The Control Project Costs process is concerned with controlling, managing, forecasting, and analyzing project costs.
It begins as soon as the project budget is approved, and the major activities are:
- Proactively influencing the factors that can lead to cost changes.
- Monitoring and reporting.
- Managing approved change request and making sure all budget components reflect those changes.
- Analyzing variances (even beneficial variances), determining their causes, and documenting them as lessons learned.
- Monitoring variances and performance trends and making requests for corrective or preventative actions.
- Forecasting project costs.
Control Project Costs Process Decomposition
Control Project Costs Process: Inputs
- Project management plan
The project management plan includes the cost management plan, which describes how project costs will be managed, reported on, and controlled.
The cost performance baseline is also part of the project management plan, and it’s used to compare actual costs to planned costs.
- Project funding requirements
Project funding requirements refer to the entire estimated cost of the budget, including any contingency or management reserves.
It’s used to compare actual costs to planned costs.
- Work performance information
Work performance information is any data that can be considered related to the work which produces the project deliverables.
Examples are schedule and progress status information, budget and cost status, quality status, estimates to complete, resource utilization information, and lessons learned.
- Organizational process assets
Organizational process assets are the source of existing policies, processes, organizational data, and knowledge.
The organization may have cost-related policies, procedures, and reporting methods that must be followed.
Control Project Costs Process: Tools and Techniques
- Earned value management
Earned value management mathematically measures the performance of the project and provides formulas that forecast future results.
It also provides a way to forecast future performance based on what's happened thus far with the project.
Forecasting involves predicting future performance based on historical work performance information and expert judgment.
EVM provides forecasting formulas.
- To-complete performance index (TCPI)
TCPI is a formula that provides the level of performance that must be achieved to meet either the budget at completion (BAC) or the estimate at completion (EAC).
- Performance reviews
Performance reviews are assessments that analyze the project’s historical cost performance.
It can include earned value measurements, variance analysis, and trend analysis.
- Variance analysis
Variance analysis compares expected cost performance to what is actually occurring and determines the causes of any variance uncovered. Variance analysis also makes a determination whether requests for preventative or corrective actions will be made.
- Project management software
Automated tools can help in monitoring, tracking, and reporting on earned value measurements.
Control Project Costs Process: Outputs
- Work performance measurements
This includes work performance information that specifically provides mathematical measurements of performance that is communicated to stakeholders.
It may also report on earned value values for WBS components or control accounts within the WBS.
- Budget forecasts
Forecasts on the project’s expected completion cost and variances are documented and provided to stakeholders throughout the project.
- Organizational process assets updates
Updates to the organizational or institutional knowledge base occur as part of cost control, including lessons learned, corrective actions were taken and the reasons, and the causes of financial variances.
- Change requests
Changes to the cost baseline or any component of the project management plan may be needed as part of this process.
- Project management plan updates
Approved changes will impact the project management plan. The most likely component subject to change is the cost performance baseline.
- Project document updates
Lessons learned, the basis of estimates, and activity cost estimates are project documents likely to undergo revisions.
Cost Control System
The project cost change control system provides the processes and procedures for requesting, logging, reviewing, and implementing cost changes.
It is a component of the project change control system, and since most project changes have a cost ramification, it's important for the cost change control system to be well-established and communicated so that everyone knows the procedures to follow.
Some projects will require a very extensive, detailed, and rigid system of change control while others may not have a need for a cost control system that’s distinct from the project change control system.
One of the project manager's most important cost control functions is to proactively influence the causes of change, and this includes discouraging unnecessary changes that will impact costs.
This is not to say that projects should have no changes, but only that unnecessary changes must be deterred.
Earned Value Management
One of the most common cost control techniques is Earned Value Management (EVM).
Earned value provides a consistent method for monitoring project cost and schedule performance using budgeted work and actual work completed on its basis.
Earned value analysis is useful because if the project manager only focuses on work completed versus planned work completed or on actual project costs versus planned project costs, the project may appear to be on-track and healthy when in fact it's behind schedule or over budget.
Because all earned value formulas are closely tied with the schedule and aggregated budgeted activity costs, earned value formulas provide measurements that when taken regularly can identify trouble spots early and give the project manager enough time to take corrective actions.
Earned value measurements are taken routinely throughout the project, usually at predefined periods, such as monthly, but generally only after about 20% of the project is work is completed because the EVM measurements are helpful only after there are sufficient data from execution activities.
Earned value analysis can also be used to provide performance information for phase-gate decisions, such as whether to continue with the project or not.
In these go/no-go decisions, costs already incurred by the project are called sunk costs, and though tempting to use as justification for continuing a project, sunk costs shouldn't be a factor in those decisions.
The earned value measurements help identify what project components aren't performing as planned, but they will not identify why.
So we have to find out the causes of those variances, even if the variance is beneficial.
No project performs perfectly as planned, so EVM values that are regularly reported as perfect are probably an indication that something is awry with the calculations or underlying data.
In our study of the earned value formulas, we’re going to use the following example throughout:
- 4-month project: Total budget $110,000
- Project cost at end of month three: $95,000
- Estimated work complete at end of month three: 80%
- Actual work complete at end month three: 75%
Earned Value Core Formulas
Earned value core formulas are:
- Budget at completion (BAC)
- Actual cost (AC)
- Planned value (PV)
- Earned value (EV)
Budget at Completion
The budget at completion (BAC) is simply the total budgeted cost of the project. In our earned value example, the budget at completion is $110,000.
The BAC is the aggregated amount of the scheduled activity cost estimates. Let’s say that our sample project is made up of 5,500 hours of work at $20 per hour.
Our BAC was arrived at by aggregating those activity costs ($20 x 5,500 = $110,000).
Actual cost (AC) is the expenditures spent thus far or at a specific point in time on the project.
There is no formula for actual cost. In our example, our actual cost at the end of month three is $95,000.
Actual cost is not only the hard expenses incurred by the project. Actual cost will include the soft internal or indirect expenses of the project.
For example, in an organization that isn't projectized and that doesn't establish a general ledger for projects, the labor costs of internal personnel will not be directly charged to the project.
The project manager will have to use some method, such as the time worked by these project team members, to create an actual cost that can be used for earned value measurements.
Planned value (PV) is how much work was expected to be completed. Planned value is shown as a monetary value based on the project's BAC.
There are alternative methods that show planned value as a unit of time (compared to the project's estimated hours), but the PMP examination questions will only present planned value as money.
The formula for planned value is:
PV = Planned % Complete × BAC
In our example at the end of month three:
PV = 80% × $110,000
PV = $88,000
Earned value (EV) is how much work has actually been completed. Just like planned value, it's shown as a monetary value based on the project's BAC.
The formula for earned value is: EV = Actual % Complete × BAC
In our example at the end of month three, 75% of the scheduled work has been completed:
EV = 75% × $110,000
EV = $82,500
Earned Value Variance Formulas
Variances from the approved baseline will be monitored:
- Cost variance
- Schedule variance
Cost variance (CV) shows how the cost of the project is comparing to the value of work completed. It does this by calculating the difference between actual cost and earned value.
A negative CV result indicates that the project has spent more than what was expected.
The formula for cost variance is: CV = EV - AC
In our example at the end of month three:
CV = $82,500 - $95,000
CV = $12,500
This negative cost variance shows us that our sample project is running over budget.
Schedule variance (SV) tells us how well the actual work performed compares to the planned schedule. It does this by calculating the difference between earned value and planned value.
A negative PV result indicates that work on the project is behind what was scheduled while a positive value indicates that work is ahead is schedule.
The formula for schedule variance is: SV = EV - PV
In our example at the end of month three:
SV = $82,500 - $88,000
SV = ($5,500)
This negative schedule variance indicates that the amount of work actually completed is running behind what was scheduled to be completed.
Earned Value Performance Formulas
Earned value performance formulas are:
- Cost performance index (CPI)
- Cumulative CPI
- Schedule performance index (SPI)
- Cumulative SPI
Cost Performance Index (CPI)
The cost performance index (CPI) shows how much work is being completed on the project for every unit of cost spent.
A CPI of below one indicates that the project work is costing more than expected while a CPI of above one means the project work is being completed at a lesser cost than originally expected.
The formula for the cost performance index is:
CPI = EV / AC
In month three in our sample project, we have an actual cost of $95,000 and an earned value of $82,500:
CPI = $82,500 / $95,000
CPI = 0.868
For every $1 in cost, our sample project is earning only $0.87 in work output.
Cumulative Cost Performance Index (CPIC )
The cumulative cost performance index (CPIC ) provides a more accurate overall performance index for the project based on earlier CPI measurements.
Rather than just being focused on one point in time, cumulative CPI uses the aggregate of the previous EV and AC measurements.
The formula for cumulative CPI is: CPIC = EVC / ACC
In order to see cumulative CPI, let's assume that we have earned value measurements for the previous two months in our project.
CPIC = $165,000 / $172,000
CPIC = 0.959
Schedule Performance Index (SPI)
The schedule performance index (SPI) shows how close actual work is being completed compared to the schedule.
It's similar to the CPI in that an SPI of below one means that the project work is going slower than expected while an SPI greater than one means that project work is being completed faster than originally expected.
The formula for schedule performance index is: SPI = EV / PV
In our example at month three, its planned value is $88,000 and its earned value stands at $82,500:
SPI = $82,500 / $88,000
SPI = 0.938
For every hour we originally estimated, our project team is actually completing only 0.94 hours.
Cumulative Schedule Performance Index
The cumulative schedule performance index (SPIC ) provides a more accurate overall performance index for the project based on earlier SPI measurements.
Rather than just being focused on one point in time, cumulative SPI uses the aggregate of the previous EV and PV measurements.
The formula for cumulative SPI is:
SPIC = EVC / PVC
SPIC = $165,000 / $159,500
SPIC = 1.04
Earned value forecasting formulas
Earned value forecasting formulas are:
- Estimate at completion (EAC)
- Estimate to complete (ETC)
- Variance at completion (VAC)
- To-complete performance index (TCPI)
- EAC (situational formulas)
Estimate at Completion (EAC)
The estimate at completion (EAC) formula forecasts the total cost of the project based on current project performance.
There are at least 20 different ways to calculate estimate at completion, and some of those different formulas are based on unique situations.
Those alternate formulas are shown at the end of this chapter. But the easiest formula and the one we'll most likely encounter on the examination is the project's estimated budget at completion divided by its cost performance index.
If cumulative CPI is available, it can be used in place of a single CPI measurement.
The formula for estimate at completion is:
EAC = BAC / CPI or EAC = BAC / CPIC
In our example at month three, our budget at completion is $110,000 and the CPI is 0.868:
EAC = $110,000 / 0.868
EAC = $126,728.11
This tells us that when our project is completed, its total cost will be just under $127,000.
Estimate to Complete (ETC)
The estimate to complete (ETC) formula forecasts how much more money will be required to finish the project.
As with the EAC, there are some alternative formulas that can be used based on differing situations.
A common formula for ETC is:
ETC = EAC - AC
In our example at month three:
ETC = $126,728.11 - 95,000
ETC = $31,728.11
Based on current performance, our project is going to take just under $32,000 to get it finished.
Variance at Completion (VAR)
The variance at completion (VAR) predicts what the difference between the budgeted project cost and actual project cost will be at the conclusion of the project.
A negative variance indicates a budget overrun while a positive variance indicates that the project is expected to come in under budget.
The formula for variance at completion is:
VAR = BAC - EAC
In our example at month three:
VAR = $110,000 - $126,728.11
VAR = ($16,728.11)
Based on current performance, our project will run about $17,000 over budget.
To-Complete Performance Index (TCPI)
The to-complete performance index (TCPI) tells us what performance must be achieved to meet either the budget at completion or estimate at completion.
Whether the performance needed by the TCPI can be achieved depends upon the likelihood of meeting the TCPI throughout the remainder of the project.
Based on our sample project, at month three we have:
- Earned value of $82,500
- Actual cost of $95,000
- Budget for completion of $110,000
- Estimate at completion of $126,728.11
The formula for TCPI to meet the BAC is:
TCPI = (BAC – EV) / (BAC – AC)
TCPI = ($110,000 - $82,500) / ($110,000 - $95,000)
TCPI = $27,500 / $15,000
TCPI = 1.83
The formula for TCPI to meet the EAC is:
TCPI = (BAC – EV) / (EAC – AC)
TCPI = ($110,000 - $82,500) / ($126,728.11 - $95,000)
TCPI = $27,500 / $31,728.11
TCPI = 0.867
EAC and ETC Situational Formulas
There are a few situations that can occur on the project which will cause inaccurate measurements if the standard EAC and ETC formulas are used.
These situations are based on variances from the project plan, and the variances are either caused by original estimates that were inaccurate or anomalies that have thrown the project's schedule or cost off.
When large variances do occur, we have three ways to deal with them:
- New Estimate: First, we might develop a new estimate to complete that isn't based on the ETC formula we saw above.
Instead, it's just an updated aggregation of revised activity cost estimates from this point in the project going forward.
- Atypical Variances: Second, we can use alternative ETC formulas if the variances that have occurred are simply so unusual that they aren't expected to happen again.
- Typical Variances: Third, there are alternative ETC formulas that we can use if the variances that have occurred are going to be typical for the duration of the project.
EAC based on a new estimate:
If a new ETC estimate is created, the alternative EAC formula is actual cost plus the new estimate to complete.
EAC = AC + ETC
ETC based on new estimate:
This is just the new estimate to complete based on revised activity cost estimates. There is no formula for ETC based on a new estimate.
EAC based on atypical variances:
If the variances are not expected to reoccur then the alternative EAC formula is the actual cost plus the budgeted cost to complete the rest of the project.
EAC = AC + (BAC - EV)
ETC based on atypical variances:
This alternate ETC formula uses cumulative earned value.
ETC = (BAC - EVC)
EAC based on typical variances:
When current variances are expected to continue throughout the project, an alternative
EAC formula factoring in cumulative CPI is used.
EAC = AC + ((BAC - EV)/CPIC))
ETC based on typical variances:
This formula factors in cumulative CPI.
ETC = (BAC - EVC)/CPIC
Earned Value Formulas
|AC||Actual Cost||AC = Actual cost of the project up to the measurement period|
|BAC||Budget at Completion||BAC = The total budgeted cost of the project|
|EV||Earned Value||EV = Actual % Complete x BAC|
|PV||Planned Value||PV = Planned % Complete x BAC|
|CV||Cost Variance||CV = EV – AC|
|SV||Schedule Variance||SV = EV - PV|
|CPI||Cost Performance Index||CPI = EV / AC|
|CPIC||Cumulative Cost Performance Index||CPIC = EVC / ACC|
|SPI||Schedule Performance Index||SPI = EV / PV|
|SPIC||Cumulative Schedule Performance Index||SPIC = EVC / PVC|
|EAC||Estimate at Completion||EAC = BAC / CPI|
|ETC||Estimate to Complete||ETC = EAC – AC|
|VAC||Variance at Completion||VAC = BAC - EAC|
|TCPI||To-Complete Performance Index for BAC||TCPI = (BAC – EV) / (BAC – AC)|
|TCPI||To-Complete Performance Index for EAC||TCPI = (BAC – EV) / (EAC – AC)|