Cost Management
6.3 Economic Analysis of Project Cost
6.3.4 Work Packages
The cost is divided into work packages.
For every activity, it is required to define the following in order to calculate the cost:
• Execution time start and finish
• The resources to execute this activity
• The cost to execute the activity
The cost account (CA) records the expenditure of the project's budgeted activity. Covering everyone responsible in the organiza- tion, it comprises mostly direct costs for materials and labor.
For example, the concrete supervisor will be responsible for executing the following activities:
• The foundation with cost: $150,000
• The first floor with cost: $60,000
• The other floors: $400,000
Table 6.5 WBS/OBS matrix Project manager Planning supervisor Design supervisor Electric works supervisor Mechanical work supervisor Civil work supervisor Concrete works supervisor
Civil Work X X
Foundation Work X X X
Mechanical Work X X
Electrical Works X X
Design Works X X
Planning Work X X
So, in this case, he or she will be responsible for three cost alloca- tions with a total cost of $610,000.
Note that indirect costs, so far, have not been taken into account under this rubric. Not being costs incurred as part of fulfilling the requirements of the WBS, they are charged to the administrative management of the project or elements of project management. For example, the concrete foreman in the previous example has a salary and consumes equipment and other expenses. These expenses can- not be added or charged to the specific activities, as he will super- vise the foundation, columns, the slabs, and others. Those expenses must be paid on a regular basis nevertheless during the execution of these activities.
Any other expenses of supervision must similarly be taken into account, as well as related administrative expenses such as offices for the engineers, technicians, computers, cars to transport engi- neers, and expenses and salaries of engineers and senior manage- ment. For example, concrete work might continue for a period of six months. Monthly indirect expenses (the concrete former's sal- ary and miscellaneous expenses) are $10,000. While the cost of con- crete materials and manufacturing from mixing until curing it is accounted a direct cost of around $440,000 (calculated based on the quantity of concrete), the concrete former's salary for supervising this activity is included in indirect costs and allocated over the six months allotted for this activity. Thus, the total reinforcing concrete budget comprises:
Direct costs = $440,000;
Indirect costs = $60,000;
Total costs = $500,000;
6.3.5 Cost C o n t r o l
Cost control is very important in the management of projects. The real-life economics of the project as a whole depend on it.
The objective of cost control is to follow up what has been spent compared to what was already planned to be spent and to iden- tify any deviations, so that appropriate action may be taken at an appropriate time. These matters therefore fall within the domain of the project manager, as the individual directly responsible for defining and deciding who is to execute and who is to supervise.
Calculation of actual cost should consider the different component costs for employment, materials, equipment, and sub- contractors, in accordance with the contractual arrangements set out at the start of the project. If the actual costs increase beyond what was estimated, this could be due to any of several reasons:
• the cost estimate was too low;
• the circumstances of the project were not studied well;
• prices of raw materials and labor during the project increased;
• climatic conditions and other circumstances induced unanticipated delays in some project activities;
• there was poor selection of working equipment; and-or
• there was inefficient supervision.
It is difficult to correct for the impact of the first four factors. There is, however, usually some hope of 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 involves more than collecting data on running costs. Cost control should help the project manager to analyze the performance rate for equipment productivities and manpower.
From an auditing standpoint, project costs will fall under one of three possibilities:
1. they were exactly equal to the spending planned in accordance with the implementation plan of the proj- ect and estimated budget for this plan.
2. more was spent than was planned, according to the project's plan of implementation, which means an over expenditure "cost overrun."
3. less was spent than planned, generating savings in thr for of a "cost underrun."
In general, over-expenditure is not desirable and must be pre- vented, whereas savings in spending is desirable. This also requires looking into the causes of increasing costs, a true hallmark of suc- cessful project management of a project during its execution phase.
Among the main parameters of cost control accounting manage- ment are the following:
• 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 assume that in the phase of engi- neering costs, time and resources (CTR) has been planned to be completed in 200 hours. The actual work will take 250 hours. The work already done has reached 200 hours. So 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 budgeted cost of work performed (BCWP) = $20,000.
The budgeted cost of work scheduled (BCWS) = $20,000.
Cost variance (CV) = BCWP - ACWP.
Schedule variance (SV) = BCWP - BCWS.
The cost variance (CV) is equal to -$5,000. The minus-sign indi- cates that, at this point in the project, the budget for this component is now "short," i.e., has been overspent, by this amount.
Percentage of cost deviation = (ACWP - BCWP)/BCWP.
Schedule performance index (SI) = BCWP/BCWS; here it equals exactly 1. An SI value higher than 1 representing an acceptable per- formance, and a value less than 1 representing an unacceptable one, in this example we have reached a borderline, exactly at 1, at this point in the project schedule.
Cost performance index (CI) = BCWP/ACWP. In this example, CI - 0.8. It is less than 1, and this is as expected because the engi- neering CTR has already used up $25,000 and was budgeted to have consumed only $20,000 to this particular point.
EAC = BAC/CI. Dividing the budgeted actual cost by 0.8 is the equivalent of multiplying it by 1.25. In other words, by the time the project is completed, the estimated actual cost of engi- neering CTR can be anticipated to run 25 per cent over what was budgeted.
Calculated at regular intervals during project implementation, these factors should be compatible with the date of the month accounted by the company. Monitoring on a monthly basis assists in evaluating the project and approximating final costs of project components while there is enough time left to make any neces- sary course corrections in management of the remainder of the project's trajectory.
6.3.6 "S" Curve
The cost curve is called the "S" curve, named for the characteristic shape of the curve that plots the distribution of project costs as a function of time. To illustrate the main issues that can be resolved by charting such a curve, we return our previous example of the pouring of concrete foundations. In Figure 6.2 the project-days in which 10 subtasks associated with pouring the concrete founda- tions were carried out are "Gantt-charted," indicating the days in which this work was completed. The number in the rightmost col- umn, headed "$K", is the amount spent on each subtask for the project-days shown in the chart's main body. (For simplicity's sake, we assume here that every activity cost is rated at $1000 a day.) One of the subtasks was carried out from Day 24 through Day 28, i.e., past the 25-day period (25 workdays at 8 hours per day = 200 hours) originally assigned for completing the pouring of the concrete foundations. This subtask, and another that was under- taken later than planned, have been placed in a second section of the chart, below the main data chart illustrating the completion and budget expenditure on the other subtasks that finished within the originally envisioned 25-day work timeframe.
The (S)-curve is obtained as information from the Gantt chart of Figure 6.2 is graphically represented so as to display project bud- get expenditure of this set of subtasks as a function of time. In the case of the subtasks completed early, the first curve Figure (6.3) is obtained. In the case of subtasks implemented in the later phases and even past the originally-envisioned 25-day period around which the budget was originally designed, the second curve Figure (6.4) is obtained.
If these data are now taken and placed on the same graph, an envelope appears, bounded above by the curve displaying the data on outlays for the subtasks that finished early and from below by the data on outlays for the subtasks that finished late.
Another example will serve to illustrate cost-control approaches to managing what might happen at the overall level of a project.
The following table gives the values of the cost of planning in an engineering project for a period of 12 months. At a point six months into the project, we calculate the position and display the crisis presented in Table (6.6)
From the previous table calculate the cost control parameters after 6 months from start of the project.
Activity Mobilization Excavation Pouring cone. Mech. package Grouting Comm & start up Install piping Connect piping Sum Install piping Connect piping Sum
K$ 3 8 10 1 1 2 4 5 4 5
1 1 1
2 2 2
3 3 3
4 5 6 7 ίίϊ^Μ*^**^ 5 4
7 5
9 6
11 7
8 9 10 11 12 AeÉtóA 13 8
15 9
17 10
19 11
21 12
13 22 13
14 23 14
15 24
16 25
17 26
18 27 SÄS^ÄSSMWm 16 18 20 22
19 28 \
20 29
21 30
22 31
23 32 ^^4sN\\^^W^^m 24 26 28 30 32
24 33 I 33
25 34 34 Figure 6.2 Distribution of cost on the activity.
I I I I I I I I I I I I I I I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Days Figure 6.3 Cash flow in case of early dates.
ü o 40 35 30 25 20 15 10 5
0 H — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i — i —
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1920 21 22 23 24 25 Days
Figure 6.4 Cash flow in case of late date.
From these parameters we have tools to evaluate the project 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 laborers.
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.