ADMAS UNIVERSITY

SCHOOL OF POST GRADATES STUDIES

Project Cost Management

CHAPTER-5
Project Costs Control

ERMIAS A. (PhD-DBL, FCCA)

 CHAPTER-5 Monitoring and Control of Project Costs

5.1. Monitoring and Controlling the project

5.2. Conducting Variance Analysis
5.3. Managing Change Requests
5.4. Lessons Learned

Monitoring and Report of Project Progress

7/27/2024
 The three main benefits of having a project control
based on the determined budget are:
1. Ability to assess Performance
2. Calculation of EV, SPI, CPI and EAC
3. Improved future estimating accuracy

Ability to assess performance throughout the duration of a project.

If a project is performing behind time schedule or above budget, it
is time to either make changes to the baseline or add more
resources by increasing time or costs.
1) The Help with ”Earned Value Management” Calculation;
• is a technique often used by project managers to measure and
compare a project’s performance with its baseline.
• Calculating Earned Value Requires:
i. Planned Value (PV) = The budgeted cost of Work Scheduled
ii. Actual Value (AV) = Actual Costs AC of work performed to date

iii. Earned Value (EV) = Earned value ( EV) is defined as total

project budget multiplied by the % of project completion.

EV =The total project budget(PV) X % of project completion

2) Help with calculation of Schedule Performance Index (SPI)
 SPI measures the progress that is achieved to date against the progress that is
initially planned.

 The SPI shows how a projects are progressing compared to the planned project
schedule.

Schedule Performance Index (SPI) = EV/PV

 When a project completed more work than planned, that is, if the SPI is
greater than one; the project is ahead of schedule.

 When a completed less work than planned work, that is, if the SPI is less than
one. The project is behind schedule.
 When a project completed work is equal to the planned work, that is, if the
SPI is equal to one; the project is on schedule.
 Example: When SPI<1, work was achieved than planned . When
SPI>1, work was achieved than planned
3) Help with the calculation of Cost Performance Index (CPI)
 CPI is a measure of the conformance of the actual work completed (measured by
its earned value) to the actual cost incurred.
• CPI indicates how a project is performing with regards to cost. CPI is
calculated as earned value divided by actual cost.

Where EV=Earned value, AV=Actual Costs AC of work performed to date

 Measures the value of work completed against the cost of the work planned
 When project earning is more than what it has spent, that is,
 if the CPI is greater than one. The project is under budget.

 When project earning is less than what it has spent, that is,
 if the CPI is less than one. The project is over budget.
 When project Earning and spending is equal, that is, if the CPI is equal to
one. The project is proceeding as per the planned spending.
4)Help with calculation of Estimated at Completion (EAC)
 EAC is a forecast of how much the total project will cost so that you
can approximate the correct allocation of resources

Estimated at Completion (EAC) = (Total Project Budget) / CPI

Where PV= total project budget, and CPI= cost performance Index
 Example 1: Mr. X is a project manager who is managing a large and
complex project. Midway through the project, upper management
asked him for an updated estimate of the total cost of the project. At
the beginning of the project, the costs of the project were estimated at
$150,000 for development, $170,000 for design costs, and $120,000
for quality control. The Cost Performance Index of the project is 1.04.
What is the Estimate at Completion at this stage?
 Solution:
• Given : CPI= 1.04, Total cost = 150,000+ 170,000 + 120,000
• Estimate at Completion = Budget at Completion / Cost Performance Index
• By using the above-mentioned formula, you can calculate: ($150,000 +
$170,000 + $120,000) / 1.04 = $423,076.92.
 For example 2, Project A has an estimated budget at completion of $100,000
and a cost performance index of 0.8. The project manager believes that the past
performance of the project will mirror the future performance. What is EAC?
Solution: Estimate at completion (EAC) = $100,000 / 0.8 = $125,000
• Example: You are three months into the five month bathroom remodeling
project. The original budget (BAC) was $1,500 and you have completed
approximately 40% of the work. You currently are running over-budget, as
indicated by a cost performance index (CPI) of 0.67. Actual costs to-date have
been $900. Find EV, SPI, CPI and EAC?
• Solution: EV=40%(PV) = 0.4*1500=600, SPI=EV/PV=600/1500=0.4,
CPI= EV/AC=600/900= 0.667, EAC= PV/CPI= 1500/0.667= 2248.87
Example 4: Assume we are halfway through a year-long project that has a total
budget of $ 100,000. The amount budgeted through this six-month mark is $
55,000. The actual cost through this six-month mark is $ 45,000.
• Solution: Planned Value (PV) = $55,000, Actual Cost (AC) = $45,000,
• Earned Value(EV) = $100,000* 0.5 = $50,000
• Schedule Performance Index (SPI)= EV/PV = $50,000/$55,000 = 0.91
( bad because < 1)
• Cost Performance Index (CPI)= EV/AC= $50000/$45000= 1.11
(good because >1)
• Estimated at Completion(EAC) = (Total Project Budget)/CPI
= $100,000/1.11 = $90000
• Because SPI is <1, the project is considered behind schedule. We are 50% of the
way through the project but have planned for 55% of the costs to be used. There
will have to be some catch-up in the second half of the project.
• Because Cost variance CV is positive and CPI is >1, the project is considered to
be under budget. We are 50% of the way through the project but our costs so far
are only 45% of our budget. If the project continues at this pace, then the total
cost of the project (EAC) will be only $90000, as opposed to our original budget
of $10000.
Example 5: of Planned Value (PV)

• You have a project to be completed in 12 months. The budget of the

project is 100,000 USD. Six months have passed and the schedule says
that 50% of the work should be completed. What is the project‘s Planned
Value (PV)?

Solution:
• Project duration: 12 months,
• Project cost (BAC): 100,000 USD,
• Time elapsed: 6 months,
• Percent complete: 50% (as per the schedule),
• Planned Value is the value of the work that should have been completed
so far (as per the schedule). In this case, we should have completed 50%
of the total work. Planned Value = 50% of the value of the total work =
50% of BAC = 50% of 100,000 = (50/100) X 100,000 = 50,000 USD
.
Example 6: of Actual Cost (AC)
• You have a project to be completed in 12 months. The budget of the project is
100,000 USD. Six months have passed and 60,000 USD has been spent, but on
closer review, you find that only 40% of the work has been completed so far.
What is the project‘s Actual Cost (AC)?

Solution: Actual Cost is the amount of money that you have spent so far. In
the question, you have spent 60,000 USD on the project so far. Hence, The
project’s Actual Cost is 60,000 USD
Example 7: of Earned Value (EV)
• You have a project to be completed in 12 months. The budget of the project is
100,000 USD. Six months have passed and 60,000 USD has been spent. On
closer review, you find that only 40% of the work has been completed so far.
What is the project‘s Earned Value (EV)?
Solution: In the above question, you can clearly see that only 40% of the
work is actually completed, and the definition of Earned Value states that it
is the value of the project that has been earned. Earned Value = 40% of the
value of total work = 40% of BAC = 40% of 100,000 = 0.4 X 100,000
= 40,000 USD Therefore, the project’s Earned Value (EV) is 40,000 USD.
Example 8: Earned Value (EV)
• You have a project to be completed in 12 months. The budget of the project is
100,000 USD. Six months have passed and 60,000 USD has been spent. On
closer review, you find that only 40% of the work has been completed so far.
What is the project‘s Earned Value (EV)?
Solution:
• In the above question, you can clearly see that only 40% of the work is actually
completed, and the definition of Earned Value states that it is the value of the
project that has been earned. Earned Value = 40% of the value of total work =
40% of BAC = 40% of 100,000 = 0.4 X 100,000 = 40,000 USD Therefore, the
project‘s Earned Value (EV) is 40,000 USD.
 For example 3, Project B went off-track on one specific task. Project Y has a
budget at completion of $100,000, an earned value of $30,000, and an actual
cost of $35,000. The rest of the tasks are expected to be on track with the
original budget.
• Solution: Estimate at completion (EAC) = Actual cost (AC) + (Budget at
completion (BAC) - Earned value (EV))
Estimate at completion (EAC) = $35,000 + ($100,000 - $30,000) =
$105,000
3. Improved future estimating accuracy:
• Baseline helps with future estimation accuracy. This includes a better
idea of how long the project will take for completion and at what costs
• Keeping an accurate record of current project estimates and actual
outcome allows for application of estimates onto similar future projects.
Through the use of Variance analysis, you can calculate the margin of
error, which you can build onto future project estimations.
 Thus, Purpose of Project Cost Management
Effective cost management ensures that the
project stays on track and delivers intended
values.
By implementing cost management practices:
 Establish clear expectations and align better with
stakeholders.
 Proactively manage scope changes through
effective control processes with the project team
 Monitor cost variations and take corrective actions,
 Maintain profit margins, increase return on
investment, and avoid financial loss,