UPSWING LEARNING CENTER - WEBINAR

1:00 – 5:00 PM
MAY 4, 2023

Speaker:
Dr. Maribel C. Tubera, DBA
• ARCHITECT
• ENVIRONMENTAL PLANNER
• MS IN CONSTRUCTION MANAGEMENT
• DOCTOR OF BUSINESS ADMINISTRATION

• Email: maribeltubera@yahoo.com
WHAT IS YOUR PROFESSION?

ARCHITECT

CIVIL ENGINEER

OTHERS/Student
KNOW WHAT YOU
WANT FOR YOUR SUCCESS TO
BUINESS CONSTRUCTION
PLAN YOUR WORK BUSINESS
AND WORK YOUR
PLAN

BREAD FOR THE

HEAD BUILD AND
UNDERSTAND SUPPORT
LEVELLING YOUR
COMPANY
Cost Management
• It is a method of reducing operating or
production expenses in order to provide
less expensive products or services to
consumers.
Cost Management
• Activities concerning planning and
controlling a project’s budget.

• It is the prime determinant of

project outcome
Effective Cost Management
• Ensures that a project is completed
on budget and according to its
planned scope.
Project Management Process
https://www.migso-pcubed.com/blog/cost-management/the-4-step-cost-
management-process/
What is Cost Control?
• Cost Control can be defined as a tool that is used
by the management of an organization in regulating
and controlling the functioning of a manufacturing
concern by limiting the costs within a planned level
and it involves a series of activities that begins with
the preparation of a budget, evaluation of the
actual performance and ends with implementing
the necessary actions that are required in
rectifying discrepancies if any.
 What is the role of a cost
controller?
•Cost controller is responsible for
planning, developing, controlling and
forecasting the project cost.
5 Skills of a Project Cost Controller
1. Knowledgeable in Total Cost Management
concepts and terminologies
5 Skills of a Project Cost Controller
2. Knows how to allocate budget and
establish a Cost Baseline.
5 Skills of a Project Cost Controller
3.Knows Earned Value Management (EVM) in
and out.
5 Skills of a Project Cost Controller
4. Can analyze a cost report, detect issues,
and effectively communicate the project’s cost
performance, issue/concerns, & recovery
plans to the project team.
5 Skills of a Project Cost Controller
5. Proficient in Microsoft Excel (or a Cost
Control Tool
The 5M's of Resources Management:

•1. MONEY
• 2. MATERIAL
• 3. MACHINE
• 4. MANPOWER
• 5. METHODOLOGY
Cost Management Plan

The outline of the project’s

estimation, allocation and control of
costs for the required resources to
complete all project activities.
 Cost Management plan answers two main
questions
1. “How will I go about planning cost for
the project?”

Cost management plan will guide you on how to

estimate costs for each activity, each deliverable
and how to construct the overall project budget
respectively.
2. “How will I manage the project to the
cost baseline?”

After the budget of the project is determined,

cost baseline is taken.

Cost management plan will guide you on when to

spend on what throughout the project and
ensure you meet the determined project budget.
Effective cost management plan
• This is one of the most important
plans that needs to be prepared
even before the groundbreaking of
the project.
 Components of a
Cost Management Plan
• Cost variance Plan
• Cost management approach
• Cost estimation
• Cost baseline
• Cost control and reporting process
• Change control process
• Project budget
1. Cost Variance Plan
• Cost variance means when the actual amount
differs from that of the budgeted amount.

• You will need a section in your cost

management plan that explains the actions
that you should take in case of a cost
variance in your project;

• this also includes the person to be held

responsible in case of cost variance.
2. Cost Management Approach
• This section talks about the approach a manager
uses for cost management. This section basically
describes how a cost baseline is established and
how to compare the actual costs.

• It is used to determine the resources necessary to

complete the project by breaking it down into small
components of work.
3. Cost Estimation

• In this part of the cost management

plan we need to define the following:

• methods used for estimating project costs,

• level of variation and the expected
precision,
• its accuracy and
• risks
4. Cost Baseline

• The cost baseline represents the authorized

spending plan basing on its time phasing
where you measure cost performance to.

• It is basically the sum of the estimated cost

of the entire project as well as the
contingency reserves that help manage the
identified risks.
5. Cost Control and Reporting
Process
• This section helps establish how will the costs
be measured and their key metrics during the
whole project.

• Cost control not only deals with managing the

budget but also planning, and preparing for
potential risks.
6. Change Control Process

• It describes the process involved in making

changes to the cost baseline as well as how
to approve of these proposed changes.
7. Project Budget
• It is the detailed estimate of all the costs
required to finish the project including the
contingencies for possible risks or management
reserves.

• Depending on the policy the company has set,

the amount for this is usually 5 to 15 percent of
the total budget.
• Generally, a cost management
plan analyzes how to plan, fund, and
control the project costs.

• It basically maps out all the expenses

the project will acquire along with the
plan on how to effectively budget it
and spend it on the necessary aspects
of the project.
• The Cost Management Plan clearly
describes specifically the methodology
for monitoring and control of project costs
during the project lifecycle.
• Also includes the following:

• Identification of the authority for cost

management
• Nomination of the authority for approval of
changes in costs
• Procedure for quantitative measurement of
cost performance, and its reporting
• Formats for reports, their frequency, and to
whom delivered
By implementing efficient cost management
practices, project managers can:

• Set clear expectations with stakeholders

• Control scope creep due to transparencies
established with the customer
• Track progress and respond with corrective
action at a quick pace
• Maintain expected margin, increase ROI, and
avoid losing money on the project
• Generate data to benchmark for future projects
and track long-term cost trends
 Elements of Cost Management
ELEMENT DESCRIPTION
Cost Estimating Developing estimates and
measurement for the costs needed
for a resource to complete the project
tasks and activities

Cost Budgeting Collecting the cost estimates,

combining hem to develop an overall
cost and baseline
Cost Controlling Managing and controlling factors that
change or affect the budget
Aims of Cost Management
1. Measure the operational costs
2. Minimize all non-value added costs if
not eliminate them
3. See if operations can be run more
efficiently and effectively
4. Create processes that will work
better for future operations
4 Phases of Cost Management
1. Resource Planning
2. Cost Estimating
3. Cost Budgeting
4. Cost Control
Resource Planning
• Resources are people, equipment, place,
money.

• Every activity in your activity list needs to

have resources assigned to it.

• Before you can assign resources to your

project, you need to know their
availability.
Resource Planning
st
1 step - Use Work Breakdown Structure
(WBS) to calculate the full cost of resources
needed to complete a project successfully.
2 nd Step is to make an activity
resource estimate..

Assign resources to each activity in

the activity list from your WBS.
 Tools and Techniques for
estimating activity resources

1. Expert Judgement
2. Alternative Analysis
3. Published estimating data
4. Project management software
5. Bottom-up estimating
Expert judgment
Bringing in experts who have done this work before
and getting their opinions on what resources are
needed.
Alternative analysis
Considering several different options for how you
assign resources.

There are more than one way to accomplish an

activity and alternative analysis helps decide among
the possibilities.
Published estimating data
There are project managers in a lot of industries who
rely on articles, books, journals, and periodicals
that collect, analyze, and publish data from other
people’s projects. They use it to help them figure out
how many resources they need.
Project management software
Microsoft Project will often have features designed to
help project managers estimate resource needs and
constraints and find the best combination of
assignments for the project.
Bottom-up estimating
It is a process of estimating individual activity
resource need or cost and then adding these up
together to come up with a total estimate.

Bottom-up estimating is a very accurate means of

estimating, provided the estimates at the schedule
activity level are accurate.

The smaller and more detailed the activity, the

greater the accuracy and cost of this technique.
3 rd Step is to Estimate Activity
Duration

Consider the scope and resources,

and estimate how long it will take
to perform.
 Tools and Techniques to create
the most accurate estimates:
1. Expert Judgement
2. Analogous Estimating
3. Parametric Estimating
4. Three point Estimating
5. Reserve Analysis
Expert judgment
The experts judgement will come from your project
team members who are familiar with the work that
has to be done.
Analogous estimating
You look at similar activities from previous projects
and how long they took.

This only works if the activities and resources are

similar.
Parametric estimating
• Plugging data about your project into a formula,
spreadsheet, database, or computer program that
comes up with an estimate.

• The software or formula that you use for parametric

estimating is based on a database of actual
durations from past projects.
Three-point estimating
• A realistic estimate that’s most likely to occur, an
optimistic one that represents the best-case scenario,
and a pessimistic one that represents the worst-case
scenario.

• Similar to Program Evaluation and Review

Technique (PERT) but different approach
Reserve analysis
Means adding extra time to the schedule (called
a contingency reserve or a buffer) to account for extra
risk.

Contingency reserve. Budget within the cost baseline or the

performance measurement baseline that is allocated for
identified risks that are accepted and for which contingent or
mitigating responses are developed.
4th Step is to make a Project
Schedule and Critical Path
The resource plan

should always..
1. Ensure the availability of resources,

• both workers and equipment, by

spotting and resolving any resource
conflict.

For instance, a cement mixer cannot

be on two building sites at the same
time.
 2. Optimize time, effort and money

having workers work on a succession of

tasks with minimal downtime or transport
between sites.

The resource planning process itself should also be

quick and efficient when building construction
teams to match project objectives.
 3. Apply common sense and a little
psychology.

Allocating the same worker to a

bewildering variety of different tasks can be as
counter-productive as specifying the same
monotonous task to be done repeatedly.

Smart resource management will take account of individual

worker preferences where possible, or at least strive for a
happy medium when larger teams are involved.
 4. Incorporate the realities of the
construction site,

any limitations on access for trucks or

backhoes, or the different possibilities for
delivering concrete to where it’s needed in order
to speed up work and decrease worker effort.
 5. Respond to changes in project
objectives

to reassign resources as required and maintain

good overall productivity and profitability.

6. Track resource utilization

in a timely, accurate way to correct or prevent

excessive staffing or under-utilization of
equipment.
Sometimes resource management meets a
conflict it cannot resolve, such as two
building projects with the same priority
competing for the same limited resource at
the same time.

We may now ask the higher management

which will be the priority.
Construction Cost Control
Conserve money on large and small projects
Cost Control
• Process of comparing actual expenditure to
the baseline cost plans to determine
variances, evaluate possible alternatives and
take appropriate action.
Control costs are defined as processes for
monitoring the status of a project in order to
update the project costs.

This will allow project managers to manage

the changes in the cost baseline if
present.
Take note that there will be changes
in the cost in any project life cycle.

The benefit of the control costs is

that it gives project managers a way
to determine different variances
from the plan, particularly on the
cost so that they can take the
appropriate corrective action to
reduce the risk.
• Simply coming up with a project budget
is not enough during the planning
session of your project.

• It is crucial for the entire team to keep

a watchful eye on the cost to be always
aware of the risks and how to avoid or
mitigate them.
Minimizing costs the company must
expend without sacrificing the end
product that the customer receives.
Tools of Cost Control
1. Cost Estimate: This tool is used in
the initiation phase.

• In this phase, the users are responsible

for evaluating the financial
viability of a particular project.
Cost Estimating
• It is an iterative process that uses
variety of estimating techniques to
determine the total cost of completing a
project.
Tools of Cost Control
2. Budget: This tool is used in the planning
phase. In this phase, the users plan out the
work by considering the overall cost
estimates and converting it into a
budget.
Cost Budgeting
• Cost budgeting is a tool to estimate the costs
of activities in project management.

• Cost budgeting includes the estimation of

costs, setting a fixed budget, and managing
and controlling the actual costs (compared to
the estimated ones).

A carefully implemented schedule and resource

plan enables a more precise cost budgeting.
Cost Budgeting
• Budgeted amounts are released in stages
based on the leveled project’s progress.

• Budget allocation includes contingencies and

reserve.
Cost Budgeting Process Inputs
• Project scope statement
• WBS
• Activity cost estimates
• Project schedule
• Resource calendar
• Contract
• Cost management plan
Cost Budgeting Process Tool
Cost Aggregation (sample)
 Project Budget Table (Sample)

http://www.maxwideman.com/guests/write/b
udget.htm
Cost Budgeting Techniques
1. Parametric estimating – can be done in
planning stage, estimate the cost, time or risk based
on the complexity of the project.

2. Funding limit reconciliation – comparing two

problems: solvency and fiscal timing; compare the
planned expenditure of a project and the funding
limits.
Cost Budgeting Output
• Cost baseline;
• Project funding requirements;
• Updates to the cost management plan; and
• Requested changes.
Cost baseline
• The primary goal of the cost budgeting process is
to determine the cost baseline.

• The cost baseline will be used to measure and

monitor cost performance on the project. Usually
displayed in the form of an S-CURVE

• projects may have multiple cost or resource

baselines to measure different aspects LIKE,
internal labor costs may be tracked separately
from external costs of contractors or from total
labor hours.
Project funding requirements
• Funding requirements are derived from the
cost baseline and must exceed the cost
baseline in every period by an amount that
will cover expenditures associated with both
early progress and cost overruns.
Requested Changes
• When budgets are allocated to fit within
constraints, some control accounts may not
have funding that is sufficient to accomplish
the required scope.

• A change request is necessary to request

additional funding, reduce the scope, or
perhaps adjust other planning
documentation such as the risk response
plan.
Cost budget reserves
• Reserves analysis is a Cost Budgeting
technique used to identify the areas in need
of reserves.

• Budget allocations provide challenges to

individual control accounts.

• To mitigate the risk of insufficient funds, it is

appropriate to establish a cost reserve.
Types of reserves
• Contingency reserves
• Management reserves

Appropriate use of reserves

Contingency Reserve
• Contingency reserves are estimated costs to be
used at the discretion of the project manager to
deal with estimating errors and with risk events
that have been identified in the risk register.

• These are called "known unknowns," because their

size cannot be predicted with certainty and they
may not occur at all, their causes are familiar, and
their impacts tend to follow similar patterns on
similar projects.
Management Reserve
• Large, unexpected risks that impact the project
budget may materialize are referred to as
"unknown unknowns," because their size, cause,
and likelihood are all impossible to predict. An
example might be a labor strike in the middle of a
long construction project.

• The project manager may need to draw on

additional funding that was not part of the budget.
Appropriate use of reserves
Reserves should not be used to
accommodate scope changes.

• Any addition to project scope must be formally

initiated with a change request, and
corresponding adjustments to budget and
schedule baselines must be negotiated.
Tools of Cost Control
3. Cost Monitoring: This is used in the
execution phase. In this phase, the users
monitor their costs in order to
check if there is not any sort of
overspending or unnecessary
spending so that they can keep the
expenditures in line with the budgets
Project control procedures are primarily
intended to identify deviations from the
project plan rather than to suggest
possible areas for cost savings.
Tools of Cost Control
4. Financial Evaluation: This is used in the
closing phase. In this phase, users
evaluate if a particular project has
met the pre-determined financial
targets or not.
Cost Control Techniques
• Planning the Project Budget
• Keeping a Track of Costs
• Effective Time Management
• Project Change Control
• Use of Earned Value
 Characteristics of project control
system
1. A focus on what is important – focus on
project objectives

2. A system for taking corrective action –

focus on response

3. Emphasis on timely response – have an

accurate data
 Project-level Control
1. Tracking cost to date is one of the preliminary jobs of a
successful project manager.
2. Finding the earned value to date
3. Projection of profit to date, based on revenues and cost
to date.
4. Actual cost must be compared to budgeted costs
5. Viable cost control system must be developed to ensure
the early detection and assessment of financial problems
on the project.
6. An effective cost control system must be able to detect
and reflect both profitable and negative cost trends
7. A good cost control system can be the basis for accurate
calculation of unit costs, which can be used for pricing
future work.
• After acceptance of bid price, pricing is subject
to very little variation:

Project profit = Bid price as adjusted (fixed) –

Cost of work (variable)

Most construction companies have developed cost

control systems to capture variations as they occur
during construction.
 Types of Costs

1. Direct cost (labor and material costs of the

project)

2. Production support costs (

superintendent’s salary, site office costs,
builder’s risk insurance etc.) – indirect
costs/field overhead
 Types of Costs

3. Costs associated with the operation and

management of the company as viable entity
(General and administrative “G&A” costs) such as the
cost associated with preparation of payroll in the home
office, preparation of the estimate, marketing, and
salaries of the company officers.

*overhead costs in construction are typically less than

5% of total project costs.
Types of Taxes
• Direct Tax – levied on the net income by a
company or individual as income tax.

• Indirect taxes
• Excise tax – levied on the output of a product
(not the price) e.g. gasoline
• Import and export taxes
• Sales tax – (Value Added Tax VAT)
• Ad valorem tax – levied on the estimated value
of a property
 Taxation of business
Taxable income = Revenue -Expenses-Deductions
Direct expenses – (job payroll, project related
equipment costs, materials used for construction and
sub-contractor payments)

Indirect expenses – (senior mgt and staff salaries,

office equipment costs such as computer and copying
charges, cost related to ownership or rental od office
space) overhead expenses.

Deduction – depreciation costs

Cost Control System
• Each project is unique and requires a
customized cost control system.

2 Major functions:
1. Cost monitoring and control versus the
project budget

2. Collection of data for estimating future

projects.
Techniques of output and reports
• The earned value management system

• Use to determine project status

• A technique that can use to monitor, track
and report the performance of any project.
Earned Value Analysis (EVA)
• EVA also known as Earned Value
management (EVM)- formal project
cost control technique currently used in
construction.
Earned Value Management (EVM)

• EVM is a project performance

measurement technique that integrates
scope, time, and cost data.

• Given a baseline (original plan plus

approved changes), you can determine
how well the project is meeting its goals.
Benefits of EVM
• Accurate display of project status
• Early and accurate identification of trends
• Early and accurate identification of problems
• Basis for course corrections
 EVMS can answer the following
questions:

• What is the true status of the project?

• What are the problems?
• What can be done to fix the problem?
• What is the impact of each problem?
• What are the present and future risks?
Activities before doing Earn Value Analysis:

1.Divide the project into manageable parts or

packages of authorized work. This is commonly
referred to as establishing the work breakdown
structure (WBS)

2.Ensure that the parts are defined in a manner so

that each activity can be allocated duration of
time to be completed and a cost to complete.

3.Allocate cost and effort to all parts across the

entire project. This is to establish baseline.
Earned Value Management
• PV - Planned Value,
• EV - Earned Value
• AC - Actual Costs
• SV- schedule variance
• EAC – Estimate at completion
• ETC – estimate to complete
• ATC – Actual time to complete
• VAC - Variance at completion
• BAC – Budget at completion
• CPI – Cost performance index (in %)
• SPI – schedule performance index (in %)
Formula:
PLANNED VALUE

PV = (Planned % to complete) x BAC

Example:
Project duration is 12 months; 5 months have
passed.
BAC = Php 100,000
5/12= 42%
PV = (Planned % to complete) x BAC

PV = (42% of the total work) x BAC

PV = 42% X 100, 000
PV = Php 42, 000
Formula:
EARNED VALUE also known as Budgeted Cost
of Work Performed (BCWP)

EV = % of completed work x BAC

Example:
Project duration is 12 months; 5 months have
passed.
AC = Php 55,000,
completed work after review = 30%
EV = % of completed work x BAC
EV = 30% X 100, 000
EV = Php 30, 000
Formula:
COST VARIANCE

CV = EV - AC

If the answer is negative = OVER BUDGET

If the answer is positive = UNDER BUDGET
Example:
COST VARIANCE
CV = EV - AC

CV = 30,000- 55,000
CV = - 25, 000

the answer is negative = OVER BUDGET

Formula:
SCHEDULE VARIANCE

SV = EV - PV

If the answer is negative = BEHIND SCHEDULE

If the answer is positive = AHEAD OF
SCHEDULE
Example:
SCHEDULE VARIANCE
SV = EV - PV
SV = 30,000- 42,000
SV = - 12, 000

the answer is negative = BEHIND SCHEDULE

 Formula:
COST PERFORMANCE INDEX

CPI = EV / AC

How much are we getting for Peso that we spend.

It is the cost efficiency factor representing the

relationship between the actual costs expended
and the value of the physical work performed.
Example:
COST PERFORMANCE INDEX

CPI = EV / AC

CPI = 30,000/55,000
CPI =0.54 OR 54%
Formula:
SCHEDULE PERFORMANCE INDEX

SPI = EV / PV

Progress as to % against the plan.

The schedule efficiency ratio of earned value

accomplished against the planned value.

Describes what portion of the planned schedule was

actually accomplished.
Example:
SCHEDULE PERFORMANCE INDEX

SPI = EV / PV

SPI = 30,000/42,000
SPI =0.71 OR 71%
Formula:
ESTIMATE TO COMPLETE
ETC = EAC - AC

How much more do we have to spend?

Formula:
ESTIMATE TO COMPLETE
ETC = EAC - AC
=120,000 - 55,000
= 65,000
How much more do we have to spend?
Formula:
VARIANCE AT COMPLETION
VAC = BAC - EAC

At the end of the day, how close will we be to

plan?
Formula:
VARIANCE AT COMPLETION
VAC = BAC - EAC
= 100,000-120,000
=-20,000
At the end of the day, how close will we be to
plan?
Formula:
ESTIMATE AT COMPLETION

EAC =BAC / CPI if no variance from BAC have

accured
EAC = AC + ATC if the original estimate was bad.
actual cost + new estimate
EAC = AC + BAC - EV if current variances are
corrected
EAC = AC + (BAC - EV)/CPI if current variances are
expected to continue
 EARNED VALUE CALCULATIONS

ACTIVITY WEEK 1
Earned Value (EV) 7,500
Planned Value (PV) 10,000
Actual Cost(AC) 15,000
Cost Variance (CV) ?
Schedule Variance (SV) ?
Cost Performance Index (CPI) ?
Schedule Performance Index ?
(SPI)
 EARNED VALUE CALCULATIONS

ACTIVITY WEEK 1
Earned Value (EV) 7,500
Planned Value (PV) 10,000
Actual Cost(AC) 15,000
Cost Variance (CV) - 7,500
Schedule Variance (SV) - 2,500
Cost Performance Index (CPI) 50%
Schedule Performance Index 75%
(SPI)
EXAMPLE:

• The Project Manager has been assigned the

responsibility for the management and control of the
project cost during the project life cycle.

• Earned value management will be used for measuring

cost performance.

• The Project Manager is accountable for all cost

variance, and recommending alternatives for
completing the project back on planned budget.
1. Cost Management Approach
• Approach to be maintained for the
management of cost is documented in this part
of the Cost Management Plan.

• Cost Accounts will be created at the third level

of the Work Breakdown Structure.
Hierarchy of Project Works
• Top level – Project Goal
• 2nd level – Project Objectives
• 3rd level – Project outputs
• 4th level – project activities
• If a detailed Project Management
Information System is not available, then
the level of cost control in the Work
Breakdown Structure should be such
until the cost can be efficiently
reported and managed.
• The lower the cost is managed in
the Work Breakdown Structure, the
greater will be the effort required.

• Thus, the level should be balanced

with the effort that can be utilized
for this purpose.
 SOLUTION: Cost Management
Approach
• Project costs will be controlled at the third
level of the WBS, by creation of Control
Accounts at this level for the cost tracking.

• Project financial cost performance will be

measured and controlled by using the
methodology of Earned Value Management,
to be applied for the Control Accounts.
SOLUTION : Cost Management
Approach
Set your level of control:
• Variance of +/- 0.2 in the Schedule
Performance Index ( SPI ) and Cost
Performance Index ( CPI ) will indicate a
caution to the Project Manager, and will
be reflected in the status reports of the
project.
SOLUTION : Cost Management
Approach
• If these variances exceed +/- 0.3, an alert
stage will be created, where appropriate
remedial measures will be necessary by the
Project Manager, to ensure reduction of the
variances below the alert level.

• Corrective actions to be undertaken will be

recommended to the Project Sponsor, by the
initiation of a Change Request.
Project Costs Measurement
This part of the Cost Management Plan
describes the procedure for measuring the
project cost.

• Earned Value Management is a useful tool

that is used globally for the measurement
and control of the costs in a project.
 It is recommended that Project
Managers should be conversant in
this methodology by undertaking
formal training in this discipline.
Cost measurment:
Detailed procedure should be mentioned
in this section, including the
measurements that will be captured and
analyzed.

If any software is to be used, like

Primavera P6, then it should be
mentioned, including its installing and
training to the users of this application.
Cost measurment:
This section will also describe if the cost
performance will be reviewed with
reference to work packages, time, or
schedule of activities.
• In this section of the Cost Management Plan,
four measurements have been specified,
namely Cost Variance (CV), Cost
Performance Index ( CPI ), Schedule
Variance (SV), and Schedule Performance
Index ( SPI ).

• These measurements will provide adequate

status of the project cost performance for
efficient control and management.
Project Costs Measurement
• Cost Variance (CV) : It is a measurement that
determines the project budget performance, and
can be measured at any stage of the project. CV is
the difference of Earned Value (EV) and the Actual
Costs (AC).
• EV represents the budgeted cost of an activity, and
is the real value achieved for the project.
• AC is the amount actually spent for the completion
of that activity.
• CV will indicate if the cost performance is below,
equal, or above the planned budget at any stage of
the project.
Project Costs Measurement
• If value of CV is zero, then it implies
that the project coast performance is
the same as was planned, and project is
on budget.
Project Costs Measurement
• If value of CV is greater than zero, then
it is a good indicator, representing that
more is being earned by the project
than was planned, and the project is
under budget.
Project Costs Measurement
• If CV is less than zero, then cost
performance is not good, and needs to
be analyzed for remedial action. The
project in this situation is earning less
than what was planned, and the project
is over budget.
Cost Performance Index ( CPI ) :
• It measures the value of the completed work,
comparing the actual cost incurred for the
completion of that work. CPI is determined by
dividing EV by AC, EV/AC. If the value of CPI is 1,
then the project is precisely on budget.
Cost Performance Index ( CPI ) :

• If the value of CPI is greater than 1, then it

is a good indicator for the project cost
performance, and the project is under
budget.

• If CPI is less than 1, then the project is

being completed over budget, and
corrective actions are necessary.
• Schedule Variance (SV) : It is a measurement
that indicates the project schedule
performance. It is calculated by subtracting the
Planned Value (PV) from the Earned Value (EV),
and formula is SV = EV – PV.

• EV is the real value earned at any stage of the

project, and PV is the value that was planned at
that stage, then SV will indicate the variance,
whether the project is behind or ahead of the
schedule baseline, or on schedule.
• Schedule Variance (SV) :

• If SV is greater than zero, then the project

performance is good, and it is earning
more value than that was planned, and
project is ahead of schedule.

• If value of SV is less than zero, then the

project schedule performance is not
satisfactory, and needs to be analyzed for
necessary remedial actions.
Schedule Performance Index ( SPI ) :

• It signifies the project progress attained

till any stage, against the value that was
planned. SPI is the ratio of EV and PV, and
calculated as EV/PV.

• If EV is same as PV, then SPI will be 1,

implying that the project schedule status
is exactly the same as that was planned.
Schedule Performance Index ( SPI ) :

• If the value of SPI is greater than 1, then

the project schedule performance is
good, and the project is ahead of
schedule.

• A good planned and controlled project

should have the value of SPI close to 1,
and value less than 1 indicates that the
schedule performance needs to be
reviewed.
Project Costs Measurement Plan
Project performance will be measured by the use
of Earned Value Management. Following metrics
concerning Earned Value Management will be
utilized for the measurement of project cost
performance:
• Cost Variance (CV)
• Cost Performance Index ( CPI )
• Schedule Variance (SV)
• Schedule Performance Index ( SPI )
Project Costs Measurement

If the variance of Cost Performance Index ( CPI )

or Schedule Performance Index ( SPI ) is
between 0.2 and 0.3 the Project Manager will
report the reasons for this status, including
recommendations for improvement.
Format for Reporting
1. Reports regarding the project cost
performance will be included in the
project monthly status reports.

2. The Project Monthly Status Report will

comprise a part called “Cost
Performance Management”.
Format for Reporting
3. This portion will include the Earned Value
Metrics, which were established in the
previous part. All cost variances, which
exceed the limits defined, will be
communicated to all concerned, including
any remedial actions planned.

4. Change Requests which are necessitated

due to project cost overruns, will be
tracked in this report.
 Cost Variance Response Process
• This defines the control thresholds for the project
and what actions will be taken if the project
triggers a control threshold.

• The thresholds for the financial control of this

project are a SPI less than 0.8, and CPI of less
than 0.9. If the project attains any one of the
threshold, a corrective action will be necessary.
 Cost Variance Response Process
• Project Manager will analyze and
recommend options to the Project Sponsor
for remedial actions, within four business
days of the occurrence of the variance.

• After approval by the Sponsor, the Project

Manager will implement the desired course
of action within three business days.
Project Budget
The budget assigned for this project is mentioned below.

Fixed Costs: $xxx,xxx.xx

Contractor Costs: $xxx,xxx.xx

Material Costs: $xxx,xxx.xx

Contingency Reserve: $xxx,xxx.xx

Total Project Cost: $xxx,xxx.xx

Management Reserve: $x,xxx.xx

2 Concepts Of Cost Management
• Life Cycle Costing
• Value Engineering
What Is Life Cycle Costing?
• Life cycle costing is looking at the cost
of the whole life of the product, not
just the cost of the product in the
project.
Purpose of Life Cycle Cost Analysis
1. Choose between two or more assets- helps in
purchasing decision.

2. Determine the asset’s benefits – accurately

predict the asset’s return on investment.

3. Create accurate budget – failing to account

for expenses can result in overspending and
negative cashflow.
Life Cycle Costing Example
• EX. consider that, you will be needing a
pressing machine for your project. And
your company plans to use this machine
in future projects after your project is
completed.

• Therefore, your company will buy the

pressing machine instead of leasing it.
 Life Cycle Costing Example
• There are two options for pressing machine.

• Low quality and high quality.

• Low quality pressing machine is $80,000 but it

is expected to pay around $40,000 afterwards
during maintenance in next years. So total
lifecycle cost is $120,000 for low quality
pressing machine.
 Life Cycle Costing Example

• High quality pressing machine is $100,000.

And expected maintenance costs for the
next years is $10,000. So in total, life cycle
cost of the high-quality pressing machine
is $110,000.
 Life Cycle Costing Example
• if you consider only project costs, buying
low quality pressing machine is more
feasible.

• But your company plans to use it in

future projects, therefore, life cycle cost
must be considered and high quality
pressing machine must be purchased.
What Is Value Engineering?
• Value engineering is also known as
value analysis. Value engineering is,
briefly, finding a less costly way of the
same work.
What Is Value Engineering?

•If a team is trying to decrease

the costs with the same
scope, they are performing
value engineering.
VALUE ENGINEERING
• A proven management technique using a
systematic approach (JOB PLAN)

• COST = RELIABILITY = PERFORMANCE

• Identifying and removing unnecessary cost

Value Engineering is…
1. Systems oriented – a formal job plan to identify
and remove unnecessary cost
2. Multidiscipline team approach – teams of
experienced designers and VE consultants
3. Life cycle oriented – examines the total cost of
owning and operating a facility.
4. A proven management technique
5. Function oriented – relates function required to
the value received.
 Value Engineering is NOT….
1. Design review – it is not intended to correct
omissions made in the design, not to review
calculations made by the designer.
2. A cheapening process – it does not cut cost by
sacrificing needed reliability and performance.
3. A requirement done on all designs – it is not a
part of every designer’s scheduled review, but a
formal cost and function analysis.
4. Quality control – it does more than review fail-
safe reliability status of plant or product design.
 Work in Process Schedules
 it’s best to prepare WIP monthly

 review sample job schedules in your materials.

Compilation of individual job calculations

reviewed earlier.

Scrutinized by banks/bonding companies.

Consistency in gross profit reporting is key!

177
SAMPLE WIP SCHEDULE
 CONSTRUCTION CO., INC.
CONSTRUCTION CONTRACTS IN PROGRESS
for the year ended December 31, 20XX
The earlier you develop an approximation of cost
and the more farsighted you can be, the better
the chances are of successful project delivery.

“Expect the best, plan for the

worst and prepare to be
surprised.”
Thank You
References
• Reichel, C. W. (2006). Earned value management systems (EVMS).
Pmi.org. https://www.pmi.org/learning/library/earned-value-
management-systems-analysis-8026
• Dwivedi, U. (2010). Earned Value Management Explained. Project Smart.
https://www.projectsmart.co.uk/earned-value-management-
explained.php
• APMG International. (2017). What Is Earned Value Management and
Why Is It Important? APMG International. https://apmg-
international.com/article/what-earned-value-management-and-why-it-
important
• Value engineering in building design and construction - Designing
Buildings Wiki. (2013). Designingbuildings.co.uk.
https://www.designingbuildings.co.uk/wiki/Value_engineering_in_buildi
ng_design_and_construction
• Marsh, C. (2012). Financial Management for Non-Financial Managers.
Kogan Page Publishers.
• Thorn, D. (1991). Finance for Managers.
• What is cost management? - Definition from WhatIs.com. (2019). What
is cost management? - Definition from WhatIs.com. WhatIs.com.
https://whatis.techtarget.com/definition/cost-management