The proper cost and budget direction contribute moderately in the success of undertaking every bit good as in the overall profitableness of an organisation. The undertaking director is responsible to command, proctor and manage all the costs related to the undertaking and besides track the undertaking public presentation with regard to clip, cost and available resources throughout the undertaking life rhythm. This academic paper is chiefly focused on the cost direction including the prevailing techniques of cost estimating and cost commanding along with the different types of cost estimations and overall scheme for the cost direction procedure.
This paper supplements the information refering to be direction provided in the Project Management Plan ( PMP ) for the undertaking R012 which is presented as portion of the group assignment of the same undertaking. The techniques and attack presented herein for the cost control and estimating of costs will be adopted throughout the undertaking life rhythm for the undertaking R012.
The cost direction contributes a critical function in the success of a undertaking when integrates with other success taking factors such as clip direction, range direction and resource direction. Cost direction of a undertaking includes chiefly the procedures of gauging cost, finding of budget and control and monitoring of undertaking costs throughout the life rhythm of the undertaking.
It is one of the premier duties of a undertaking director to pull off and command the budget and costs refering to all the undertaking activities for the completion of undertaking on or under the allocated budget in concurrence with the overall control of range, cost and optimized resource use.
A typical form of cost and staffing degree with regard to clip at different phases of undertaking is shown in the below mentioned figure.
Figure – Typical Cost and Staffing Levels across the Project Life Cycle
Relationship of Stages of Project Development to Types of Cost Estimates:
A cost estimation is a quantitative appraisal of the likely costs for resources required to finish the activity. Cost estimations are developed and further refined at several phases during the life rhythm of undertaking. In the preceding subdivision, development of undertaking at several phases is presented along with the relevant estimations.
The construct phase consists of a development stage and surveies of all the available information related to the undertaking which include the findings of feasibleness study, study consequences, geotechnical probe studies and other pertinent informations to the undertaking. During this probe procedure, be aftering feasibleness survey estimations are derived for preliminary budget estimations of entire undertaking cost. In an origin stage, a undertaking could hold a ballpark estimation or unsmooth order of magnitude ( ROM ) estimation.
The design phase consists of the preliminary design stage and elaborate design stage. In the preliminary design stage, a preliminary cost estimation is prepared based on the preliminary design with the aid of a greater degree of available information and the estimations consist of country, volume or similar approximate estimating techniques. In the elaborate design stage, cost estimations are based on the elaborate design including a elaborate measure takeoff that is an result of the entire sum of basic work required along with the costs of labour, building equipment, and stuffs.
The execution phase consists of the building and stages of field operations when existent work and operations are performed. These cost estimations are required throughout the life of the undertaking for cost control. These cost estimations are based on production rates that can be expressed as hours of labour or equipment clip required to carry through a unit sum work.
Techniques of Cost Estimating: Undertaking costs can be computed by following methods:
Adept Judgment: Adept judgement, guided by historical information, provides valuable penetration about the information from anterior similar undertakings.
Analogous Estimating: Analogous cost estimating uses the values of parametric quantities, such as range, cost, budget and continuance from a old, similar undertaking as a footing for current undertaking.
Parametric Estimating: Parametric gauging uses a statistical relationship between historical informations and other variables to cipher an estimation for the undertaking.
Bottom-up Estimating: In bottom-up estimating, the cost of single activities is estimated with the greatest degree of specified item and the elaborate cost is so rolled-up to higher degrees.
Three-Point Estimating: This construct is based on Program Evaluation and Review Technique ( PERT ) . It uses three estimations to specify an approximative scope for an activity ‘s cost:
Most Likely ( CM ) : The cost of activity based on realistic attempt.
Optimistic ( CO ) : The activity cost based on analysis of the best-case scenario for the activity.
Pessimistic ( CP ) : The activity cost based on analysis of the worst-case scenario for the activity.
PERT analysis calculates an expected ( CE ) activity cost utilizing a leaden norm of these three estimations:
CE = ( CO + 4CM + CP ) / 6
Development of undertaking budget:
When the cost estimation has been completed, the undertaking control budget is prepared.
The undertaking budget is a elaborate agenda of disbursals that the undertaking director uses for cost control purposes during the undertaking life rhythm. At the origin of undertaking, a baseline budget for the undertaking is established based upon the range of work stated in the signed contract. The work advancement and public presentation are continuously monitored and controlled against the same baseline budget. As the undertaking progresses, the baseline budget gets refined based on the alteration in range of work due to alterations ensuing in a elaborate budget with the collection of estimated costs of single activities or work bundles.
Undertaking Cost Accounting:
Undertaking cost accounting is the cardinal ingredient in the undertaking cost system. It provides the basic information required for both cost control and gauging. Cost accounting relates entirely to finding the elaborate make-up of productiveness and costs associated with the production of a merchandise in the field, including the necessary overhead disbursal. Cost accounting involves the uninterrupted finding of productiveness and cost informations.
Undertaking Cost Coding:
All undertaking related activities are described by a name or descriptive rubric augmented by a specific cost codification with regard to their places in the hierarchy of undertaking work breakdown construction. A brief representation of undertaking cost codifications with regard to the WBS activities is presented below:
Description as per WBS
Administration and Project Control
Integration of Project Cost with the Work Breakdown Structure ( WBS ) :
All the undertaking related costs and controls are fundamentally originated from the work dislocation construction ( WBS ) . The WBS is a hierarchal and logically oriented grouping of undertaking elements ( typically deliverable or phase based ) that defines the entire range of the undertaking and organizes it in a mode that is consistent with the executing program. The top degree of the WBS consists of a individual component that reflects the full undertaking range. Each subsequent degree represents an increased degree of item until the desired control degrees are established. As work advancements, the WBS provides the model on which costs, clip, and schedule/performance can be compared against the budget for each degree of the WBS.
Integration of Project Cost with Quality:
To verify that a merchandise or service meets the client ‘s demands requires the measuring of the costs of quality, i.e. the cost of conformity and the cost of nonconformity. Conformity costs include points such as preparation, indoctrination, confirmation, proof, proving, care, standardization, and audits. Nonconforming costs include points such as bit, rework, guarantee fixs, merchandise callbacks, and ailment handling.
Cost of Conformity
Cost of Nonconformity
Internal Failure Costss
( Construct a quality merchandise )
( Failures found by the undertaking )
• Document procedures
• Time to make it compensate
External Failure Costss
( Failures found by the client )
( Assess the quality )
• Warranty work
• Lost concern
• Destructive testing loss
Money spent during and after
the undertaking because of failures
Money spent during the undertaking
to avoid failures
Figure – Cost of Quality
Undertaking Cost Classs:
The undertaking costs can be loosely classified into following classs:
Variable costs or Direct costs: These are the costs that incurred at a rate which is relative to the rate of working on the undertaking, these costs can be measured and associated straight with a peculiar undertaking.
Fixed costs or Indirect costs: These are the costs that with few exclusions constitute the operating expense or indirect costs, i.e. the costs that are non straight associated with a peculiar undertaking.
Types of Cost Estimates: The type of cost estimations chiefly depend on the quality of available information and grade of assurance of calculators in the truth. Main type of cost estimations are as follows:
Ballpark estimates or Rough Order of Magnitude ( ROM )
Ballpark estimates or Rough Order of Magnitude ( ROM ) : Ballpark estimations are those estimations which contain obscure outline information about the undertaking or prepared based on a elaborate degree of information but with a clip restraint.
Comparative estimations: These cost estimations are prepared by comparing the work to be done for a new undertaking with the work already done for a similar old undertaking.
Feasibility estimations: These types of estimations can be derived merely after holding a important sum of information about preliminary design.
Definitive estimations: Definitive estimations are prepared based on the contract paperss which include all the undertaking specifications and concluding drawings.
Undertaking Cost Control:
The undertaking director must guarantee that all work is performed in a cost effectual mode and that appropriate cost controls are in topographic point on the undertaking at all times. The undertaking director is besides responsible to reexamine and O.K. all labour charges and other undertaking costs and to take immediate action to rectify negative discrepancies.
The cost control entails a proper cost direction procedure, which chiefly includes the followers:
Influencing the factors that create alterations to the authorized cost baseline.
Guaranting that all alteration petitions are acted on in a timely mode
Pull offing the existent alterations when and as they occur
Guaranting that cost outgos do non transcend the authorised support, by period and in entire for the undertaking,
Monitoring cost public presentation to insulate and understand discrepancies from the approved cost baseline,
Monitoring work public presentation against financess expended,
Preventing unapproved alterations from being included in the reported cost or resource use,
Informing appropriate stakeholders of all approved alterations and associated cost, and
Acting to convey expected cost overproductions within acceptable bounds.
Undertaking cost control initiates with the readying of the original cost estimation and the subsequent undertaking budget. As the work progresses, cost accounting methods are applied to find the existent costs of production. The costs as they really occur are continuously compared with the budget. In add-on to supervising current disbursals, periodic studies are prepared that forecast concluding undertaking costs and compare these predicted costs with the established budget.
Techniques for the Project Cost Control:
Earned Value Analysis ( EVA )
To-complete public presentation Index ( TCPI )
Project direction package
Earned Value Analysis ( EVA ) :
Earned value analysis is a proved method to mensurate advancement in accomplishing the undertaking ‘s aim of executing agreed-to work within an agreed-to budget and agenda. In this undertaking, the undertaking director must implement the Earned Value Management ( EVM ) techniques to pull off the undertaking. In EVM, cost, agenda, and proficient range are all described utilizing a common unit of step ( normally currency or labour hours ) . This allows all three facets of the undertaking to be integrated into a individual system that allows the undertaking director to measure and command undertaking hazard by be aftering, measurement, and analysing the fiscal and physical undertaking public presentation. The Earned value direction develops and proctors three cardinal dimensions for each work bundle and control history.
Earned Value ( EV ) : Earned value is the per centum of completed work on the undertaking.
Planned Value ( PV ) : Planned value is the authorised budget assigned to the work to be accomplished for an activity or WBS constituent.
Actual Cost ( AC ) : Actual cost is the entire cost really incurred and recorded in carry throughing work performed for an activity or WBS constituent.
Figure – Earned Value, Planned Value and Actual Costss
Any divergences of agenda and cost from the baselines can be monitored with the aid of agenda discrepancy and cost discrepancy as mentioned below:
Agenda Variance ( SV ) : Agenda discrepancy is a step of agenda public presentation on a undertaking. It is equal to the earned value ( EV ) minus the planned value ( PV ) , i.e. SV = EV – PV.
Cost Variance ( CV ) : Cost discrepancy is a step of cost public presentation on a undertaking. It is equal to the earned value ( EV ) minus the existent cost ( AC ) , i.e. CV = EV – Actinium.
The agenda discrepancy and cost discrepancy can farther be converted into efficiency indexs, i.e agenda public presentation index ( SPI ) and cost public presentation index ( CPI ) to reflect the agenda and cost public presentation of the undertaking.
Schedule Performance Index ( SPI ) : The agenda public presentation index is a step of advancement achieved compared to the advancement planned on a undertaking, The SPI is equal to the ratio of the EV to the PV, i.e. SPI = EV/PV.
Cost Performance Index: The cost public presentation index is a step of the value of work completed compared to the existent cost or advancement made on the undertaking, The CPI is equal to the ratio of the EV to the AC, i.e. CPI = EV/AC.
Earned Value Metrics
EV – PV
Ahead of agenda
EV – Actinium
& A ; gt ; 1
Ahead of agenda
& A ; lt ; 1
Consumer price index
& A ; gt ; 1
& A ; lt ; 1
As the undertaking progresses, the undertaking director can develop a prognosis for the estimation at completion ( EAC ) that may differ from budget at completion ( BAC ) based on the undertaking public presentation. EACs are typically based on the existent costs incurred for the work completed, plus an estimation to finish ( ETC ) the staying work. One of the common techniques to EAC prediction attack is a manual, bottom-up summing up by the undertaking director. EAC = AC + bottom-up ETC.
EAC prognosis for ETC work performed at the budgeted rate: This method accepts the existent undertaking public presentation to day of the month as represented by the existent costs and predicts that all future ETC work will be accomplished at the budgeted rate. EAC = AC + BAC – Electron volt.
EAC prognosis for ETC work performed at the present Consumer price index: This method assumes what the undertaking has experienced to day of the month can be expected to go on in future. EAC = BAC/cumulative CPI.
EAC prognosis for ETC work sing both SPI and CPI factors: In this prognosis, the ETC work will be performed at an efficiency rate that considers both the cost and agenda public presentation indices. EAC = AC + [ ( BAC-EV ) / ( cumulative SPI x cumulative CPI ) ] .
To-Complete Performance Index ( TCPI ) : The to-complete public presentation index is the deliberate projection of cost public presentation that must be achieved on the staying work to run into a specified direction end, such as the BAC or the EAC. The TCPI based on the BAC = ( BAC-EV ) / ( BAC-AC ) . The TCPI based on EAC = ( BAC-EV ) / ( EAC-AC ) .
Figure – To-Complete Performance Index ( TCPI )
Performance reappraisals compare cost public presentation over clip, agenda activities or work bundles infesting and under running the budget, and estimated financess needed to complete work in advancement. For the public presentation reappraisals based on EVM, the undermentioned information is determined:
Discrepancy analysis: Discrepancy analysis compares the existent undertaking public presentation to planned or expected public presentation.
Trend analysis: Tendency analysis examines the undertaking public presentation over clip to find if public presentation is bettering or deteriorating.
Earned Value Performance: Earned value direction compares the baseline program to existent agenda and cost public presentation.
Cost Performance measurings ( CV, CPI ) are used to measure the magnitude of fluctuation to the original cost baseline.
Project Management Software:
Project direction package is besides used to supervise the three indispensable EVM dimensions ( i.e. PV, EV and AC ) , to expose graphical tendencies and calculate a scope of possible concluding undertaking consequences.