You are on page 1of 37

Project Management and SAP

Cost Management
3

(M5)

Maria Maddalena Ruggini, PMP


CC ERP Roma

www.eng.it

Cost Management

1. 2. 3. 4.

Introduction Monitoring and control costs Performance monitoring 3 Earned Value Technique

www.eng.it

Introduction
Once the project is started there are some more question for the PM:

Where did you arrive with scheduling?

How much budget has been consumed?


How much work has been done?

M5_Cost Management

www.eng.it

Introduction

Control is not intended for the mere detection of the actual data. Actual data, while important, does not allow itself to make a critical judgment on the actual status of the project Control means determining if things are going as planned and, if not, take timely and appropriate actions.

There is no control without planning


4 M5_Cost Management www.eng.it

Control Costs Inputs

Project Management Plan and cost baseline;

Project funding requirements (billing plan)


Work performance data: are the data on which control is based - their accuracy influence the assessments of project status and following corrective actions. Deliverables completion, actual data, estimate to complete, the percentage of completion; Organization process assets: policies and procedures for cost control, support tools, methods of monitoring and reporting (es. SIAL)

M5_Cost Management

www.eng.it

Control Costs Tools and techniques

Performance measurement analysis (Earned Value Management or other techniques ) Forecasts: Forecasting includes making estimates
or predictions of conditions in the projects future based on information and knowledge available at the time of the forecast. Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed and progressed.

Project Performance Reviews (status meeting):


Performance reviews compare cost performance over time, schedule activities or work packages overrunning and under running budget (planned value), milestones due, and milestones met.

Reserve analysis: The cost management plan describes how cost


variances will be managed, for example, having different responses to major or minor problems.

M5_Cost Management

www.eng.it

Control Costs Process

Choice of rules of monitoring: monitoring interval and methods for monitoring the progress (in the PM Plan); Monitoring of progress in terms of time, cost and resources, with any new estimates for the activities in progress or to be started: Consolidation (approval and input into the PM system) of actual time, money and resources for the executed part of the project. Monitoring the performance of the project through variance analysis in terms of time, cost and performance of the entire project and its parts; Replanning (adjustments and realignments) in terms of time, cost and resources; Formalization and logging of the situation of the project to date (consolidated + replanning ) with production of the progress report; Possible redefinition of the official Baseline (only in extreme cases).

M5_Cost Management

www.eng.it

Performance monitoring

Performance measurement techniques help to assess the magnitude of any variances that will invariably occur; To determine the performance of a project, it is essential to measure the actual "physical progress" (how much work has been done); It is good to keep the measure of the physical progress (earned value) disjoint from other types of feed: time, cost / income and resources; A physical progress "inferred" in an indirect way by other metrics (e.g.: dd actual / dd planned) would lead to considerable errors in the assessment of the real progress of work and in the determination of estimates to complete.

M5_Cost Management

www.eng.it

Performance monitoring Techniques

ON/OFF (0/100): 0 at the beginning of the activity 100 at the end. Useful for short time activities or low budget; 50/50 (or 20/80): 50 (20) when the activity starts and 100 at the end. Useful for short time activities or low budget; Weighted events: important events are identified within the activity to which it is given a weight, the achievement of an event determine the progress of the activity. Applicable to activities in which the subparts can be demonstrated;

Number of finished units: Applicable only to activities measured in quantity;

M5_Cost Management

www.eng.it

Earned Value Technique


Earned value management (EVM), or Earned value project/performance management (EVPM) is a project management technique for measuring project performance and progress in an objective manner. It has the ability to combine measurements of: Scope Schedule, and Costs In a single integrated system, Earned Value Management is able to provide accurate forecasts of project performance problems, which is an important contribution for project management.

10

M5_Cost Management

www.eng.it

Earned Value Technique


Earned value management (EVM), translates all the values into a homogeneous unit (money in the defined currency but even days in some contexts) and is based on the comparison of three values: Planned Value - PV (or BCWS - Budgeted Cost of Work Scheduled): represents the planned budget (estimated cost) at the date of measurement - is the Baseline value; Actual Cost - AC (or ACWP - Actual Cost of Work Performed) is the actual cost (posted) at the date;

Earned Value - EV (or BCWP - Budgeted Cost of Work Performed): represents the budgeted value of the work actually produced (deliverable) at the date of measurement.

11

M5_Cost Management

www.eng.it

Earned Value

The Earned Value represents the progress of the project (deliverable or portion of deliverable produced); EV provides guidance on project progress in terms of time and productivity; EV is calculated by multiplying the Total Planned Budget (BAC) for the percentage of physical progress: EV = BAC * %physical completion at the date; EV can be calculated at the level of activity, work package or entire project;

EV allows to measure the actual variances between planned and actual value, also highlighting the performance of the project;
EV is used to calculate forecasts (EAC); EV is a great instruments to feed synthetic managerial "dashboards.
www.eng.it

12

M5_Cost Management

Earned Value Example


TIMENOW 30.04

ACT.

JAN

FEB

MAR

APR

MAY

JUN

TOTAL BUDGET

A B C D

PLANNED =150 ACTUAL =120

150
PLANED =150 ACTUAL =100

150 200
PLANNED =100 ACTUAL =150 PLANNED =0 ACTUAL =0

100

Total at Timenow

Planned Cost Actual Cost

(PV) = 400 (AC) = 370

Variance : - 30

600

13

M5_Cost Management

www.eng.it

Earned Value Example


TIMENOW 30.04

ACT.

JAN
100%
PLANNED =150 ACTUAL =120

FEB

MAR

APR

MAY
TIMENOW

JUN

TOTAL BUDGET

A B C D
Total at timenow

EARNED=150

150

33%
PLANNED =150 ACTUAL =100 EARNED= 50

150
75%

200
PLANNED =0 EARNED =0 EARNED= 0

PLANNED =100 ACTUAL =150

EARNED= 150

100

Planned Cost Earned Value Actual Cost


M5_Cost Management

(PV) = 400 (EV) = 350 (AC) = 370

Schedule variance: -50 Cost variance: -20

600

14

www.eng.it

Earned Value Deviations and efficiency ratios


Cost Variance: Schedule Variance: Cost Performance Index: CV = EV AC SV = EV PV CPI = EV / AC

Schedule Performance Index:

SPI = EV / PV

15

M5_Cost Management

www.eng.it

Earned Value Deviations and efficiency ratios


To-Complete Performance Index (TCPI) = (BAC-EV) (BAC-AC) or (EAC-AC)
The TCPI formula gives the efficiency at which the project team should be utilized for the remainder of the project. TCPI > 1 indicates utilization of the project team for the remainder of the project can be stringent. TCPI < 1 indicates utilization of the project team for the remainder of the project should be lenient.

To-Complete Schedule Performance Index (TSPI) =

(BAC-EV)

(BAC-PV)
TSPI gives the efficiency at which the project team should utilize the remaining time allocated for the project. TSPI < 1 indicates project team can be lenient in utilizing the remaining time allocated to the project. TSPI > 1 indicates project team needs to work harder in utilizing the remaining time allocated to the project

16

M5_Cost Management

www.eng.it

Earned Value Example


CV = 350 - 370 = - 20 SV = 350 - 400 = - 50

The actual cost at TimeNow is greater Earned Value: we are spending more than you would have had to spend on what has been achieved: we are above budget The planned value at TimeNow is greater than the Earned Value: The value of what is actually achieved in terms of budget is less than what had been planned, we are behind schedule

17

M5_Cost Management

www.eng.it

Earned Value Example


CPI = 350 / 370 = 0,94
SPI = 350 / 400 = 0,87 with BAC = 600 TCPI= 600-350/600-370= 1,1

The index of cost efficiency is less than 1: we are getting 94% of value for every euro spent, we are inefficient with the costs; The efficiency index of the schedule is less than 1: We are making 87% of what was planned, we are inefficient with the schedule; The efficiency to finish (TCPI) is > 1: the use of resources until the end of the project must be stringent.
M5_Cost Management www.eng.it

18

Earned Value Example


Costs

CPI < 1 SPI < 1

Timenow

600
DB=Delta Budget

Total Budget

PV = 400 SV CV AC = 370 EV = 350

Delay 19 M5_Cost Management

TF
www.eng.it

Time

Earned Value S Curves

EV AC AC PV EV PV AC EV PV

SPI <1 CPI <1

Sched: negative Costs: negative

SPI <1 CPI <1

Sched: negative Costs: negative

SPI >1 CPI >1

Sched: positive Costs: positive

AC EV PV AC EV PV PV EV AC

SPI >1 CPI >1


20

Sched: positive Costs: positive

SPI >1 CPI <1

Sched: positive Costs: negative

SPI <1 CPI >1

Sched: negative Costs: positive

M5_Cost Management

www.eng.it

Earned Value Application with WBS


Lets analyze this project
Negative on costs and sched

AC
PV

1
TOP-DOWN
21
Positive Positive PV AV

EV

1.1

EV

1.2

EV

PV AV

1.3

Negative on costs and sched

AC

PV EV

1.1.1 1.1.2 1.1.3 1.2.1 1.2.2 1.2.3 1.2.4 1.3.1 1.3.2


AC

Negative On sched

EV
PV EV AC PV

Negative On costs

M5_Cost Management

www.eng.it

Earned Value Estimate to complete


Estimate At Completion (EAC):

EAC = AC + ETC

Represents the estimated cost at the end of the project, taking into account what is actually spent (sunk costs = AC) and how much further you have to achieve;

Estimate At Completion (EAC) is the estimated cost of the project at the end of the project.
There are three methods to calculate EAC

22

M5_Cost Management

www.eng.it

Earned Value Estimate to complete


Estimate At Completion (EAC):
Without taking into account the (in)efficiency at TimeNow

EAC = AC + (BAC EV)


Compared to the example:

370+(600-350) = 620

Variances are Atypical - This method is used when the variances at the current stage are atypical and are not expected to occur in the future;

23

M5_Cost Management

www.eng.it

Earned Value Estimate to complete


Estimate At Completion (EAC):
Taking into account the (in)efficiency at TimeNow

EAC = AC + ((BAC EV)/CPI) 370+((600-350)/0,94) = 636

Compared to the example:

Variances are Typical - Variances will be present in the future - This method is used when the assumption is that the current variances will continue to be present in the future

24

M5_Cost Management

www.eng.it

Earned Value Estimate to complete


Costs
EAC 3 EAC 2 EAC 1 (Total Budget)
2

What is the estimate to complete more correct?


Timenow
3

DB

DB*CPI

AC CV SV PV EV

Delay 25 M5_Cost Management

Delay www.eng.it

Delay

Time

Earned Value Estimate to complete


Estimate At Completion (EAC):

What is the third method?

26

M5_Cost Management

www.eng.it

Earned Value Estimate to complete


Estimate At Completion (EAC):

EAC = AC + ETC

Estimate To Complete (ETC) Estimate To Complete (ETC) is the estimated cost required to complete the remainder of the project. Estimate To Complete (ETC) is calculated and applied when the past estimating assumptions become invalid and a need for fresh estimates arises. ETC is used to compute the Estimation at Completion (EAC).
27 M5_Cost Management www.eng.it

Consolidation

Formalization of the data collected (time, costs, resources, ...) at TimeNow;


Loading data into the computer system of Project Management; Historicization of work plan version at TimeNow (Versioning).
% Compl. Dur. Rim.
100%
0 4 sett. 40% 2,5 sett. 4 sett.

A B C D

Schedule

Actual Start dates


3,5 3 2,5 2 1,5 1 0,5 0
1 sett 2 sett 3 sett 4 sett

Actual end dates

Richiesta Disponibilit Effettiv o

Resources

5 sett

6 sett

7 sett

8 sett

9 sett

10 sett

11 sett

12 sett

Costs

1 2 3

1 - PV 2 - AC

Costs and

Performance

Time

3 - EV
www.eng.it

28

M5_Cost Management

Timenow

Earned Value

Example

29

M5_Cost Management

www.eng.it

Earned Value
a) Draw the Gantt (after defining the network of dependencies)
You are a PM and you have this sequence of activities with its dependencies: Activity 1 can start immediately and has an expected duration of 4 weeks Activity 2 should end together with Activity 1, and has an estimated duration of 2 weeks Activity 3 begins after Task 1 is finished and has an estimated duration of 6 weeks Activity 4 starts two weeks after the Activity 2 is over and it has an expected duration of 8 weeks Activity 5 begins after that activity 3 is over and ends together with Activity 4 and has a duration of 3 weeks Activity 6 starts after the Activity 4 is over and it has a duration of 5 weeks

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

30

M5_Cost Management

www.eng.it

Earned Value
a) Draw the Gantt (after defining the network of dependencies)
You are a PM and you have this sequence of activities with its dependencies: Activity 1 can start immediately and has an expected duration of 4 weeks Activity 2 should end together with Activity 1, and has an estimated duration of 2 weeks Activity 3 begins after Task 1 is finished and has an estimated duration of 6 weeks Activity 4 starts two weeks after the Activity 2 is over and it has an expected duration of 8 weeks Activity 5 begins after that activity 3 is over and ends together with Activity 4 and has a duration of 3 weeks Activity 6 starts after the Activity 4 is over and it has a duration of 5 weeks

5
3 5 End 4
+ 2Ws

Start

1 2 6

10

11

12

13

14

15

16

17

18

19

20

31

M5_Cost Management

www.eng.it

Earned Value
b) Allocate costs
All activities use a mix of resources whose cost is equal to 1000 per week. The Activity 2 instead uses a mix of resources whose cost is equal to 3000 per week. What is the trend of costs weekly and cumulative?

1 2

3 4

5 6

1
32

10

11

12

13

14

15 16

17

18 19

M5_Cost Management

www.eng.it

Earned Value
b) Allocate costs
All activities use a mix of resources whose cost is equal to 1000 per week. The Activity 2 instead uses a mix of resources whose cost is equal to 3000 per week. What is the trend of costs weekly and cumulative?

1 2

3 4

5 6

1.000
1.000

1.000
2.000

4.000
6.000

4.000

1.000

1.000

2.000

2.000

2.000

2.000

1.000

2.000

2.000

2.000

1.000

1.000

1.000

1.000

1.000

10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000

31.000 32.000

1
33

10

11

12

13

14

15 16

17

18 19

M5_Cost Management

www.eng.it

Earned Value
c) Check the costs
We are at the end of the 10th week.

PV = 20.000 AC = 18.000
now

PV=4000

PV=6000
100%

1
AC=4000

AC=5000 PV=4000
100% 70%

60%

5 4 6

PV=6000

2
AC=6000

AC=3000

1.000
1.000

1.000
2.000

4.000
6.000

4.000

1.000

1.000

2.000

2.000

2.000

2.000

1.000

2.000

2.000

2.000

1.000

1.000

1.000

1.000

1.000

10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000

31.000 32.000

1
34

10

11

12

13

14

15 16

17

18 19

M5_Cost Management

www.eng.it

Earned Value
c) Check the costs
Get the Earned Value, the variances and indexes of the project at the end of the tenth week.
EV = CV = SV =

CPI =

now
PV=4000 PV=6000
100%

SPI =

1
AC=4000

AC=5000 PV=4000
100% 70%

60%

5 4 6

PV=6000

2
AC=6000

AC=3000

1.000
1.000

1.000
2.000

4.000
6.000

4.000

1.000

1.000

2.000

2.000

2.000

2.000

1.000

2.000

2.000

2.000

1.000

1.000

1.000

1.000

1.000

10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000

31.000 32.000

1
35

10

11

12

13

14

15 16

17

18 19

M5_Cost Management

www.eng.it

Earned Value
c) Check the costs
Get the Earned Value, the variances and indexes of the project at the end of the tenth week.
EV = 19.200 CV = 1200 SV = - 800

CPI = 1,07

now
PV=4000 PV=6000
100%

SPI = 0,96

1
AC=4000

AC=5000 PV=4000
100% 70%

60%

5 4
PV
EV

PV=6000

2
AC=6000

AC=3000

1.000
1.000

1.000
2.000

4.000
6.000

4.000

1.000

1.000

2.000

2.000

2.000

2.000

1.000

2.000

2.000

2.000

1.000

1.000

1.000 AC 1.000

1.000

10.000 11.000 12.000 14.000 16.000 18.000 20.000 21.000 23.000 25.000 27.000 28.000 29.000 30.000

31.000 32.000

1
36

10

11

12

13

14

SPI <1 Tempi: negativo CPI >1 positivo 15 16Costi: 17 18

19

M5_Cost Management

www.eng.it

Exercise Earned value Duration : 30 min

37

M5_Cost Management

www.eng.it

You might also like