Control Costs

Control Costs is the process of monitoring the status of the project to update the project budget and managing changes to the cost baseline. See Figures 7-7 and 7-8. Updating the budget involves recording actual costs spent to date. Any increase to the authorized budget can only be approved through the Perform Integrated Change Control process (Section 4.5). Monitoring the expenditure of funds without regard to the value of work being accomplished for such expenditures has little value to the project other than to allow the project team to stay within the authorized funding. Thus much of the effort of cost control involves analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures. The key to effective cost control is the management of the approved cost performance baseline and the changes to that baseline.

Project cost control includes:

• Influencing the factors that create changes to the authorized cost baseline,

• Ensuring that all change requests are acted on in a timely manner,

• Managing the actual changes when and as they occur,

• Ensuring that cost expenditures do not exceed the authorized funding, by period and in total for the project,

• Monitoring cost performance to isolate and understand variances from the approved cost baseline,

• Monitoring work performance against funds expended,

• Preventing unapproved changes from being included in the reported cost or resource usage,

• Informing appropriate stakeholders of all approved changes and associated cost, and

• Acting to bring expected cost overruns within acceptable limits.

Project cost control seeks out the causes of positive and negative variances and is part of the Perform Integrated Change Control process (Section 4.5).

r Inputs

Tools & Techniques

r ^ Outputs

.1 Project management plan .2 Project funding requirements .3 Work performance information .4 Organizational process assets

.1 Earned value management .2 Forecasting

.3 To-complete performance index

.4 Performance reviews .5 Variance analysis .6 Project management software

.1 Work performance measurements .2 Budget forecasts .3 Organizational process assets updates .4 Change requests .5 Project management plan updates .6 Project document updates

Figure 7-7. Control Costs: Inputs, Tools & Techniques, and Outputs

Develop Project Management Plan

4.3 Direct and Manage Project Execution

• Project management plan

• Project management plan updates

• Work performance information

Project Cost Management

• Organizational

Enterprise/ Organization

• Organizational

• Project document

• Work performance measurements

• Budget forecasts

• Work performance measurements

• Budget forecasts

Figure 7-8. Control Costs Data Flow Diagram

7.3.1 Control Costs: Inputs

.1 Project Management Plan

The project management plan described in Section 4.2.3.1 contains the following information that is used to control cost:

• Cost Performance baseline. The cost performance baseline is compared with actual results to determine if a change, corrective action or preventive action is necessary.

• Cost management plan. The cost management plan describes how the project costs will be managed and controlled (Introduction to Chapter 7).

.2 Project Funding Requirements

Project funding requirements are described in Section 7.2.3.2.

.3 Work Performance Information

Work performance information includes information about project progress, such as which deliverables have started, their progress and which deliverables have finished. Information also includes costs that have been authorized and incurred, and estimates for completing project work.

4 Organizational Process Assets

The organizational process assets that can influence the Control Costs process include, but are not limited to:

• Existing formal and informal cost control-related policies, procedures, and guidelines;

• Cost control tools; and

• Monitoring and reporting methods to be used.

7.3.2 Control Costs: Tools and Techniques

.1 Earned Value Management

Earned value management (EVM) in its various forms is a commonly used method of performance measurement. It integrates project scope, cost, and schedule measures to help the project management team assess and measure project performance and progress. It is a project management technique that requires the formation of an integrated baseline against which performance can be measured for the duration of the project. The principles of EVM can be applied to all projects, in any industry. EVM develops and monitors three key dimensions for each work package and control account:

• Planned value. Planned value (PV) is the authorized budget assigned to the work to be accomplished for an activity or work breakdown structure component. It includes the detailed authorized work, plus the budget for such authorized work, allocated by phase over the life of the project. The total of the PV is sometimes referred to as the performance measurement baseline (PMB). The total planned value for the project is also known as Budget At Completion (BAC).

• Earned value. Earned value (EV) is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or work breakdown structure component. It is the authorized work that has been completed, plus the authorized budget for such completed work. The EV being measured must be related to the PV baseline (PMB), and the EV measured cannot be greater than the authorized PV budget for a component. The term EV is often used to describe the percentage completion of a project. A progress measurement criteria should be established for each WBS component to measure work in progress. Project managers monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends.

• Actual cost. Actual cost (AC) is the total cost actually incurred and recorded in accomplishing work performed for an activity or work breakdown structure component. It is the total cost incurred in accomplishing the work that the EV measured. The AC has to correspond in definition to whatever was budgeted for in the PV and measured in the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). The AC will have no upper limit; whatever is spent to achieve the EV will be measured.

Variances from the approved baseline will also be monitored:

• Schedule variance. Schedule variance (SV) is a measure of schedule performance on a project. It is equal to the earned value (EV) minus the planned value (PV). The EVM schedule variance is a useful metric in that it can indicate a project falling behind its baseline schedule. The EVM schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. EVM SVs are best used in conjunction with critical path methodology (CPM) scheduling and risk management. Equation: SV = EV - PV.

• Cost variance. Cost variance (CV) is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual costs (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. The EVM CV is particularly critical because it indicates the relationship of physical performance to the costs spent. Any negative EVM CV is often non-recoverable to the project. Equation: CV=EV-AC.

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The SV and CV values can be converted to efficiency indicators to reflect the cost and schedule performance of any project for comparison against all other projects or within a portfolio of projects. The variances and indices are useful for determining project status and providing a basis for estimating project cost and schedule outcome.

• Schedule performance index. The schedule performance index (SPI) is a measure of progress achieved compared to progress planned on a project. It is sometimes used in conjunction with the cost performance index (CPI) to forecast the final project completion estimates. An SPI value less than 1.0 indicates less work was completed than was planned. An SPI greater than 1.0 indicates that more work was completed than was planned. Since the SPI measures all project work, the performance on the critical path must also be analyzed to determine whether the project will finish ahead of or behind its planned finish date. The SPI is equal to the ratio of the EV to the PV. Equation: SPI = EV/PV.

• Cost performance index. The cost performance index (CPI) is a measure of the value of work completed compared to the actual cost or progress made on the project. It is considered the most critical EVM metric and measures the cost efficiency for the work completed. A CPI value less than 1.0 indicates a cost overrun for work completed. A CPI value greater than 1.0 indicates a cost underrun of performance to date. The CPI is equal to the ratio of the EV to the AC. Equation: CPI = EV/AC.

The three parameters of planned value, earned value, and actual cost can be monitored and reported on both a period-by-period basis (typically weekly or monthly) and on a cumulative basis. Figure 7-9 uses S-curves to display EV data for a project that is performing over budget and behind the work plan.

Budget * at Completion (BAC)

Data Date

Time

Budget * at Completion (BAC)

Data Date

Time

Figure 7-9. Earned Value, Planned Value, and Actual Costs

.2 Forecasting

As the project progresses, the project team can develop a forecast for the estimate at completion (EAC) that may differ from the budget at completion (BAC) based on the project performance. If it becomes obvious that the BAC is no longer viable, the project manager should develop a forecasted EAC. Forecasting the EAC involves making estimates or predictions of conditions and events in the project's future based on information and knowledge available at the time of the forecast. Forecasts are generated, updated, and reissued based on work performance information (Section 4.3.3.2) provided as the project is executed. The work performance information covers the project's past performance and any information that could impact the project in the future.

EACs are typically based on the actual costs incurred for work completed, plus an estimate to complete (ETC) the remaining work. It is incumbent on the project team to predict what it may encounter to perform the ETC, based on its experience to date. The EVM method works well in conjunction with manual forecasts of the required EAC costs. The most common EAC forecasting approach is a manual, bottom-up summation by the project manager and project team.

The project manager's bottom-up EAC method builds upon the actual costs and experience incurred for the work completed, and requires a new estimate to complete the remaining project work. This method may be problematic in that it interferes with the conduct of project work. The personnel who are performing the project work have to stop working to provide a detailed bottom-up ETC of the remaining work. Typically there is no separate budget to perform the ETC, so additional costs are incurred for the project to conduct the ETC. Equation: EAC = AC + bottom-up ETC.

The project manager's manual EAC can be quickly compared with a range of calculated EACs representing various risk scenarios. While EVM data can quickly provide many statistical EACs, only three of the more common methods are described as follows:

• EAC forecast for ETC work performed at the budgeted rate. This EAC method accepts the actual project performance to date (whether favorable or unfavorable) as represented by the actual costs, and predicts that all future ETC work will be accomplished at the budgeted rate. When actual performance is unfavorable, the assumption that future performance will improve should be accepted only when supported by project risk analysis. Equation: EAC = AC + BAC - EV.

• EAC forecast for ETC work performed at the present CPI. This method assumes what the project has experienced to date can be expected to continue in the future. The ETC work is assumed to be performed at the same cumulative cost performance index (CPI) as that incurred by the project to date. Equation: EAC = BAC / cumulative CPI.

• EAC forecast for ETC work considering both SPI and CPI factors. In this forecast, the ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices, it assumes both a negative cost performance to date, and a requirement to meet a firm schedule commitment by the project. This method is most useful when the project schedule is a factor impacting the ETC effort. Variations of this method weigh the CPI and SPI at different values (e.g., 80/20,50/50, or some other ratio) according to the project manager's judgment. Equation: AC + [(BAC - EV) / (cumulative CPI x cumulative SPI)].

Each of these approaches can be correct for any given project and will provide the project management team with an "early warning" signal if the EAC forecasts are not within acceptable tolerances.

.3 To-Complete Performance Index (TCPI)

The to-complete performance index (TCPI) is the calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC. If it becomes obvious that the BAC is no longer viable, the project manager develops a forecasted estimate at completion (EAC). Once approved, the EAC effectively supersedes the BAC as the cost performance goal. Equation for the TCPI based on the BAC: (BAC - EV) / (BAC - AC).

The TCPI is conceptually displayed in Figure 7-10. The equation for the TCPI is shown in the lower left as the work remaining (defined as the BAC minus the EV) divided by the funds remaining {which can be either the BAC minus the AC, or the EAC minus the AC).

If the cumulative CPI falls below the baseline plan (as shown in Figure 7-6), all future work of the project will need to immediately be performed in the range of the TCPI (BAC) (as reflected in the top line of Figure 7-6) to stay within the authorized BAC. Whether this level of performance is achievable is a judgment call based on a number of considerations, including risks, schedule, and technical performance. Once management acknowledges that the BAC is no longer attainable, the project manager will prepare a new estimate at completion (EAC) for the work, and once approved, the project will work to the new EAC value. This level of performance is displayed as the TCPI (EAC) line. The equation for the TCPI based on the EAC: (BAC - EV) / (EAC - AC).

Status Date

1.00

1.00

"V Baseline Plan w TCPI

Cumulative CPI

Formula:

Work Remaining (BAC-EV) Funds Remaining (BAC-AC) or (EAC-AC)

Figure 7-10. To-Complete Performance Index (TCPI)

.4 Performance Reviews

Performance reviews compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and estimated funds needed to complete work in progress. If EVM is being used, the following information is determined:

• Variance analysis. Variance analysis as used in EVM compares actual project performance to planned or expected performance. Cost and schedule variances are the most frequently analyzed.

• Trend analysis. Trend analysis examines project performance over time to determine if performance is improving or deteriorating. Graphical analysis techniques are valuable for understanding performance to date and for comparison to future performance goals in the form of BAC versus EAC and completion dates.

• Earned value performance. Earned value management compares the baseline plan to actual schedule and cost performance.

.5 Variance Analysis

Cost performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline. Important aspects of project cost control include determining the cause and degree of variance relative to the cost performance baseline (Section 7.2.3.1) and deciding whether corrective or preventive action is required. The percentage range of acceptable variances will tend to decrease as more work is accomplished. The larger percentage variances allowed at the start of the project can decrease as the project nears completion.

.6 Project Management Software

Project management software is often used to monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends, and to forecast a range of possible final project results.

7.3.3 Control Costs: Outputs

.1 Work Performance Measurements

The calculated CV, SV, CPI, and SPI values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders.

.2 Budget Forecasts

Either a calculated EAC value or a bottom-up EAC value is documented and communicated to stakeholders.

.3 Organizational Process Assets Updates

Organizational process assets that may be updated include, but are not limited to:

• Causes of variances,

• Corrective action chosen and the reasons, and

• Other types of lessons learned from project cost control. .4 Change Requests

Analysis of project performance can result in a change request to the cost performance baseline or other components of the project management plan. Change requests can include preventive or corrective actions and are processed for review and disposition through the Perform Integrated Change Control process (Section 4.5).

.5 Project Management Plan Updates

Elements of the project management plan that may be updated include, but are not limited to:

• Cost performance baseline. Changes to the cost performance baseline are incorporated in response to approved changes in scope, activity resources, or cost estimates. In some cases, cost variances can be so severe that a revised cost baseline is needed to provide a realistic basis for performance measurement.

• Cost management plan.

.6 Project Document Updates

Project documents that may be updated include, but are not limited to:

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