ZeePedia buy college essays online


Project Management

<<< Previous COST MANAGEMENT AND CONTROL IN PROJECTS:Variance, Depreciation Next >>>
 
img
Project Management ­MGMT627
VU
LESSON 41
COST MANAGEMENT AND CONTROL IN PROJECTS
BROAD CONTENTS
Budget
Variances & Earned Value
ACWP, BCWS, BCWP
Cost & Schedule Variance
CPI, SPI
Variance Analysis (V/A)
Depreciation & Ethics
41.1
Budgets
The project budget, which is the final result of the planning cycle of the MCCS, must be reasonable,
attainable, and based on:
 Contractually Negotiated Costs And
 The Statement of Work.
The basis for the budget is:
 Historical Cost,
 Best Estimates, Or
 Industrial Engineering Standards.
The budget must identify:
 Planned Manpower Requirements,
 Contract Allocated Funds, And
 Management Reserve.
All budgets must be traceable through the budget "log," which includes:
 Distributed budget
 Management reserve
 Undistributed budget
 Contract changes
Management reserve is the dollar amount established by the project office to budget for all categories of
unforeseen problems and contingencies resulting in out-of-scope work to the performers. Management
reserve should be used for tasks or dollars, such as rate changes, and not to cover up bad planning
estimates or budget overruns. When a significant change occurs in the rate structure, the total
performance budget should be adjusted.
In addition to the "normal" performance budget and the management reserve budget, there also exists
the following: Undistributed budget, which is that budget associated with contract changes where time
constraints prevent the necessary planning to incorporate the change into the performance budget. (This
effort may be time-constrained.) Unallocated budget, which represents a logical grouping of contract
tasks that have not yet been identified and/or authorized.
41.2
Variance
Variance is defined as any schedule, technical performance, or cost deviation from a specific plan.
Variances are used by all levels of management to verify the budgeting system and the scheduling
system. The budgeting and scheduling system variance must be compared together because:
The cost variance compares deviations only from the budget and does not provide a measure of
comparison between work scheduled and work accomplished.
321
img
Project Management ­MGMT627
VU
The scheduling variance provides a comparison between planned and actual performance but does not
include costs.
There are two primary methods of measurement:
Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose
completion produces tangible results.
Level of effort: work that does not lend itself to subdivision into discrete scheduled increments of work,
such as project support and project control.
41.2.1
Variances are used on both types of measurement. In order to calculate variances we
must define the three basic variances for budgeting and actual costs for work scheduled and performed.
Archibald defines these variables:
Budgeted cost for work scheduled (BCWS) is the budgeted amount of cost for work scheduled to be
accomplished plus the amount or level of effort or apportioned effort scheduled to be accomplished in a
given time period.
Budget cost for work performed (BCWP) is the budgeted amount of cost for completed work, plus
budgeted for level of effort or apportioned effort activity completed within a given time period. This is
sometimes referred to as "earned value."
Actual cost for work performed (ACWP) is the amount reported as actually expended in completing
the work accomplished within a given time period.
Planned Value (PV) What Plan should be worth at this point in "Schedule". Also BCWS: Budgeted
amount of "Cost for work Schedule" to be accomplished Plus "Amount or level of effort for "Schedule"
to be Accomplished at a given time period.
Earned Value (EV) Physical work completed to date & with in authorized "Budget" for that.
The budget at completion is the sum of all budgets (BCWS) allocated to the project. This is often
synonymous with the project baseline. This is what the total effort should cost. The estimate at
completion identifies either the dollars or hours that represent a realistic appraisal of the work when
performed. It is the sum of all direct and indirect costs to date plus the estimate of all authorized work
remaining (EAC = cumulative actuals + the estimate-to-complete).
Using the above definitions, we can calculate the variance at completion (VAC):
The estimate at completion (EAC) is the best estimate of the total cost at the completion of the project.
The EAC is a periodic evaluation of the project status, usually on a monthly basis or until a significant
change has been identified. It is usually the responsibility of the performing organization to prepare the
EAC.
These costs can then be applied to any level of the work breakdown structure (i.e., program, project,
task, subtask, work package) for work that is completed, in-program, or anticipated. Using these
definitions, the following variance definitions are obtained:
Cost variance (CV) calculation:
A negative variance indicates a cost-overrun condition.
Schedule variance (SV) calculation:
A negative variance indicates a behind-schedule condition.
In the analysis of both cost and schedule, costs are used as the lowest common denominator. In other
words, the schedule variance is given as a function of cost. To alleviate this problem, the variances are
usually converted to percentages:
322
img
Project Management ­MGMT627
VU
The schedule variance may be represented by hours, days, weeks, or even dollars.
As an example, consider a project that is scheduled to spend $100K for each of the first four weeks of
the project. The actual expenditures at the end of week four are $325K. Therefore, BCWS = $400K and
ACWP = $325K. From these two parameters alone, there are several possible explanations as to project
status. However, if BCWP is now known, say $300K, and then the project is behind schedule and
overrunning costs.
Variances are almost always identified as critical items and are reported to all organizational levels.
Critical variances are established for each level of the organization in accordance with management
policies.
Not all companies have a uniform methodology for variance thresholds. Permitted variances may be
dependent on such factors as:
 Life-cycle phase
 Length of life-cycle phase
 Length of project
 Type of estimate
 Accuracy of estimate
Figure 41.1: Project variance projections
Figure 41.1 shows time-phased cost variances for a program requiring research and development,
qualification, and production phases. Since the risk should decrease as time goes on, the variance
boundaries are reduced. Figure 41.2 shows that the variance envelope in such a case may be dependent
on the type of estimate.
Figure 41.2: Methodology to variance
By using both cost and schedule variance, we can develop an integrated cost/schedule reporting system
that provides the basis for variance analysis by measuring cost performance in relation to work
323
img
Project Management ­MGMT627
VU
accomplished. This system ensures that both cost budgeting and performance scheduling are constructed
on the same database.
COST PERFORMANCE INDEX (CPI)
41.2.2
In addition to calculating the cost and schedule variances in terms of dollars or
percentages, we also want to know how efficiently the work has been accomplished. The formulas used
to calculate the performance efficiency as a percentage of BCWP are:
If CPI = 1.0, we have perfect performance. If CPI > 1.0, we have exceptional performance. If CPI < 1.0,
we have poor performance. The same analysis can be applied to the SPI.
Variance Analysis
41.2.3
The cost and schedule performance index is most often used for trend analysis as shown
in Figure 41.3. Companies use either three-month, four-month, or six-month moving averages to predict
trends. The usefulness of trend analysis is to take corrective action to alleviate unfavorable trends by
having an early warning system. Unfortunately, effective use of trend analysis may be restricted to long-
term projects because of the time needed to correct the situation.
Figure 41.3: The performance index
Figure 41.4 shows an integrated cost/schedule system. The figure identifies a performance slippage to
date. This might not be a bad situation if the costs are proportionately under-run. However, from the
upper portion of Figure 41.4, we find that costs are overrun (in comparison to budget costs), thus adding
to the severity of the situation.
324
img
Project Management ­MGMT627
VU
Figure 41.4: Integrated cost/schedule system
Also shown in Figure 41.4 is the management reserve. This is identified as the difference between the
contracted cost for projected performance to date and the budgeted cost. Management reserves are the
contingency funds established by the program manager to counteract unavoidable delays that can affect
the project's critical path.
For variance analysis, goal of cost account Manager To take action that will correct problem within
original budget or justify a new estimation.
Five Questions must be addressed during variance analysis:
 What is the problem causing the variance?
 What is the impact on time, cost, and performance?
 What is the impact on other efforts, if any?
 What corrective action is planned or under way?
 What are the expected results of the corrective action?
One of the key parameters used in variance analysis is the "earned value" concept, which is the same as
BCWP. Earned value is a forecasting variable used to predict whether the project will finish over or
under the budget. As an example, on June 1, the budget showed that 800 hours should have been
expended for a given task. However, only 600 hours appeared on the labor report. Therefore, the
performance is (800/600) 100, or 133 percent, and the task is under running in performance. If the
actual hours were 1,000, the performance would be 80 percent, and an overrun would be occurring.
The difficulty in performing variance analysis is the calculation of BCWP because one must predict the
percent complete. To eliminate this problem, many companies use standard dollar expenditures for the
project, regardless of percent complete. For example, we could say that 10 percent of the costs are to be
"booked" for each 10 percent of the time interval. Another technique, and perhaps the most common, is
the 50/50 rule:
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 that 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. 50/50 rule eliminate the necessity
for the continuous determination of percent complete.
41.3
Depreciation
41.3.1
Depreciation is the technique used to compute "Estimated value" of any object after
few years. Some types are:
325
img
Project Management ­MGMT627
VU
1. Straight line depreciation same amount deprecated (reduced) from cost each year.
2. Double-declining balance First year - high "Deduction in value" Twice amount of straight line.
Each year after that deduction 40% less than previous year.
3. Sum of year depreciation If life - 5 years. Total of 1-5 is 15 first year deduce 5/15 from cost, in 2nd
year Deduce 4/15, & so on.
41.3.2
Parametric Modeling Estimation
This is the use of mathematical model to make estimation. Following are the two types of PME.
Regression Analysis: Mathematical model based upon historical information.
Learning Curve: Model based upon principal Cost/unit describes as more work, Gets completed.
41.3.3
Analogous Estimating
Estimation technique with characteristics Estimation based on past Project (historical information) less
accurate compared to bottom-up estimation Top-down approach Takes less time compared to bottom-up
estimation Form of an expert judgment.
41.3.4
Ethics
Ethics are standards of right & wrong that influence behavior. Right behavior is considered ethical &
wrong behavior is considered unethical. Major concern to both managers & employee.
A set of beliefs about right & wrong principles of conduct governing an individual or a group behavior
that is fair & just, over & above obedience to laws & regulations
Ethics guide people in dealings with stack holders & others, to determine appropriate actions. Project
Manager often must choose between the conflicting interests of stakeholders.
326
Table of Contents:
  1. INTRODUCTION TO PROJECT MANAGEMENT:Broad Contents, Functions of Management
  2. CONCEPTS, DEFINITIONS AND NATURE OF PROJECTS:Why Projects are initiated?, Project Participants
  3. CONCEPTS OF PROJECT MANAGEMENT:THE PROJECT MANAGEMENT SYSTEM, Managerial Skills
  4. PROJECT MANAGEMENT METHODOLOGIES AND ORGANIZATIONAL STRUCTURES:Systems, Programs, and Projects
  5. PROJECT LIFE CYCLES:Conceptual Phase, Implementation Phase, Engineering Project
  6. THE PROJECT MANAGER:Team Building Skills, Conflict Resolution Skills, Organizing
  7. THE PROJECT MANAGER (CONTD.):Project Champions, Project Authority Breakdown
  8. PROJECT CONCEPTION AND PROJECT FEASIBILITY:Feasibility Analysis
  9. PROJECT FEASIBILITY (CONTD.):Scope of Feasibility Analysis, Project Impacts
  10. PROJECT FEASIBILITY (CONTD.):Operations and Production, Sales and Marketing
  11. PROJECT SELECTION:Modeling, The Operating Necessity, The Competitive Necessity
  12. PROJECT SELECTION (CONTD.):Payback Period, Internal Rate of Return (IRR)
  13. PROJECT PROPOSAL:Preparation for Future Proposal, Proposal Effort
  14. PROJECT PROPOSAL (CONTD.):Background on the Opportunity, Costs, Resources Required
  15. PROJECT PLANNING:Planning of Execution, Operations, Installation and Use
  16. PROJECT PLANNING (CONTD.):Outside Clients, Quality Control Planning
  17. PROJECT PLANNING (CONTD.):Elements of a Project Plan, Potential Problems
  18. PROJECT PLANNING (CONTD.):Sorting Out Project, Project Mission, Categories of Planning
  19. PROJECT PLANNING (CONTD.):Identifying Strategic Project Variables, Competitive Resources
  20. PROJECT PLANNING (CONTD.):Responsibilities of Key Players, Line manager will define
  21. PROJECT PLANNING (CONTD.):The Statement of Work (Sow)
  22. WORK BREAKDOWN STRUCTURE:Characteristics of Work Package
  23. WORK BREAKDOWN STRUCTURE:Why Do Plans Fail?
  24. SCHEDULES AND CHARTS:Master Production Scheduling, Program Plan
  25. TOTAL PROJECT PLANNING:Management Control, Project Fast-Tracking
  26. PROJECT SCOPE MANAGEMENT:Why is Scope Important?, Scope Management Plan
  27. PROJECT SCOPE MANAGEMENT:Project Scope Definition, Scope Change Control
  28. NETWORK SCHEDULING TECHNIQUES:Historical Evolution of Networks, Dummy Activities
  29. NETWORK SCHEDULING TECHNIQUES:Slack Time Calculation, Network Re-planning
  30. NETWORK SCHEDULING TECHNIQUES:Total PERT/CPM Planning, PERT/CPM Problem Areas
  31. PRICING AND ESTIMATION:GLOBAL PRICING STRATEGIES, TYPES OF ESTIMATES
  32. PRICING AND ESTIMATION (CONTD.):LABOR DISTRIBUTIONS, OVERHEAD RATES
  33. PRICING AND ESTIMATION (CONTD.):MATERIALS/SUPPORT COSTS, PRICING OUT THE WORK
  34. QUALITY IN PROJECT MANAGEMENT:Value-Based Perspective, Customer-Driven Quality
  35. QUALITY IN PROJECT MANAGEMENT (CONTD.):Total Quality Management
  36. PRINCIPLES OF TOTAL QUALITY:EMPOWERMENT, COST OF QUALITY
  37. CUSTOMER FOCUSED PROJECT MANAGEMENT:Threshold Attributes
  38. QUALITY IMPROVEMENT TOOLS:Data Tables, Identify the problem, Random method
  39. PROJECT EFFECTIVENESS THROUGH ENHANCED PRODUCTIVITY:Messages of Productivity, Productivity Improvement
  40. COST MANAGEMENT AND CONTROL IN PROJECTS:Project benefits, Understanding Control
  41. COST MANAGEMENT AND CONTROL IN PROJECTS:Variance, Depreciation
  42. PROJECT MANAGEMENT THROUGH LEADERSHIP:The Tasks of Leadership, The Job of a Leader
  43. COMMUNICATION IN THE PROJECT MANAGEMENT:Cost of Correspondence, CHANNEL
  44. PROJECT RISK MANAGEMENT:Components of Risk, Categories of Risk, Risk Planning
  45. PROJECT PROCUREMENT, CONTRACT MANAGEMENT, AND ETHICS IN PROJECT MANAGEMENT:Procurement Cycles