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Control Costs
1
MEC-3
Agenda
2
Cost Baseline Project Funding Requirements Inputs to Control Cost Outputs from Control Cost Tools & Techniques for Controlling Cost
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
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
Cost Baseline & Management Reserve
5
PV
AC
Project Budget & Cost Baseline
6
Simple CBS & Project Budgeting
7
Activities
Work Packages
Control Accounts
Cost Baseline
Management Reserve
Project Budget
8
22030
26040
25050
36090
13515
700 750 35075
550100
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
Control Schedule Inputs & Outputs
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Control Costs
1. PCMP (PMP)2. Cost Baseline (Budget)3. WPD (D&M PW)4. OPA
1. WPI2. Change Request3. PMP Updates4. PD Updates5. OPA Updates5. Proj Funding
Requirements6. Cost Forecasts
Control Costs Inputs
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Input Details
PCMP How the Project Costs will be Controlled
Project Budget Cost 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
Control Cost Outputs 1/2
11
Output Details
WPI CV, SV, CPI, SPI values for WBS components, in particular the Work Packages and Control Accounts
Change Request Based on Cost Variance Analysis, Recommendations for:• Changes to Baselines (Cost, Scope etc)• Corrective, Preventive Actions & Defect Repairs
PMP Updates Based 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
Control Cost Outputs 1/2
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Output Details
OPA Updates • Causes of Variances• Corrective Action chosen and the Reasons• Financial Databases• Other types of lessons learned from Project Cost Control
Cost Forecast EAC, ETC, VAC, TCPI for the Remaining Project
Control Costs Tools & Techniques
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Tool Category Tools
Performance Reviews • EVM• TCPI• Forecasting• Variance Analysis• Trend Analysis• Reserve Analysis
Project Management Software e.g. MS Project
Earned Value Management (EVM)
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• 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)
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
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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 1080 blocks delivered; Contractor invoiced Rs 900K for these 80 blocks
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EVM Cost Performance - Simplified Example
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 250
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
1000
2000
800
2000
900
2250
Time in Days
Rs in
Tho
usan
d
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
Wor
k Re
mai
ning
AC EV
PV
Cost Baseline
Fund
s Re
mai
ning
TCPIBAC = (2,000-800)/(2,000-900) = 1.09
TCPIEAC = (2,000-800)/(2,250-900) = 0.89
BAC = 2,000
Finding EV
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1. Portioning BAC on the basis of Fraction of Work Completed2. Evaluating Work Completed on the basis of Baselined Cost per
UnitExample: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?3. 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
Earned Value Management - General Template
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PVAC
SV
SV
EV
CV
Overall Schedule Slippage
ETC
Wor
k Re
mai
ning
Fund
s Re
mai
ning
VAC
Term Formula What 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-AC Difference between ACCOMPLISHED WORK & PLANNED WORK (+ under, - over budget)
Cost Performance Index (CPI)
= EV/AC Comparison 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
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Term Formula What it means
Estimate At Completion (EAC)
•BAC/CPI•AC + (BAC-EV)•AC + (BAC-EV) CPI x SPI
As of today, how much is the TOTAL PROJECT COST Expected to be?
Estimate To Complete (ETC)
EAC-AC As of today, how much MORE the Project will Cost?
Variation At Completion (VAC)
BAC-EAC How 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
20
Variance Analysis – Another Dimension
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•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
Variance Analysis – Another Dimension
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• 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)
Basic Definitions
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Material Rate Variance (MRV)• Variance due to difference in Actual & Standard Costs on Actual
QuantityMaterial 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 HoursLabour 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
Basic Definitions
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Fixed Attribute Differing Attributes VarianceActual Quantity of Material
Actual & Standard Purchase Costs
MRV
Standard Cost of Material Actual & Standard Quantities of Material
MUV
Actual Number of Man Hours Labour Employed
Actual & Standard Labour Rates
LRV
Standard Labour Rate Actual & Standard Number of Man Hours Labour Employed
LEV
Variance Analysis – General Template
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Actual QtyX
Actual Rate
Actual QtyX
Standard Rate
Standard QtyX
Standard Rate
MPVor
LRV
MUVor
LEV
Net Effect
• MRV/LRV FAVOURABLE if: Actual Rate < Std Rate• MUV/LEV FAVOURABLE if: Actual Qty < Std Qty
Variance Analysis – Example 1
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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 Qtyx
Actual Cost
Actual Qtyx
Std Cost
Std Qtyx
Std Cost
900 bagsx
Rs 500 per bag= Rs 450,000
900 bagsx
Rs 400 per bag=Rs 360,000
1,000 bagsx
Rs 400 per bag=Rs 400,000
Rs 90,000 (U) Rs 40,000 (F)
Rs 50,000 (U)
MRV MUV
Net Effect
Variance Analysis – Example 2
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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 Qtyx
Actual Cost
Actual Qtyx
Std Cost
Std Qtyx
Std Cost
200x80 man-daysx
Rs 600 per man-day= Rs 9,600,000
200x80 man-daysx
Rs 500 per man-day= Rs 8,000,000
200x100 man-daysx
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 Effortx
Act Lab Rate
Act Effortx
Std Lab Rate
Std Effortx
Std Lab Rate
Reserve Analysis
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• 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
Reserve Analysis
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•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
Trend Analysis
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Variance Trend Performance Index Trend
Regression Analysis
• Performance improving or deteriorating? • Forecast
Software Tools
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•MS Project 2010 (Exercise Files)