1. Cost Control

2. Do project managers control costs, monitor costs or both?

3. Cost Management v Cost estimating v Cost accounting v Project cash flow v Company cash flow v Direct labor costing v Overhead rate costing v Others, such as incentives, penalties, and profit-sharing v Cost estimating v Cost accounting v Project cash flow v Company cash flow v Direct labor costing v Overhead rate costing v Others, such as incentives, penalties, and profit-sharing

4. Cost And Control System PLANNING WORK AUTHORIZATION AND RELEASE DATA COLLECTION AND REPORTING COST ACCOUNTING CUSTOMER AND MANAGEMENT REPORTING PHASE IPHASE IIPHASE IIIPHASE IV PHASE V OPERATING CYCLE CYCLE PLANNING

5. Cost Control Requirements v Measure resources consumed v Measure status and accomplishments v Compare measurements to projections and standards v Provide the basis for diagnosis and re- planning v Measure resources consumed v Measure status and accomplishments v Compare measurements to projections and standards v Provide the basis for diagnosis and re- planning

6. Cost Control Requirements v Thorough planning of the work to be performed to complete the project v Good estimating of time, labor, and costs v Clear communication of the scope of required tasks v A disciplined budget and authorizations of expenditures v Timely accounting of physical progress and cost expenditures v Periodic re-estimation of time and cost to complete remaining work v Thorough planning of the work to be performed to complete the project v Good estimating of time, labor, and costs v Clear communication of the scope of required tasks v A disciplined budget and authorizations of expenditures v Timely accounting of physical progress and cost expenditures v Periodic re-estimation of time and cost to complete remaining work

7. Cost Control Requirements (Continued) v Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion

8. WHEN TO IMPLEMENT A COST MANAGEMENT SYSTEM CONCLUSION A cost management system should be implemented right at the beginning of the life cycle of the project. CONCLUSION A cost management system should be implemented right at the beginning of the life cycle of the project. Possible cost reductions Cost of change PROJECT COSTS PROJECT LIFE CYCLE PHASES

9. Partitioning The Budget

10. The Work Authorization Form

11. Work Authorization Form Description Cost Work Work Centers Hours Cost Starts Ends - Test Material 2400 150 R4500 1 Aug 15 Sept - Processing 2610 160 R7500 - Final inspection 2621 140 R3500 - Packaging 2623 46 R 750 - Delivery 2624 R 350 Project office authorization signature:________________ WBS: 31.03.02 Work order no: D1385 Date of original release: 03 Feb 97 Date of revision: 18 March 97 Revision number: C

12. PLANNING AND BUDGETING Work packages WBS Element MGRMGR Org Work Package WP______ORG_______ Description of task_____ ____________________ Sched: Start____Stop__ Budget:______________

13. CACN No. _____________ Revision to Cost Account No. ____________ Date ___________ DESCRIPTION OF CHANGE: ____________________________________________________________________________________ REASON FOR CHANGE: ____________________________________________________________________________________ __________________________________________________________________________________ Requested Budget Authorized Budget Labor Hours _________________ _________________ Period of performance Materials _________________ _________________ From _____________ ODCS _________________ _________________ To _____________ BUDGET SOURCE: Funded Contract Change Management Reserve Undistributed Budget Other _________________ INITIATED BY: ____________________________ APPROVALS: Program Mgr. ________ Prog. Control ________ COST ACCOUNT CHANGE NOTICE (CACN)

14. Sources Of Additional Funding v Funded contract change v Management reserve v Undistributed budget v Other (e.g. profits) v Funded contract change v Management reserve v Undistributed budget v Other (e.g. profits)

15. Cost data collation and reporting flow chart Actuals Labor ACWP Inventory Accounts BCWP Computer BCWS Monthly Total Program Effort Weekly Labor Reports MCCS C omparison reports To All Execs Variance Report

16. Cost Data v Labor v Material v Other direct charges v Overhead v Labor v Material v Other direct charges v Overhead

17. Types of Budgets v Distributed budget v Management budget v Undistributed budget v Contract changes v Distributed budget v Management budget v Undistributed budget v Contract changes

18. Variance Analyses

19. VARIABLES FOR VARIANCE ANALYSIS v BUDGETED COST FOR WORKED SCHEDULED (BCWS) IS THE BUDGETED AMOUNT OF COST FOR WORD SCHEDULED TO BE ACCOMPLISHED PLUS THE AMOUNT OF LEVEL OF EFFORT OR APPORTIONED EFFORT SCHEDULED TO BE ACCOMPLISHED IN A GIVEN TIME PERIOD. v BUDGETED COST FOR WORK PERFORMED (BCWP) IS THE BUDGETED AMOUNT OF COST FOR COMPLETED WORD, PLUS BUDGETED FOR LEVEL OF EFFORT OR APPORTIONED EFFORT ACTIVITY COMPLETED WITHIN A GIVEN TIME PERIOD. THIS IS SOMETIMES REFERRED TO AS AN “EARNED VALUE.” v ACTUAL COST FOR WORK PERFORMED (ACWP) IS THE AMOUNT REPORTED AS ACTUALLY EXPENDED IN COMPLETING THE WORK ACCOMPLISHED WITHIN A GIVEN TIME PERIOD. v COST VARIANCE = BCWP – ACWP v SCHEDULE/PERFORMANCE VARIANCE = BCWP - BCWS v BUDGETED COST FOR WORKED SCHEDULED (BCWS) IS THE BUDGETED AMOUNT OF COST FOR WORD SCHEDULED TO BE ACCOMPLISHED PLUS THE AMOUNT OF LEVEL OF EFFORT OR APPORTIONED EFFORT SCHEDULED TO BE ACCOMPLISHED IN A GIVEN TIME PERIOD. v BUDGETED COST FOR WORK PERFORMED (BCWP) IS THE BUDGETED AMOUNT OF COST FOR COMPLETED WORD, PLUS BUDGETED FOR LEVEL OF EFFORT OR APPORTIONED EFFORT ACTIVITY COMPLETED WITHIN A GIVEN TIME PERIOD. THIS IS SOMETIMES REFERRED TO AS AN “EARNED VALUE.” v ACTUAL COST FOR WORK PERFORMED (ACWP) IS THE AMOUNT REPORTED AS ACTUALLY EXPENDED IN COMPLETING THE WORK ACCOMPLISHED WITHIN A GIVEN TIME PERIOD. v COST VARIANCE = BCWP – ACWP v SCHEDULE/PERFORMANCE VARIANCE = BCWP - BCWS

20. Variances v The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished. v The scheduling variance provides a comparison between planned and actual performance but does not include costs. v The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished. v The scheduling variance provides a comparison between planned and actual performance but does not include costs.

21. Measurements v Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results. v Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control. v Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results. v Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.

22. COST VARIANCE CALCULATION A NEGATIVE VARIANCE INDICATES A COST OVERRUN CV = BCWP - ACWP

23. SCHEDULE VARIANCE CALCULATION SV = BCWP - BCWS A NEGATIVE VARIANCE INDICATES A BEHIND SCHEDULE CONDITION

24. VARIANCE PERCENTS SCHEDULE VARIANCE % = (SVP) COST VARIANCE % = (CVP) SV BCWS X 100 CV BCWP X 100

25. Project Variance Analysis R&DQUALIFICATIONDEVELOPMENT PHASE IPHASE IIPHASE III VARIANCE LOWER BOUNDARY ACTUAL COST VARIANCE PROJECTED COST VARIANCE UPPER BOUNDARY TIME $

26. Trend Analyses

27. Management Reserve CONTRACTED COST RELEASED BUDGET ACTUAL COST TIME MANAGEMENT RESERVE $

28. Information Requirements v Budgeted cost for work scheduled (BCWS) v Budgeted cost for work performed (BCWP) v Actual cost for work performed (ACWP) v Estimated cost at completion v Budgeted cost at completion v Cost and schedule variances/explanations v Traceability v Budgeted cost for work scheduled (BCWS) v Budgeted cost for work performed (BCWP) v Actual cost for work performed (ACWP) v Estimated cost at completion v Budgeted cost at completion v Cost and schedule variances/explanations v Traceability

29. Variance Analysis Questions v What is the problem causing the variance? v What is the impact on time, cost, and performance? v What is the impact on other efforts, if any? v What corrective action is planned or under way? v What are the expected results of the corrective action? v What is the problem causing the variance? v What is the impact on time, cost, and performance? v What is the impact on other efforts, if any? v What corrective action is planned or under way? v What are the expected results of the corrective action?

30. VARIANCE REPORTING Variance reporting is accomplished at each reporting interval. However, the variance threshold reports are exception reports and occur only when the variances exceed the upper and lower boundaries of the project variances envelope.

31. REPORTING INTERVALS v Depends on the type of organization and characteristics of the projects. v Project-driven organization - weekly. v Non-project-driven organization - monthly v Depends on the type of organization and characteristics of the projects. v Project-driven organization - weekly. v Non-project-driven organization - monthly

32. Cost Account Variance Analysis Report Cost account no/cam WBS/Description Cost performance dataVariance Reporting level As of At completion Budget EAC Var. BCWS BCWP ACWP SCHED COST Month to date ($) Contract to date ($k) Problem cause and impact Corrective action (including expected recovery date) Cost account Date Cost center Date WBS element Date Date Mgr. Mgr. Mgr.

33. The 50/50 rule HALF OF THE BUDGET FOR EACH ELEMENT IS RECORDED AT THE TIME THAT THE WORK IS SCHEDULED TO BEGIN AND THE OTHER HALF AT THE TIME THE WORK IS SCHEDULED TO BE COMPLETED. FOR A PROJECT WITH A LARGE NUMBER OF ELEMENTS THE AMOUNT OF DISTORTION FROM SUCH A PROCEDURE IS MINIMAL.

34. J F M A M J J A S O N D ANALYSIS Budgeted cost for work Scheduled (BCWS) Performed (BCWP) Budget - 6 8 14 12 10 12 8 10 8 Work packages Cost account budget = 100 (thousands) BCWS = 38 BCWP = 49 SCHED. VARIANCE = +11 50-50 rule used for work in process

35. Using The 50-50 Rule 4,000 10,000 12,000 4,000 6,000 10,000 TIME TIME LINE COMPLETED NOT COMPLETED LEGEND BCWS = 34,000 BCWP = 33,000 BAC = 52,000

36. Earned Value Status Reporting SV CV BCWS BCWP ACWP TIME LINE CUMMULATIVE COST, $ TIME

37. Estimated Cost At Completion

38. ESTIMATE AT COMPLETION (EAC) EAC = ACWP BCWP X Budget at completion The estimate at completion is the best estimate of the total cost at the completion of the project. The EAC is a periodic evaluation of the status of the project - usually on a monthly basis or until a significant change has been identified. (BAC)

39. PROGRESS REPORTING Progress reporting needs to answer four fundamental questions: 1. Where are we today (time and cost)? 2. Where will we end up (time and cost)? 3. What are the present and future risks? 4. Are there any special problems that need to be addressed and what can management do to help? Progress reporting needs to answer four fundamental questions: 1. Where are we today (time and cost)? 2. Where will we end up (time and cost)? 3. What are the present and future risks? 4. Are there any special problems that need to be addressed and what can management do to help?

40. Monthly Project Report 1. VARIANCE ANALYSIS (Cost in Thousands) 1 June 1997 Budgeted Budgeted Cost Milestone Cost Work Work Actual Variance, % Subtask Status Scheduled Performed Cost Schedule Cost 1 Completed 100 100 100 0 0 2 Completed 50 50 55 0 -10 3 Completed 50 50 40 0 20 4 Not Started 70 0 0 -100 -- 5 Completed 90 90 140 0 -55.5 6 Not started 40 0 0 -100 -- 7 Started 50 50 25 0 50 8 Not started 0 0 0 -- -- Total 450 340 360 -24.4 -5.9 Monthly Project Report 1. VARIANCE ANALYSIS (Cost in Thousands) 1 June 1997 Budgeted Budgeted Cost Milestone Cost Work Work Actual Variance, % Subtask Status Scheduled Performed Cost Schedule Cost 1 Completed 100 100 100 0 0 2 Completed 50 50 55 0 -10 3 Completed 50 50 40 0 20 4 Not Started 70 0 0 -100 -- 5 Completed 90 90 140 0 -55.5 6 Not started 40 0 0 -100 -- 7 Started 50 50 25 0 50 8 Not started 0 0 0 -- -- Total 450 340 360 -24.4 -5.9

41. 2. ESTIMATE AT COMPLETION (EAC) EAC = (360/340) X 579,000 = $613,059 Overrun = 613,059 - 579,000 = $34,059 3. COST SUMMARY Costs are running approximately 5.9% over budget due to higher salaried labor. 4. SCHEDULE SUMMARY The 24.4% behind schedule condition is due to subtasks 4 and 6 which have not yet begun due to lack of raw materials and the 50/50 method for booking costs. Overtime will get us back on schedule but at an additional cost of 2.5% of direct labor costs. 2. ESTIMATE AT COMPLETION (EAC) EAC = (360/340) X 579,000 = $613,059 Overrun = 613,059 - 579,000 = $34,059 3. COST SUMMARY Costs are running approximately 5.9% over budget due to higher salaried labor. 4. SCHEDULE SUMMARY The 24.4% behind schedule condition is due to subtasks 4 and 6 which have not yet begun due to lack of raw materials and the 50/50 method for booking costs. Overtime will get us back on schedule but at an additional cost of 2.5% of direct labor costs.

42. 5. MILESTONE REPORT Milestone/ Scheduled Projected Actual Subtask Completion Completion Completion 1 4/1/97 4/1/97 2 5/1/97 5/1/97 3 5/1/97 4/23/97 4 7/1/97 7/1/97 5 6/1/97 6/1/97 6 8/1/97 8/1/97 7 9/1/97 9/1/97 8 10/1/97 10/1/97 5. MILESTONE REPORT Milestone/ Scheduled Projected Actual Subtask Completion Completion Completion 1 4/1/97 4/1/97 2 5/1/97 5/1/97 3 5/1/97 4/23/97 4 7/1/97 7/1/97 5 6/1/97 6/1/97 6 8/1/97 8/1/97 7 9/1/97 9/1/97 8 10/1/97 10/1/97

43. 6. ACTIVITY REPORT Current Potential Corrective Problem Impact Action (a) Lack of raw Cost overruns and Overtime is scheduled. materials. behind schedule We will try to use lower condition. salaried staff. Raw materials are expected to be on dock next week. (b) Customer un- May need add- Customer will provide happy with test itional planning. us with revised statement results. of work on 6/15/97. 6. ACTIVITY REPORT Current Potential Corrective Problem Impact Action (a) Lack of raw Cost overruns and Overtime is scheduled. materials. behind schedule We will try to use lower condition. salaried staff. Raw materials are expected to be on dock next week. (b) Customer un- May need add- Customer will provide happy with test itional planning. us with revised statement results. of work on 6/15/97.

44. Status Reporting Is More Than Just A Computer Printout.

45. Intranet Status Reporting

46. Reporting Favorable Status

47. Reporting Unfavorable Status

48. DATA ACCUMULATION WBS Organization BCWS BCWP ACWP Budget SCHED VAR COST VAR

49. Cutting The Budget

50. Financial Close-Out

51. Cost Problems v Poor estimating techniques and/or standards, resulting in unrealistic budgets v Out-of-sequence starting and completion of activities and events v Inadequate work breakdown structure v No management policy on reporting and control practices v Poor work definition at the lower levels of the organization v Poor estimating techniques and/or standards, resulting in unrealistic budgets v Out-of-sequence starting and completion of activities and events v Inadequate work breakdown structure v No management policy on reporting and control practices v Poor work definition at the lower levels of the organization

52. Cost Problems (Continued) v Management reducing budgets or bids to be competitive or to eliminate “fat” v Inadequate formal planning that results in unnoticed, or often uncontrolled, increases in scope of effort v Poor comparison of actual and planned costs v Comparison of actual and planned costs at the wrong level of management v Unforeseen technical problems v Management reducing budgets or bids to be competitive or to eliminate “fat” v Inadequate formal planning that results in unnoticed, or often uncontrolled, increases in scope of effort v Poor comparison of actual and planned costs v Comparison of actual and planned costs at the wrong level of management v Unforeseen technical problems

53. Cost Problems (Continued) v Schedule delays that require overtime or idle time costing v Material escalation factors that are unrealistic v Schedule delays that require overtime or idle time costing v Material escalation factors that are unrealistic

54. Problem Areas in Cost Control v Organization: - Inadequate Work Breakdown Structure - Poor work definition at working levels - Lack of formal system procedures v Planning and budgeting: - Inadequate forward planning - Over-allocation of budget - Poor integration of budget, schedule, work authorization v Accounting: - Inability to account for cost of material on applied basis v Analysis: - Determination of status not based on work package completion - Comparison of actual vs. planned costs at improper level v Revisions: - Failure to maintain valid measurement baseline v Organization: - Inadequate Work Breakdown Structure - Poor work definition at working levels - Lack of formal system procedures v Planning and budgeting: - Inadequate forward planning - Over-allocation of budget - Poor integration of budget, schedule, work authorization v Accounting: - Inability to account for cost of material on applied basis v Analysis: - Determination of status not based on work package completion - Comparison of actual vs. planned costs at improper level v Revisions: - Failure to maintain valid measurement baseline

55. Cost Problems Per Phase v Proposal Phase –Failure to understand customer requirements –Unrealistic appraisal of in-house capabilities –Underestimating time requirements v Proposal Phase –Failure to understand customer requirements –Unrealistic appraisal of in-house capabilities –Underestimating time requirements

56. Cost Problems Per Phase v Planning phase –Omissions –Inaccuracy of the work breakdown structure –Misinterpretation of information –Use of wrong estimating techniques –Failure to identify and concentrate on major cost elements –Failure to assess and provide for risks v Planning phase –Omissions –Inaccuracy of the work breakdown structure –Misinterpretation of information –Use of wrong estimating techniques –Failure to identify and concentrate on major cost elements –Failure to assess and provide for risks

57. Cost Problems Per Phase v Negotiation phase –Forcing a speedy compromise –Procurement ceiling costs –Negotiation team that must “win this one” v Negotiation phase –Forcing a speedy compromise –Procurement ceiling costs –Negotiation team that must “win this one”

58. Cost Problems Per Phase v Contractual phase –Contractual discrepancies –SOW different from RFP requirements –Proposal team different from project team v Contractual phase –Contractual discrepancies –SOW different from RFP requirements –Proposal team different from project team

59. Cost Problems Per Phase v Design phase –Accepting customer requests without management approval –Problems in customer communications channels and data items –Problems in design review meetings v Design phase –Accepting customer requests without management approval –Problems in customer communications channels and data items –Problems in design review meetings

60. Cost Problems Per Phase v Production phase –Excessive material costs –Specifications that are not acceptable –Manufacturing and engineering disagreement v Production phase –Excessive material costs –Specifications that are not acceptable –Manufacturing and engineering disagreement