Figure Resource leveling Controlling Project Costs

The project manager must capture, track, and control all project-related costs that are incurred against planned project cost items. Whether it is project timesheets, hardware, or travel expenses, it is essential that all costs be reflected against the project. This provides a realistic measure of what the project cost the company at the end of the day. Additionally, it also helps measure how well the project was planned.

It is necessary that these costs be captured on the project system that the project manager is using. In the event where unforeseen costs arise, it is the project manager's responsibility to immediately compare the cost item (invoice) against the planned project cost WBS task. If there is a difference, it implies a loss on the specific WBS work package, not necessarily on the total project. If the tendency is similar on many of the WBS tasks, then it is probable that the project will be heading for a loss, indicating bad planning and estimation. There is nothing that the project manager is able to do. To aid the project managers in cost control, the following items need to be verified:

The budget allocations are accurate and correct.

• The original project estimate and budget are correct.

• The original prices used to develop the estimate still apply and are firm.

• Technical difficulties will affect the cost of the project.

However, when costs are incurred against the project and it is found that an actual cost item is slightly higher than the planned WBS cost, the project manager must ensure that, for the project to remain profitable to the company, no more additional cost overruns can be tolerated. The costs must now be controlled even more than ever. Remember, depending on the contract value, the overall project will not immediately reflect this loss; initially only single WBS items reflect this loss. The project manager needs to communicate this necessary information to the executive team. Let's assume the following project scenario:

As project manager you planned the project extremely well, received the purchase order from the client, and commenced work on a $400,000 IT project. During your initial estimations and planning you obtained quotations from your hardware vendor for $60,000. Subsequently, you included your company markup on the hardware and came to a WBS cost item of $65,000. However, during the project, the vendor informs you of manufacturer increases, and the vendor's new cost is now $66,000. You immediately review the WBS, and it reflects a shortfall of - $1,000. Not only have you failed to break even, you realize you are over budget for this item. You explore alternative vendors, but none exist. Accordingly, you inform the executive team of the cost overrun and the decision is made to carry the cost. The project manager does not want the project to run into similar financial losses and realizes that if the remaining project costs (schedule and travel) are kept in check and even improved, the possibility exists to reduce the shortfall and still maintain the profit margin.

ADDRESSING EARNED VALUE

I'll be honest and state that I never formally attended an earned value (EV) course, as most of my time was engulfed on physical projects, and it took me a long time to understand what the concept of earned value was all about. In my search to learn something on earned value, I found out that being directly exposed to projects where I dealt with project costs and reporting helped me understand it better. Sure, there are some basic EV formulas to learn, and one needs to apply the concept a few times to get it right. However, once someone has the hang of it, it will put a new perspective on the way that person looks at any project in the future, and this makes it such an exciting tool to use.

There are those groups that advocate that earned value is extremely complex to implement within an organization and that it is seen as a way to circumvent already established financial processes that are currently used within organizations. But this is not the case: Project managers also need to have the necessary tools and abilities to monitor and report accurately on their project performance at a moment's notice. Earned value offers this ability.

Simply put, earned value is a project technique that project managers can use to monitor, track, and report on the performance of any project. Its use is not limited just to the super projects, as it applies equally to both small and medium sized projects. The technique lends itself to jointly plotting both the project schedule and cost values on an S-curve chart or table. Once used, the project manager can very quickly highlight positive or negative variances. The project manager cannot just measure the project schedule alone and make the assumption that project tasks are ahead of schedule and that the project is doing well. It may very well be the case that the project is exceeding project costs, making it unprofitable. This is why both schedule and cost have to be measured simultaneously to gain a more accurate picture (see Figure 7.3).

Current Dato

Current Dato

I Implensnl |

Figure 7.3: Controlling both project schedule and cost

I Implensnl |

Figure 7.3: Controlling both project schedule and cost

0 0

Post a comment