PROJECT COST CONTROL &

REPORTING

Project Management Cost Control

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 Elements of Cost
• Introduction
Cost, in project control and accounting, is the
amount measured in money, cash expended or
liability incurred, in consideration of goods
and/or services received. From a total cost
management perspective, cost may include any
investment of resources in strategic assets
including time, monetary, human, and
physical resources.
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Elements of cost include engineering, design,
labor, material, equipment, and any other costs
necessary for delivering the scope of work at an
agreed‐upon price. Aggregating these costs to
determine a total cost is necessary to
determine pricing to cover other costs
associated with being able to perform the work,
and, in most cases, provide a reasonable profit.

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 Corporate Cost Structure
Cost estimating is often intertwined with
corporate accounting specially with the
treatment of expenditures for property records
and resulting tax treatment.

Capital Vs. Operation and Maintenance

Demolition Vs. Salvage
Fixed Vs. Variable
Direct Vs. Indirect
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In business practice, cost element information may be grouped in a variety
of ways to provide the basis for management decisions.
Any set of cost groupings should be tailored to the individual company’s
method of doing business.

i.e.
Cost centers: are groups of activities within a project that provide a
convenient point for collecting and measuring costs.
This could be a department in an engineering organization such as a
structural design group. Or it could be process related such as a metal
stamping operation.

Labor Craft: It may be convenient to group types of labor such as

electricians, plumbers, etc. on a construction site. Or machinists,
tool & die technicians, etc. in a manufacturing operation.

Material Type: These groups could be raw material, purchased parts, etc.
in a manufacturing company. Or could be concrete, 1.5-inch 55
Prepared by Ahmed Shaaban
and smaller pipe, etc. for a construction project.
Cost elements can be categorized into
groupings, such as work breakdown structures,
in order to better organize, present, and
analyze the estimate. A more detailed
presentation of different types of categories is
covered Later.

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 COST ACCOUNTING
Cost accounting is defined as the historical
reporting of disbursements and costs and
expenditures on a project. When used in
conjunction with a current working estimate,
cost accounting can assist in giving the precise
status of the project to date. Historical costs
can also provide a sound basis for forecasting
and budgeting costs of future activities and
assets.
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Despite complexity and diversification in
accounting methods, cost accounting include but
not limited to the three basic steps of recording,
classifying, and summarizing cost element data in
terms of money expended with time

Every business enterprise has an established

approach for classifying and summarizing costs
that is organized around their business practices.
This approach is called a “code/chart of accounts”
by which all recorded cost elements are classified.

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While classifying costs in accordance with the
general ledger breakout is a common practice,
this approach does not generally provide the
visibility needed to manage the work or to
make informed forecasts of the cost of new
jobs.

i.e.
Assets, liabilities, expenses, WIP, revenue……etc

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 ABC
A method of cost element classification is called activity-
based costing (ABC).

In the ABC approach, resources that are used

are assigned to activities that are required to accomplish a
cost objective. ABC makes cost accounts understandable
and logical, and much more useful for the cost engineer.

This method of collecting and summarizing cost elements

reveals which resources and activities are the most
significant contributors (drivers) to the cost of the cost
objective. 1100
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 WBS
Another approach to classifying costs that is similar to ABC
accounting is using a work breakdown structure (WBS) to group
cost elements.

It has become a common practice for a WBS to be a required

project management tool on most contracts.

Not only does a WBS provide a framework for planning

and controlling the resources needed to perform the
technical objectives, but it facilitates a summary of project
data regarding the cost and schedule performance.
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When used to classify and record costs, the
WBS becomes the cost element structure (CES),
as well.

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 COST MANAGEMENT
There are many ways that cost elements and
cost structure can be displayed to provide
information for cost management.
We will consider four of the most common
methods of how cost information is applied to
cost management.

These are: cost estimating, cost trending, cost

forecasting, and lifecycle costing.
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 Cost Estimating
Cost Estimating predicts the quantity and cost of
resources needed to accomplish an activity or create an
asset.

The building blocks of a cost estimate are

• a well-defined scope (what we are trying to estimate).
• a cost element structure (how we organize the
information).
• historical cost data (data from cost accounting records
and/or “experience” of knowledgeable people).
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 Cost Trending
Cost trends are established from historical cost
accounting information.

Cost management questions may focus on how

expenditures are trending relative to physical
accomplishments.
“How much are we spending for pipe fitters and
how much piping has been installed during the
last six months?”
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 Cost Forecasting
Forecasts are much like estimates. Whereas an estimate is
always for future activities and assets, forecasts are predictions
of the cost at completion for cost elements in progress.

Therefore, a sound cost forecast will be based on cost element

data from inception of the work to the date of the forecast, the
cost trend of that data compared to accomplishments, and a
cost estimate of the work remaining to be completed.

Cost element history in the proper activity structure is essential

for realistic cost forecasts.
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 Life-Cycle Costing
Life-cycle costs (LCC) are associated with an asset
and extend the cost management information
beyond the acquisition (creation) of the asset to the
use and disposal of the asset.

Asset acquisition consists of the design or

development phase and the production or
construction phase.
Generally, cost elements are segregated into these
phases because design/development costs are often
recovered over morePrepared
than one
by Ahmed asset.
Shaaban
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Once the asset is created, it enters the
operation and support (O&S) phase, sometimes
called operations and maintenance (O&M). A
new set of cost elements and CES is applicable
to this phase and cost data must be collected to
support cost
management efforts.

The final phase is disposal of the asset with

another unique set of cost elements.
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 INPUTS TO ESTIMATING

• WBS

• Network diagram - Costs cannot be estimated until it is

known how the project will flow from beginning to end

• Schedule - For multi-year projects, the cost is usually

different if it is completed in one year compared to
another

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 MORE INPUTS TO ESTIMATING

• Historical information

• Resource pool - available resources assigned.

• Risk management plan - it includes a budget for risk.

• Risks -Full risk analysis of the details of the project is not

completed before costs are estimated.
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 What is Project budgeting and cost estimation?

• An estimate is an approximation,

• A budget is some type of financial plan.

• Usually, a project estimate becomes a project budget after

the Top management approval the estimation.

• The project budget determines the total cost allocated for

the project.

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 1 Expert 2 Analogous
Judgments Estimating

Methods of
7 PM
Cost 3 Parametric
Information
Estimation in Estimating
System
Projects

6 Data Analysis 4 Bottom-up

Method 5 Three-Point Estimating
Estimating
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Methods ofPrepared
Cost Estimation in Projects
by Ahmed Shaaban
 1) Expert judgment Method
• Expertise should be considered from individuals or
groups with specialized knowledge or team and
physical resource planning and estimating

• Expert judgment, guided by historical information

from prior similar projects.

• Expert judgment can be used to determine whether

to combine different methods of estimation
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 2) Analogous Estimating Method
• Analogous estimating comparing past
projects with current project

• Analogous estimating is done when there is

limited data on the current project.

• The more data that is collected from past

projects, the better the comparison will be.

• Top Down Estimating is a project estimating

technique whereby the overall project is estimated
first, then individual tasks are apportioned from it.

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 2) Analogous Estimating Method
• Analogous cost estimating uses the values of scope,
cost, budget, and duration or measures of scale such
as size, weight, and complexity from a previous,
similar project as for a current project.

• It is most reliable when the previous projects are

similar in fact and not just in appearance.

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 3) Parametric Estimating Method

• Parametric Estimating a unit

rate is used and multiplied by
the number of units.

• For example, if an activity needs

4,000 hours of coding and it
needs to finish it in 1 year, it will
require two people to code
(each doing 2,000 hours a year,
40 hr./week).
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 3) Parametric Estimating Method

• Parametric Estimating uses a statistical relationship

between historical data and other variables (e.g.,
square footage in construction) to calculate resource
quantities needed for a required present activity.

• This technique can produce higher levels of accuracy.

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 4) Bottom-up Estimating Method

 Bottom-up estimating involves the

estimation of work at the lowest
possible level of detail.

 These estimates are then aggregated in

order to arrive at summary totals.

 By building detailed cost and time

estimates for a work package, the
probability of being able to meet the
estimated amounts improves
substantially.

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 4) Bottom-up Estimating Method
• Team and physical resources are estimated at the activity level and
then combined to develop the estimates for work packages, control
accounts, and summary project levels.

• Bottom-up Estimating The cost of individual work activity is estimated

to the greatest level of specified detail. The detailed cost is then
summarized or rolled up to higher levels

• The accuracy of Bottom-up Cost Estimating are typically influenced by

the size and complexity of the work package

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 5) Three-Point Estimating Method
• The accuracy of single-point activity cost estimates may be
improved by considering estimation of uncertainty and
using three estimates to define an approximate range for
an activity‘s cost:
• Most likely (M): The cost of the activity, based on realistic
effort assessment for the required work and any predicted
expenses.
• Optimistic (O): The activity cost based on analysis of the
best-case scenario for the activity.
• Pessimistic (P): The activity cost based on analysis of the
worst-case scenario for the activity.
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 5) Three-Point Estimating Method (C0nt.)

• Depending on the assumed distribution of values within the

range of the three estimates the expected cost, CE, can be
calculated using a formula. Two commonly used formulas
are triangular and beta distributions. The formulas are:
• Triangular Distribution
E = (O+M+P)/3
• Beta Distribution (from a traditional PERT analysis)
E = (O+4M+P)/6
• Assumed statistical distribution provide an expected cost
and clarify the range of uncertainty around the expected
cost (Example)
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 6) Cost Data Analysis Method
• Cost Data Analysis is performed on a large amount of
historical procurement data and current market values.

• This should not only include costs but technical

information as well. By capturing this knowledge in a
database it becomes globally available to all estimators.

• The comparison of costs (as of standard with actual or for

a given period with another) for the purpose of disclosing
and reporting on conditions subject to improvement.

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7) PM Information System Method
• Project management information systems can include
resource management software that can help plan,
organize, and manage resource pools and develop
resource estimates.

• Project Management Information System (PMIS) are

system tools and techniques used in project management
to deliver information. ...

• During the planning process, project managers use PMIS

for budget framework such as estimating costs.
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 8) Decision-Making Method
• Some decision techniques are unanimity, majority,
plurality, points allocation, and dictatorship.
‫اإلجماع واألغلبية والتعددية وتخصيص النقاط والديكتاتورية‬
• For unanimity, everyone must agree; there is a shared
consensus.
‫ يجب أن يوافق الجميع ؛ هناك إجماع‬، ‫من أجل اإلجماع‬
‫مشترك‬
• A majority or plurality ( ‫ )األغلبية أو التعددية‬is usually
determined by a vote. For a majority, the decision
must be agreed to by more than half the participants.
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 Cost Management
• Cost management includes the processes required to
ensure that the project is completed within the approved
budget.

• It holds activities such as resource planning, cost

estimating, budgeting and cost control.

• These activities are repeated in a closed loop and take

place during the whole project life cycle. Cost estimation is
a main pillar in the cost management process and as a
result in project management.
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 COST MANAGEMENT PLAN
• Cost Management Plan is the outline of
the project's estimation, allocation and
control of costs for the required resources
to complete all project activities.

• Upon cost estimation, the project manager must put in

place a plan for cost baseline and manage cost
variances.

• The cost management plan in general

terms analyzes how the project costs will
be planned, funded and controlled. 3388
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PROJECT COST CONTROL &
REPORTING

Contracting in Project
Management

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Definition of Contracting In Project
Management
 'Contract' as the term specifies is
an agreement between two parties
in general. In project management,
it's a formal agreement between a
buyer and a seller (more often
referred to as supplier).

 The agreement is made to procure

goods and services required for
the agreed project.

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 Definition of a Contract
• An agreement between two or
more parties to accomplish a
certain obligations enforceable
(‫ )واجبة النفاذ‬by law. Project
contracts are important to have in
the event of a dispute. (‫فى حالة‬
‫)وجود نزاع بين الطرفين‬

• There are specific basic elements

required for the contract to be a
legally enforceable document

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 Essential Elements of a Contract
• Several essential elements must be present
before a contract is binding (‫)يكون ملزما‬:
– The offer, (‫)العرض‬
– Acceptance, (‫)القبول‬
– Mutual assent(‫الموافقة‬
‫ )المتبادلة‬also known as
“meeting of the minds”),
– Consideration (‫)المراعاة‬,
– capacity (‫)القدرة‬
– Legality (‫ )الشرعية‬.
• Contracts are typically in writing and
signed to prove all of those elements are
present.
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 What Should Be Included in a Contract?
• A statement of objectives & Scope
• A list of services
• Performance standards
• Definition of responsibilities
• Performance metrics ‫مقاييس األداء‬
• Penalties or repercussions for breaking
terms ‫عقوبات أو تداعيات مخالفة‬
‫الشروط‬
• The right to exit the agreement
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 Developing a Contract
• Developing a contract allows
both parties to fully understand
their obligations and clearly
define intellectual property
(‫ )الملكية الفكرية‬and key
success criteria.
• The development phase forms
the foundation for managing
the contract and relationship
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effectively. Prepared by Ahmed Shaaban
 Develop Effective Contract
(Contract Manger)
Five steps contract managers
can follow to develop effective
contracts are:
1. Develop clear specifications/
scope of work.
2. Establish a baseline for cost and
quantity.
3. Develop strong contract
language.
4. Develop clear performance
measures.
5. Perform ongoing contract
management.
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 Contract Management
• Contract Management is the process of handling
contracts, deliverables, deadlines, terms and conditions
while ensuring customer satisfaction.

• Purchasing does not end when the contract is awarded.

Effective post-award Contract Management is essential.

• The purpose of the contract management plan is to

document the key activities and tasks required to
manage this contract to ensure the objectives of the
contract are achieved.
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Successful Contract Management Strategy

• Arrangements for service delivery satisfactory to both

parties.

• The expected business benefits, efficiencies and value

for money are delivered.

• The supplier is co-operative and responsive.

• Your organisation understands its obligations under the

contract.
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 The 7 Stages of Contract Management

• Stage1: Contract Preparation—Identify Your Needs, Establish Goals, Set Expectations, and
Define Risk

• Stage 2: Draft the Contract.

• Stage 3: Get Approval Before Finalizing the Contract. ...

• Stage 4: Contract Negotiation.

• Stage 5: Sign the Contract. ...

• Stage 6: Keep Up With Amendments and Revisions.

• Stage 7: Manage After the Signature—Audits, Renewals, and Obligations

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 Contract Management
• Performing regular audits to ensure obligations are
met and value is realized.

• Alerts for deadlines and renewals.

• Missed renewals mean lost opportunities to
continue a relationship, and most importantly for a
seller lost profits.

• Being aware and making contact well before the

renewal time shows reliability and care for the
relationship, and will continue to build trust and
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loyalty. Prepared by Ahmed Shaaban
 Supplier Performance Management

Supplier performance management should

follow the key performance indicators (KPI) set
out in the service level agreement and
continually reviewed in order to measure,
analyze and manage the performance of a
supplier.

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 Suppliers Key Performance Indicators
(KPI’s)
KPIs every procurement team should measure
to evaluate supplier
 Compliance rate.
 Supplier defect rate.
 PO and invoice accuracy.
 Rate of emergency purchases.
 Supplier lead time.
 PO cycle time.
 Vendor availability.
 Price Competitiveness

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 EPC Contracts

(Engineering, Procurement and

Construction)

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 EPC (Engineering, Procurement and Construction)
• Companies that deliver EPC
Projects are commonly referred to
as EPC Contractors. The EPC
contractor will carry out the
following:
• Engineering design in details of
the project,

• Procure all the equipment and

materials necessary, and then

• Construct to deliver a functioning

facility or asset to their clients.

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 Contracting for EPC Projects
(Engineering, Procurement and Construction)
• Execution of EPC contract includes a
wide issues to gain the most
efficient and cost-effective
approach.

• Subjects to be addressed include:

– Contract terms;
– Labor availability;
– Site logistics;
– Technical complexity;
– Major equipment and
material sources; and
– Extent of field
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 FEED (Front End Engineering Design)
• In EPC contracts, much of the owner execution activities depends
on the FEED study

• The FEED study defines several considerations that influence the

optimum project execution approach which may include:
– The amount of the required specialty,
– Field-fabricated equipment,
– The metallurgy of piping systems, and
– The plot layout,

• Accordingly, for execution of EPC contracts, effort cannot begin in

deep until much of the early project FEED engineering has been
accomplished.
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Prepared by Ahmed Shaaban 5566
PROJECT COST CONTROL &
REPORTING

Project Cost Control

Summary of Chapter 7
Of PMBOK, 6th Issue

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 CHAPTER 7

PROJECT
COST
MANAGEMENT

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 7. PROJECT COST MANAGEMENT
The Project Cost Management processes are:

7.1 Plan Cost Management—The process of defining

how the project costs will be estimated, budgeted,
managed, monitored, and controlled.

7.2 Estimate Costs—The process of developing an

approximation of the monetary resources needed to
complete project work.

7.3 Determine Budget—The process of aggregating the

estimated costs of individual activities or work packages to
establish an authorized cost baseline.

7.4 Control Costs—The process of monitoring the status

of the project to update the project costs and manage
changes to the cost baseline.

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 7.1 Plan Cost Management

 Plan Cost Management is the process of defining how

the project costs will be:
 estimated,
 budgeted,
 managed,
 monitored, and
 controlled.
 It provides guidance and direction on how the project
costs will be managed throughout the project.
 This process is performed once or at predefined points
in the project.
 The inputs, tools and techniques, and outputs of this
process are given in the next figs

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7.1 PLAN COST MANAGEMENT

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 [Link] [Link]
PROJECT CHARTER PROJECT
MANAGEMENT PLAN
preapproved financial Schedule management plan.
resources. Risk management plan.
project approval requirements

Organizational culture can

influence cost management.
Market conditions describe what
7.1.1
products are available in the
PLAN COST regional and global markets.
Financial controls MANAGEMENT: Currency exchange rates for
procedures INPUTS project costs
Historical information& Published commercial
lessons learned information
repository; PMIS
Existing Cost Control Productivity differences
Systems worldwide
[Link]
[Link] ENTERPRISE
ORGANIZATIONAL ENVIRONMENTAL
PROCESS ASSETS FACTORS
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 funding options such
as: self-funding,
[Link] funding with equity,
[Link]
EXPERT JUDGMENT or funding with debt DATA ANALYSIS

specialized
knowledge
in the following
topics:
[Link] similar
7.1.2
projects;
2. Information in the PLAN COST MANAGEMENT:
industry,; TOOLS &
3. Cost estimating
and budgeting; and
TECHNIQUES
4. Earned value
management.

Project teams may hold

planning meetings to [Link]
develop the cost MEETINGS
management plan..
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 7.1.3
[Link]
PLAN COST
COST MANAGEMENT PLAN
MANAGEMENT:
Contents OUTPUTS

[Link] of
Measure 4. Organizational
procedures links.

2. Level of 5. Control
Precision thresholds
(Variance
(Round up) threshold).

3. Level of 8. Additional 6. Rules of

details 7. Reporting performance
accuracy (Funding Choices, formats. measurement.
(±x%) Exchange rate,
etc)
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# Document Element Description

Describe the level of accuracy needed for estimates. The

3 Level of Accuracy level of accuracy may evolve over time as more
information is known (progressive elaboration).

Indicate whether cost estimates will be in hundreds,

thousands, or some other unit of measure.
1 Units of measure
Also indicate the currency that will be used if you are on
an international project.

Indicate the measures that determine whether an

activity, work package, or the project as a whole is on
5 Control thresholds budget, or over budget and requires corrective action.
Usually indicated as a percent deviation from the
baseline.

Identify the level in the WBS where progress and

expenditures will be measured. For projects
that use earned value management, describe the
Rules for performance measurement method that will be used,
6 measurement such as weighted milestones, fi xed-formula, percent
complete, etc. Document the equations
that will be used to forecast future costs based on
current performance trends.
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 7.2 Estimate Costs
 Estimate Costs is the process of developing an
approximation of the cost of resources needed to
complete project work.

 The key benefit of this process is that it determines the

monetary resources required for the project.

 This process is performed periodically throughout the

project as needed. The inputs, tools and techniques, and
outputs of this process are shown in the following chars

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7.2 ESTIMATE COSTS

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 [Link]
[Link]
PROJECT MANAGEMENT
PROJECT DOCUMENTS
PLAN
Cost Management Plan Lessons learned register.
Quality management plan Project schedule (Time)
Scope baseline. Resource requirements.
Scope statement Risk register.
WBS
WBS Dictionary

7.2.1
Cost estimating policies,
• Cost estimating ESTIMATE COSTS:
Market conditions.
templates,
• Historical information
INPUTS Published commercial
information.
and lessons learned
Exchange rates and
source.
inflation.

[Link]
[Link] ENTERPRISE
ORGANIZATIONAL PROCESS ENVIRONMENTAL FACTORS
ASSETS

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 7.2.2
ESTIMATE COSTS:
TOOLS &
TECHNIQUES;

[Link] [Link]
DECISION EXPERT
MAKING JUDGMENT

[Link]
[Link] ANALOGOUS
PMSI ESTIMATING

[Link]
[Link] PARAMETRIC
DATA ESTIMATING
ANALYSIS
[Link] [Link]
THREE-POINT BOTTOM-UP
ESTIMATING ESTIMATING
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 7.2.3
ESTIMATE COSTS:
OUTPUTS [Link]
PROJECT
DOCUMENTS
UPDATES

Assumption log.
[Link] Lessons learned register.
COST ESTIMATES Risk register.

labor, materials, equipment,

services, facilities, information
technology
quantitative assessments of the Supporting detail for cost estimates may include:
probable costs Documentation of the basis of the estimate
account for identified risks Documentation of all assumptions made,
reserve for unplanned work Documentation of any known constraints,
Documentation of identified risks
Indication of the range of possible estimates
(e.g., US$10,000 (±10%)
cost between a range of values),
[Link] Indication of the confidence level of the final
BASIS OF estimate
ESTIMATES
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 7.3 DETERMINE BUDGET

 This is the process of aggregating the estimated costs of

individual activities or work packages to establish an
authorized cost baseline.

 The key benefit of this process is that it determines the cost

baseline against which project performance can be
monitored and controlled.

 A project budget includes all the funds authorized to execute

the project.

 The cost baseline is the approved version of the time-

phased project budget
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 7.3.1 7.3.3 DETERMINE
DETERMINE BUDGET:
BUDGET: OUTPUTs
INPUTS
[Link] PROJECT MANAGEMENT [Link] Cost Baseline
PLAN 7.3 [Link] PROJECT FUNDING
[Link] PROJECT DOCUMENTS DETERMINE REQUIREMENTS
[Link] BUSINESS DOCUMENTS [Link] PROJECT
[Link] Purchase AGREEMENTS
BUDGET DOCUMENTS UPDATES
[Link] ENTERPRISE
ENVIRONMENTAL FACTORS
[Link] ORGANIZATIONAL
PROCESS ASSETS

[Link] EXPERT JUDGMENT

[Link] COST AGGREGATION
7.3.2 [Link] DATA ANALYSIS
[Link] HISTORICAL
DETERMINE INFORMATION REVIEW
BUDGET: Tools & [Link] FUNDING LIMIT
Techniques RECONCILIATION
`[Link] FINANCING

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 7.4 CONTROL COSTS
 Control Costs is the process of monitoring the status of
the project to update the project costs

 the cost baseline is maintained throughout the project.

 This process is performed throughout the project.

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 7.4 Project Cost Control Includes
1. Influencing the factors that create changes to the authorized
cost baseline;
2. Ensuring that all change requests are acted on
3. Managing the actual changes when they occur;
4. Ensuring that cost expenditures do not exceed the
authorized funding
5. Monitoring cost performance to understand variances from
the approved cost baseline;
6. Monitoring work performance against funds expended;
7. Preventing unapproved changes from being included in the
reported cost or resource usage;
8. Informing appropriate stakeholders of all approved changes

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 7.4 7.4.2
7.4.1
CONTROL Tools and
Inputs COSTS Techniques
[Link] PM PLAN [Link] EXPERT JUDGMENT
[Link]. PROJECT DOCUMENTS Variance analysis,
[Link] PROJECT FUNDING REQUIREMENTS Earned value analysis,
[Link] WORK PERFORMANCE DATA Forecasting, and
[Link] ORGANIZATIONAL PROCESS ASSETS Financial analysis
[Link] DATA ANALYSIS
Earned value analysis (EVA)
Variance analysis.
7.4.3 Trend analysis.
Reserve analysis
Outputs [Link] TO-COMPLETE
PERFORMANCE INDEX
[Link] PMIS
[Link] WORK PERFORMANCE INFORMATION [Link] PROJECT DOCUMENTS
[Link] COST FORECASTS UPDATES
[Link] CHANGE REQUESTS Assumption log.
[Link] PROJECT MANAGEMENT PLAN UPDATES Basis of estimates.
Cost management plan. Cost estimates.
Cost baseline. Lessons learned register.
Performance measurement baseline. Risk register.

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PROJECT COST CONTROL &
REPORTING

Earned Value and Reporting

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There’s Room For Improvement

70% of projects are:

• Over budget
• Behind schedule

52% of all projects finish at

189% of their initial budget

And some, after huge

investments of time and
money, are simply never
complete

Source: The Standish Group

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 How to answer the question:
“Have We Done What We Said We’d Do?”

 False estimation of
completed work:
% of Budget spent
% of work done
%of time elapsed

 draws false conclusions

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PMM
P P EV
Shaaban
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 Use Earned Value Analysis

“Earned Value Analysis” is an industry standard

way to:
• measure a project’s progress,
• forecast completion date and final cost
• provide schedule and budget variances
along the way.

By integrating three measurements, it provides

consistent, numerical indicators with which you
can evaluate and compare projects.

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What’s More Important?

 Knowing where you are on

schedule?

 Knowing where you are on

budget?

 Knowing where you are on

work accomplished?

P EV
PMM
P P EV

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 EVA Integrates All Three

 It compares the Planned

amount of work with what
has actually been
Completed, to determine if
Cost , Schedule, and
Work Accomplished are
progressing as planned.

 Work is “Earned” or
Credited as it is
Completed.

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PMM
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Shaaban
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 US Legal Requirement!

US mandatory requirement
OMB (Office of Management and Budget)
(Circular A-11, Part 7)
"Agencies must use a
performance based acquisition
management system, based on
ANSI/EIA Standard 748, to
measure achievement of the
cost, schedule, and
performance goals."
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 The American National Standards Institute/
Electronic Industries Alliance standard
ANSI/EIA-748,
 Earned Value Management Systems, is
the standard for DoD Earned Value
Management programs.

 The DoD formally adopted ANSI/EIA-

748 in August 1998 for application to Major
Defense Acquisition Programs (MDAPS).
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 What is EVM?
• Provide objective measures of cost and schedule performance
throughout a project management life-cycle. Simply compare
planned versus actual spend ($) data.

• The key purpose of earned value management is to inform

a project team’s decision making and to highlight cost and
schedule issues early, allowing time for recovery action to be
taken.

• EVM was first adopted by the United States Department of

Defense in 1967 and today is at the heart of the project control
systems by several governments to help manage the performance
of contractors. It is also used in numerous industries.

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 What is Earned Value?
• Earned Value is the contract (or authorized) budget value
of work successfully accomplished

• Earned Value data is expressed in budget terms which is

one of the reasons why it has been misunderstood in the
past – it’s not a financial tool, it is a tool for project
management.

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 EV as a Comparative Tool
• EVM data expressed using budget values (even schedule
data)? The data is converted to a single unit of measure
so that planned and ‘actual’ cost and schedule data
can be compared literally side by side,

• Traditional methods of representing project data (such as

comparing planned to actual spend) often contain no
aspect of performance, which at best can be a
significant weakness – at worst it can even be
misleading.

• It’s the main reason to deal with the earned value word
as integration (of cost and schedule data structures)
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 S-curves
• An S-curve is a project management tool that
tracks progress over time and allows for a quick
visual to determine project status. The S-curve is
something (costs, hours, etc...) over time.

• If two S-curves are compared together, such as

planned versus actual, that is called a
comparison S-curve.

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 BCWS - Budgeted Cost of Work
Scheduled

120000

100000

80000

60000 BCWS

40000

20000

Nov-03
Jan-03

Jun-03
Jul-03
Aug-03
Sep-03

Dec-03
Feb-03
Mar-03
Apr-03
May-03

Oct-03

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 Work Example
• We have a work package with a budget of 1000 hours,
having defined all the activities and estimated the effort
(i.e. hours) required for each. We expect the work
package to take 12 weeks.

• At the end of week 6, we planned to have completed

55% of the work scope (by effort), i.e. 55% of the work
package, as the sum of the hours of the activities
planned to be completed at the end of week 6 = 550
hours. The 550 hours can be translated into cost (or $)
using average cost rates. This is what is referred to as
planned value (at end of week 6). or BCWS (Budget Cost
of Work Scheduled)

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 Work Example (Cont.)

At the end of week 6 we found:

• The planned value (BCWS) = 550 hours

• Actual completed activities worth 350 hours of the total

task’s budget

• Actual expenditure of those same completed activities

to be 480 hours.

• In earned value language, this gives us

 Planned Value of 550 hours,
 Earned (Completed) Value of 350 hours, and
 Actual cost (in hours) of 480.
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 Work Example (Cont.)

We can derive from this:

– at its most basic we are behind schedule (earned is less
than planned) and

– We are over budget (actual is greater than earned).

– We can also do a number of other things such as calculate

cost and schedule performance indices:
• Cost performance index (CPI) and
• Schedule performance index (SPI),
• where a
1. CPI/SPI of 1.0 equals performance to plan;
2. less than 1.0 is performance less than plan.
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 Work Example (Cont.)

In this example,

• our CPI would be (350/480) 0.73 (EV/ AC)

• and our SPI would be (350/550) 0.64. (EV/ PV)

• Such metrics could be produced across a

project, even at the level of Work Package (WP)
level.

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• In the chart, the task (or project) is behind schedule and over
budget, often expressed as Cost Variance (Earned Value less
Actual Cost) and Schedule Variance (Earned Value less
Planned Value). This can also be expressed in other more
useful ways, as described in the worked example below.

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 Benefit of Using EV
 The important use of this data for the project
team (using EV data to understand their cost and
schedule performance, throughout the project
lifecycle.

 Also it helps to highlight (cost and schedule)

issues early, thus providing the maximum time to
minimize their impact.

 It can help in reporting to the top management,

to let them aware of the project situation

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PMM
P P EV
Shaaban
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