Module 6 Project Cost Planning and Control

6.1 Introduction

Project cost and control system (PCCS) and primary evaluation technique is earned value analysis (EVA) make use of Project variance analysis reporting (PVAR) reviewing two cycles of the PCCS separately

Planning cycle	Concerned with budgeting and cost planning
Control cycle	Considers cost monitoring and control including suitable reporting systems

6.2 Project Cost Planning and Control Systems

6.2.1 Introduction

Cost planning breaking total project down into individual element or work packages and assigning realistic estimate cost. Standard practice to develop cost limits for different levels of work. Cost are then rolled up. Provides a cost ‘map’ for the project

Cost control ensuring that the cost limits established by cost play are adhered to wherever possible.

6 Main stages involved:

1. Monitoring on-going actual expenditure against cost limits

2. Identifying any variances that occur

3. Identifying the reason for any variances

4. Taking appropriate corrective action

5. Monitoring to ensure that the corrective action resaves the variance

6. Taking further corrective action as necessary

Cost planning and cost control function work together but are fundamentally different in approach

Cost planning essentially a strategic project function in that it establishes aims and objectives before work actually starts.

Cost Control is tactical or reactive function intended to monitor and control in order to ensure project strategic cost objectives are met.

6.2.2 Cost Planning and Control as a Concept

Work breakdown structure (WBS) estimated and priced. Sets up a budget plan individual packages have target cost identified by an account code system. Actual cost charged against each packaged related to budgeted costs part of monitoring process. No direct time measurement involved. Time does affect performance of the cost control system regulates the rate of expenditure characteristic of expenditure and projected cash-flow curves.

Time and cost planning process linked and use the same basic work-package elements as derived in the initial development of the project WBS

Top down strategic process, after which three aspects divided and separate, planning and control systems are developed for the specialized control of each aspect.

6.2.2.2 Cost Planning and Control as Management Function

Involves establishment of cost targets – success criteria. Variance analysis used determine how close actual performance is against planned performance. Deviation from plan

6.2.2.3 General Requirements of a Cost Control System

Cost control depends on accuracy of the budget plan – number of important prerequisites

• The project schedule must be accurate
• The estimating system must be reliable
• The scope of the project must be clear
• The budget must be realistic
• The authorization system must be clear
• The system must be flexible and responsive
• There must be a reliable approach to cost tracking and variance analysis
• The variance detection sensitivity envelope must be time dependent
• There should be a flexible approach to the use of reserves and contingencies

6.2.3 Types of Control System

6.2.3.1 Introduction

Three primary types of control system

• Cybernetic
• Analogue
• Feedback

6.2.3.2 Cybernetic

Operates and different levels,

Low-level process use pre-set information, basis for analysis while higher order systems use more advanced processes main differences between lower and higher order systems lie in:

• The range of information that can be used in the system memory
• The extent to which this data can be used to influence the decision
• The extent to which two-way connections between the elements can be developed.

Low level cybernetic control is typical for simple response mechanisms

Mid-level cybernetic control more complex or where greater degree of flexibility and response required. Decision making process relies on analysis, case is still directed by analysis but the analysis considers multiple variables.

System includes range of pre-set responses , external factors are also interactive.

Micro computer or advanced processor to carry out the level of analysis. Much greater degree of response flexibility than low-level systems. Can only operate within the limits set by the design of the control system itself. Only operate within a range of pre-programmed responses

High-level cybernetic control process allow the system to move beyond any level of pre-programmed response Replaces the database of pre-set responses with reasoning process are fully interactive. Interact directly with the environment and bypass the reasoning process.

Human brain uses control systems at all three levels.

Examples of cybernetic control system as related to project teams:

1 Lowlevel cybernetic control systems:

• detecting time and cost variances;

• adjusting likely final time and cost estimates to allow for detected variances;

• reprogramming the project schedule following change.

2 Midlevel cybernetic control systems:

• adjusting estimates to allow for increases in individual cost rates;

• establishing the individual cost of change notices and variations;

• allowing the use of provisional and contingency sums.

3 Highlevel cybernetic control systems:

• generating original tactical solutions to discovered programming problems;

• updating the risk profile of the project following change;

• developing a strategy for required negotiations.

6.2.3.3 Analogue Control

Appropriate for smaller elements or work packages

Widely used in computers – ‘yes’ ‘no’ questions. Depending on the answer system directs to another ‘yes’ ‘no’. process of elimination

When faced with complex problem, natural human reaction is to:

• Eliminate those solutions that are not feasible
• Take the solutions that are feasible and break them up into smaller sections
• Break the feasible solutions up into smaller and smaller subsections
• Tackle each subsection separately

Set straightforward outcome criteria for individual work packages possible to set:

• Package start and finish times
• Package cost limits
• Package performance limits

Analogue Control system tend to operate where there are rigidly defined time, cost, and performance limitations

Rigid time limits	Penalties related with late completion
Rigid cost limits	Often with public works project can be contained with set cost limit
Rigid performance limit	Quality of the product is paramount example pharmaceutical research company

6.2.3.4 Feedback Control

Post-project evaluation and feedback. Involves assessment of completed projects with intention of feeding back any lessons learned to future projects. Essential to learn from past experiences in order to improve future project strategy.

Use of formal reporting system. -Post occupancy evaluation review (POER) review involves detailed evaluation of the finished product including detailed feedback from users.

6.2.3.5 The General Design of a Control System

Number of important consideration taken into account:

• Level of response require
• Flexibility of response require
• Level of innovation and original (thought) response required
• Reasonableness of any imposed standards in relation to project performance
• Level of detail required in reporting systems
• Degree to which responses can be automated
• Degree of variance that is acceptable (as a function of time)
• Range of acceptable solutions that are available
• Degree of time lag (between identification and response) that is acceptable
• Authority systems that are in place and associated time implications
• Extent to which corrective actions may be limited or controlled

In addition good control system should:

• Be fully automated in the case of low-level systems
• Be flexible in the case of mid-level and high-level systems
• Be cost effective (some systems cost more to run than they actually save)
• Be accurate and reliable
• Be useful (not there just for the sake of being there)
• Be responsive within any time limits that may apply
• Be capable of extension
• Be user-friendly and easy to understand (or people will not use it)
• Be fully documented by generating detailed reports

6.2.4 Costs and Allowances

6.2.4.1 Introductions

Cost planning and control system must allow for costs that are likely to be encountered during the course of a project.

6.2.4.2 Cost and Allowances Classification

Costs that may or may not be incurred during the project

Fixed and variable cost	Incurred irrespective of the level of activity Fixed cost tend to form the major part of projects indirect (or overhead) costs. Variable costs are those that are incurred at a rate that depends on the level of work activity. These are usually direct costs.
Direct and indirect cost	Direct costs are the costs directly attributable to the job or project takes- include labour, materials, equipment changes directly related to carryout the takes. Indirect cost spread over a project
Measured works	Backbone of a cost plan. Work and identify individual unit prices for carrying out individual sections of work.
Contingencies and reserve	Allowances for contingencies in some form of reserve. Can occur for number of reasons cover undefined additional costs Poor scope definition Design error Poor activity planning Poor resource estimating Production mistakes Untried methods Changes in environment Amount of contingency added will depend of many factors including Type of project Performance of company and project team Soundness of technology Reliability of subcontractors Experience 10% is not unusual
Fluctuations	Direct result of inflation. Easy to predict short-term rises in labour, material, equipment cost. Most standard contract allow for a fixed price contract with fluctuations.
Prime cost and provisional sum	Sums agreed or provisionally agreed with specialist or nominated suppliers or subcontractors Nominated suppliers usually paid through the main contractor payment is identified
Direct payment	Supply company carry out their agreed works and invoice the client directly not paid through the contractor at any time
Bonds and warranties	Level of provision required. Bond covers contractor performance up to practical completion and hand-over Warranty or guarantee covers the quality and reliability of the finished product after hand-over
Exchange Rate and currency fluctuation	Sensible to pay supply and subcontractor in own currency, estimating to nominate a project currency using a well-chosen exchange rate
Insurance	Typical insurance risks include Fire (within limits) Flood Lightning Impact of aerial devices or objects dropped there from Ionizing radiation Events that cannot be reasonably foreseen by either party

6.2.5 Life Cycle Costs

6.2.5.1 Introduction

Life cycle costs that are likely to affect the project:

• Cost planning process allows for life cycle costs
• Cost control system is capable of offering adequate control over each life-cycle phase.

Further ahead you look the more difficult it is to forecast cost of individual element accurately. Greater margin of error cost plan attempts to predict costs in distant future.

Life cycle costing (LCC) process of attaching costs to individual life-cycle stages. Overall cost incurred in the ownership of a product, structure or system over its entire life span. Includes costs that have traditionally been ignored during the planning cycle. It is long-term strategic cost planning feasibility, conceptual analysis, development, prototype, design, logistics, support, manufacturing, testing, demolition and disposal costs.

6.2.5.2 Objectives of Life Cycle costing (LCC)

Decisions made during the early stages of design process invariably have an impact on longer-term performance in the later stages. Running costs and maintenance costs for any mechanical product. Primary objective of LCC to help the project manger and client identify and evaluate the economic consequence of their decisions.

Typical Life-Cycle Phases (6)

1. Inception – client identifies a requirement
2. Feasibility stage – feasibility study and conceptual phase are where design is first initiated and developed level where basic approval obtained
3. Detailed development stage – outline proposal report issue of production information drawings
4. Production stage – production of product
5. Project termination and system operation and maintenance stage – project has been completed and it becomes operational
6. System divestment stage – decommissioned or switched off some way terminated.

Additional Life-Cycle Phases more complex project might include the following

• Research and development cost – includes all aspects of inception and feasibility, cost of initial investment appraisal and cost-benefit analysis, market research, and organizational surveys, modeling techniques.
• Prototype costs – development and production of prototypes. Testing prior to going into full production
• Design costs – costs of all aspects of the design process consultant fees, cost of the meetings and reports all other costs associated with progressing the design to production information stage.
• Production costs – manufacturing and assembly of the product
• Commissioning costs – costs in connection with getting the product up and running
• Operational costs – cost of operating the project in its finished state
• Maintenance cost – programmed, responsive and cyclic area. Cost of maintaining the building, LCC for maintenance can often exceed capital construction cost over a number of years
• Decommissioning cost – running the project down prior to recycling
• Product retirement and phase out costs – demolition or dismantling costs, and decontamination or recycling cost, restore the site to its original condition.

6.2.5.3 The Process of Life Cycle Costing

Most life cycle costing use common approach set out in the next five steps:

Establish the characteristic of the life cycle.	Establish cost for the complete lifetime of the project.
Build a process cost model	Incorporate all information known about the processes cost, functional characteristic of input data, impact on performance
Calibrate the process cost model	Calibration is the process of adjustment that is necessary in order to ensure model is accurately measuring what it is supposed to measure
Input all relevant data	Accurate as the data that is input into it
Generate a life cycle cost and establish a strategy	Life cycle cost profile interpreted and appropriate strategic decisions. Running cost very high might decide design changes should take place now, increased development and production cost. Balance between capital cost and costs-in-use delicate marketplace trade-off determine by consumer demand

6.2.5.4 Advantages and Disadvantages of Life Cycle costing

Number of advantages over traditional cost planning approaches:

• Long range consideration – considers cost likely to be incurred during life cycle ‘downstream’ considerations greater than immediate cost considerations, may seem less apparent and important
• Life cycle viability – long-term evaluation tool can influence overall viability
• Strategic decision making – make designer think more in terms of strategic performance rather than immediate performance, design stages will be different in the scenarios
• Future awareness – short-term objectives may impact on decommissioning and recycling implication of production processes. Failure to do so builds potential problems for the future.
• Market position – awareness cost designing for more efficient use and recycling may to some extent as a long-term market investment.
• Compliance – cost implications to meeting increased standards.

Obvious disadvantages :

• Prediction accuracy – future that render current assumption obsolete
• Cost – justifiable only on large projects LCC is generally not appropriate for smaller projects
• Sensitivity – accuracy of LCC model is time dependent. Further into future more vulnerable to inaccurate
• Competition – trade-off solution between immediate cost and longer-term cost
• Risk – LCC process modes is incorrect or primed with inaccurate data, the cost implications could be very significant

6.3 The Project Cost Control System

6.3.1 Introduction

A PCCS is a format for the development of cost plans and for mechanisms for monitoring and controlling actual expenditure with planned expenditure.

PCCS as a two-cycle system.

Cost planning cycle.

This includes all aspects of pricing, estimating, establishing targets and budgets and setting up accurate cost plans.

Cost control cycle.

This involves a number of separate phases. In its most simple form, a cost control cycle contains a work initiation mechanism, a methodology for observing and collecting cost data from the system (so that actual costs can be compared with targets), a comparison system and a reporting system. The reporting system initiates what is effectively a feedback loop. The report identifies areas within the project where there are cost problems. This report then acts as the basis for some form of corrective action.

Several cost-control cycle phases are generally recognized:

• Phase 2: work initiation
• Phase 3: cost data collection
• Phase 4: generation of variances
• Phase 5: cost reporting

Phase 1 is cost planning

Cost control and cost planning are intrinsically linked

6.3.2 The PCCS Planning Cycle

6.3.2.1 Introduction

Breaking the project down into manageable packages, attaching individual budget totals to these packages based on an estimate of likely costs involved. Cost normally based on some form of historical or published data.

6.3.2.2. Estimating procedure

Two main approaches should undertake the estimating process:

1.A professional estimation number of

Advantages

• Is specifically trained as an estimator
• Has considerable estimating experience
• Is aware of the limitations of estimating
• Can make accurate assessments of the works involved in individual activities
• Can appreciate the interdependencies involved in the use of multiple resources
• Can make informed judgments on risk and risk allowances
• Is free from project team influence and bias

Disadvantages

• no loyalty

2. The project team

Advantages

• People who make the estimates are also directly responsible for implementation
• Project team are ‘on the ground’ and have the best knowledge of what is required and what resources are available
• Project team are aware of the limitations of the system
• Where necessary, project team members can confer and, where necessary, negotiate on the availability of resources

Disadvantages

• Not professional estimators
• Greater risk of mistake making over optimistic estimates

Estimating is not just about cost, linked with characteristics of the project:

• Project success criteria
• Project linkages - different elements and work package is intrinsically linked.
• Standardized approach –centralized control system established individual unit rates stored and used by everybody when estimating
• Feedback – estimates are subject to feedback, develop proficiency able to review see right wrong on post implementation review

Estimating Elements

Components

• Labour costs straight forward
• Material costs financial costs, availability of items
• Work with purchasing department for two main reasons
• Purchasing department has knowledge of a wide range of supplier valuable historical data on record
• Purchasing staff more efficient when purchasing activity begins
• Plant costs

Other costs

• Fuel
• Maintenance
• Waste

Data Gathering

Several standard sources of estimating data

• Standard tables
• Company-specific tables
• Previous project data
• Estimator skill and knowledge

Estimator classified as follows:

• Accurate – accurate and consistent qualities contribute to overall risk reduction
• Optimistic – dangerous underestimate total project costs – risk with underestimated
• Pessimistic – only slightly less dangerous
• Lose most contract overestimated
• Contracts won contain budget totals too high
• Inconsistent – most dangerous no simple adjustment is possible

Presenting the Estimate

Three generally recognized stages

• The order-of magnitude-estimate – made without any price data, past experience of similar work plus / minus 25% used for initial appraisal and feasibility reports
• The indicative estimate – known information and published data plus / minus 10 – 15%
• The definitive estimate – reasonable standard drawings, supplier quotes, contractor and subcontractor prices plus/minus 5%

6.3.2.3 Project Estimating

Depends on the accuracy of work measurement and reasonableness and accuracy of rate. Estimated costs must be accurate if budget plan to be realistic.

Cost estimates are prepared first and foremost to calculate the sales price, provide valuable input into host other activities including

• Milestone planning
• Valuing the likely cost of change notices and variation orders
• Periodically reviewing the likely final account total
• Assisting in cost control
• Assisting in trade-off analysis
• Assisting in performance monitoring
• Assisting in establishing productivity targets as a basis for bonus payments

Complexity varies from project to project, from industry to industry

Top-Down estimating

Senior management setting the overall project budget by estimating the overall project costs as well as significant sub project costs

Benefits of top down estimating:

• Set by senior management therefore compatible with overall strategic objective of organization
• Budget carries more authority since it originates from senior management
• Less likely to be changed or tampered with during the course of the project
• Such changes are likely to be formalized
• Estimate originates from higher levels with the organization it is likely to be more reliable and accurate
• Local influence and bias are unlikely to be factors

Disadvantages of top down estimating:

• Project team may feel unrealistic budgets have been impose upon them
• Great incompatibilities are perceived there may be a reduction in project team motivation
• Senior management may be ‘out of touch’ with operational costs
• Politics may be a factor, some elements of package manager may receive greater budget for reasons that may be no entirely justified in term of responsibility
• Inappropriate budget allocation can affect the entire cost control and performance management system

Bottom-Down estimating

Relies on budget being developed upwards from individual activity level, each activity is estimated as accurately as possible in terms of labour and converted into a financial cost estimate

Benefits of bottom down estimating:

• People on the ground decide what is required and how much it should cost
• People are more likely to commit themselves when they have had a say in setting their own budgets
• People who set their own budgets are more likely to stick to them
• Provided budgets are allocated fairly, this eliminates the motivational problem associated with favoritism or other forms of inequitable budget allocation

Disadvantages: of bottom down estimating

• Budget may carry less status than those set by senior management
• Careful controls are needed to ensure that budgets are not altered
• Local influence and bias may be issues
• May be difficult to adjust budgets in line with strategic changes
• The budget are more easily overridden by senior management
• Senior managers sometimes feel threatened
• Element and package mangers tend to over estimate to ‘be on the safe side’
• The whole project budget can become driven by the process itself rather than by market conditions

Iterative estimating

Based on negotiation. Compromise between top-down and bottom-up estimating. Element and package managers develop detailed action plans and corresponding estimates for the work responsible. Action plans and estimates to senior management for approval. End result should be an action plan and estimate that lies somewhere between the market-driven conservative estimate of the senior manager and the process-driven generous estimate of the operational manager.

Benefits of iterative estimating:

• Estimate is prepared by the operational manager
• Estimate is tempered by senior management and is therefore more likely to be compatible with the strategic objectives of the organization
• Influence of market forces is maintained
• End result combines practical (operational) considerations with senior management (strategic) considerations.

Disadvantages: of iterative estimating

• Negotiation process is time consuming and costly
• Adequate control procedures have to be put in place to prevent senior managers simply overriding the operational managers
• Some operational managers might be better at negotiation than others and may secure themselves a better budget total than their less gifted colleagues
• Negotiation skills can become more important than estimating skills
• Negotiation exercise made less onerous, less confrontational by considering the nature of the project
• Substantially different opinion of the level of resources required for a particular task, senior manager estimate fewer resources

Bidding Strategy and Estimate Reporting

Once project or work package approved in principle, next stage is to prepare the bid for approval by senior management.

Development of bid can be seen as progression through eight stages:

1. Formulate a viable estimating strategy	Project schedule and master programme worked out in order ensure minimum cost meet minimum requirements of success criteria Project work elements for work package, allowance for fees, overheads, contingencies. Levels of contingencies depend on a number of variables, more progressed less opportunity for change. Contingency allowance lower Decision on estimating allowance, standard levels of or certain variable, pricing labor cost, in-house hourly rate, Estimating process consists largely of calculating the total number of hours required for each team member and multiplying this by the agreed unit rate. Estimating and bid form part of an overall costing and pricing strategy. Initial cost model and corresponding estimating strategy developed
2. Make initial (order of magnitude) minimum realistic estimate	Initial minimum realistic estimate is first estimate based upon the planning and specification information provided
3. Carry out any necessary preliminary refinement	Reducing the percentage allowed for overheads or contingency, trade-off analysis, develop alternative cost outcomes by varying the cost-time or cost-performance functions., adjust risk allowance (risk engineering), lowering the reserves and contingencies, Insurance risks reevaluated, omitted or reduced.
4. Make realist (indicative) minimum estimate	What the project will cost generally an indicative cost based on the level of project information available at the time. Circulated to relevant people. The minimum realist cost is meant to be an accurate estimate of package or project will realistically cost, based on the individual costs involved. Include all direct and indirect costs and all hidden costs. Reasonable provision for contingency and management reserve, unforeseen events
5. Add for profit and risk	Margins to cover overheads and profit are added. Minimum profit levels may be set by senior management, Minimum overheads directly set by company, Risk evaluated separately and would be quantified as part of refinement process.
6. Compare overall price to projected cost limit	Established cost limit. The overall price compared with whether competitive. External applications, limit is not necessarily know, be aware of ballpark figure.
7. Make subjective evaluation of bid success probability	Bid is considered and decision made proceed or not. Internal system – outside the organizational cost limit, decision made not to proceed, look at way of reducing cost, i.e. reduce resources, increase time limit, reconsider project logic phase approach, reduce units, External system – two definite acquisition characteristics 1. type (x) one-off project little follow-up potential, new-build or one-off maintenance project complete project at maximum profitability – based on realistic minimum cost baseline 2. type (y) – acquisition related to good chance of more projects of same type, foothold in client organization so that more work will follow. – Based on market forces
8. Develop final (definitive) estimate	Final bid is submitted for consideration by client or by the appropriate approvals committee

6.3.2.4 Computerized Database Estimating System (CDES)

Assists in the preparing of estimates and budge plans for projects. Person preparing description of work measured amount and type cost consultant to scan same quantity information directly from drawings and into computer

CDES works by linking together several different databases. Each database contains a different type of information

Description Library	Descriptions of all different type of work are broken down with detail accurate pricing 12 Welding 12.1 Arc welding 12.1.1Arc welding, fillet welding
Pricing code and unit rate database	Works with the description library, price code individual components preset with appropriate figures, labour, equipment, material provide time allowance and unit cost. price code might allow ½ hour per linear meter e.g. Welder: .5 hr /m @ 25.00 /hr = $12.50/m Torch: .5hr/m @ 5.00 /hr = 2.50m
Other database elements	CDES to digitize drawings (project statement of work) enter series standard description include quantities work involved. Produces overall cost estimate. Allows for Cost Consulting

6.3.2.5 The Project Budget Plan

Planning cycle includes project cost control system (PCCS) Phase 1, planning process. A(planning and control system) Breaking down the project into separately controllable packages and then calculating a cost target or budget limit for each one. Summarized in the corresponding package total for the next level up. Sum total individual work packages budgets for the whole project. Project budget is another form of project plan. Strategic project plan (SPP) overall strategy is developed from, and includes a number of specific individual plans. Include the Project master schedule (PMS), Gantt charts, and quality plan so on. Project master schedule. SPP also contains project cost plan or project budget/ Project budgets likely to be reviewed in boardrooms in a way time and resource schedules are not. Overall cost performance is perceived as being the single most important performance indicator. Project budget often requires heightened political as well as practical consideration.

Initially project budget is developed from original cost estimates in project proposal, reviewed and adjusted until final version approved authorized limit for spending on project. Modified once the actual costs of various work packages are established.

Sequence of preparation of the Project budget.

Develop ongoing estimated project budget as design progresses

Increasing estimating is carried out using CDES

Report on estimated cost each design reporting stage

Final pre-tender check

Statement of Work (SOW) starting point broken down into WBS that are individually costed / target maximum expenditures.

Cost consultants measure work in project directly from production information. Measurement and quantification in accordance within Standard Method of Measurements (SMM) number of different formats.

Final or baseline budget plan and overall project budget are therefore the end result of a series of internal estimate planning processes. Tempered by external influence of tenders, free to price for work.

Role of Project Budget.

Relates the forecast costs to particular project tasks. Planning management, planning and decision-making tool. May also be used for:

· Baseline for project basis for subsequent earned value analysis

· Developing project cost curves for each element and work package

· Establish reference for variance analysis allowing performance of individual elements and packages to be assessed through course of project

· Moderating spending of element and package managers

· Generate the basic data for scenario analysis in trade-offs

· Estimating likely effects of change notices and variation orders.

Strong psychological effects on project stakeholders. Motivation or demotivating.

Budget Development and Layout

To be effective management tool, the project budget should contain at least:

· Project objectives and activities in terms of measurable outputs

· Financial resources allocated to achieve these objectives and complete activities

· Clearly defined start and finish point of each activity

· Facility to compare actual and planned performance details

6.3.3 The PCCS Operating Cycle

6.3.3.1 Introduction

PCCS operating cycle referred to as the cost and control system. The operating cycle is the section of the PCCS that implements the estimating and budgeting sections of the planning cycle. Monitors the actual expenditure against planned expenditure in order to generate cost variances. Indicate if project running over or under cost.

PCCS operating cycle comprises four phases

6.3.3.2 Phase 2: Work initiation

To control cost some form of controlled release of work. Formal issue of a contract or through change control notices and variation orders or works order. Project work order (PWO) and change notice or variation order (VO). PWO describe work cost centre to charge, cost accounting codes (CAC) based on project WBS

Variation order and works order document take numerous form, Cost accounting codes predetermined and fixed budgets in order to work these have to be fixed and can be increased through some kind of formalized control system such as cost accounting variation notices (CAVNs)

6.3.3.3. Phase 3: cost data collection

Actual cost data are recorded entered into the system by individual work packages , data are compared with latest budget revision and variances are calculated. Cost- data collection process is the generation of cost variance and schedule variance values. Basis for evaluating performance of project and perhaps for corrective action

Milestone Monitoring - EVA is based on milestone monitoring - useful to plot milestone. Budget curve – simple way to monitor and predict performance trends – simple technique, disadvantages

• Reaction time lag – too late to fully correct
• Residual accumulated overspending – remain unless package can be improved
• Replanning issues – very susceptible to re-planning
• Time scale issues – point in time along time continuum

Earned Value Analysis (EVA) –attractive method of project control because

• Is dynamic
• Provides combined and simultaneous time – cost- performance assessment
• Provides frequent reporting use of a good computerized EVA daily reporting
• Demonstrates value as well as cost. Gives high frequency report of profitability
• Generated accurate assessment of the cost implication of delays
• Allow easier trade-off analysis in that the calculations include resource implications.

Earned value work performed on project cost project estimator attached to work when project budget was defined. Term ‘work’ refer to WBS element separate labour, plant, materials, fuel etc

EVA is a milestone monitor applied to

Cost variance difference between budget cost and actual cost value is taken as works actually completed. Variance expressed as measurable effort and support effort.

Seven major considerations involved in variance analysis

Identify and validate variance	Wide range reason, time dependent good system make allowance for unpaid committed
Quantify variance	Allow variance within pre-set limit without generating alert, only alerts on significant variances
Determine source of the variance	Variance is significant import to determine causes and effects as quickly as possible. EVA system able to abstract data straight forward provided PMS is up-to-date CDES is up-to-date Dynamic links between the two systems are accurate Efficient EVA system is used
Determine impact of the variance on the project as a whole	Determine potential impact negative impact on critical activity more dangerous then non-critical activity. One variance requires much more urgent attention than the other
Determine impact of the variance on other elements and packages	Review dependency of delay on another work package, risk exposures, interdependencies percentages decide on a tactical response to variances.
Determine the extent to which tactical response is already underway	Significant variance usually develop over a period of time current variance is actual on-going variance that has been identified and addressed. Difficult to remember which variance occurred previously and corrective measures put in place
Determine the range of possible outcomes of any corrective action	Identified and analyzed reason for variance, determine what corrective actions are available and what affect these likely to have. Numerous trade-off scenarios, range of variables Include Magnitude of variance Availability of any time or financial reserves Absolute minimum acceptable performance required of the element or package Significance of the variance on the project as a whole

Earned value analysis make use of the following variables

Actual cost of the work performed (ACWP)	Actual cost in terms of payment or legal committed expenditure incurred in order to get the project to its current level of development
Budgeted cost of the works performed (BCWP)	Some times known as actual earned value represents budgeted cost that should have been required in order to get the project to its current level of development
Budget cost of work scheduled (BCWS)	Some times known as planned earned value represents budgeted cost that should be required in order to get the project to any specified level of completion Budgeted cost multiplied by the works scheduled percentage
Scheduled time for work performed (STWP)	Estimated time required to perform a defined amount of work
Actual time for work performed (ATWP)	Actual time taken to perform a defined amount of work
Cost Variance (CV)	Budgeted cost of work performance (BCWP) minus Actual cost of work performed (ACWP) CV = BCWP – ACWP Comparison of how much the work has cost in relation to what it was budgeted to cost
Schedule Variance (SV)	Difference between budgeted cost for the works performed (BCWP) minus Budgeted cost of work scheduled (BCWS) SV = BCWP – BCWS Measures the performance of the work in relation to budget
Budget at completion (BAC)	Sum of all the individual budgets (BCWS) that make up the whole project. Sometimes known as project baseline. What the project should cost in total
Estimate at completion (EAC)	Estimated total cost of the project sum of all direct and indirect costs to date plus work remaining. EAC = ACWP + Estimated (ETC) Updated estimate of total project cost, sometimes known as planned estimate approach Expressed as budget at completion BAC as follows: EAC = BAC – CV Expressed in terms of cost variance index (CVI): Sometimes referred to as the current estimate approach
Variance at completion (VAC)	Is the difference between what the project should have cost (BAC) and what is expected to actually cost (EAC) VAC = BAC - EAC

Example of EVA distribution

6.3.3.4 Phase 4: generation of variances

A variance is any cost or schedule deviation from a specific and predetermined plan. Next stage is to decide how to use them to define performance and to steer any necessary corrective actions.

Variance and Variance Envelopes

Permitted variances are usually larger in early stages of project, become smaller as the project progresses. This is the original of the concept of a variance envelope

Analysis of variance envelope main application for monitoring and control of EVA. Use CV and SV together to show cost and schedule performance of individual WBS to Access performance the two most common are by direct evaluation of the variances themselves or by conversion of variances to indices.

Upper / lower limit 10 – 15% at start of project diminish to 3 – 5% later stages, opportunity for change diminish as details become fixed and not able to change opportunity for change diminishes as a function of time and detail becomes fixed becomes more expensive to make changes and therefore fewer occur.

Variance Interpretation

In general terms:

cost variance (CV) = BCWP − ACWP

Therefore

BCWP > ACWP: work performed has cost less.

BCWP < ACWP: work performed has cost more.

BCWP = ACWP: work on cost plan.

And

schedule variance (SV) = BCWP − BCWS

Therefore

BCWP > BCWS: works ahead of programme.

BCWP < BCWS: works behind programme.

BCWP = BCWS: works on programme.

These values can also be shown as indices:

Cost Variance Index (CVI) =

so that

CVI > 1.0: good

CVI < 1.0: bad

CVI = 1.0: ok

And

Schedule Variance Index (SVI) =

so that

SVI > 1.0: good

SVI < 1.0: bad

SVI = 1.0: ok

Example interpretations as follow:

CVI > 1.0, SVI > 1 Excellent: project is under cost and ahead on programme

CVI > 1.0, SVI = 1 Good: project is under cost and on schedule

CVI > 1.0, SVI < 1 Good/Bad: project is under cost and behind on programme

CVI = 1.0, SVI > 1 Good: project is on cost and ahead of programme

CVI = 1.0, SVI = 1 Good: project is on cost and on schedule

CVI = 1.0, SVI < 1 Bad: project is on cost and behind schedule

CVI < 1.0, SVI > 1 Good: caused by faster than expected work practice project is over cost and ahead of programme

CVI < 1.0, SVI = 1 Poor: project is over cost and on schedule

CVI < 1.0, SVI < 1 Very Bad: project is over cost and behind schedule

Example:

The Critical Ratio

‘alarm’ system that operates in association with the variance envelope is critical. Alarm trigger itself often use critical ratio

The critical ratio uses EVA principles - includes consideration of both time and cost performance. This means that performance in one aspect is linked to performance in the other aspect.

Critical ratio will depend on extent to which the values of each element are greater or less than unity. A good time performance may be associated with a poor cost performance.

Relative weighting to the time and cost elements can also be used example

Critical ratio values are plotted month by month through the project as a curve. Curve dips below unity should evaluate the extent of the deficit and take action appropriate to the magnitude of the problem. Also need to watch value s above unity.

Typical zone classification:

Zone A: Take no action	Contains minor negative variations that can be ignored
Zone B: Record and monitor	More significant negative variations that cannot be ignored
Zone C: Act immediately	Negative variance falls into this zone the performance is critical
Zone D: Emergency response required	Negative variance that are super-critical
Zone A1: Observe and note	Small positive variances
Zone A2: Investigate and correct	Large positive variances · Pessimistic estimating · Poor quality control · Poor supervision · Undetected errors and omissions

6.3.3.5 Phase 5: cost reporting

Project reporting is notoriously deficient for many reasons

• Virtually all reporting systems inform retrospectively, Show what has already happened
• Reports are only as accurate as the information input
• People sometimes feel that report production is secondary to other responsibilities
• People often feel that they spend a lot of time preparing reports that subsequently generate little interest or response
• Reports are sometimes rushed to get them ‘out of the way’
• Report over-complex more information that actually needed. Important points diluted
• Reports can be interpreted in different ways, import issues need to be understood and appropriate action taken
• Not compatible depending on what project team member prepares
• Reports often do not present the whole picture. Favor areas of writer

In general reports should:

• Be produced on time
• Include only relevant information
• Allow for all interrelationships between the data contained in them
• Be honest and accurate
• Be issued to everybody who is involved
• Highlight particularly important issues
• Put forward proposed solutions
• Put forward clear responsibilities

Timely well-written reports can:

• Improve the overall understanding and efficiency of the project team
• Provide early warning of potential problems
• Act as an overall stabilizing mechanism
• Contribute to the project audit trail
• Provide essential data to act as the basis for management decision making
• Assist in progress review
• Improve co-ordination of management response

Basic Report types

Routine Reports	Used routinely – regardless of project performance Cost reports, Schedule progress report Quality report Risk report
Development Review Reports	When review of project or development programme, Detailed review from time to time to establish developing and establish success criteria
Exception Reports	Highlight an exception, something out of the ordinary has occurred. Significant time or cost variance. Subsequent of exception report would show corrective procedures i.e. exception log, on-going diary of problem & corrective action
Subject Specific report	Specific aspect detailed monitoring and control required. Such as delays to completion date or critical activity.
Project variance and analysis Reports (PVAR)	Use EVS as the primary analysis tool address full range of relevant information from routine reporting to monitoring and control of specific problems

PVAR Reporting

Project variance analysis reporting (PVAR) generated directly from cost data assembled each month. Report variance performance of the project as a whole and then moves down finer levels of detail according to WBS breakdown. Produce CV and SV figures by work package.

Typical PVAR show

· Routine reporting information

· Development progress and review information

· Performance of each level of the WBS in terms of :

o ACWP

o BCWP

o BCWS

o CV

o SV

o EAC

o ETC

· Significant cost or schedule variances

· Sources of such variances

· Reason for such variance

· Proposed responses together with individual responsibilities, action plans and time scales

Each problem cost centre, separate PVAR report generated showing

• WBS identifiers (project, elements, sub elements etc);
• CAC identifier and approved budget limits;
• Current values of ACWP, BCWP, BCWS, CV, SV, BAC, EAC, ETC and VAC figures;
• Previous month (or other reporting period) corresponding values;
• Year (or project) to date corresponding values (as appropriate);
• Summary of differences between previous month and current month values;
• Summary of significant differences (improvements and deteriorations);
• Current EAC, ETC, ECTC, ETTC values.

PVAR report summarizes performance for project as a whole for each layer of components WBS element.

May be illustrated with Earned value performance measure chart

Prerequisites are:

• An effective CDES
• A detailed WBS
• A detailed CAC system
• The periodic input of works performed values

PVAR report sometime referred to as the ‘fishing rod’ approach

Project manager effectively holding the fishing rod adopts the shape and curve of the ACWP project in.

‘reel in’ pull rod back horizontally improve efficiency and performance

‘real-out’ level fishing rod less control

Pull back on rod effect of reducing overall project completion date although end point of rod may lift (EAC increase)

EAC reduced need to reel-out allow time slippage to extend.

Height of rod decreases the overall EAC decreases

EVA can quickly and easily calculates

• Earned value money earned by doing the work to date equivalent to budget cost of work multiplied by work completed
• Earned-value hours total budgeted number of hours multiplied proportion of total hours actually completed. Earned value achieved and gives proportion that remains
• Anticipated final hours total budgeted number of hours divided by proportion of total hours actually completed
• Project efficiency earned value hours divided by the total hours actually completed
• Project progress earned value hours divided by the total budgeted work hours