SCHEDULE, COST, AND SITUATION ANALYSIS
4.3 COST ANALYSIS AND MONITORING
discuss the matter with the other estimators before they make their estimates.
A simple “rule of 2 or 3” is that two people are asked for inputs for most situations, and three folks provide independent inputs for very important or critical situations.
For example, if we are approaching the last 3 months of a one-year project being carried out on a firm fixed price (FFP) contract, we might consider invoking the “rule of 3” for time and cost to complete estimating. If we get similar results from the 3 estimators, we can have considerable confidence in these inputs. If we get disparate inputs, it’s time to call a meeting to resolve the disparity. The objective, of course, is to zero in on the best input data we can produce as we move into the final stretch of an important project. Another example is that of estimating the cost and schedule of a software development project. Chapter 10 will define the COCOMO (Constructive Cost Model) method for providing these cost and schedule estimates, both of which are seriously dependent upon estimates of delivered source instructions (DSI).
Therefore, if the DSI estimates are incorrect at the beginning, much trouble is in store for the project. Applying the “rule of 3” for the initial (as well as updated) estimates is likely to pay great dividends during the life of the project.
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TABLE 4.1 Bottom-Line Cost Monitoring: Week 4 of 8
End of Week
1 2 3 4 5 6 7 8 Line
Budget, by Week* 2,541 8,641 8,641 4,321 17,720 5,592 7,116 5,846 1
Budget, Cumulative* 2,541 11,182 19,823 24,144 41,864 47,456 54,572 60,418 2
Actuals, by Week 2,600 8,800 9,000 5,000 — — — — 3
Actuals, Cumulative 2,600 11,400 20,400 25,400 — — — — 4
Budget Less Actuals, by Week (59) (159) (359) (679) — — — — 5
Budget Less Actuals, Cumulative (59) (218) (577) (1,256) — — — — 6
Percent Deviation, by Week (3.5) (1.8) (4.2) (15.7) — — — — 7
Percent Deviation, Cumulative (3.5) (1.9) (2.9) (5.2) — — — — 8
*See Table 3.5.
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or greater than the budgeted costs. By subtracting the actual costs from the budgeted costs, we are able to produce lines 5 and6of the cost report. These data show that actuals have been greater than budget numbers for each and every week of the four weeks of the project. By the end of the fourth week, a total overexpenditure of$1,256 has occurred. The convention adopted here is that overexpenditures are shown with parentheses around them. Finally, lines 7 and 8 convert the deviations to percentages on the basis of budgeted numbers. The sample cost report numbers show a jump during the fourth week to 15.7% and a cumulative percent deviation of 5.2%. This degree of overexpenditure is normally considered significant.
The sample bottom-line cost report signals a problem in that 1. There has been an overexpenditure every week.
2. In the last week (week 4), the percent overexpenditure has jumped to 15.7%.
3. The overall project is now 5.2% overspent.
These observations would normally lead to the following two questions:
1. Where have the overexpenditures occurred?
2. Why have the overexpenditures occurred?
The answer to the former question is usually found by looking at more detailed cost reports, the first of which would be a report similar to Table 3.5, but with the addition of actual costs. By examination of such a report, it is possible to track the cost deviations back to the potential sources, namely:
1. Direct labor costs 2. Fringe costs 3. Overhead costs
4. Other direct costs (e.g., software, training materials, etc.) 5. General and administrative (G&A) costs
Most likely, but not always, deviations occur in the application of direct labor.
It is then possible to investigate why more hours were required in relation to the original plan and budget.
Another type of cost report may be provided that indicates costs by task or by work breakdown structure (WBS) element. For such cases, these reports allow tracking back to cost deviations at the task and WBS levels. Ultimately, reasons for why these deviations occurred have to be explored with project personnel closest to the task and work elements.
In at least some cases, the customer designates the form of cost status information that is required. As an example, Table 4.2, drawn from a real-
world procurement, shows a cost status report format that tabulates both hours and cost information for the period in question, cumulative sums for that period, cumulative sums since contract inception, authorized hour and cost data, and remaining hours and cost listings. In such a situation, the or- ganization under contract is obliged to provide this type of information to the customer on a periodic basis. Thus, the issue of whether internal hour and cost reports provide such information becomes important for the PM.
Ideally, the accounting/finance department can make appropriate adjustments to make such information available in an automated fashion. If this is not possible, then it becomes necessary for the Project Manager, usually in con- junction with the Project Controller, to determine how to provide the needed customer report, augmenting the “standard” internally generated cost reports.
Translation of internal reports to necessary external reports thus becomes a problem for the PM. Such specialized customer reports usually have to be signed off as well by other company personnel before they are sent to the customer.
The essence of cost tracking lies in the periodic (weekly, monthly) exami- nation of the foregoing types of cost reports. Budget and actual cost numbers are arrayed as a function of time, element of cost, task and subtask, and WBS element. Analysis and further questioning as to deviations reveal both where the problems are occurring and also why there appear to be cost prob- lems. Minor deviations are often noted but not investigated. Larger deviations (reaching levels of 5% or more) are usually triggers for a detailed examination of sources and reasons.
For many projects, it is standard operating procedure, at the end of each reporting period, to reestimate time and cost to complete. With this new input of data, overall project times and costs are projected and compared to budgets. Where unacceptable end results are projected, a corrective action is triggered. This includes revisions of the original plan for both schedule and cost, resulting in new budgeted values. In short, where there is a schedule or cost problem, future periods have to be examined to see where time or dollars can be reduced to get back on schedule and perform within overall project cost budgets. There is a procedure that assesses the current schedule and cost situation and projects project end results as a function of performance to date. This procedure, called earned value analysis (EVA), is described in what follows.
4.3.2 Earned Value Analysis (EVA)
Basic Relationships. Earned value analysis (EVA) is a formal procedure for estimating cost and schedule variances during a project and extrapolating these variances to the end of the project. The wordvarianceis interpreted as a deviation or difference in distinction to a mean square error as in the field of statistics.
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TABLE 4.2 Cost Status Report
Actual Expended Task/Subtask From To
Cumulative for Base/Option
Period
Cumulative Since Start of the
Contract
Authorized Authorized Remaining Remaining
Areas Hours Dollars Hours Dollars Hours Dollars Hours Cost Hours Cost
(Col. 1) (Col. 2) (Col. 3) (Col. 4) (Col. 5) (Col. 6) (Col. 7) (Col. 8) (Col. 9) (Col. 10) (Col. 11)
Total Contract
108
TAC Time Current
review time
Cost variance
Schedule variance BAC
Cost
BCWS ACWP BCWP
BCWS = Budgeted cost of work scheduled ACWP = Actual cost of work performed BCWP = Budgeted cost of work performed CV = Cost variance = BCWP – ACWP SV = Schedule variance = BCWP – BCWS Figure 4.2. Earned value analysis (EVA) terminology.
An overview of the EVA concept can be gleaned from Figure 4.2. Three cumulative cost curves are depicted, each flowing from the project initiation time to the current reporting time. These cost curves are
1. Budgeted cost of work scheduled (BCWS) 2. Budgeted cost for work performed (BCWP) 3. Actual cost of work performed (ACWP)
The EVA concept specifically accounts for the degree to which work that has been scheduled has also been accomplished. In that sense, it does more than simply compare budgeted versus actual costs without regard for the extent to which work has been executed. For example, a project can be at month nine of a 10-month period and also have spent 90% of the budget. In that simple sense, both time and cost are tracking until one realizes that perhaps only 50%
of the work may have been accomplished. Many a naive Project Manager has been caught in this trap by not considering the work progress in relation to schedule and budget.
By comparing the actual versus budgeted cost of work performed (ACWP vs. BCWP), at each point in time, we have a true measure of the “cost variance”:
Cost variance (CV)=BCWP−ACWP
In this context, both budgeted and actual costs are computed on the same basis, namely, the work that has been performed. Therefore, the PM and PC ask the question: How much work has been performed (i.e., which tasks or WBS elements have we actually accomplished) at this point in time? The budgeted cost for these tasks/WBS elements is then calculated (BCWP) and compared against actual expenditures for these same tasks/WBS elements (ACWP). If the BCWP is greater than the ACWP, we have underspent; if the BCWP is less than the ACWP, we have a cost overrun. The definition of cost variance, as shown before, will yield positive numbers if we are underspent and negative values if we have overspent. Thus, a negative cost variance indicates a problem. Figure 4.2 shows a negative value for the cost variance and therefore reveals an issue that must be further investigated.
Perhaps a more difficult concept is the meaning of the discrepancy between budgeted cost of work performed (BCWP) and the budgeted cost for work scheduled (BCWS), both of which are shown in Figure 4.2. The difference between these two is defined as the “schedule variance”:
Schedule variance (SV)=BCWP−BCWS
Here it is recognized that the work scheduled and the work performed, at each point in time, may be different. As an example, halfway through the project in time, we may have scheduled to finish fifty WBS elements but actually have completed only forty WBS elements. We budgeted $100,000 for the fifty elements and $80,000 for the forty elements. Therefore, the schedule variance is
SV=$80,000−$100,000= −$20,000
We note that the schedule variance, for the EVA construct, is measured in dollars, not time. Clearly, at this point, by completing only forty of the fifty planned WBS elements, we are behind schedule. Our actual and planned rate of completing work elements is the same, namely,$2,000 per work element.
For some reason, possibly because we did not staff the project as quickly as our plan called for, we are some ten work elements behind. In principle, we are not overrun in cost, but lag in the rate at which we have been able to get the work done. This is basically a schedule issue. Further, this lag in time shows up in the negative value for the schedule variance.
The estimates of BCWP, BCWS, and ACWP also allow us to carry out a linear extrapolation as to the estimated cost at completion (ECAC) and the estimated time at completion (ETAC). This can be found through the following relationships:
ECAC= ACWP
BCWP×BAC ETAC= BCWS
BCWP×TAC
where BAC is the original budget at completion, and TAG is the original time to completion. The BAC is either increased or decreased as it is multiplied by ACWP/BCWP. If ACWP is greater than BCWP, then the budget at completion (BAC) is augmented, representing a linear extrapolation of the current cost overrun to the end of the project. It must be recognized that this is only an extrapolation and is not based on a detailed analysis of the reasons for the current overrun condition.
Similarly, the estimated time at completion (ETAC) is determined by mul- tiplying the original time at completion (TAG) by BCWS/BCWP. If BCWS>
BCWP, then ETAC will be greater than TAG. This, too, is a linear extrapo- lation, but in this case in the time dimension. The PM and the PC are urged to look more deeply into schedule and work performance issues and prob- lems before accepting the new ETAC as a fully accurate representation of the project schedule status.
Illustrative Example of an EVA. An example of the results of an EVA can be posed by the following situation:
As a PM, you are at the 18-month point of a 24-month project, with a$400,000 budget. Your original project plan and a review of work performed reveal that BCWS =$300,000, ACWP=$310,000, and BCWP=$280,000. What are your current estimates of the cost variance (CV), schedule variance (SV), cost at completion (ECAC), and time at completion (ETAC)?
This example is depicted in Figure 4.3. From the given data, we calculate the cost and schedule variances as
CV=BCWP−ACWP=$280,000−$310,000= −$30,000 SV=BCWP−BCWS=$280,000−$300,000= −$20,000 The estimated cost and time at completion are
ECAC= ACWP
BCWP ×BAC= 310,000
280,000 ×400,000=$442,857 ETAC= BCWS
BCWP×TAC= 300,000
280,000×24=25.7 months
Thus, the original budget of $400,000 is now reestimated to be $442,857 and the new time at completion is estimated to be 25.7 months instead of the original 24 months. The example indicates overruns in both cost and schedule and suggests a more definitive analysis to determine status and what can be done to meet the original budget and schedule.
We note here the earlier comment in this chapter regarding the procedure to reestimate time and cost to complete. The EVA process leads automatically to
24 18
12
6 Months
Time now 400,000
300,000
200,000 Cost
BCWS
BCWP = 280,000 ACWP =
310,000
Figure 4.3. Example of earned value analysis (EVA).
such estimates, although they are linear extrapolations of the current situation.
In the preceding EVA example, these estimates are
Estimated cost to complete=$442,857−$310,000=$132,857 Estimated time to complete=25.7 months−18 months=7.7 months If the EVA indicates the existence of a problem, as does the preceding example, it is suggested that further detailed and project-specific estimates of cost and time to complete be made, leading, we hope, to necessary corrective actions.
4.3.3 Other Cost Considerations
Monitoring Other Direct Costs (ODCs). The overall project budget shown in Table 3.4 shows other direct costs (ODCs) as a separate category of costs, which may include such items as travel, computer services, equipment, con- sultants, subcontractors, mailing, reproduction, telephone, materials, soft- ware, and other types of costs. Many of these costs come in late and therefore lag the normal reporting cycle times. The PM must be aware of these costs and commitments and make sure that they are not lost in the reckoning of the project cost picture. Many PMs have been surprised by late inputs of these types of costs simply because they were forgotten or lost in company processing. The PM should assign this tracking responsibility to the PC so that these costs do not appear as a late and not very welcome surprise.
A particular type of ODC requiring special attention is subcontracting. If a PM is in a position where subcontracting is a major part of the project, or critical path events depend on the delivery of a subcontract product or service, then unique steps may need to be taken to assure there is no victimization by the subcontractor. Some very large projects have dozens of subcontractors, thus increasing manyfold the likelihood of a significant problem. Some actions for a PM under these circumstances include:
1. Placing project personnel at the subcontractor’s facility to monitor status and progress
2. Establishing interface control and documentation as a more prominent aspect of the systems engineering effort
3. Holding more frequent status review sessions for subcontractors 4. Meeting with the management of the subcontractors to obtain commit-
ment to cost, schedule, and performance requirements
5. Providing parallel developments and backup sources as insurance, if they can be afforded
6. Using incentive award contracts for on-time, high-quality deliveries Monitoring for Different Contract Types. The way in which information is aggregated and reported is also related to the type of contract under which the project is being carried out. We discuss some of the vagaries of monitoring for three generic contract types:
1. Cost contracts 2. Fixed-price contracts
3. Time and materials (T&M) contracts
Cost contracts include cost-plus-fixed-fee (CPFF), cost-plus-incentive-fee (CPIF), cost-plus-award-fee (CPAF) contracts and variations on this basic theme. All such contracts mean that the customer pays the basic costs of the contract and the fee can be fixed or variable. Such contracts are preva- lent in the world of government contracting and are almost never used in the commercial arena. Under an arrangement where under most conditions all costs are covered and guaranteed, there is sometimes not a strong in- centive for a company to control costs to the budgeted numbers. However, it is strongly recommended that the PM adopt a point of view that such control is mandatory. It is generally not a good idea to lose the discipline of cost control, even when there is not a strong penalty for overrunning a contract. Cost reports for a cost contract are precisely those that have been shown in this chapter. Each element of cost is monitored and tracked, and corrective action is taken whenever actual costs begin to exceed budgeted values.
Incentive- and award-fee cost contracts are recommended in order for the system acquisition agent (customer) to make sure the contractor focuses on meeting the cost, schedule, and performance requirements. Incentive- and award-fee parameters can be defined so as to reward contractors for empha- sizing the items most important to the customer. Experience has shown that these types of contracts are quite effective in motivating contractors. Explicit evaluations and scoring by the customer also provide periodic feedback to the contractor so that the positions and issues of both parties are known as the contract proceeds. A PM who is not getting good evaluation scores is likely not to be achieving fee (profit) goals. This gets the immediate attention of both the PM and management.
Fixed-price contracts basically mean that the contractor works on the con- tract until all requirements and specifications are satisfied. Costs in excess of the original budget are borne by the contractor. Thus, if budgeted costs are exceeded, profit dollars are jeopardized. Such contract forms are utilized al- most exclusively in the commercial world, and increasingly in the government arena.
A PM working under a fixed-price contract should be aware that every dollar “saved” is one that could be added to the profit made under that contract.
There is a tendency, therefore, for such contracts to be monitored extremely carefully, always looking for a better solution that will satisfy requirements within cost and schedule constraints. It should also be noted that, at times, such contracts have penalty clauses. A typical clause of this type penalizes the company for late delivery of the product. In this fashion, the customer makes it clear that meeting schedule is a very important issue, and failure to do so may force both the contractor and the customer to experience increased costs.
Cost reports for fixed-price contracts can take the same form illustrated in this chapter, as each element of cost is tracked on a periodic basis. A PM may wish to shorten the periodicity of such reports, such as getting a weekly reading of costs instead of the more usual monthly report. This can place a strain on the company accounting system, which may not be geared to such rapid reporting. In such cases, PMs have been known to generate their own interim cost reports in order to satisfy their needs. This may be done by capturing weekly time charges on Friday afternoon and feeding them in to a spreadsheet developed by the Project Controller, so that by the Monday following the week in question, a weekly cost report is available.
This type of special reporting is recommended for all contracts as they near their completion times when it may be necessary to exercise more stringent controls.
Both cost and fixed-price contracts may also include the requirement of a minimum delivery of hours. At times, a “window” of ±10% of the bid number of hours is established and placed into the contract document itself.
Thus, if more experienced personnel than originally proposed are used on the work, it may turn out that the “−10%” requirement is not satisfied. This