Project Cost Management - Control Costs

Caution: This process contains a lot of formulas to use. Read through each section 2 or 3 times in order to process the information step by step. Just understand the formulas and then use sample questions to practice doing the calculations. The summary table of formulas in another blog will be helpful to review. 

This process monitors the status of the project to update the project costs and managing changes to the cost baseline.

Updating the budget requires you to know the actual costs spent to date. You need to analyze the relationship between the consumption of project funds to the physical work being accomplished for such expenditures. The key is to manage the approved cost baseline and the changes to the baseline.

Project costs include the following:

• Influencing the factors that create changes to the authorized cost baseline
• Ensuring that all change requests are acted upon timely
• Mange the changes when they happen
• Ensure the cost expenditures don't exceed the authorized funding by period, WBS component, activity and total project cost
• Monitor cost performance to identify variances from the approved cost baseline
• Monitor work performance against funds expended
• Preventing unapproved changes from being included in the reported cost
• Inform appropriate stakeholders of all approved changes and costs
• Bring expected cost overruns within acceptable limits

Lets look at the Inputs, Tools and Techniques, and Outputs of this process. 

1) Project Management Plan

• This contains the following information to help you control costs:
• Cost baseline
• Cost management plan

2) Project Funding Requirements

• This includes projected expenditures plus anticipated liabilities

3) Work Performance Data

• Contains information about project progress and the costs that have been authorized and incurred. 

4) Organizational Process Assets

• Assets that may impact controlling costs may include:
• Existing policies, procedures, and guidelines
• Cost control tools
• Monitor and reporting methods to be used

5) Earned Value Management (EVM) 

• Methodology that combines scope, schedule and resource measurements to assess project performance and progress. 
• It integrates the scope baseline with the cost baseline, along with the schedule baseline, to form the performance measurement baseline, to help the team assess and measure the performance and progress. 
• EVM monitors the following three dimensions: 
• Planned value (PV) - authorized budget assigned to scheduled work and excludes the management reserve.  It defines the physical work that should have been completed and the PV is also known as the performance measurement baseline (PMB).  Budget at completion (BAC) is the goal planned value for the project. 
• Earned value (EV) - a measure of work performed expressed in terms of the budget authorized for the work. It is the budget associated with the authorized work that has been completed. EV need to be related to the performance measurement baseline (PMB) and can't be great than the authorized planned value (PV) budget for a component. It is used to calculate the percentage of work that is completed. 
• Actual cost (AC) - the realized cost incurred for the work performed on an activity during a specific time period. Basically it's the total cost incurred in accomplishing the work that the earned value (EV) measured. The (AC) needs to relate to what was budgeted (PV) and measured in the (EV)
• Variances from the approved baseline will also be monitored and will include:
• Schedule variance (SV) -  a measure of schedule performance expressed as the difference between the earned value (EV) and the planned value (PV).  It is a useful metric that indicates when a project is falling behind or is ahead of its baseline schedule. It will become zero when the project is completed because all planned value will have been earned. 
• Equation:  SV = EV - PV
• Cost variance (CV) - the amount of budget deficit or surplus at a given point in time. It is the difference between earned value (EV) minus the actual cost (AC). It indicates the relationship of physical performance to the costs spent. 
• Equation: CV = EV - AC
• Schedule performance index (SPI) - measure of schedule efficiency expressed as the ratio of earned value to planned value. Basically how efficient is the project team using its time. It can be used with the cost performance index (CPI) to for caste final project completion estimates. 
• SPI less than 1 = less work was completed than was planned
• SPI greater than 1 = more work was completed than planned
• Equation: SPI = EV/PV
• Cost performance index (CPI) - measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost. Basically measuring the cost efficiency for the work completed. 
• CPI less than 1 = cost overrun for work completed
• CPI greater than 1 = cost under run of performance to date
• Equation: CPI = EV/AC

6) Forecasting

• An estimate of future conditions based on the information you know about the project to date. Since you have originally developed a budget at completion (BAC) it is important to monitor and calculate the estimate at completion (EAC) based on project performance. 
• Estimate at completion (EAC) - is based on actual costs incurred for work completed, plus and estimate to complete (ETC) the remaining work. This can be done by using the earned value method (EVM). 
• Equation: EAC = AC + bottom-up ETC
• The project manager can manually calculate the EAC and compare to the range of calculated EACs representing various risk scenarios 
• Other common methods
• Estimate at completion (EAC) forecast for estimate to complete (ETC) work performed at the budgeted rate
• This EAC method accepts the actual project performance to date (good or bad) as represented by the actual costs, and predicts that all future ETC work will be accomplished at the budgeted rate
• Equation: EAC = AC + (BAC - EV) 
• estimate at completion = actual cost + (budget at cost - earned value
• Estimate at completion (EAC) for estimate to complete (ETC) at the present cost performance index (CPI) 
• This method assumes what the project has experience to date can be expiated to continue in the future.
• Equation: EAC = BAC/ CPI
• estimate at completion = budget at completion / cost performance index
• Estimate at completion (EAC) forecast for estimate to complete (ETC) work considering both schedule performance index (SPI) and cost performance index (CPI) factor
• The estimate to complete (ETC) work will be performed at the efficiency rate that considers both the cost and schedule performance indices.
• Equation: EAC = AC + [(BAC - EV) / (CPI x SPI)]
• estimate at completion = actual cost [(budget at completion - earned value) / (cost performance index x schedule performance index)]

7) To-Complete Performance Index (TCPI) 

• A measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal. This is expressed as a ratio of the cost to finish the outstanding work to the remaining budget. 
• The management goal can be the budget at completion (BAC) or the Estimate at completion (EAC). If the BAC is not viable anymore then the project manager should forecast the EAC. 
• When it goes through the approval process when you calculate the to-complete performance index (TCPI) you may use the EAC number instead of the BAC number. 
• Equation based on BAC to identify efficiency that must be maintained in order to complete on plan: TCPI = (BAC - EV) / (BAC - AC) 
• to-complete performance index = (budget at completion - earned value) / budget at completion - actual cost) 
• Equation based on EAC to identify efficiency that must be minted in order to complete the current EAC: TCIP = (BAC - EV) / (EAC - AC) 
• to-complete performance index = (budget at completion - earned value) / estimate at completion - actual cost) 

8) Performance Reviews

• Compares cost performance over time, schedule activities or work packages overrunning and under-running the budget, and estimated funds needed to complete the work in progress. 
• If you are using the earned value management (EVM) the following can be determined
• Variance analysis - is the explanation for cost, schedule, and variance at completion
• Formulas for the above are outlined below: 
• cost variance = earned value - actual cost (CV = EV - AC)
• schedule variance = earned value - planned value (SV = EV - PV) 
• variance at completion = budget at completion - estimate at completion (VAC = BAC - EAC) 
• if you are not using earned value management (EVM) you can simply compare planed activity cost against actual activity cost to identify the variances
• It's important to identify the cause and degree of the variances relative to the cost baseline to determine what kind of action you want to take
• Trend analysis - examines project performance over time to determine if performance is improving or deteriorating by using graphical analysis techniques
• Earned value performance - compares the performance measurement baseline to the actual schedule and cost performance when earned value management is used (EVM) if not then analyze the cost baseline against the actual costs for the work performed

9) Project Management Software

• used to monitor the three earned value management (EVM) dimensions to display a graphical trend and to forecast results
1. planned value (PV)
2. earned value (EV)
3. actual costs (AC) 

10) Reserve Analysis

• Used to monitor the status of contingency and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested. 

11) Work Performance Information

• Document and communicate the calculated the following for work breakdown structure (WBS) components
• cost variance (CV) 
• schedule variance (SV)
• cost performance index (CPI) 
• schedule performance index (SPI) 
• to-complete performance index (TCPI)
• variance at completion (VAC) 

12) Cost Forecasts

• Document and communicate the calculated estimate at completion (EAC) value or the bottom-up estimate at completion (EAC) value

13) Change Requests

• Analysis of performance may elicit changes which will go through the Perform Integrated Change Control Process

14) Project Management Plan Updates

• Plans that may need to be updated include:
• Cost baseline
• Cost management plan

15) Project Document Updates

• Documents that may need to be updated include:
• Cost estimates
• Basis of estimates

16) Organizational Process Assets

• Assets that may need to be updated include:
• Causes of variances
• Corrective action chosen and the reason
• Financial databases
• Other types of lessons learned from this process

Source: PMBOK 5th ed.