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 . BCWS a negative value indicate behind schedule condition Cost variance percent = CVP = CV/BCWP Schedule variance percent = SVP = SV/BCWS .Variances Calculation • Cost Variance CV = BCWP -ACWP a negative value = cost over run Schedule variance = BCWP . 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 $$$ value regardless of % complete • No matter how much task is completed if the project is 20% in time then 20% $ should be BCWP . Calculating BCWP – 50/50 Rule • Half of the budget is recorded at the start of the scheduled work and half at completion – Advantages • Eliminate the calculation of % complete . – % complete • Long work duration with no milestone • Value earned is the reported % of the budget .Calculating BCWP – 0/100 • Usually for small activities • Value is earned at the end of the activity – Milestone • Long work / activities • Value is earned at the completion of milestone. Calculating BCWP – Cost formula (80/20) • Variation of % complete for long duration work – Equivalent unit • Similar unit work • Earnings are in completed unit not in labor – Level of effort • • • • Based on passage of time Used for managers and supervisors work Value earned is based on time expanded over schedule time Measured in terms of resources consumed . Subtask 1: All contractual fund were budgeted. Milestone was completed later than schedule . A cost over run . Cost/performance was completed on time as indicated by milestone position Also see table 15-3 Subtask 2: All contractual fund were budgeted.Analysis of Project Status • Earned value is more effective if used at higher levels of tasks. as ACWP >BCWO. WHY? Subtask 4: Work not yet started .Analysis of Project Status Subtask 3: Cost was under run. 000 cost overrun Subtask 6: Work has not yet started.Analysis of Project Status Subtask 5: Scheduled work completion but $50. Behind schedule . Analysis of Project Status Subtask 7: 25% completed Subtask 8: Not started . • Estimate at Completion – $$$ 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 • Budget at Completion: – Sum of all budgets (BCWS). 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 A 100 1000 1000 1200 B 50 1000 500 700 C 0 1000 0 0 Formula I. if burn rate is calculated periodically . EAC =(ACWP/BCWP)*BAC =(1900/1500)*(3000)=$3800. • Assume constant burn rate for the remaining project • Best formula. Analysis of Project Status Activity % Complete BCWS BCWP ACWP A 100 1000 1000 1200 B 50 1000 500 700 C 0 1000 0 0 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 A 100 1000 1000 1200 B 50 1000 500 700 C 0 1000 0 0 Formula III EAC = [Actual to date] + [All remaining work to be at planned cost including remaining work in progress ]. • Assume remaining work is independent of burn rate • Unrealistic . = 1900+[500+1000]=$3400. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 1 800 800 800 .Cases for Comparing Planned Vs Actual Performance Case 1: This is the ideal planning situation where everything goes according to schedule. since actuals exceed BCWP.Cases for Comparing Planned Vs Actual Performance Case 2: Costs are behind schedule. 2 800 600 400 . and the program appears to be under-running. of the worst Case Value(BCWS) (ACWP) value(BCWP) possible cases. 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. Work is being accomplished at less than 100 percent. The bad news is that we are behind schedule. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 3 800 400 600 . The good news is that we are performing the work efficiently (eff1ciency exceeds 100 percent).Cases for Comparing Planned Vs Actual Performance Case 3: In this case there exists good news and bad news. . is behind schedule). Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 4 800 600 600 . but the costs are being maintained for what has been accomplished.Cases for Comparing Planned Vs Actual Performance Case 4: The work is not being accomplished according to schedule (i.e. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 5 800 800 600 . 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 5: The costs are on target with the schedule. 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. earned Actuals Actual Earned Case 6 Value(BCWS) (ACWP) value(BCWP) 800 800 1000 . We are performing at a more favorable position on the learning Plannedcurve. Costs are being maintained according to budget. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 7 800 1000 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. and costs are being underrun Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 8 800 600 800 .Cases for Comparing Planned Vs Actual Performance Case 8: Work is being accomplished properly. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 9 800 1000 800 . but costs are being overrun.Cases for Comparing Planned Vs Actual Performance Case 9: Work is being accomplished properly. This situation is very bad. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 10 800 1000 600 . Work is being accomplished inefficiently.Cases for Comparing Planned Vs Actual Performance Case 10: Costs are being overrun while underaccomplishing the plan. and the costs are lower than planned. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 11 800 600 1000 . This situation results in a big Christmas bonus.Cases for Comparing Planned Vs Actual Performance Case ll: Performance is ahead of schedule. and a possible cost overrun can occur. The overall result may be either an overrun in cost or an underrun Planned in schedule. However.Cases for Comparing Planned Vs Actual Performance Case 12: Work is being done efficiently. performance is ahead of schedule. earned Actuals Actual Earned Case 12 Value(BCWS) (ACWP) value(BCWP) 800 1200 1000 . and work is being accomplished very efficiently.se 13: Although costs are greater than those budgeted. performance is ahead of schedule. This is also a good situation. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 13 800 1000 1200 .Cases for Comparing Planned Vs Actual Performance Ca. 00 $ 24.24 $554.30 17.000 $26.630 $236.07 9.200 .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 $ 30.853 $31. $26.71 • Labor rate cost variance = Budgeted rate .24 = $ 1.853 * ($30.Summary Variance • Total price variance for direct labor = Actual units * ( BCWP .ACWP ) = 17.30 .Actual rate = $24.00 .$31.94 .07) = $ 19.102. Status Reporting • Brief • Contain – – – – – – Variance analysis Estimate at completion Cost summary Schedule summary Milestone report Event report . . technical and non technical – Schedule delays. resulting in unrealistic budgets – Inadequate brake down of work – No management policy for reporting and control – Unforeseen problems. etc.Cost Control Problems • Causes – Poor estimates. .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.