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PMP Training Kit: Cost Management

Control Costs

The Control Costs process is focused mainly on measuring actual against planned cost performance, forecasting likely future cost performance, and managing any changes to the cost baseline. The Control Costs process covers the following domain tasks:

  • 4.1 Measure project performance using appropriate tools and techniques, in order to identify and quantify any variances, perform approved corrective actions, and communicate with relevant stakeholders.

  • 4.2 Manage changes to the project scope, schedule, and costs by updating the project plan and communicating approved changes to the team, in order to ensure that revised project goals are met.

Inputs

The Control Costs process uses the following inputs.

Project management plan

The project management plan, and its subsidiary plans, guide you in the process of controlling any potential changes to your cost baseline or any of the individual estimates that were prepared. As such, it is an important input into the Control Costs process. The project management plan is an output from the Develop Project Management Plan process.

Project funding requirements

The project funding requirements are an important input into the Control Costs process because they enable you to determine when expenditures will be incurred and when funding for the project will be available, and to therefore assess actual versus planned project funding requirements and control any changes to these elements. The project funding requirements are an output from the Determine Budget process.

Work performance data

By now you should have picked up that work performance data is an important input into several controlling processes. Work performance data is the information you gather about what is actually occurring on the project down to the level of which activities have started, the costs associated with completing those activities, and any estimates for completing the remainder of the work to be done. Work performance data is an output from the Direct and Manage Project Work process.

Organizational process assets

The types of organizational process assets that will be useful as inputs into the Control Costs process are any existing organizational policies, procedures, templates, or any other element relating to how costs will be monitored and reported on in your project.

Tools and techniques

The following tools and techniques can be used upon the inputs into the Control Costs process.

Earned value management

The earned value management (EVM) system provides you with an effective and efficient way to establish what has occurred in the past and use this information to forecast likely future scenarios by using a range of mathematical equations. It is better than simply taking one or two elements of past performance and simply expecting that performance to continue. For example, imagine that you are a project sponsor on a project, and your project manager tells you that the project is 50 percent of the way through and has spent only 40 percent of the budget. Is this a good situation or not? It might be, but without knowing how much of the actual work has been completed and how much value has been earned, you don’t really know if this is a positive statement or not. This is exactly the scenario that earned value management is able to get around.

Earned value management takes the original project cost baseline, the planned value of the work you had expected to have completed by now, the earned value of the work you have completed now, and the actual cost of delivering that value to determine what the project cost and schedule performance to date is, and then forecast what the likely costs at completion will be. It does this by using the following formulas:

  • Budget at completion (BAC) The original forecast budget for the project.

  • Planned value (PV) The amount of value that you should have earned by this time in the project. Because the total planned value (PV) for a project equals the budget at completion (BAC), you can determine the planned value by simply determining how far through the project you are in relation to time, and mapping this back to the approved cost baseline to establish the planned value. Figure 5-4 demonstrates how to determine the PV from the BAC.

    Figure 5-4

    Figure 5-4 The project cost baseline shows Planned value (PV) and budget at completion (BAC).

  • Earned value (EV) The value of the work that has been completed. This is not the actual cost of the work that has been completed but rather the original ascribed value from your approved cost baseline for the value of the work.

  • Actual cost (AC) The actual realized cost you incurred for the work that you have done to date. You will be able to get a record of this from your accounts system.

    Figure 5-5 shows the budget at completion (BAC), planned value (PV), earned value (EV), and actual cost (AC) on a single graph. Incidentally, it shows a project in trouble in terms of both time and cost because the actual cost is above the planned value, and the earned value is less than the planned value.

    Figure 5-5

    Figure 5-5 This graph shows a record of project planned value, earned value, and actual cost.

  • Cost variance (CV) This is simply the difference between the value of what you expected to have earned (EV) at this point and the actual cost (AC) at this point. A positive cost variance is good and shows that the project is under budget, a negative cost variance is bad and shows that the project is over budget. The formula is:

    CV = EV – AC

  • Cost performance index (CPI) One of the limitations of the cost variance equation is that it gives you a simple gross figure. You are not able to tell whether a $10,000 cost variance is significant on your project. If you are working on a $50,000 project it would be significant; if you are working on a $10 million contract, it may not be so significant. The cost performance index calculation tells you the magnitude of the variance. A cost performance index of more than 1 is good because it means that the project is under budget; a cost performance index of less than 1 is bad because it means that the project is over budget. For example, if you have a cost performance index of 1.1, it means that for every dollar you spend on the project you are getting a $1.10 return. The formula is:

    CPI = EV/AC

  • Schedule variance (SV) This tells you whether you are ahead or behind your planned schedule. It is the difference between the earned value (EV) and the planned value (PV). A positive schedule variance is good and means that you are ahead of schedule; a negative schedule variance is bad and means that you are behind schedule. The formula is:

    SV = EV-PV

  • Schedule performance index (SPI) This is a ratio of the earned value and planned value that allows you to better determine the magnitude of any variance. A schedule performance index of more than 1 is good because it means that the project is ahead of time; a schedule performance index of less than 1 is bad because it means that the project is behind schedule. For example, if you have a schedule performance index of 0.95, it means that every day you spend working on the project you are getting a 0.95 day return. The formula is:

    SPI = EV/PV

Forecasting

Forecasting is the process of taking time and cost performance to date and using this information to forecast a likely future scenario. The time and cost performance measurements are the cost variance (CV), schedule variance (SV), cost performance index (CPI), and schedule performance index (SPI). You can use these measurements and the following formulas to forecast a likely project cost at completion, the amount of money required to complete the project, and the difference between what you originally thought it would cost and what you now think it will cost.

  • Estimate at completion (EAC) There are many ways to calculate a forecast estimate at completion (EAC). Keep in mind that in order to forecast a likely future cost or time frame for the project, you are going to be using historical information. Therefore, the quality of your EAC calculation will depend entirely on the quality of the historical information that you are using. The following four formulas use different inputs to calculate the EAC. Each one will give a difference answer for the same project.

    • EAC = BAC/CPI This is perhaps the simplest of the estimate at completion calculations because it simply takes your original budget at completion (BAC) and divides that by your cost performance index (CPI). Obviously, this is a useful calculation if your cost performance to date is indicative of your likely cost performance going forward, and by the same measure will not be a great calculation to use if your cost performance to date is not indicative of your cost performance in the future.

    • EAC = AC+ ETC Simply adding your estimate to complete (ETC) to your actual cost (AC) spent to date is an effective way to determine your estimate at completion (EAC). However, the method by which you determine your estimate to complete calculation will have a great effect on whether or not this formula is accurate.

    • EAC = AC + (BAC–EV) This formula takes the actual costs (AC) spent to date and adds to them the total budget at completion (BAC) with your current earned value (EV) subtracted.

  • EAC = AC + ((BAC–EV)/(CPI × SPI)) This formula takes into account both your cost performance and your schedule performance and applies it to the value of the work you have left to complete.

  • Estimate to complete (ETC) The estimate to complete calculation is simply your forecast of the remaining costs to be incurred on the project. The easiest way to calculate this is simply to subtract your actual cost (AC) spent to date from your estimate at completion (EAC). The formula is:

    ETC = EAC – AC

  • Variance at completion (VAC) The variance at completion calculation is simply the difference between what you originally thought the project was going to cost (BAC) and what you now think it is going to cost (EAC). A negative variance is bad, and a positive variance is good. The formula is:

    VAC = BAC – EAC

To-complete performance index (TCPI)

The to-complete performance index (TCPI) tells you the rate at which you have to work to achieve either your estimate at completion (EAC) or your budget at completion (BAC), depending on which one you are targeting. A to-complete performance index of less than 1 is good, whereas a to-complete performance index of more than 1 is bad. If you are using the original budget at completion as your target, the formula is:

  • TCPI = (BAC-EV)/ (BAC-AC)

    If you are using the estimate at completion as the target, the formula for TCPI is:

  • TCPI = (BAC-EV)/ (EAC-AC)

Performance reviews

Performance reviews are conducted via a variety of means, including earned value management variances and trend analysis. You already have learned about the use of earned value management variances for the calculation of both the cost variance (CV) and schedule variance (SV) using earned value management. These are the most frequently used methods of determining variance and performance.

In addition to earned value management variances as a performance review tool, you can also use trend analysis, which looks at past performance and extrapolates from that a likely future performance, usually by using graphs and linear regression.

Project management software

Project management software is very useful in monitoring the performance of cost on a project as it is able to quickly do what would take a lot of time if done manually. Additionally, it can take both the original data and any data from calculations and display it graphically for easy interpretation and communication.

Reserve analysis

Reserve analysis in this monitoring and controlling process is the process of re-examining the original reserves calculated, both the contingency and management reserves, and checking whether the assumptions made when calculating them are still valid, and also releasing any unused portions of contingency reserves from the approved project budget in order to enable other projects to access the pool of funds.

Outputs

The Control Costs process produces the following outputs.

Work performance information

The easiest way to display work performance information based on the work performance data is by using the earned value calculations for cost variance (CV), schedule variance (SV), cost performance index (CPI), schedule performance index (SPI), and the to-complete performance index (TCPI). The work performance information goes on to be used as an input into the Monitor and Control Project Work process.

Costs forecasts

Cost forecasts are obtained from the estimate at completion (EAC) values. Cost forecasts go on to be used as an input into the Monitor and Control Project Work process.

Change requests

One of the key outputs from any controlling process is change requests that arise as a result of either variances detected or additional information provided. Change requests may include preventive or corrective actions. All change requests are processed as per your documented and approved change control process.

Change requests go on to be used as an input into the Perform Integrated Change Control process from the Integration Management knowledge area.

Project management plan updates

Specific parts of the project management plan that may be updated as a result of the Control Costs process include the cost baseline and the cost management plan. Project management plan updates are used in turn as an input into the Develop Project Plan process.

Project documents updates

Specific project documents that may be updated as a result of the Control Costs process include any documentation relating to how you build up your cost estimates, such as the cost baseline and the basis of estimates document.

Organizational process assets updates

Specific organizational process assets that may be updated as a result of the Control Cost process are historical information, records of financial information kept, lessons learned, records of corrective actions, and updates to any organizational financial templates and policies in order to ensure that they are still relevant.