1. Control Costs 1 MEC-3

2. Agenda Agenda 2  Cost Baseline  Project Funding Requirements  Inputs to Control Cost  Outputs from Control Cost  Tools & Techniques for Controlling Cost

3. Cost Baseline Cost Baseline 3  Approved Version of the Time Phased Cost Budget for the Project (Spending Plan indicating how much money is approved for the Project and when the Funds are required – the Cash Flow Plan)  Excludes Management Reserves  Developed as a summation of the approved budgets for the different Schedule Activities

4. Project Funding Requirements Project Funding Requirements 4  Forecast Project Costs to be paid that are derived from the Cost Baseline for Total or Periodic Requirements  Includes Projected Expenditures plus Anticipated Liabilities  Management Reserves are not part of the Cost Baselines but they are part of the Project Funding requirements. Therefore, the difference between the Cost Baseline and Funding requirement at Project completion is Management Contingency Reserve

5. Cost Baseline & Management Reserve Cost Baseline & Management Reserve 5 PV AC

6. Project Budget & Cost Baseline Project Budget & Cost Baseline 6

7. Simple CBS & Project Budgeting 7 Activities Work Packages Control Accounts Cost Baseline Management Reserve Project Budget

8. 8 220 30 260 40 250 50 360 90 135 15 700 750 350 75 550 100 1,900 650 2,550 500 3,050 Work Packages Control Accounts Cost Baseline Management Reserve Project Budget Activities Figures at bottom are Contingency Reserve for that Activity or Work Package Simple CBS & Project Budgeting

9. Control Schedule Inputs & Outputs Control Schedule Inputs & Outputs 9 Control Costs 1. PCMP (PMP) 2. Cost Baseline (Budget) 3. WPD (D&M PW) 4. OPA 1. WPI 2. Change Request 3. PMP Updates 4. PD Updates 5. OPA Updates 5. Proj Funding Requirements 6. Cost Forecasts

10. Control Costs Inputs Control Costs Inputs 10 InputDetails PCMPHow the Project Costs will be Controlled Project BudgetCost Baseline WPD Activities that have Started Activities’ Progress Finished Deliverables Costs Incurred OPA Cost Control-related Policies, Procedures & Guidelines Control Cost Tools Monitoring & Reporting Methods Project Funding Requirements Projected Expenditures Anticipated Liabilities

11. Control Cost Outputs 1/2 Control Cost Outputs 1/2 11 OutputDetails WPICV, SV, CPI, SPI values for WBS components, in particular the Work Packages and Control Accounts Change RequestBased on Cost Variance Analysis, Recommendations for: Changes to Baselines (Cost, Scope etc) Corrective, Preventive Actions & Defect Repairs PMP UpdatesBased on Change Requests, projected Changes to: Cost Baseline viz Activity Cost Estimates etc PCMP, such as changes to Control Thresholds, or specified Levels of Accuracy reqd in managing the Project’s Cost, or Changes based on Stakeholders’ feedback PD Updates Cost estimates Basis of estimates

12. Control Cost Outputs 1/2 Control Cost Outputs 1/2 12 OutputDetails OPA Updates Causes of Variances Corrective Action chosen and the Reasons Financial Databases Other types of lessons learned from Project Cost Control Cost ForecastEAC, ETC, VAC, TCPI for the Remaining Project

13. Control Costs Tools & Techniques Control Costs Tools & Techniques 13 Tool CategoryTools Performance Reviews EVM TCPI Forecasting Variance Analysis Trend Analysis Reserve Analysis Project Management Softwaree.g. MS Project

14. Earned Value Management (EVM) Earned Value Management (EVM) 14 Tool to determine both Cost & Schedule Variances Key Terms (Some common with Schedule Variance, others specific to Schedule Variance: -Budget At Completion (BAC) -Planned Value (PV) -Earned Value (EV) -Actual Cost (AC) -Cost Variance (CV) -Cost Performance Index (CPI) Current Cost Performance Forecast Cost Performance -Estimate At Completion (EAC) -Estimate To Complete (ETC) -Variance At Completion (VAC) -To Complete Performance Index (TCPI)

15. Considerations 80 blocks should have cost: 80 x Rs 10K = Rs 800K. This is EV At the end of Day 10, 100 blocks should have been delivered, which would have cost: 100 x Rs 10K = Rs 1,000K. This is PV These 80 blocks actually invoiced/cost Rs 900K. This is AC EVM – Simplified Example EVM – Simplified Example 15 Procurement Project 200 heavy duty concrete security blocks Total Price: Rs 2,000K. This is BAC Rs 10K per block; 200 blocks deliverable in 20 days @ 10 blocks per day. This is Cost Baseline 7.5% Reserved for the UUs. This is Mgt Res Contract Type: Cost Reimbursable Situation at the end of Day 10 80 blocks delivered; Contractor invoiced Rs 900K for these 80 blocks

16. EVM Cost Performance - Simplified Example 16 EAC PROJ BUDGET = 2,000+150 = 2,150 VAC ETC MGT RES @ 7.5% = 150 VAC = 2,000-2,250 = -250 CV = 800K-900 = -100 CPI = 800/900 = 0.89 EAC = 2,000/.89 = 2,250 ETC = 2,250-900 = 1,350 Work Remaining AC EV PV Cost Baseline Funds Remaining TCPI BAC = (2,000-800)/(2,000-900) = 1.09 TCPI EAC = (2,000-800)/(2,250-900) = 0.89 BAC = 2,000

17. Finding EV 17 1.Portioning BAC on the basis of Fraction of Work Completed 2.Evaluating Work Completed on the basis of Baselined Cost per Unit Example: On a certain project, 220 km of oil pipeline was to be laid, in 50 weeks, at a Cost of 2,000 monetary units (mu). Today, at the end of Week-20, 88 km has been laid. What is the EV? 1.EV= Fraction of Work Completed x BAC = 88 km/220 km x 2,000 mu = 800 mu 2.EV= Work Completed x Cost per Km = 88 km x 2,000 mu/220 km = 800 mu

18. Earned Value Management - General Template Earned Value Management - General Template 18 PV AC SV EV CV Overall Schedule Slippage ETC Work Remaining Funds Remaining VAC

19. TermFormulaWhat it means Planned Value (PV)As of today, the estimated value of the WORK PLANNED to be done Earned Value (EV)As of today, the estimated value of the WORK ACTUALLY ACCOMPLISHED? Budget at Completion (BAC) BUDGET for the TOTAL PROJECT Cost Variance (CV)= EV-ACDifference between ACCOMPLISHED WORK & PLANNED WORK (+ under, - over budget) Cost Performance Index (CPI) = EV/ACComparison of ACCOMPLISHED WORK with PLANNED WORK (ACCOMPLISHED WORK as fraction or % of PLANNED WORK) (>1 under, <1 over budget) EVM for Cost Performance – Present Status EVM for Cost Performance – Present Status 19

20. TermFormulaWhat it means Estimate At Completion (EAC) BAC/CPI AC + (BAC-EV) CPI x SPI As of today, how much is the TOTAL PROJECT COST Expected to be? Estimate To Complete (ETC) EAC-ACAs of today, how much MORE the Project will Cost? Variation At Completion (VAC) BAC-EACHow much OVER or UNDER BUDGET the Project will be at Completion To-Complete Performance Index (TCPI) (BAC-EV) (BAC- AC)* CPI of the Remaining Work Ratio of WORK REMAING to MONEY REMAINING * Denominator based on BAC or EAC EVM for Cost Performance – Forecast EVM for Cost Performance – Forecast 20

21. Variance Analysis – Another Dimension Variance Analysis – Another Dimension 21 While Budgeting, Materials & Human Resources are Costed using Standard Rates & Quantities Should these Rates or Quantities change during the Project Life Cycle, Cost Performance would be affected favourably or unfavourably Variance Analysis quantifies the effect of Variance between the Standard and Actual Rates & Quantities for Materials used and Labour employed on a Project Variance is expressed as a Monetary Quantity and suffixed FAVOURABLE or UNFAVOURABLE/ADVERSE depending on its effect on Cost Performance

22. Variance Analysis – Another Dimension Variance Analysis – Another Dimension 22 Variance Analysis is an interplay of 4 Attributes: -Standard Rate -Standard Quantity -Actual Rate -Actual Quantity This course will only introduce the subject through the following types of Variances: -Material Cost/Rate Variance (MCV/MRV -Material Usage Variance (MUV) -Labour Wage Rate Variance (LRV) -Labour Efficiency Variance (LEV)

23. Basic Definitions Basic Definitions 23 Material Rate Variance (MRV) Variance due to difference in Actual & Standard Costs on Actual Quantity Material Usage Variance (MUV) Variance due to difference in Actual & Standard Quantities at Standard Cost/Rate Labour Wage Rate Variance (LRV) Variance due to difference in Actual & Standard Labour Rates on Actual Man Hours Labour Efficiency Variance (LEV) Variance due to difference in Actual & Standard Quantities Man Hours at Standard Labour Rate Variance FAVOURABLE if respective ACTUAL RATE or QTY < STD RATE or QTY, & vice versa

24. Basic Definitions Basic Definitions 24 Fixed AttributeDiffering AttributesVariance Actual Quantity of Material Actual & Standard Purchase Costs MRV Standard Cost of MaterialActual & Standard Quantities of Material MUV Actual Number of Man Hours Labour Employed Actual & Standard Labour Rates LRV Standard Labour RateActual & Standard Number of Man Hours Labour Employed LEV

25. Variance Analysis – General Template Variance Analysis – General Template 25 Actual Qty X Actual Rate Actual Qty X Standard Rate Standard Qty X Standard Rate MPV or LRV MUV or LEV Net Effect MRV/LRV FAVOURABLE if: Actual Rate < Std Rate MUV/LEV FAVOURABLE if: Actual Qty < Std Qty

26. Variance Analysis – Example 1 26 On a certain construction project, first slab has been poured. For this activity, 1,000 bags of cement had been planned, at the standard rate of Rs 400 per bag. The cement was purchased @ Rs 500 per bag and 900 bags were consumed in the pouring. Carry out Variance Analysis and its Overall Effect on Project Cost Performance. Actual Qty x Actual Cost Actual Qty x Std Cost Std Qty x Std Cost 900 bags x Rs 500 per bag = Rs 450,000 900 bags x Rs 400 per bag =Rs 360,000 1,000 bags x Rs 400 per bag =Rs 400,000 Rs 90,000 (U) Rs 40,000 (F) Rs 50,000 (U) MRV MUV Net Effect

27. Variance Analysis – Example 2 27 On a certain construction project, HR Assignment Plan assigned 200 unskilled workers, on a particular activity, for 100 days, on a daily wage of Rs 500. Due to countrywide escalating inflation no worker was available for less than Rs 600 per day. The activity actually took 80 days to complete. Carry out Variance Analysis and its Overall Effect on Project Cost Performance. Actual Qty x Actual Cost Actual Qty x Std Cost Std Qty x Std Cost 200x80 man-days x Rs 600 per man-day = Rs 9,600,000 200x80 man-days x Rs 500 per man-day = Rs 8,000,000 200x100 man-days x Rs 500 per man-day = Rs 10,000,000 Rs 1,600,000 (U) Rs 2,000,000 (F) Rs 400,000 (F) LRV LEV Net Effect Act Effort x Act Lab Rate Act Effort x Std Lab Rate Std Effort x Std Lab Rate

28. Reserve Analysis Reserve Analysis 28 Reserve Analysis is used to monitor and control 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 Reserve Analysis is all about Using, Reducing or Eliminating Contingency Reserves, as more precise information about the Project becomes available As work on the project progresses, these Reserves may be used as planned to cover the cost of Risk Mitigation events or other Contingencies. For example on Rework for some Project Deliverables which fail Quality Or, if the probable Risk Events do not occur, the unused Contingency Reserves may be Reduced or Removed from the project budget to free up resources for other projects or operations

29. Reserve Analysis Reserve Analysis 29 When an amount of Management Reserve is used to fund unforeseen work, the amount of Management Reserve used is added to the Cost Baseline, thus requiring an approved change to the Cost Baseline

30. Trend Analysis Trend Analysis 30 Variance Trend Performance Index Trend Regression Analysis Performance improving or deteriorating? Forecast

31. Software Tools Software Tools 31 MS Project 2010 (Exercise Files)