Cost Control

Cost control is the process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.In addition to the project goals that the project manager has to oversee, the control of various costs is also a challenging task for any project.Project management would not be effective at all if the project manger fails in this respect, as it would essentially determine whether or not your organization would make a profit or loss.Project cost control includes:

• Influencing the factors that create changes to the authorized cost baseline.
• Ensuring that all change requests are acted on in a timely manner.
• Managing the actual changes when and as they occur.
• Ensuring that cost expenditures do not exceed the authorized funding, by period and in total.
• Monitoring cost performance to isolate and understand variances from the approved cost baseline.
• Monitoring work performance against funds expended.
• Preventing unapproved changes from being included in the reported cost or resource usage.
• Informing appropriate stakeholders of all approved changes and associated cost.
• Acting to bring expected cost overruns within acceptable limits.

Cost Control Techniques

Almost all the projects need to be guided right throughout in order to receive the required and expected output at the end of the project.It is the team that is responsible for the project and most importantly the project manager that needs to be able to carry out effective controlling of the costs.The following are some of the valuable and essential techniques used for efficient project cost control.

Planning the Project Budget

Project managers need to ideally make a budget at the beginning of the planning phase with regard to the project at hand.It is this budget that would help project managers for all payments that need to be made and costs that they will incur during the project life cycle.The making of this budget therefore entails a lot of research and critical thinking.

Like any other budget, the project manager would always have to leave room for adjustments as the costs may not remain the same right through the period of the project.Adhering to the project budget at all times is key to the profit from project.

Keeping Track of All Actual Costs

Keeping track of all actual costs is also as equally important as any other technique.Here, it is best to prepare a time-base budget, which will help to trail the budget of a project in each of its phases.The actual costs will have to be tracked against the periodic targets that have been set out in the budget.These targets could be on a monthly or weekly basis, or even yearly if the project will go on for long.

This is much easier to work with rather than having one complete budget for the entire process of the project.If any new work is required to be carried out, it is needed to make estimations for this and see if it can be accommodated with the final amount in the budget.

Effective Time Management

Although this technique does apply to various management areas, it is very important with regard to project cost control.The reason is that the cost of a project could keep rising if it is unable to meet the project deadlines; the longer the project is dragged on for, the higher the costs incurred, which means for certain that the budget will be exceeded.The project manger would need to constantly remind his/her team of the important deadlines of the project in order to ensure that work is completed on time.

Project Change Control

Change control systems are essential to take into account any potential changes that could occur during the course of the project.As a result of the fact that each change to the scope of the project will have an impact on the deadlines of the deliverables, the changes may increase project cost by increasing the effort needed for the project.

Use of Earned Value

In order to identify the value of the work that has been carried out thus far, it is very helpful to use the accounting technique commonly known as earned value.This is particularly helpful for large projects, and will help to make any quick responses that are absolutely essential for the success of the project.

Countermeasures of Project Cost Control

As mentioned above, proper budgeting and cost control are vital ingredients of a successful project.When a project is insufficiently funded, the quality of the work and the speed of the project will suffer.On the other hand, the project manager must be careful to keep costs under control, so that the project can be completed within the approved budget.During the process of conducting a project, the project manager can probably be confronted with some common types of cost controlling problems, and can take respective measures to solve the problems effectively.

High Labor Costs

Unless you are operating a fully automated facility, what you pay for labor is typically the biggest component of your total operating costs, and it is a challenge for even the most competent project manager to rein in labor costs without damaging customer service.

• Review resource utilization levels for underutilized resources; examine the schedule and use resource leveling to optimize resource utilization.
• Examine labor cost estimates for accuracy; reestimate work elements as needed.
• Review the schedule for too much or too little level of work effort; examine use of overtime or multiple work shifts; ensure that only authorized work is being performed.
• Examine time sheets and reports for indications of “too much, too frequent” overtime to ensure accuracy on staff time sheets.
• Conduct routine meetings with staff leaders and individual project team members to review their perspectives on labor costs, and examine ways to reduce such costs.

High Material and Supply Costs

These include the cost of materials and supplies, such as hardware, raw materials and parts produced directly or indirectly by project.

• Examine material and supply quantity use for their being more or less than originally estimated, either condition could reflect a higher-than-expected cost.
• Review the unit cost for materials and supplies; if higher than expected, consider alternate sources and suppliers, and, if as expected, find ways to reduce cost.
• Examine material consumption to determine if any materials are being used prematurely in the schedule; place control on materials use and make schedule adjustments as needed.
• Examine material and supply cost estimates for accuracy; reestimate materials and supplies as needed.

High Vendor Costs

A vendor means anyone who provides goods or services to a company.

• Examine vendor invoices in comparison with the established vendor milestones and deliverables schedule and confirm that payments are due; if not, return or hold vendor invoices until payment is due.
• Review the invoice schedule to determine whether the subcontractor is requesting payments prematurely; adjust the vendor’s invoice and payment schedule as needed.
• Review the vendor’s scope of work in contrast to work performed to see if there are any indications of “scope creep”; if so, use project change control procedures to make an adjustment.
• Identify any vendor billing patterns that might affect the perception or result in the reality of higher vendor costs.
• Conduct routine meeting with vendors to review their fees and expenses, and examine workable ways to reduce vendor costs.

High General Costs

General costs are indirect costs of the provider costs which are incurred for common or joint objectives in project operating.Such costs are distributed to all provider programs on an allocation basis.

• Examine individual and group expense reports to identify and revise any unauthorized expenditures.
• Review the scope of work in comparison with work performed to see if there are any indications of “scope creep”; if so, use project change control procedures to rectify the cause of higher costs.
• Review travel expense reports in an active and timely manner to approve all travel-related expenses.
• Apply rigorous examination and approval processes for project-related requisitions.
• Identify any risk events that have occurred to bring about higher-than-expected project expenditures; look back on the project risk management plan to determine if there are any additional, lingering threats to the project cost.

Earned Value Management (EVM)

EVM is a project performance measurement technique that integrates scope, time, and cost data.Given a baseline, you can determine how well the project is meeting its goals.You must enter actual information periodically to use EVM.

Earned Value Management Terms

(1)PV.Planned Value (PV), the authorized budget assigned to the work to be accomplished for an activity or WBS component.The totality 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).

(2)EV. Earned Value (EV) is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or WBS 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.

(3)AC. Actual Cost (AC) is the total cost actually incurred and recorded in accomplishing work performed for an activity or WBS component.The AC has to correspond in definition to whatever has been budgeted for in the PV and measured in the EV.

(4)CV. Cost Variance (CV) is a measure of cost performance on a project.The cost variance at the end of the project will be the difference between the Budget at Completion (BAC) and the actual amount spent.It is particularly critical because it indicates the relationship of physical performance to the costs spent.

(5)SV. Schedule Variance (SV) is a measure of schedule performance on a project.It is a useful metric in that it can indicate a project falling behind its baseline schedule and will ultimately equal zero when the project is completed because all of the planned values will have been earned, so that it is best used in conjunction with CPM scheduling and risk management.

(6)CPI.Cost Performance Index (CPI) is a measure of the value of work completed compared to the actual cost or progress made on the project.It is considered the most critical EVM metric and measures the cost efficiency for the work completed.

(7)SPI.The Schedule Performance Index (SPI) is a measure of progress achieved compared to progress planned on a project.It is sometimes used in conjunction with the Cost Performance Index (CPI) to forecast the final project completion estimates.

(8)BAC.Budget at Completion (BAC) is the total planned value at the end of the project.If a project has a management reserve, it is typically outside the BAC.

(9)EAC.Estimate at Completion (EAC) is the expected total cost of a schedule activity, a WBS component, or the project when the defined scope of work will be completed.

(10)ETC.Estimate to Completion (ETC) is a forecast of the labor and materials required to complete the remaining authorized work.It is based on a bottom up analysis of remaining work and consideration of past and future performance, along with the availability of EVM.

(11)VAC.Variance at Completion (VAC) is the difference between the total baseline cost and the estimated total cost.It means how much over or under budget do we expect to be.

Earned Value Analysis Formulas

CV=EV−AC

Note: Negative is over budget and indicates problems in those areas.

SV=EC−PV

Note: Negative is behind schedule and indicates problems in those areas.

Note: Less than 100% indicates problems.

Note: Less than 100% indicates problems.

ETC=EAC−AC

Note: How much it will cost from now to completion.

VAC=BAC−EAC

Note: When the project is over how much more or less has been spent.Negative is bad, positive results are good.

Among the above indicators, EAC, CPI, SPI, and VAC are more accurate, and therefore more useful as the project progresses through the performing phase.