M5 CostManagment v.2.0

8/13/2019 M5 CostManagment v.2.0

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Maria Maddalena Ruggini, PMP

CC ERP Roma

Cost Management (M5)

Project Management and SAP


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Cost Management

1. Introduction

2. Monitoring and control costs

3. Performance monitoring4. Earned Value Technique


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Introduction

3 M5_Cost Management www.eng.it

Once the project is started there are some more question for

the PM:

Wheredid you arrive with scheduling?

How much budget has been consumed?

How much work has been done?


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Introduction

4

Control is not intended for the mere detection of the actual

data.

Actual data, while important, does not allow itself to make a

critical judgment on the actual status of the project

Control means determining if things are going as planned and,

if not, take timely and appropriate actions.

There is no control without planning

M5_Cost Management www.eng.it


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Control Costs

Inputs

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Project Management Plan and cost baseline;

Project funding requirements (billing plan) Work performance data: are the data on which

control is based - their accuracy influence the

assessments of project status and following

corrective actions. Deliverables completion, actual

data, estimate to complete, the percentage of completion;

Organization process assets:policies and procedures for cost

control, support tools, methods of monitoring and reporting (es.

SIAL)



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Control Costs

Tools and techniques

6

Performance measurement analysis (Earned Value

Management or other techniques )

Forecasts: Forecasting includes making estimatesor predictions of conditions in the projects future based

on information and knowledge available at the time of

the forecast. Forecasts are generated, updated, and

reissued based on work performance information

provided as the project is executed and progressed.

Project Performance Reviews (status meeting):Performance reviews compare cost performance over time, schedule

activities or work packages overrunning and under running budget

(planned value), milestones due, and milestones met.

Reserve analysis: The cost management plan describes how costvariances will be managed, for example, having different responses to

major or minor problems.



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Control Costs

Process

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Choice of rulesof monitoring: monitoring interval and methods for monitoring

the progress (in the PM Plan);

Monitoring of progressin terms of time, cost and resources, with any newestimates for the activities in progress or to be started:

Consolidation (approval and input into the PM system) of actual

time, money and resources for the executed part of the project.

Monitoring the performance of the project through variance

analysisin terms of time, cost and performance of the entire project and itsparts;

Replanning(adjustments and realignments) in terms of time, cost and

resources;

Formalizationand logging of the situation of the project to date (consolidated

+ replanning ) with production of the progress report;

Possible redefinitionof the official Baseline (only in extreme cases).



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Performance monitoring

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Performance measurement techniques help to

assess the magnitude of any variancesthat will

invariably occur;

To determine the performance of a project, it is

essential to measure the actual

"physical progress" (how much work has been done);

It is good to keep the measure of the physical progress (earned value)

disjointfrom other types of feed: time, cost / income and resources;

A physical progress "inferred" in an indirect way by other

metrics (e.g.: dd actual / dd planned) would lead to considerable

errors in the assessment of the real progress of work and in the

determination of estimates to complete.



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Performance monitoring

Techniques

9

ON/OFF (0/100): 0 at the beginning of the activity

100 at the end. Useful for short time activities or

low budget; 50/50 (or 20/80): 50 (20) when the activity starts

and 100 at the end. Useful for short time activities or

low budget;

Weighted events: important events are identified within the activity to

which it is given a weight, the achievement of an event determine theprogress of the activity. Applicable to activities in which the subparts

can be demonstrated;

Number of finished units: Applicable only to activities measured in

quantity;



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Earned Value Technique

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Earned value management (EVM), or Earned value

project/performance management (EVPM) is a

project management technique for measuringproject performance and progress in an

objective manner.

It has the ability to combine measurements of:

Scope

Schedule, and

Costs

In a single integrated system, Earned Value Management is able

to provide accurate forecasts of project performance problems,

which is an important contribution for project management.



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Earned Value Technique

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Earned value management (EVM), translates all the values into

a homogeneous unit (money in the defined currency

but even days in some contexts) and is basedon the comparison of three values:

Planned Value - PV (or BCWS - Budgeted Cost

of Work Scheduled): represents the planned budget (estimated

cost) at the date of measurement - is the Baseline value;

Actual Cost - AC (or ACWP - Actual Cost of Work Performed) is

the actual cost (posted) at the date;

Earned Value - EV (or BCWP - Budgeted Cost of Work

Performed): represents the budgeted value of the work actually

produced (deliverable) at the date of measurement.



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Earned Value

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The Earned Value represents the progress of the project (deliverable

or portion of deliverable produced);

EV provides guidance on project progress in termsof time and productivity;

EV is calculated by multiplying the Total

Planned Budget (BAC) for the percentage of physical progress: EV =

BAC * %physical completion at the date;

EV can be calculated at the level of activity, work package or entire

project;

EV allows to measure the actual variances between planned and

actual value, also highlighting the performance of the project;

EV is used to calculate forecasts (EAC);

EV is a great instruments to feed synthetic managerial "dashboards.



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Earned Value

Example


PLANNED =100ACTUAL =150

ACT. JAN FEB MAR APR MAY JUN TOTALBUDGET

A

B

C

D

150

150

200

100

PLANNED =150ACTUAL =120

PLANED =150ACTUAL =100

PLANNED =0ACTUAL =0

TIMENOW 30.04

Totalat

Timenow

Planned Cost (PV) = 400Actual Cost (AC) = 370

Variance: - 30 600

?

E d V l


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Earned Value

Example


PLANNED =100 EARNED= 150ACTUAL =150

ACT. JAN FEB MAR APR MAY JUN TOTALBUDGET

A

B

C

D

150

150

200

100

PLANNED =150 EARNED=150ACTUAL =120

PLANNED =150 EARNED= 50

ACTUAL =100

PLANNED =0 EARNED= 0EARNED =0

TIMENOW100%

33%

75%

TIMENOW 30.04

Totalat

timenow

Planned Cost (PV) = 400Earned Value (EV) = 350

Actual Cost (AC) = 370

Schedule variance: -50Cost variance: -20

600

?

E d V l


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Earned Value

Deviations and efficiency ratios


Cost Variance: CV = EV AC

Schedule Variance: SV = EV PV

Cost Performance Index: CPI = EV / AC

Schedule Performance Index: SPI = EV / PV

E d V l


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Earned Value

Deviations and efficiency ratios


To-Complete Performance Index (TCPI) = (BAC-EV)

(BAC-AC) or (EAC-AC)

The TCPIformula gives the efficiency at which the project team should be utilized for the remainder of the project.

TCPI > 1 indicates utilization of the project team for the remainder of the project can be stringent.

TCPI < 1 indicates utilization of the project team for the remainder of the project should be lenient.

To-Complete Schedule Performance Index (TSPI) = (BAC-EV)

(BAC-PV)

TSPIgives the efficiency at which the project team should utilize the remaining time allocated for the project.

TSPI < 1 indicates project team can be lenientin utilizing the remaining time allocated to the project.

TSPI > 1 indicates project team needs to work harder in utilizing the remaining time allocated to the project

Earned Val e


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Earned Value

Example


The actual cost at TimeNow is greater Earned Value: we are spendingmore than you would have had to spend on what has been achieved: we are

above budget

The planned value at TimeNow is greater than the Earned Value: The

value of what is actually achieved in terms of budget is less than what hadbeen planned, we are behind schedule

CV = 350 - 370 = - 20SV = 350 - 400 = - 50

Earned Value


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Earned Value

Example


The index of cost efficiency is less than 1: we are getting 94% of value forevery euro spent, we are inefficient with the costs;

The efficiency index of the schedule is less than 1: We are making 87% of

what was planned, we are inefficient with the schedule;

The efficiency to finish (TCPI) is > 1: the use of resources until the end of

the project must be stringent.

CPI = 350 / 370 = 0,94

SPI = 350 / 400 = 0,87

with BAC = 600

TCPI= 600-350/600-370= 1,1

Earned Value


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Earned Value

Example


Time

Costs

AC = 370

EV =350

TimenowCPI < 1

SPI < 1

SV

Delay

CV

DB=Delta

Budget

PV = 400

TotalBudget

TF

600

Earned Value


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Earned Value

S Curves


AC

EV

PV

SPI 1 Costs: positive

AC

EV

PV

SPI >1 Sched: positive

CPI >1 Costs: positive

AC

EV

PV

SPI >1 Sched: positiveCPI


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Earned Value

Application with WBS


1.1.1 1.1.2 1.1.3

1.1

1.2.1 1.2.2 1.2.3 1.2.4

1.2

1.3.1 1.3.2

1.3

1

AV

EV

PV

Positive

AV

EVPV

Positive

Lets analyze this project

TOP-

DOWN

AC

EV

PV

Negativeon costsand sched

AC

EV

PV

Negativeon costs

and sched

Negative

On sched

AC

EV

PV Negative

On costs

AC

EV

PV

Earned Value


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Earned Value

Estimate to complete


Represents the estimated cost at the end of the project, taking into account

what is actually spent (sunk costs = AC) and how much further you have to

achieve;

Estimate At Completion (EAC) is the estimated cost of the project at the end of

the project.

There are three methods to calculate EAC

EAC = AC + ETC

Estimate At Completion (EAC):

Earned Value


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Earned Value



Variances are Atypical -This method is used when the

variances at the current stage are atypical and are not expected

to occur in the future;

Without taking into account the (in)efficiency at TimeNow

EAC = AC + (BAC EV)Compared to the example:

370+(600-350) = 620


Earned Value


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Earned Value



Variances are Typical -Variances will be present in the future

- This method is used when the assumption is that the current

variances will continue to be present in the future

Taking into account the (in)efficiency at TimeNow

EAC = AC + ((BAC EV)/CPI)Compared to the example:

370+((600-350)/0,94) = 636


Earned Value


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Earned Value



Time

SV

Costs

AC

EV

PVCV

Timenow

EAC 1(Total

Budget)

Delay

EAC 2

EAC 3

DBDB*CPI

Delay Delay

What is the estimate to complete more correct?

1

2

3

Earned Value


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Earned Value



What is the third method?


Earned Value


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Estimate To Complete (ETC)

Estimate To Complete (ETC) is the estimated cost required to

complete the remainder of the project.

Estimate To Complete (ETC) is calculated and applied when

the past estimating assumptions become invalid and aneed for fresh estimates arises.

ETC is used to compute the Estimation at Completion (EAC).

EAC = AC + ETC


Consolidation


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Formalization of the data collected (time, costs, resources, ...) at TimeNow;

Loading data into the computer system of Project Management;

Historicization of work plan version at TimeNow (Versioning).

Schedule

Resources

Costs andPerformance

A

B

C

D

% Compl. Dur. Rim.

100%

40%

0

4 sett.

2,5 sett.

Timenow

4 sett.

Actual Start dates Actual end dates

0

0,5

1

1,5

2

2,5

3

3,5

1 sett 2 sett 3 sett 4 sett 5 sett 6 sett 7 sett 8 sett 9 sett 10 sett 11 sett 12 sett

Richiesta

Disponibilit

Effettivo

Costs

2 - AC

Time3 - EV

1 - PV

2

1

3

Earned Value


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Example

Earned Value


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a) Draw the Gantt (after defining the network of dependencies)You are a PM and you have this sequence of activities with its dependencies:

Activity 1 can start immediately and has an expected duration of 4 weeks

Activity 2 should end together with Activity 1, and has an estimated duration of 2 weeks

Activity 3 begins after Task 1 is finished and has an estimated duration of 6 weeks

Activity 4 starts two weeks after the Activity 2 is over and it has an expected duration of 8 weeks

Activity 5 begins after that activity 3 is over and ends together with Activity 4 and has a duration of 3 weeks

Activity 6 starts after the Activity 4 is over and it has a duration of 5 weeks

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Earned Value


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a) Draw the Gantt (after defining the network of dependencies)You are a PM and you have this sequence of activities with its dependencies:

Activity 1 can start immediately and has an expected duration of 4 weeks

Activity 2 should end together with Activity 1, and has an estimated duration of 2 weeks

Activity 3 begins after Task 1 is finished and has an estimated duration of 6 weeks

Activity 4 starts two weeks after the Activity 2 is over and it has an expected duration of 8 weeks

Activity 5 begins after that activity 3 is over and ends together with Activity 4 and has a duration of 3 weeks

Activity 6 starts after the Activity 4 is over and it has a duration of 5 weeks

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1

2

3

4

5

6Start End1

3 5

4 62+ 2Ws

Earned Value


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b) Allocate costs

All activities use a mix of resources whose cost is equal to 1000per week.

The Activity 2 instead uses a mix of resources whose cost is equal to 3000per week. What is the trend of costs weekly and cumulative?

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1

2

3

4

5

6

Earned Value


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b) Allocate costs

All activities use a mix of resources whose cost is equal to 1000per week.

The Activity 2 instead uses a mix of resources whose cost is equal to 3000per week. What is the trend of costs weekly and cumulative?

1.000 1.000 4.000 4.000 1.000 1.000 2.000 2.000 2.000 2.000 1.000 2.000 2.000 2.000 1.000 1.000 1.000 1.000 1.000

1.000 2.000 6.000 10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000 31.000 32.000

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1

2

3

4

5

6

Earned Value


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c) Check the costs

We are at the end of the 10thweek.

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1

2

3

4

5

6

1.000 1.000 4.000 4.000 1.000 1.000 2.000 2.000 2.000 2.000 1.000 2.000 2.000 2.000 1.000 1.000 1.000 1.000 1.000

1.000 2.000 6.000 10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000 31.000 32.000

PV=4000 PV=6000

PV=6000 PV=4000

AC=4000 AC=5000

AC=6000 AC=3000

100%

100%

60%

70%

PV = 20.000

AC = 18.000

now

Earned Value


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c) Check the costs

Get the Earned Value, the variances and indexes of the

project at the end of the tenth week.

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1

2

3

4

5

6

1.000 1.000 4.000 4.000 1.000 1.000 2.000 2.000 2.000 2.000 1.000 2.000 2.000 2.000 1.000 1.000 1.000 1.000 1.000

1.000 2.000 6.000 10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000 31.000 32.000

PV=4000 PV=6000

PV=6000 PV=4000

AC=4000 AC=5000

AC=6000 AC=3000

100%

100%

60%

70%

EV =

CV =

SV =

CPI =

SPI =now

Earned Value


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c) Check the costs

Get the Earned Value, the variances and indexes of the

project at the end of the tenth week.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

1

2

3

4

5

6

1.000 1.000 4.000 4.000 1.000 1.000 2.000 2.000 2.000 2.000 1.000 2.000 2.000 2.000 1.000 1.000 1.000 1.000 1.000

1.000 2.000 6.000 10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000 31.000 32.000

PV=4000 PV=6000

PV=6000 PV=4000

AC=4000 AC=5000

AC=6000 AC=3000

100%

100%

60%

70%

now

EV = 19.200

CV = 1200

SV = - 800

CPI = 1,07

SPI = 0,96

AC

EV

PV

SPI 1 Costi: positivo


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Exercise

Earned valueDuration : 30 min


M5 CostManagment v.2.0

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