Chapter 28: Cost Management during Monitoring & Controlling the Project

Aim: To understand the Control Costs process

The control costs process helps the project manager ensure that the work is occurring within the project budget and identifies any variances early in the process.

The table below shows the inputs, tools and techniques, and outputs for the control costs process.

Control Costs
Inputs	Tools & Techniques	Outputs
Project management plan Project funding requirements Work performance information Organizational process assets	Earned value management Forecasting To-complete performance index Performance reviews Variance analysis Project management software	Work performance measurements Budget forecasts Organizational process assets updates Change requests Project management plan updates Project document updates

The control costs process identifies any areas that are costing more than planned. As a project moves toward completion the value of the project’s deliverables changes. The “value” of a project at any point in time is known as its earned value. One method of comparing the earned value of a project to the budget is earned value analysis.

Exam Alert:

Do you remember Earned Value Analysis? The calculations where we calculate SPI & CPI using the EV, PV and AC. Remember??

The whole idea behind a corrective or preventive action is to help preserve the healthy execution of your project and maximize its resource utilizations.

Let us Recap the Terms & Formulae used during Earned Value Analysis:
Terms:

• BAC – Budget At Completion – This is the amount that you planned that your project will use at completion
• EV – Earned Value – The value (in monetary terms) your project has earned so far
• PV – Planned Value – The value that your project is supposed to have earned so far
• AC – Actual Cost – The Actual cost that you have spent so far
• ETC = Estimate To Complete – The amount of money you will need to complete the project
• EAC = Estimate At completion – The Amount of money you would have spent when the project completes
• TCPI – To Complete Performance Index – The Cost Performance Index that you must attain in order to finish the project as per the planned amounts

Formulae:

• SPI – Schedule Performance Index = EV / PV
• CPI – Cost Performance Index = EV / AC
• SV – Schedule Variance = EV – PV
• CV – Cost Variance = EV – AC
• ETC = EAC – AC
• EAC = BAC / CPI
• TCPI = BAC – EV / BAC – AC or
• TCPI = BAC – EV / EAC – AC

To know more about the Control Costs process Click Here

To know more about the Earned Value Measurements with examples Click Here

Preb: Chapter 27

Next: Chapter 29

Important Terms and Definitions - Monitoring & Controlling the Golden Triangle

Let us wrap up this section by covering the important terms we learnt as part of this section on managing and controlling the golden triangle.

• Actual cost (AC) - The total cost actually incurred until a specific point on the timescale in performing the work for a project or a project activity.
• Budget at completion (BAC) - The total budget authorized for performing the project work. This is the planned budget for the project, the cost that you originally estimated for the project.
• Change control system - A collection of formal documented procedures that specifies how the project deliverables and documents will be changed, controlled, and approved.
• Cost baseline - The planned budget for the project over a time period, used as a basis against which to monitor, control, and measure the cost performance of the project. The cost performance is measured by comparing the actual cost to the planned cost over a time period.
• Cost performance index (CPI) - A measure of the cost efficiency of a project calculated by dividing earned value (EV) by actual cost (AC).
• Cost variance (CV) - A measure of cost performance obtained by subtracting actual value (AC) from earned value (EV). A positive result indicates good performance, whereas a negative result indicates bad performance.
• Earned value (EV) or budgeted cost of work performed (BCWP) - The value of the actually performed work expressed in terms of the approved budget for a project or a project activity for a given time period.
• Earned value management (EVM) or earned value technique (EVT) - A management methodology and a technique to measure project progress by comparing integrated measures of scope, schedule, and cost with the planned performance baseline.
• Estimate at completion (EAC) at budgeted rate - The estimate from the current point in time of how much it will cost to complete the entire project or an entire project activity for which the BAC is given. The value of EAC is obtained by adding the value of ETC at the budgeted rate to AC.
• Estimate at completion (EAC) at current CPI - The estimate from the current point in time of how much it will cost to complete the entire project or an entire project activity for which the BAC is given. The value of EAC is obtained by adding the value of ETC at the current CPI to AC.
• Estimate to complete (ETC) at budgeted rate - The expected cost, estimated by assuming the future performance will be at the budgeted rate, to complete the remaining work for the project or for a project activity.
• Estimate to complete (ETC) at present CPI - The expected cost, estimated by assuming the future performance will be at the current CPI, to complete the remaining work for the project or for a project activity.
• Performance measurement baseline - An approved integrated plan for scope, schedule, and cost for the project, against which the project execution is compared to measure the project performance.
• Project scope creep - Changes applied to the project scope without going through the approval process, such as the integrated change control process.
• Schedule baseline - A specific version of the project schedule developed from the schedule network analysis and the schedule model data. This is the approved version of the schedule with a start date and an end date, and it is used as a basis against which the project schedule performance is measured.
• Schedule performance index (SPI) - A measure of the schedule efficiency of a project calculated by dividing earned value (EV) by planned value (PV).
• Schedule revision - An update to the project schedule that includes changing the project start date, end date, or both.
• Scope baseline - The approved project scope, which includes the approved project scope statement, the WBS based on the approved project scope statement, and the corresponding WBS dictionary.
• Variance - A measurable deviation in the value of a project variable, such as cost from a known baseline or expected value.
• Variance analysis - A technique used to assess the magnitude of variation in the value of a variable (such as cost from the baseline or expected value), determine the cause of the variance, and decide whether a corrective action is required.

Prev: Section Summary

Next: Introduction to Closing a Project

Summary - Monitoring & Controlling the Golden Triangle

We have reached the end of the discussion on Monitoring and Controlling the Golden Triangle. Let us summarize what we have learned so far.

• You need to monitor and control your project throughout its lifecycle, which includes monitoring and controlling performance.
• In an ideal world, there should be no changes to or variations from the planned baselines, such as cost, schedule, and scope baselines.
• A good-quality project is completed within the planned cost, schedule, and scope.
• However, in the real world, there are changes and variations, and therefore quality needs to be monitored and controlled, which involves monitoring certain project results by making measurements and taking actions based on those measurements.
• The three project parameters: cost, scope, and schedule are collectively known as a triple constraint because if one of them changes, at least one of the other two parameters must change.
• Therefore, project monitoring and controlling includes monitoring and controlling these three parameters, which involves measuring cost, schedule, and scope performance and taking actions based on performance.
• The most commonly used technique to measure cost and schedule performance is known as the earned value technique (EVT), also called earned value management (EVM), and it measures performance by comparing the earned value of the actual work performed to the actual cost and to the planned value that was supposed to be earned according to the plan.
• You incur cost in executing the scheduled work.
• So performance is also measured in terms of performed work or schedule performance.

Prev: Measuring Performance

Next: Important Terms & Definitions

Chapter 83: Big Picture of Controlling Scope, Schedule, and Cost

The nutshell of running a project is delivering the scope according to some schedule, which will cost someone. Completing a project successfully includes delivering the planned scope according to the planned schedule and within the planned budget. The fundamental parameters for budget and schedule are cost and time, respectively. Budget is the cost with a timeline, and schedule is determined from the time estimates for completing the schedule activities. So scope, time, and cost make the heart of any project. These three project parameters comprise a triple constraint that is a framework for evaluating competing demands. A triple constraint is often depicted as a triangle, with each side representing one of these three parameters. Since these 3 parameters are of utmost importance for any project, we are going to refer to them as “The Golden Triangle”

Trivia:
Don’t be confused if you see the triple constraint referred to as scope, schedule, and cost constraint as well as scope, time, and cost constraint. Time and schedule are intrinsically connected.

For example, assume you are being interviewed by a functional manager for a project manager position. Don’t be surprised if you are asked a question based on the following situation:

1. The project is way behind the schedule.
2. No extra resources, such as money or project team members to perform activities, are available.
3. You have to implement all the planned features.

The question is, what will you do to meet the deadline that is approaching within a week?
From a project management viewpoint, this situation is a good example of the triple constraint. The project is behind schedule, which means there is a schedule change (or a change in time available to finish the remaining project). Therefore, at least one of the other two parameters must change. If you want to meet the deadline, either you should be allotted more funds to hire more human resources or the scope of the project should be changed, which means some of the features would be left out. Depending upon the knowledge level of the functional manager about project management, this answer might not get you the job, but as a project manager, you must stand your ground. Project management is not magic; it involves dealing with cold, hard reality in a realistic way, thereby establishing clear and achievable objectives.

You can see the relationship of triple constraint to quality by recalling that a high-quality project delivers the required product on time and within the planned scope and budget. Therefore, while balancing between these three constraints, the quality (and as a result, customer satisfaction) might be affected. The triple constraint is also a good example of how one change can give rise to other changes across the project. This highlights the importance of managing and controlling changes.

Trivia:
These 3 factors are shown as a triangle because – when you try to change the size of one of the sides of the triangle, the other two automatically get changed and it is inevitable. The same is the case with these 3 factors. In any project, you cannot change just the cost or the scope or the schedule without affecting the other two factors. Just hard-wire that into your brain and never forget this.

Changes to scope, schedule, and cost are controlled using the Control Scope, Control Schedule, and Control Cost processes, respectively, which we will discuss in detail. These three processes are at the center of the project action.

The picture below is the big picture of the whole idea.

As you can see, they take work performance information from the project execution and generate work performance measurements that are used by the quality control process to generate quality control measurements and by the report performance process to generate performance reports.

Prev: Introduction to Monitoring & Controlling the Golden Triangle

Cost is incurred in executing a schedule, which depends on the scope.

Don't worry if this doesn't make much sense as of now. We will dive head-first into this topic and cover them until we drown.

Prev: Introduction to Monitoring & Controlling the golden triangle

Next: Controlling Scope

Chapter 82: Introduction to Monitoring & Controlling the Golden Triangle

High-quality projects deliver the promised product, service, or result within the planned budget, schedule, and scope. This is also a very important and basic criterion of success: Complete the project with complete scope, on schedule, and within budget.
So, it is not surprising to see that the project performance is largely measured by making integrated measures of scope, schedule, and cost and comparing them to the scope, schedule, and cost baselines. Cost and time are the underlying fundamental parameters that determine budget and schedule, respectively. So, the three fundamental parameters that we are talking about here are scope, time, and cost.

Why are these 3 factors so important?

You can understand the answer by trying to answer the below questions based on the scenario:
Scenario: You are the CEO of a Bank and as a strategic business plan, you want an online banking website for all your customers which you intend to roll-out by Jan 2012. Your Board of Directors has allocated a 10 million USD budget for the same and you identified some XYZ Software company and given them this project. Now…

1. XYZ Company has not finished the website and it is December 2011 already and based on the state of things, it looks like you are not going to meet the Jan 2012 cut that your Board of Directors wanted. Will you be happy? (SCHEDULE)
2. XYZ Company has finished the website but, your UAT team is unable to use the website properly. Funds transfer doesn't happen at times, certain type of account information isn’t visible, bill payments feature has totally been forgotten. Though the website can go live in Jan 2012, many of the features are not fully ready. Will you be happy? (SCOPE)
3. XYZ Company is making good progress on your website. It is September and they have already utilized 8 million dollars and it looks like they might need 2 million more in order to meet the go-live in Jan 2012. Will you be happy? (COST/BUDGET)

I am sure that, if you were the CEO, you will be grossly unhappy in any of the 3 situations.

This is how important these 3 factors Schedule, Scope & Budget are and that is why they are called the Golden Triangle.

Since the success of the project is tightly coupled with these 3 factors, it is extremely important that you monitor them efficiently. This is what we are going to learn in the next few chapters.

Prev: Important Terms & Definitions - Monitoring & Controlling Quality and Risk

Next: Big Picture of Controlling Schedule, Cost and Scope