COST PLANNING AND PERFORMANCE CHAPTER 13. In addition to establishing a baseline schedule for a project, its also necessary to develop a baseline budget. - презентация

1 COST PLANNING AND PERFORMANCE CHAPTER 13

2 In addition to establishing a baseline schedule for a project, its also necessary to develop a baseline budget. Project costs are estimated when a proposal is prepared for the project. Once a decision is made to go forward with the proposed project, its necessary to prepare a budget, or plan, for how and when funds will be spent over the duration of the project.

3 At regular intervals during the project, the following cost-related parameters should be monitored: Cumulative actual amount spent since the start of the project; Cumulative earned value of the work performed since the start of the project; Cumulative budgeted amount planned to be spent, based on the project schedule, from the start of the project.

4 LEARNING OBJECTIVES In this chapter, you will learn how to regularly forecast, based on the actual amount spent and the value of the work performed, whether the entire project will be completed within budget. You will become familiar with: Items to be considered when estimating project cost;

5 Preparation of a baseline budget, or plan, for how and when funds will be spent over the duration of the project; Cumulating actual costs; Determining the earned value of the work performed; Analyzing cost performance; Forecasting project cost at completion Controlling project costs; Managing cash flow.

6 PROJECT COST ESTIMATES Cost planning starts with the proposal for the project. The cost section of a proposal may consist of tabulations of the contractors estimated costs for such elements as the following: 1.Labor. This portion gives the estimated costs for the various classifications of people who are expected to work on the project.

7 2.Materials.This portion gives the cost of materials the contractor or project team needs to purchase for the project. 3.Subcontractors and consultants.When contractors or project teams do not have the expertise or resources to do certain project tasks, they may hire subcontractors or consultants to perform those tasks. 4.Equipment and facilities rental. Sometimes the contractor may need special equipment, tools, or facilities solely for the project.

8 In such cases, the contractor may decide to rent the equipment for as long as it is needed on the project. Travel. If travel is required during the project, the costs for travel, hotel rooms, and need to be included. In addition to the above items, the contractor or project team may include an amount for contingencies, to cover unexpected situations that may come up during the project.

9 PROJECT BUDGETING The project budgeting process involves two steps. First, the project cost estimate is allocated to the various WP in the project WBS. Second, the budget for each WP is distributed over the duration of the WP so that its possible to determine how much of its budget should have been spent at any point in time.

10 ALLOCATING THE TOTAL BUDGETED COST There are two approaches to establishing the total budgeted cost (TBC) for each work package. One is a top-down approach, in which total project costs are reviewed in relation to the work scope for each work package, and a proportion of the total project cost is allocated to each work package.

11 The other is a bottom-up approach, which is based on an estimate of the costs for the detailed activities associated with each work package. The TBC for each work package will be the sum of the costs of all activities that make up that work package. Figure 13.1 illustrates the allocation of costs to individual work packages in the work breakdown structure for a $

12 Whether the top-down or the bottom-up approach is used to establish the total budgeted cost for each WP, when the budgets for all the work packages are summed, they cannot exceed the total project budgeted cost. Fig.13.2 is a network diagram for a project to make a specialized automated packaging machine and install it at the customers factory. The project consists of three activities. Figure 13.3 shows the WBS with the total budgeted cost for each WP.

13 DEVELOPING THE CUMULATIVE BUDGETED COST Once a total budgeted cost has been established for each WP, the second step in the project budgeting process is to distribute each TBC over the duration of its WP. The cumulative budgeted cost (CBC), is the amount that was budgeted to accomplish the work that was scheduled to be performed up to that point in time.

14 The CBC is the baseline that will be used in analyzing the cost performance of the project. For the packaging machine project, Fig.13.4 shows how the TBC for each WP is spread over the time periods, based on the estimated durations shown in Fig Fig.13.5 shows the cumulative budgeted cost curve for the packaging machine project.

15 The CBC for the entire project or each WP provides a baseline against which actual cost and work performance can be compared at any time during the project. To avoid nightmares, its important to use the cumulative budgeted cost, rather than the total budgeted cost, as the standard against which actual cost is compared. This way, if actual cost begins to exceed the CBC, corrective action can be taken before its too late.

16 DETERMINING ACTUAL COST Once the project starts, its necessary to keep track of actual cost and committed cost so that they can be compared to the CBC. ACTUAL COST. To keep track of actual cost on a project, its necessary to set up a system to collect, on a regular and timely basis, data on funds actually expended.

17 Each work packages actual cost can then be totaled and compared to its CBC. Weekly timesheets are often used to collect actual labor costs. Individuals working on the project indicate the numbers of the work packages on which they worked and the number of hours they spent on each work package. These hours are then multiplied by the hourly cost rate for each individual to determine the actual dollar cost.

18 COMMITTED COST In many projects, large dollar amounts are expended for materials or services (subcontractors, consultants) that are used over a period of time longer than one cost reporting period. These committed costs need to be treated in a special way so that the system periodically assigns a portion of their total cost to actual cost, rather than waiting until the materials or services are finished to charge to the total actual costs.

19 Committed costs are also known as commitments or encumbered costs. Costs are committed when an item (material, subcontractor) is ordered, usually by means of a purchase order, even though actual payment may take place at some later time – when the material or service has been completed, delivered, and invoiced. The committed amount must be considered as encumbered, or set aside, since funds will be needed to pay supplier or subcontractor at some time in the future, when the material or service is delivered and an invoice is received.

20 COMPARING ACTUAL COST TO BUDGETED COST As data are collected on actual cost, including portions of any committed cost, they need to be totaled by work package so that they can be compared to the cumulative budgeted cost. For the packaging machine project, Fig.13.6 shows actual cost by time period for each work package through week 8.

21 Also shown is the period-by-period actual cost for the entire project, as well as the cumulative actual cost (CAC). With the CAC values, its possible to draw a cumulative actual cost curve. Drawing this curve on the same axes as the cumulative budgeted cost curve, as shown in Fig.13.7, provides a good visual comparison. Generating individual curves will help pinpoint the particular work packages that are contributing to the overrun.

22 DETERMINING THE VALUE OF WORK PERFORMED Earned value, the value of the work actually performed, is a key parameter that must be determined throughout the project. Comparing the cumulative actual cost to the cumulative budgeted cost tells only part of the story and can lead to wrong conclusions about the status of the project.

23 Determining the earned value involves collecting data on the percent complete for each work package and then converting this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete. The percent complete data usually are obtained each period from the individual responsible for the work package. In many cases, the estimate is subjective.

24 Fig.13.8 shows the cumulative percent complete estimates reported during each of the first 8 weeks for each work package. Fig.13.9 shows the associated cumulative earned value (CEV) for each WP, calculated by multiplying each percent complete by the TBC for the WP. The earned value of the work performed on this project is $54,000. Although the cost curves in Fig illustrate the CBC, CAC, and CEV for the entire project, similar curves can be made for each WP, if desired. Generating individual curves will help identify how much each WP is affecting project cost performance.

25 COST PERFORMANCE ANALYSIS The following four cost-related measures are used to analyze project cost performance: TBC (total budgeted cost) CBC (cumulative budgeted cost) CAC (cumulative actual cost) CEV (cumulative earned value)

26 They are used to determine whether the project is being performed within budget and whether the value of the work performed is in line with the actual cost. A quick analysis (Fig.13,4, 13.6, 13.9) indicates that the actual cost is exceeding the budgeted cost. It is a good idea to plot CBC, CAC, and CEV curves on the same axes, as shown in Fig , at the end of each report period. Using the format in Fig.13.11, we could say that, at the end of week 8.

27 COST PERFORMANCE INDEX Another indicator of cost performance is the cost performance index (CPI), which is a measure of the cost efficiency with which the project is being performed. CPI=CEV/CAC, CPI=$54,000/$68,000=0.79 This ratio indicates that for every $1.00 actually expended, only $0.79 of earned value was received. When the CPI goes below 1.0 or gradually gets smaller, corrective action should be taken.

28 COST VARIANCE Another indicator of cost performance is cost variance (CV), which is the difference between the CEV of the work performed and the CAC. CV=CEV-CAC CV=$54,000-$68,000=-$14,000 This calculation indicates that the value of the work performed through week 8 is $14,000 less than the amount actually expended.

29 COST FORECASTING Based on analysis of actual cost performance throughout the project, its possible to forecast what the total costs will be at the completion of the project or WP. There are three different methods for determining the forecasted cost at completion (FCAC).

30 The first method assumes that the work to be performed on the remaining portion of the project or WP will be done at the same rate of efficiency as the work performed so far. FCAC= TBC/CPI FCAC=$100,000/0.79=$126,582 As of week 8, the project has a cost efficiency, or CPI, of 0.79, and if the remainder of the project continues to be performed at this same efficiency rate, then the entire project will actually cost $126,582. If this forecast is correct, there will be an overrun of $26,582 beyond the total budgeted cost for the project of $100,000.

31 A second method assumes that, regardless of the efficiency rate the project or WP has experienced in the past, the work to be performed on the remaining portion of the project or WP will be done according to budget. FCAC=CAC+(TBC-CEV) FCAC=$68,000+($100,000- -$54,000)=$68,000+$46,000=$114,000 This method results in a forecasted cost at completion of $114,000, a forecasted overrun of $14,000 beyond the total budgeted cost for the project.

32 A third method for determining the forecasted cost at completion is to re- estimate the costs for all the remaining work to be performed and then add this re- estimate to the cumulative actual cost. FCAC=CAC + Re-estimate of remaining work to be performed This approach can be time consuming, but it may be necessary if the project experiences persistent deviations from the plan or if there are extensive changes.

33 COST CONTROL The key to effective cost control is to analyze cost performance on a regular and timely basis. Cost control involves the following: 1.Analyzing cost performance to determine which WP may require corrective action. 2.Deciding what specific corrective action should be taken.

34 3.Revising the project planincluding time and cost estimates – to incorporate the planned corrective action. The cost performance analysis should include identifying those WP that have a negative cost variance or a cost performance index of less than 1.0. When evaluating WP that have a negative cost variance, you should focus on taking corrective actions to reduce the costs of two types of activities:

35 1.Activities that will be performed in the near term. 2.Activities that have a large cost estimate. There are various ways to reduce the costs of activities. One way is to substitute less expensive materials that meet the required specifications. Another approach is to assign a person with greater expertise or more experience to perform or help with the activity so as to get it done more efficiently.

36 Reducing the scope or requirements for the WP or specific activities is another way to reduce costs. In many cases, there will be a trade-off -- reducing cost variances will involve a reduction in project scope or a delay in the project schedule. The scope, budget, schedule, or quality of the overall project could be in jeopardy. In some cases, the customer and contractor may have to acknowledge that one or more of these elements cannot be achieved.

37 MANAGING CASH FLOW Managing cash flow involves making sure that sufficient payments are received from the customer in time so that you have enough money to cover the costs of performing the project – employee payroll, charges for materials, invoices from subcontractors, and travel expense,for example.

38 The key to managing cash flow is to ensure that cash comes in faster than it goes out. The contractor might try to negotiate payment terms that require the customer to do one or more of the following: Provide a down payment at the start of the project. Make equal monthly payments based on the expected duration of the project. Provide frequent payments, such as weekly or monthly payments rather than quarterly payments.

39 PROJECT MANAGEMENT SOFTWARE Project management software makes it fairly easy to handle the cost considerations of a project. All costs associated with each resource in a project can be stored, and the software will calculate the budget for each WP and for the entire project. See Appendix A.