Controlling the Project Cost, in practice

Project managers meet the project cost objective when the total amount money spent at the end of the project is under budget. Project budget is a big constraint since the project is authorized and it should only be changed using formal change control procedures.

To get the project finished under budget, we need to measure cost performance on each review date. Earned Value Management (EVM) is the ANSI 748 standard method to measure the project cost performance objectively. According to EVM standard, as of each status date, three measures are enough to analyze the project cost performance:

• Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS) is the authorized budget assigned to scheduled work, up to status date. At project or phase closing, PV equals Budget at Completion (BAC).
• Earned Value (EV) or Budgeted Cost of Work Performed (BCWP) is the measure of work performed expressed in terms of the budget authorized for that work, up to status date. At project or phase closing, EV equals Budget at Completion (BAC), so as the PV.
• Actual Cost (AC) or Actual Cost of Work Performed (ACWP) is the realized cost incurred for the work performed on an activity up to status date.

EVM provides two kinds of metrics: Lagging indicators to measure cumulated variations up to status date; and leading indicators to forecast final cost at project closing. This information helps steering committee make decisions and request preventive or corrective actions. Measure and adjust periodically is the key to finish the project on budget.

Let’s check a real example of a project with an initial budget of €750k. Project cost is controlled using only 3 work packages:

• Project Management (€125k): Budget for this work package is €125k, including €100k for project manager hours, and €25k for software and hardware purchases.
• Internal Work (€375k): 5 internal workers invoiced at a hourly rate of 40€/h (€200k), 2 contractors on time and materials at a hourly rate of 50 €/h (€100k), and 15 travels costing €5k each (€75k).
• Outsourced Work (€250k): A whole part of the project is under fix priced contract arranged with an external provider.

Let’s move to the review meeting after 80 days since the project was started. Work performance data shows this information regarding scope and schedule:

• Work packages 000 and 100 are completed by 50%. Outsourced work has not started.
• Work packages 000 and 100 have started on time. They are due as planned.

However, cost performance measures tell us that cost performance to date is not acceptable. These charts show the project cost performance after 437 days of execution:

This trend chart shows how over cost has evolved to reach €3690:

Schedule variance time has decreased up to 180 days of delay:

Root analysis found that client was asking for more requirements without accepting deliverables. Following the escalating process, a meeting was called to extend scope, schedule (+18 months) and cost (+€302k). Budget at Completion –BAC– was increased from €76k to €378k. Project cost was rebaselined:

Professional project managers can control project performance effectively with PMPeople.