agenda
CostManagement
Cost Budgeting
Cost Control
The Cost Performance Index (CPI)
The Cost Performance Index (CPI) is the ratioof Earned Value to Actual Cost (EV/AC).
Cost Performance Index (CPI) = EV/AC
The cumulative CPI (the sum of all individualEVs divided by the sum of all individual ACs) iswidely used to forecast project cost atcompletion
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Agenda
CostManagement
Cost Budgeting
Cost Control
The magnitude of a possible cost overrun
To predict the magnitude of apossible cost overrun, the followingformula is used:
Projected Cost At Completion =
Original Cost Estimate / CPI
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Agenda
CostManagement
Cost Budgeting
Cost Control
CPI explained
Suppose the value of the work is worth $750(EV).
It cost $800 to perform the work (AC).
This means that every dollar spent will provide93.73 cents worth of work.
This ratio can then be applied to project thepossible costs overrun.
If the original project cost estimate was $10,000,divided by the calculated CPI of .9373 =$10,669, or a possible $669 overrun.
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Agenda
CostManagement
Cost Budgeting
Cost Control
The Schedule Performance Index (SPI)
The Schedule Performance Index (SPI) is theratio of budgeted cost work performed tobudgeted cost of work scheduled (BCWP/BCWS)
Schedule Performance Index (SPI) =EV/PV
In some applications areas, the SchedulePerformance Index is used to forecast the projectcompletion date.
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Agenda
CostManagement
Cost Budgeting
Cost Control
SPI interpreted
An interpretation of the SPI is that if $500 worthof work (EV) is performed, and the value ofwork schedule is $400 (PV), each dollar ofscheduled work generated $1.25 worth of work,or a ratio of 25.
This ratio tells us that for every day of workscheduled, the project is .25 days ahead ofschedule at the point the analysis wascompleted.
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Agenda
CostManagement
Cost Budgeting
Cost Control
What does CPI and SPI say about projectperformance
If the CPI is equal to 1.0, there is perfectperformance.
If CPI > 1.0, means cost under run, there isexceptional performance.
If CPI is < 1.0, means cost overrun, theperformance is poor.
This same generalization is true for the SPI.
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Agenda
CostManagement
Cost Budgeting
Cost Control
Budgeted at Completion (BAC)
Budgeted at Completion (BAC) is the sum of allthe budgets (PV) allocated to the project or theproject baseline, i.e. this is what the total effortof the project should cost.
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Agenda
CostManagement
Cost Budgeting
Cost Control
Estimated at completion (EAC)
The EAC [(AC/EV) X BAC] or [BAC/CPI] isdefined as either the hour or dollar amount thatprovides a realistic appraisal of the workperformed.
According to Dr. Kerzner, it is the sum of alldirect and indirect costs to date plus theestimate of all authorized work remaining.
In other words, the EAC is what the totalproject is expected to cost.
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3 Ways of Calculating EAC
EAC = Actuals to date
plus a new estimate forall remaining work.
This approach is most oftenused when past performanceshows that the originalestimating assumptions were
fundamentally flawed, or thatthey are no longer relevantdue to a change inconditions.
EAC = Actuals to dateplus remaining budget.
This approach is most oftenused when current variancesare seen as atypical and theproject management team'sexpectation is that similarvariances will not occur in thefuture.
EAC = Actuals to date plusthe remaining projectbudget modified by aperformance factor, oftenthe CPI.
This approach is most oftenused when current variancesare seen as typical of futurevariances.
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Agenda
CostManagement
Cost Budgeting
Cost Control
The Variance at Completion (VAC)
Using the EAC, the Variance at Completion(VAC) can be calculated.
VAC = BAC - EAC
The VAC provides the best estimate of the
total cost at the completion of the project.
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How to remember all of this
Question Answer Acronym
How much work shouldbe done?
Planned Value orBudgeted cost of work
scheduled
PV or BCWS
How much work is
done?
Earned Value or
Budgeted cost of workperformed
PV or BCWP
How much did the workcost?
Actual Cost or
Actual cost of workperformed
AC or ACWP
What was the total jobsupposed to cost?
Budget at completion BAC
What do we now expectthe total job to cost
Estimate at completionor latest revised
estimate
EAC
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Agenda
CostManagement
Cost Budgeting
Cost Control
Class Exercise
The Fence Part 2
Complete the rest
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Agenda
CostManagement
Cost Budgeting
Cost Control
The Cumulative Cost Curve
The Cumulative Cost Curve or S curve is anothereffective monitoring tool in controlling the budget
This chart provides the cumulative expendituresof the project.
The cost curves for the planned and actual resultsare graphically shown.
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Cumulative Cost Curve
Cost
Duration
Totalproject
Planned
Cost
MeasuredPeriod
SV = BCWP -
BCWS
CV = BCWP -
ACWP
BCWS
BCWP
ACWP
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Agenda
CostManagement
Cost Budgeting
Cost Control
The End
Thank youThank you