Week 5 Lecture

Estimating costs: developing an approximation or estimate of the costs of the resources needed to complete a project

Determining the budget: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

Controlling costs: controlling changes to the project budget

Information Technology Project Management, Sixth Edition 1

Project cost control includes:◦ Monitoring cost performance◦ Ensuring that only appropriate project changes

are included in a revised cost baseline◦ Informing project stakeholders of authorized

changes to the project that will affect costs Many organizations around the globe have

problems with cost control


Track actual cost by establishing a system to collect data on funds actually expended.

Periodically assign a portion of the total committed cost to actual cost.

Cumulative actual cost (CAC) should be calculated.

Total actual and committed cost by work package for comparison to the cumulative budgeted cost (CBC).

Earned value is the value of the work actually performed.

Determine earned value by collecting data on the percent complete for each work package.

Convert this percentage to a dollar amount by multiplying the Total Budgeted Cost (TBC) of the work package by the percent complete.

TBC (total budgeted cost) CBC (cumulative budgeted cost) CAC (cumulative actual cost) CEV (cumulative earned value)

A measure of the cost efficiency with which the project is being performed.

Cost performance index = F(Cumulative earned value,Cumulative actual cost)

CPI = (CEV/CAC)

The difference between the cumulative earned value of the work performed and the cumulative actual cost.

Cost variance = Cumulative earned value – Cumulative actual cost

CV = CEV – CAC

Three methods for determining forecasted cost at completion (FCAC):◦ FCAC = (Total budgeted cost/Cost performance

index)

◦ FCAC = Cumulative actual cost + (Total budgeted cost – Cumulative earned value)

◦ FCAC = CAC + Re-estimate of remaining work to be performed

EVM is a project performance measurement technique that integrates scope, time, and cost data

Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals

You must enter actual information periodically to use EVM

More and more organizations around the world are using EVM to help control project costs


The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period

Actual cost (AC), formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period

The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed

EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date


Rate of performance (RP) is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity

Brenda Taylor, Senior Project Manager in South Africa, suggests this term and approach for estimating earned value

For example, suppose the server installation was halfway completed by the end of week 1: the rate of performance would be 50% because by the end of week 1, the planned schedule reflects that the task should be 100 percent complete and only 50 percent of that work has been completedInformation Technology Project

Management, Sixth Edition 11



Negative numbers for cost and schedule variance indicate problems in those areas

CPI and SPI less than 100% indicate problems Problems mean the project is costing more than

planned (over budget) or taking longer than planned (behind schedule)

The CPI can be used to calculate the estimate at completion (EAC), an estimate of what it will cost to complete the project based on performance to date; the budget at completion (BAC) is the original total budget for the project



Performance Assessment ◦Purpose: determine current status of

project with respect to schedule and budget

Earned value method◦Combine % complete, schedule, and cost

information to assess current status of project

Total Expenditure Budget to date

A 1000 1000B 2000 2050C 1000 250

4000 3300

Earned Value Concept (EV)Status Date

100%

50%

75%

A

C

B

How well is this project doing?

Example, project with three tasks, A, B, and C

◦ Task A is on schedule, on budget

◦ Task B is behind schedule, under budget

◦ Task C is ahead of schedule, under budget

How well is the project doing?


100%

50%

75%

A

C

B

(a) Total (c) Percent (a) x (c)= (d) Percent (a) x (d)= Budget (b) AC Scheduled PV Completed EV

A 1000 1000 100 1000 100 1000

B 2000 2050 100 2000 50 1000

C 1000 250 50 500 75 750

4000 3300 3500 2750

Definitions

◦ PV = planned value (also called BCWS: budgeted cost of work scheduled)

◦ AC = actual cost (or ACWP: actual cost of work performed)

◦ EV= earned value (or BCWP: budgeted cost of work performed)

(a) x (d)=

Total (c) Percent (a) x (c)= (d) Percent (EV) Budget (b) ACWP Scheduled BCWS Complete BCWP

A 1000 1000 100 1000 100 1000

B 2000 2050 100 2000 50 1000

C 1000 250 50 500 75 750

4000 3300 3500 2750


100%

50%

75%

A

C

B

Budget AC PV EV 4000 3300 3500 2750

• Since EV < PV, project is behind schedule in terms of value of work (ignores critical path)• Since AC > EV project is over budget in terms of value of work completed

Second example◦ Assess not only current state of the project but

also the project’s likely completion cost.

Definitions

◦ CPI= cost performance index= EV/AC

◦ ETC= estimated cost to complete project

= (BAC - EV)/CPI

BAC = budgeted cost at completion

◦ EAC= estimated cost of project at completion

= AC + ETC

Budget

%

Scheduled

PV %

Complete

EV

AC

A A 220 100 220 100 220 240

B B 190 100 190 100 190 180

C C 250 100 250 50 125 150

D D 90

100 90 100 90 110

E E 350 100 350 50 175 190

F F 400 50 200 100 400 380

G G 250 0 0 0 0 0

H H 140 0 0 0 0 0

I I 240 0 0 0 0 0

1 2 3 4

5 6 7 weeks 2,130 1,300 1,200 1,250

Second Example

Status summary analysis, end of week 4:

1. Project Cost to date $1,250

2. Value of work completed, EV = $1,200

3. Value of work remaining,

$2,130 – $ 1,200 = $930

3. CPI = 1,200/1,250 = 0.96

4. Likely cost to complete project

930/0.96 = $969

Second Example (cont’d) Likely project cost at completion

◦ $1,250 + $969 = $2,219

Project cost variance◦ $2,130 – $2,219 = -$89 (4.2% overrun)

Earned value is assessed continually

Actual expenditures (AC) and actual work completed (EV) are assessed vs. budget and schedule (PV)

If AC line is above EV line, project is over budget

EV

AC

If EV line is below PV line, project is behind schedule◦ How much behind schedule?

Identify progress on the critical path, or Compare EV with PV

PV

EV

Measure on the graph horizontal distance between PV and EV.

This represents amount of time project is behind, ahead of schedule

Enables ◦ simultaneous assessment of % completion,

schedule, and cost performance◦ information about work packages to be rolled up

to provide a project –wide assessment◦ forecasts of cost and date at completion

Assumes ◦ valid estimates of % complete◦ actual expenditures coincide with work performed

(no delayed or advance payment)

Week 5 Lecture

Documents

project cost control

actual cost of work

cost information

cost data

cost variance

forecasted cost

cost efficiency

track actual cost