The tools and techniques required to complete the cost control process can include the cost change control system, work performance measurements (earned value management), budget forecasts, organisational process assets, change requests, project management plan updates and project document updates.
Sometimes a project manager must add or remove costs from a project. The cost change control system is part of the integrated change control system and documents the procedures to request, approve and incorporate changes to project costs. Learn what you need to know to become a project manager by studying a diploma of project management – www.edna.edu.au/online-courses/diploma-of-project-management/
When a cost change enters the system, there is appropriate paperwork, a tracking system and procedures that the project manager must follow to obtain approval on the proposed change. A cost change control system, documented in the cost management plan, defines the procedures by which the cost baseline can be changed. It includes the forms, documentation, tracking systems and approval levels necessary for authorising changes.
The cost change control system is integrated with the integrated change control process. The example demonstrates a typical workflow for cost change approval. If a change gets approved, the cost baseline is updated to reflect the approved changes. If a request gets denied, the denial must be documented for future potential reference.
Example of a cost change control system tracks and documents cost changes:
Earned value management (EVM) in its various forms is a commonly used method of performance measurement. It integrates project scope, cost and schedule measures to help the project management team assess and measure project performance and progress. It is a project management technique that requires the formation of an integrated baseline against which performance can be measured for the duration of the project. The principles of EVM can be applied to all projects, in any industry. EVM develops and monitors three key dimensions for each work package and control account.
The key dimensions include:
- Planned value (PV). Planned value is the authorised budget assigned to the work to be accomplished for an activity or WBS component. It includes the detailed authorised work plus the budget for such authorised work, allocated by phase over the life of the project. The total of the PV is sometimes referred to as the performance measurement baseline (PMB). The total planned value for the project is also known as Budget at Completion (BAC).
- Earned value (EV). Earned value is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or WBS component. It is the authorised work that has been completed plus the authorised budget for such completed work. The EV being measured must be related to the PV baseline (PVB) and the EV measured cannot be greater than the authorised PV budget for a component. The term EV is often used to describe the percentage completion of a project. Project managers monitor EV both incrementally to determine current status and cumulatively to determine the long-term performance trends (visit this here).
- Actual cost (AC). This is the total cost actually incurred and recorded in accomplishing work performed for an activity or WBS component. It is the total cost incurred in accomplishing the work that the EV measured. The AC has to correspond in definition to whatever was budgeted for in the PV and measured in the EV (for example, direct hours only, direct costs only or all costs, including indirect costs). The AC has no upper limit; whatever is spent to achieve the EV will be measured.
Variances from the approved baseline will also be monitored. This can include the schedule variance and cost variance.
The schedule variance (SV) is a measure of schedule performance on a project. It is equal to the earned value (EV) minus the planned value (PV). The EVM schedule variance is a useful metric in that it can indicate a project falling behind its baseline schedule. The EVM schedule variance will, ultimately, equal zero when the project is completed because all of the planned values will have been earned. EVM SVs are best used in conjunction with critical path methodology (CPM) scheduling and risk management. Equation: SV = EV – PV.
Cost variance (CV) is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual costs (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. The EVM CV is particularly critical because it indicates the relationship of physical performance to the costs spent. Any negative EVM CV is often non-recoverable to the project.
Equation: CV = EV – AC.
The SV and CV values can be converted to efficiency indicators to reflect the cost and schedule performance of any project for comparison against all other projects or within a portfolio of projects. The variances and indices are useful for determining project status and providing a basis for estimating project cost and schedule outcome.
The three parameters of planned value, earned value and actual cost can be monitored and reported on both a period-by-period basis (typically weekly or monthly) and on a cumulative basis. The diagram uses S-curves to display EVA data for a project that is performing over budget and behind the work plan.
Example of an illustrative graphic performance report:
As the project progresses, the project team can develop a forecast for the estimate at completion (EAC) that can differ from the budget at completion (BAC) based on the project performance. If it becomes obvious that the BAC is no longer viable, the project manager should develop a forecasted EAC.
Forecasting the EAC involves making estimates or predictions of conditions and events in the project’s 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. The work performance information covers the project’s past performance and any information that could impact the project in the future.
EACs are typically based on the actual costs incurred for work completed, plus an estimate to complete (ETC) the remaining work. It is incumbent on the project team to predict what it may encounter to perform the ETC based on its experience to date. The EVM method works well in conjunction with manual forecasts of the required EAC costs. The most common EAC forecasting approach is a manual, bottom-up summation by the project manager and project team.
The project manager’s bottom-up EAC method builds upon the actual costs and experience incurred for the work completed and requires a new estimate to complete the remaining project work. This method could be problematic in that it interferes with the conduct of project work.
The personnel who are performing the project work have to stop working to provide a detailed bottom-up ETC of the remaining work. Typically there is no separate budget to perform the ETC, so additional costs are incurred for the project to conduct the ETC. Equation: EAC = AC + bottom-up ETC.
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