Outline Introduction Understanding Control The Operating Cycle Cost Account Codes Budgets The Earned Value Measurement System（ EVMS） Variance and Earned Value
Outline The Cost Baseline Justifying the Costs The Cost Overrun Dilemma Recording Material Costs Using Earned Value Measurement The Material Accounting Criterion Material Variances : Price and Usage Summary Variances
Outline Status Reporting Cost Control Problems
Introduction Do project managers control costs, monitor costs or both? Cost control is not only “monitoring” costs and recording data, but also analyzing the data in order to take corrective action before it is too late.
Cost Management • Cost estimating • Cost accounting • Project cash flow • Company cash flow • Direct labor costing • Overhead rate costing • Others, such as incentives, penalties, and profit-sharing
Cost And Control System PLANNING WORK AUTHORIZATION AND RELEASE DATA COLLECTION AND REPORTING COST ACCOUNTING CUSTOMER AND MANAGEMENT REPORTING PHASE I PHASE II PHASE III PHASE IV PHASE V PLANNING OPERATING CYCLE CYCLE
Cost Control Requirements • Measure resources consumed • Measure status and accomplishments • Compare measurements to projections and standards • Provide the basis for diagnosis and re-planning
Cost Control Activities • Contract receipt (if applicable) • Work authorization for project planning • Work breakdown structure • Subdivided work description • Schedules • Planning charts • Budgets
Cost Control Requirements • Thorough planning of the work to be performed to complete the project • Good estimating of time, labor, and costs • Clear communication of the scope of required tasks • A disciplined budget and authorizations of expenditures • Timely accounting of physical progress and cost expenditures • Periodic re-estimation of time and cost to complete remaining work
Cost Control Requirements(Continued) • Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion
Purposes of Cost Control (1/2) • Verification • The objectives have been successfully translated into performance standards • The performance standards are, in fact, a reliable representation of program activities and events • Meaningful budgets have been established such that actual versus planned comparison can be made
Purposes of Cost Control (2/2) • Decision making via three reports • The project plan, schedule, and budget prepared during the planning phase • A detailed comparison between resources expended to date and those predetermined. • A projection of resources to be expended through program completion
When to Implement a Cost Management System Possible cost reductions Cost of change PROJECT COSTS CONCLUSION A cost management system should be implemented right at the beginning of the life cycle of the project. PROJECT LIFE CYCLE PHASES
Work Authorization Form WBS: 31.03.02 Work order no: D1385 Date of original release:03 Feb 97 Date of revision: 18 March 97 Revision number: C Cost Work Work Centers Hours Cost Starts Ends Description - Test Material 2400 150 R4500 1 Aug 15 Sept - Processing 2610 160 R7500 - Final inspection 2621 140 R3500 - Packaging 2623 46 R 750 - Delivery 2624 R 350 Project office authorization signature:________________
Planning and Budgeting WBS Element Work Package Work packages Org M G R WP______ORG_______ Description of task_____ ____________________ Sched: Start____Stop__ Budget:______________ Org Org
COST ACCOUNT CHANGE NOTICE (CACN) CACN No. _____________ Revision to Cost Account No. ____________ Date ___________ DESCRIPTION OF CHANGE: ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ REASON FOR CHANGE: ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ __________________________________________________________________________________ Requested Budget Authorized Budget Labor Hours _________________ _________________ Period of performance Materials _________________ _________________ From _____________ ODCS _________________ _________________ To _____________ BUDGET SOURCE: Funded Contract Change Management Reserve Undistributed Budget Other _________________ INITIATED BY: ____________________________ APPROVALS: Program Mgr. ________ Prog. Control ________
Sources Of Additional Funding • Funded contract change • Management reserve • Undistributed budget • Other (e.g. profits)
Cost data collation and reporting flow chart Actuals Monthly Total Program Effort BCWP Labor Weekly Labor Reports Computer ACWP MCCS Comparison reports To All Execs Inventory Accounts BCWS Variance Report ACWP: Actual Cost for Work Performed BCWP: Budgeted Cost for Work Performed BCWS: Budgeted Cost for Work Scheduled MCCS: Management Cost and Control System
Cost Data • Labor • Material • Other direct charges • Overhead
Types of Budgets • Distributed budget • Management budget • Undistributed budget • Contract changes
Variances • The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished. • The scheduling variance provides a comparison between planned and actual performance but does not include costs.
Variables for Variance Analysis • Budgeted Cost for Worked Scheduled (BCWS) is the budgeted amount of cost for word scheduled to be accomplished plus the amount of level of effort or apportioned effort scheduled to be accomplished in a given time period. • Budgeted Cost for Work Performed (BCWP)is the budgeted amount of cost for completed word, plus budgeted for level of effort or apportioned effort activity completed within a given time period. this is sometimes referred to as an “earned value.”
Variables for Variance Analysis • Actual Cost for Work Performed (ACWP) is the amount reported as actually expended in completing the work accomplished within a given time period. • Cost Variance = BCWP – ACWP • Schedule/Performance Variance • = BCWP - BCWS
Measurements • Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results. • Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.
Cost Variance Calculation A Negative Variance Indicates A Cost Overrun CV = BCWP - ACWP
Schedule Variance Calculation SV = BCWP - BCWS A Negative Variance Indicates A Behind Schedule Condition
Variance Percents SV SCHEDULE VARIANCE % = (SVP) COST VARIANCE % = (CVP) X 100 BCWS CV X 100 BCWP
Permitted Variances May be Dependent on Such Factors as : • Life cycle phase • Length of life cycle phase • Length of project • Type estimate • Accuracy of estimate
Project Variance Analysis VARIANCE UPPER BOUNDARY PROJECTED COST $ ACTUAL COST VARIANCE VARIANCE LOWER BOUNDARY R&D QUALIFICATION DEVELOPMENT PHASE I PHASE II PHASE III TIME
Performance Index BCWP Cost Performance Index = (CPI) Schedule Performance Index = (SPI) ACWP BCWP BCWS
Management Reserve • Defined as the difference between the contracted cost for projected performance to date and the budgeted cost. • It is to cover the unforseen events within a defined project scope, but is used for unlikely major events.
Management Reserve CONTRACTED COST MANAGEMENT ACTUAL COST RESERVE $ RELEASED BUDGET TIME
Information Requirements • Budgeted cost for work scheduled (BCWS) • Budgeted cost for work performed (BCWP) • Actual cost for work performed (ACWP) • Estimated cost at completion • Budgeted cost at completion • Cost and schedule variances/explanations • Traceability
Variance Analysis Questions • What is the problem causing the variance? • What is the impact on time, cost, and performance? • What is the impact on other efforts, if any? • What corrective action is planned or under way? • What are the expected results of the corrective action?
Variance Reporting Variance reporting is accomplished at each reporting interval. However, the variance threshold reports are exception reports and occur only when the variances exceed the upper and lower boundaries of the project variances envelope.
Reporting Intervals • Depends on the type of organization and characteristics of the projects. • Project-driven organization - weekly. • Non-project-driven organization - monthly
Cost Account Variance Analysis Report Cost account no/cam Reporting level WBS/Description As of Cost performance data Variance At completion Budget Var. EAC BCWS BCWP ACWP SCHED COST Month to date ($) Contract to date ($k) Problem cause and impact Corrective action (including expected recovery date) Cost account Date Cost center Date WBS element Date Date Mgr. Mgr. Mgr.
The 50/50 Rule Half of the budget for each element is recorded at the time that the work is scheduled to begin and the other half at the time the work is scheduled to be completed. For a project with a large number of elements the amount of distortion from such a procedure is minimal.
Analysis Scheduled (BCWS) Performed (BCWP) Budgeted cost for work Budget - 6 Cost account budget = 100 (thousands) 8 14 12 10 Work packages 12 8 BCWS = 38 BCWP = 49 SCHED. VARIANCE = +11 12 10 8 50-50 rule used for work in process J F MA M J J AS O N D
Using The 50-50 Rule 4,000 TIME LINE 10,000 LEGEND 12,000 COMPLETED 4,000 NOT COMPLETED 6,000 BCWS = 34,000 6,000 BCWP = 33,000 BAC = 52,000 10,000 TIME
Earned Value Status Reporting TIME LINE BCWS SV ACWP CV CUMMULATIVE COST, $ BCWP TIME