COST MANAGEMENT AND CONTROL IN PROJECTS
Variances & Earned Value
ACWP, BCWS, BCWP
Cost & Schedule Variance
Variance Analysis (V/A)
Depreciation & Ethics
The project budget, which is the final result of the planning
cycle of the MCCS, must be reasonable,
attainable, and based on:
Negotiated Costs And
• The Statement
The basis for the budget is:
• Best Estimates,
The budget must identify:
Allocated Funds, And
All budgets must be traceable through the budget "log," which
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.
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.
The scheduling variance provides a comparison between planned
and actual performance but does not
There are two primary methods of measurement:
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.
Variances are used on both types of measurement. In order to calculate variances
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
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
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:
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
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
Not all companies have a uniform methodology for variance
thresholds. Permitted variances may be
dependent on such factors as:
- Length of
- Length of
- Type of
- Accuracy of
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
accomplished. This system ensures that both cost budgeting and
performance scheduling are constructed
on the same database.
COST PERFORMANCE INDEX (CPI)
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
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
cost and schedule performance index is most often used for trend analysis as
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 longterm
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.
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:
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.
Depreciation is the technique used to compute “Estimated value” of any object
few years. Some types are:
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.
Mathematical model based upon historical
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.
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 &
Ethics guide people in dealings with stack holders & others, to
determine appropriate actions. Project
Manager often must choose between the conflicting interests of