PROJECT COST MONITORING & CONTROL

Project Monitoring & Control Process Once the project scope is agreed upon in terms of clearly defined deliverables, the schedule is finalized at its optimum level, and the budgets sanctioned, the project is taken-up for execution. It is the responsibility of the project manager during the project execution phase to keep these three parameters under control till completion. Project success is measured as the ability to complete the project; According to desired specifications Within the specified budget Within the promised time schedule While keeping the customer and stakeholders happy.

Therefore, these parameters act as a baseline or a benchmark against which the progress is compared from time to time during the project execution. Project monitoring and control process therefore becomes one of the key processes of project management. Project Monitoring Project monitoring is to establish progress made against the plan. A review of the current status is taken periodically and a status report is prepared about the current position of the project on the date of review. Project Control Project control is taking corrective action to reduce difference between plan & reality, to achieve a balance between Cost, Time & Performance parameters of the project. Although project monitoring can be carried as an independent function having no direct responsibility for project execution, the project control and taking action is based on responsibility, authority & power. Project control is deciding the action plan among various alternatives that appears strategically the most suitable under the given situation. Project Monitoring & Control Cycle The project monitoring and control cycle illustrated in the diagram below is repeated periodically at a regular interval till completion of the project. The revised plan (R1) that replaces the Base Plan at the first review gets further replaced by the second revision (R2) subsequently and so on.
BASE PLAN Schedule Budget Scope COMPARE STATUS Schedule Budget Scope CHANGE REQUESTS Schedule Budget Scope

Replace Base plan REVISED PLAN Schedule Budget Scope

OBSERVED DEVIATIONS Schedule Budget Scope ANALYSE EFFECT On Schedule, Budget & Scope

DECIDE ACTION PLAN

MANAGERIAL ASSESSMENT OF ALTERNATIVES

The basic principle of control is that the control can be exercised only while the activity is under progress, when a likely deviation from any of the specified parameters is noticed. Therefore, the control action should be always proactive. Once the activity gets completed, any corrective action becomes a reactive control where rework is scheduled at an extra cost and time. Controllability of Contracts: The type of contract also decides its controllability from the viewpoint of a client and a contractor. The type of information required for control, risk undertaken and organization for control are dependant on the type of contract. This is explained in the following diagram.

FIX ED

Mi n. Easy. Mi n.

CONTROL REQUIRED

EFFORT

Max Har d Max

OWNER CONTROL OWNER RISK

Progress status updating and review Cost status: As the project activities progress they incur costs in form of materials, labour and equipment used to perform different tasks as listed in the schedule. It was learnt in the previous chapter that every activity has a cost assigned to it in form of a budget. The project manager needs to keep track of different costs simultaneously with reporting of progress and has to ensure that the incurred cost pertains to the physical progress of the activity. The information that is required to be collected is as under: Committed Costs: Total value of all works and expenses contained in contracts and purchase orders awarded to third parties. In case of reimbursable or measured works contracts, committed costs are in relation to defined scope of work. It is usually observed that almost all the orders are placed and contracts are issued by the time project shows about 30 % progress in terms of estimated duration. It therefore becomes possible at this point to draw a major conclusion as to the validity of the total cost target, since all the further costs incurred are related to, and contingent upon the costs of material, equipment and contracts now on order.

CO T S PL S U

FI FE XED +C E TS OS

RE FI EA M PR XED U S R & ICE E V A ON RIA S TI

FI PR XED (L I CE Su u mp m )

PR IC E

TY P

EO

FC ON TR

AC T

For Con trol Li tt le Info rma tion Req uire d Al l

Li tt le Avai labl e Info rma tion

at Con trac tAl Awa l rd

CO RE ST IM BU RS E

ME

NT

Project Expenditure: Total cost of work done, goods received and of services used, whether or not these have been paid for. This includes accruals & provisions. Outstanding Commitments: Total costs committed minus project expenditure Estimate To Complete: Is the best estimate that can be made of remaining costs for items not already reported as committed, and for the outstanding commitments considering performance trends to date modified in view of currently approved project scope Estimated Final Cost: It is project expenditure to date plus the estimate to complete. Earned Value: Total of budgeted cost for the work progress to date. (Significance of the Earned Value calculation is explained later in the chapter)

EARNED VALUE MANAGEMENT Earned Value Management is a methodology used to measure and communicate the real physical progress of a project taking into account the work complete, the time taken and the costs incurred to complete that work. Earned Value helps evaluate and control project risk by measuring project progress in monetary terms. We spend time, materials and in completing a task. If we are efficient, we complete the task with time to spare and with minimum wasted materials. If we are inefficient we take longer and waste materials. We also plan how we will accomplish the task. How long it will take, the resources we need and the estimated costs. By taking a snap-shot of the project and calculating the Earned Value we can compare the planned with the actual and make an objective assessment of the project progress. By extrapolating the curves and further calculation we can also estimate the costs to project completion and the probable completion date. Concept of Earned Value Measurement In the measurement of Earned Value, an attempt is made to differentiate value of work from the cost of work. Value is the worth of the activity for its final user who has agreed to pay certain cost against its delivery as per decided scope & specifications. The budgeted cost of the activity is therefore considered its value. Earned Value is based on the idea that the activity completion earns value equivalent to its budgeted cost. The value earned for the project at any point of time is therefore the total or cumulative budgeted cost of the tasks that are completed. And therefore, the Earned Value is a measure of the real progress of the project. If the actual cost incurred for its completion exceeds its estimated cost, it does not add any worth or value to the activity as long as the scope remains unchanged. This indicates cost over-run for such activities. On the other hand, if the project is running behind schedule, it will not be able to earn a cumulative value equivalent to the scheduled value that should have been earned for the given period. Earned Value therefore provides a standard means of objectively measuring work accomplished by integrating cost, schedule and technical performance into one set of metrics so that effective comparisons can be made. S Curves The basics of Earned Value can best be shown on the 'S-Curve'. The S-curve in its simplest form is a graph showing how project budget is planned to be spent over time. We further show the actual costs of doing the work over the same period. And also on the same graph we show how the value of the product of the project increases over the same period.

The three curves on the S Curve shown in figure represent: Budgeted Cost for Work Scheduled (BCWS) - the budgets for all activities planned to be completed. Actual Cost of Work Performed (ACWP) - the real costs of the work charged against the completed activities. Budgeted Cost of Work Performed (BCWP) - the planned costs of the work allocated to the completed activities. This is the Earned Value.

The BCWS curve is derived from the Work Breakdown Structure, the project budget and the Project Master Schedule. The cost of each Work Package is calculated and the cumulative cost of completed Works Packages is shown based on the planned completion dates shown in the Master Schedule. The ACWP curve is found by actual measurement of the work completed. Actual costs recorded from invoices and workmen's time sheets. This appears a daunting task but it can be very simple with sufficient planning and organizing. The BCWP is calculated from the measured work complete and the budgeted costs for that work.
EarnedValue = BudgetedCostofActivity PercentageActivityCompletion

Variances Schedule and cost variances can both be calculated in monetary terms from the data needed to produce the S-curves. Schedule variance is the difference between the Earned Value and the planned budget.

SV = BCWP - BCWS
Negative value of schedule variance indicate delay and a positive value indicate being ahead of schedule Cost Variance is the difference between the Earned Value and the actual costs of the works.

CV = BCWP ACWP
Negative value of cost variance indicate cost over run and a positive value indicate savings in project cost.

Performance Indices Schedule Performance Index and Cost Performance Index give indications of the health of the project. Is the project on time, in budget or what? Schedule Performance Index is a ratio of Earned Value and the planned value of completed works.

SPI = BCWP / BCWS

SPI < 1 is not good as it indicates schedule delays SPI > 1 is favourable as it indicates being ahead of schedule Cost Performance Index is a ratio of Earned Value and the actual costs of completed works.

CPI = BCWP / ACWP

CPI < 1 is not good as it indicates cost over-run CPI > 1 is favourable as it indicates cost savings The astute project manager will also calculate a set of Critical ratios at a selected level of the Work Breakdown Structure. One useful ratio combines the schedule progress versus actual progress with the budgeted cost versus the actual cost. CPI X SPI This critical ratio is a good measure of the general health of a project as it combines both schedule and cost in that a poor performance in one is compensated by a good performance in the other. A critical ratio greater than 1 is good, less than one is bad. Furthermore the project manager should also set control limits on the various critical ratios. If the ratios are outside the limits then corrective action is necessary. Interpreting project status Depending on the values of cost and time variances or CPI & SPI, four possible situations emerge. These situations can be interpreted as below:
SR COST
VARIANCE INDEX

SCHEDULE
VARIANCE INDEX

INTERPRETATION

1 2

Negative Negative

<1 <1

Negative Positive

<1 >1

Project is having Cost Over run and is running behind schedule Project is having Cost Over run but is running ahead of schedule. This could mean that probably activities are being crashed without considering the Time Cost trade-off. Project is saving on cost but is running behind schedule. This could be desirable if there is no pressure on time to complete the project. Project is having Cost saving and is running ahead of schedule

Positive

>1

Negative

<1

Positive

>1

Positive

>1

Estimate At Completion (EAC) The EAC gives an idea of the final costs of a project. It takes into account the Budgeted value at Completion (BAC) and the Cost Performance Index of the already completed works.

EAC = (BAC / CPI)

Estimated Time for Completion (ETC) The ETC gives the idea of the likely completion time for the project taking into account the Scheduled Time for Completion (STC) and the schedule performance to date.

ETC = (STC / SPI)

The more relevant use to the proactive project manager is to measure variances and define trends. Actions can then be taken to reduce the unwanted variances and the wayward trends. Variance analysis and trend projection are two important tools used by the project manager to control projects. Using earned value techniques the project manager can monitor both schedule and cost variances as well as predict trends using Cost Performance Index and the Schedule Performance Index. Setting up an Earned Value Management system

Define the scope of the works. Set up a Work Breakdown Structure (WBS). Develop a Project Master Schedule showing when every Work Package will be carried out. Allocate budget costs to each Work Package (the lowest level of WBS). Establish a practical way of measuring the actual work completed. Set the performance measurement baseline. Very important point:

For cost control within the project, internal to the performing organisation, actual costs to the performing organisation is used. For reporting to the Customer, customer contract prices are used.

We now look at one example to illustrate how Earned Value is used to assess the 'health' of a project.

Example Following Gantt Chart shows a schedule for a multi storied building and budgeted costs for different work items are indicated. Schedule for Building Construction
ID 0 1 2 3 4 5 6 7 8 9 10 Task Name Excavation, Filling & Pile Breaking Concreting - PCC & RCC Masonery Internal Plaster External Plaster Water Proofing Doors Windows Floor Tiling Toilet Finishing Cost 219 5,077 795 573 388 297 2,175 815 6,056 284 Duration 1 month 5.7 months 3 months 2.5 months 3 months 3.5 months 7.5 months 6.5 months 5 months 5.47 months

Cost in Rs. 000

Start Fri 5/15/09 Fri 5/15/09 Fri 8/7/09 Tue 9/1/09 Sun 11/1/09 Mon 6/1/09 Sun 7/5/09 Sat 7/25/09 Sat 9/5/09 Sat 9/5/09 Sep

Multi-Stoery Building Construction18,376 10.7 months Fri 5/15/09

Assuming that the progress of activities during each month happens as per schedule and the activities incur costs exactly equivalent to the budgeted costs, the monthly project expenditure is worked out and is given in table
Month Budgeted Cost Cuml. Bud. cost May 629 629 Jun 1,022 1,651 Jul 1,210 2,861 Aug 1,547 4,407 Sept 2,869 7,276 Oct 3,139 10,41 5 Nov 2,039 12,454 Dec 1,934 14,388 Jan 2,487 16,875 Feb 1,045 17,919 Mar 457 18,376

The cumulative budgeted project expenditure that depicts the Budgeted Cost of Work Scheduled (BCWS) is also shown in form of an S curve as in figure.
20,000 18,000 16,000 14,000

17,919 16,875 14,388 12,454 10,415 7,276 4,407 2,861 1,651 629
May Jun Jul Aug Sept Oct Nov Dec Jan Feb

18,376

Cost Rs. '000

12,000 10,000 8,000 6,000 4,000 2,000 0

Mar

The project progress is being reviewed every month and the status of physical progress and actual expenditure as of end of October is as given in table below:
SR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 WORK ITEM
Excavation, Filling & Pile Breaking Concreting - PCC & RCC Masonry Internal Plaster External Plaster Water Proofing Doors Windows Floor Tiling Toilet Finishing Terrace & Paving Staircase Finish Grills & Railing Painting M.S. Shutter Miscellaneous TOTAL
BUDGETED COST % COMPLETION SCH ACTUAL SCH COST ACTUAL

BCWS
240 5,200 700 500 75 1,100 450 2,725 100 219 5,026 763 469 187 1,001 350 2,301 99

BCWP
219 4,823 716 458 59 1,196 408 1,817 85

219 5,077 795 573 388 297 2,175 815 6,056 284 367 54 300 762 69 145

100 99 96 82 63 46 43 38 35 -

100 95 90 80 20 55 50 30 30

219 5,077 755 487 69 1,087 367 2,120 128 -

18,376

10,309

11,090

10,415

9,781

Note: BCWS = Budgeted Cost X Scheduled % Completion BCWP = Budgeted Cost X Actual % Completion Based on the current status, the values for BCWS & BCWP are calculated for the individual activities and totaled for the entire project. The different variances and indices are calculated as below: 1. Cost Variance 2. Schedule Variance 3. CPI 4. SPI = CV = BCWP ACWP = SV = BCWP BCWS = 9,781 / 11,091 = 9,781 / 10,415 = CPI X SPI = 9,781 11,091 = - 1,310 = 9,781 10,415 = - 634 = 0.88 = 0.94 = 0.88 X 0.94 = 0.83

= BCWP / ACWP = BCWP / BCWS

5. CRITICAL RATIO

The variances and ratios indicate that the project is behind schedule and is incurring extra cost. The Estimated cost at completion and expected time for completion are calculated as below: 6. EAC 7. ETC = Budgeted Cost / CPI = Scheduled Completion / SPI = 18,376 / 0.88 = 10.5 mths / 0.94 = 20,882 = 11.2 mth