Project Cost Control
4.3 Economic Analysis to Project Cost
4.3.5 Cost Control
Cost control is very important in the management of projects, as they relate to the economics of the project as a whole, which is a key element in the success of any project.
The objective of cost control is a follow-up of what has been spent com- pared to what was already planned to be spent and to identify deviations, so as to do the appropriate action at an appropriate time. Therefore, cost control and the intervention of an ongoing process in the domain of the control of the project by the project manager who is directly responsible to define who is execute or supervise.
Calculating the actual cost should consider the different costs such as employment, materials, equipment, and sub-contractors and each calcula- tion of the cost should be according to the specific document that all par- ties agreed on at the start of the project.
If the actual cost increases to more than the cost estimate, this will be due to one or more of the following reasons:
• The cost estimate is low.
• The circumstances of the project are not studied well.
• There is an increase in the prices of raw materials and labor during the project.
• There are climatic conditions and others that delay some of activities.
• There was a poor selection of equipment.
• There is inefficient supervision.
While it is difficult to correct the impact of the first four factors, there is always hope in improving the selection of the equipment and ensuring the department is aware and capable of choosing competent supervisors or increasing their capabilities.
The cost control process should be more than collecting data on the cost. The codification of data collection can be given a copy of the gain and loss after the implementation of the project. Cost control should help the project manager to analyze the performance rate for equipment produc- tivities and manpower.
Reviewing the total spent on the project since the beginning of work until the date of the audit will present the situation of the project cost, which usually comes out of one of the following three cases:
It was exactly equal to the spending planned in accordance with the implementation plan of the project and estimated budget for this plan.
1. More has been spent than was planned according to the project’s plan of implementation, which means an over expenditure or “cost overrun.”
2. Less has been spent than the planned expenditure in accor- dance with the project’s plan of implementation to end all activ- ities, which entails a savings in spending or “cost underrun.”
In general, over-expenditure is not desirable and must be prevented.
The analysis of the causes must be identified so that it can be avoided in future. The savings in spending is desirable. However, this also requires searching about the causes of increasing cost as the main feature of the suc- cessful management of the project in the execution phase is the best way to perform a reduction in costs.
The following parameters are the main tools to control the cost:
• ACWP – actual cost of work performed
• BCWP – budget cost of work performed, also called earning value (EV)
• BCWS – budget cost of work scheduled
• BAC – budget at completion
• EAC – estimation at completion
To illustrate the above factors simply, assume that, in the phase of the engineering, CTR is planned to be done in 200 hours, the actual work will be 250 hours, and the work that is already done is 200 hours, the same as planned. One can see that what was done is equal to the plan. Assume the cost of one hour is $100.
The actual cost of work performed (ACWP) = $25,000.
The budget cost of work performed (BCWP) = $20,000.
The budget cost of work scheduled (BCWS) = $20,000.
Cost variation (CV) = BCWP – ACWP.
Schedule variance (SV) = BCWP – BCWS.
In the previous example the cost variance (CV) is equal to -$5,000.
Percentage of cost deviation = (ACWP – BCWP)/BCWP.
Schedule performance index (SI) = BCWP/BCWS.
A value higher than one represents an acceptable performance and a value less than one represents an unacceptable performance.
Cost performance index (CI) = BCWP/ACWP.
EAC =BAC/CI.
As stated previously, these factors must be calculated at regular intervals during project implementation and should, preferably, be compatible with the date of the month accounted by the company.
Monitoring these factors on a monthly basis will assist in evaluating the project and approximating information and the final cost of the project.
4.3.6 (S) Curve
The cost curve is called the (S) curve, whereas in all projects in the calcu- lation of costs and distribution it to the Schedule, it takes the same form letter (S).
In the previous example, pouring concrete foundations is presented in the following figure: the first column represents the various activities and, on the other side, a Gantt chart was drawn and represents the cost of each item per day. For easy calculation assume that every activity cost is 1000 dollars per day.
This is done through the compilation of costs in the bottom row. With the first of the two cases, the situation is that each activity starts and fin- ishes early and, in the second case, they start and finish late.
When we assign the cumulative cost curve and establish the relationship between cost and time, we will get the (S) curve, as in the following figure.
We find the first curve in the case of an early implementation of the activi- ties and the second curve as all activities that have been implemented in the latest time.
From the previous figure, we find that the cost budget is presented by the envelope curve. When the cost is higher than planned it should be in shape to do the work well; this pre-schedule completion is called “ahead of schedule.”
Figure 4.2 Distribution of cost on the activity.
K$ Activity 3 1 2 3 4 5 6 7 8 10 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
– – – – – – –
1 2 3 5 7 9 11 13 17 15 19 21 22 23 24 25 26 27 28 29 30 31 32 33 34
1 2 3 4 5 6 7 8 10 9 11 12 13 14 16 18 20 22 24 26 28 30 32 33 34
Mobilization 8 Excavation 10 Pouring conc.
1 Mech. packg 1 Grouting 2 Comm & start up 4 Install piping 5 Connect piping
Sum 4 Install piping 5 Connect piping
Sum
Figure 4.3 Cash flow in case of early dates.
40 35 30 25 20 15 10 5 0
1 2 3 4 5 6 7 8 9 10 11 12 13 Days
Cost, K
14 15 16 17 18 19 20 21 22 23 24 25
Figure 4.4 Cash flow in case of late date.
40 35 30 25 20 15 10 5 0
1 2 3 4 5 6 7 8 9 10 11 12 13 Days
Cost, K
14 15 16 17 18 19 20 21 22 23 24 25
Figure 4.5 Cash flow envelope.
35 30 25 20 15 10 5 0
1
Ahead of schedule
Within of schedule Behind of schedule
2 3 4 5 6 7 8 9 10
Days
Cost, K
11 12 13 14 15 16 17 18
When the cost curve could prevent this cost within the envelope, this indicates that you are in accordance with the scheme called the time
“within schedule.”
Where the curve is less than planned, as shown in Figure (4.4), the situ- ation is critical as the project is late and considered “behind schedule.”
As an example, the following table gives the values of the cost of plan- ning in an engineering project for a period of twelve months in accordance Table 4.6. Cost per month.
June May April March Feb. Jan. Plan
200 200 200 200 140 60 Work in month
1000 800 600 400 200 60 Cumulative
20000 20000 20000 20000 14000 6000 Cost/month
100000 80000 60000 40000 20000 6000 BCWS
Dec. Nov. Oct. Sep. Aug. July Plan
100 100 200 200 200 200 Work in month
2000 1900 1800 1600 1400 1200 Cumulative
100000 10000 20000 20000 20000 20000 Cost/month 200000 19000 18000 16000 14000 120000 BCWS
Table 4.7 Parameters calculation.
June May April March Feb. Jan.
20000 20000 20000 20000 14000 6000 Cost per month
100000 80000 60000 40000 20000 6000 BCWS
20000 20000 20000 20000 14000 4000 BCWP (EV)
20000 21000 23000 22000 14000 4000 ACWP
98000 78000 88000 38000 18000 4000 EV cumulative 104000 84000 63000 40000 18000 4000 ACWP cumulative
2000 2000 1000 1000 0 0 CV
0 0 0 100 200 200 SV
0.942 0.929 0.921 0.95 1 1 Cost index
1 1 1 0.95 0.9 0.66 Schedule index
15000 15000 15000 15000 15000 15000 BAC 16000 16250 16333 16034 15000 15000 EAC
with the planning timetable explained above. In the project six months after the transaction, we will calculate the position of the crisis to see the project as presented in Table (4.6).
From the previous table calculate the cost control parameters after six months from start of the project.
From the parameters in Table (4.7), provide us tools to evaluate the proj- ect every month as follows:
January
The cost of execution is 300 less than the ACWP in this month, so the work is slow but the cost is acceptable.
The reason for this may be due to late hiring of new labours.
February
The work is progressing as planned, but work is still slow. Deal with this situation by letting them work on weekends to achieve the required time schedule.
March
During this month, the work is close to reaching the plan. Now the time schedule is not the only problem but also the cost increase.
April
This month the work was done more than it was planned. Now the work is going according to schedule and will be back to a normal mode of work, avoiding work on weekends.
May
The activity increased slightly more than planned, so we are going with the time schedule.
June
The work is progressing according to plan after six months of the project.
Work is proceeding according to schedule, but there has been an increase in cost. It is expected that the budget at the end of the project will be about
$16,000.