PROJECT COST CONTROL

COST CONTROL
1. Cost control may be defined as steps taken by the management to
assure that the cost objectives set down in the planning stage are
attained.
2. For effective cost control, most organizations use Standard Cost
System, in which the actual costs are compared against standard
costs for performance evaluation and deviations are investigated for
remedial actions.
3. Cost control is also concerned with feedback that might change any
or all of the future plans, the production method, or both.

ESSENTIALS INVOLVED IN COST CONTROL PROCESS:

1. Set up targets of costs for a given production
(reference base lines)
2. Measure the actuals periodically
3. Compare the actuals with the targets
4. Find out variances
5. Analyze the causes of variances
6. Take corrective actions.
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SETTING UP COST TARGETS (OF A GIVEN PRODUCTION)

1. From the Sales Budget, a production plan is drawn.
2. The input costs are estimated. The basic elements of costs are
RAW MATERIALS, LABOUR & OVERHEADS. Cost estimation is
done on the basis of this information.
3. During the actual production process, the cost of raw materials,
labour & overheads are determined:
a) Raw Materials: Costs are ascertained from the material
register or stores requisitions or Job cards, etc.
b) Labour Costs: Are ascertained by Time Cards or Job
cards, etc.
c) Overheads: Costs are not allocated to a particular
product. These are to be distributed among the products
produced.
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TYPES OF COSTS:
1. STANDARD COSTING:
STANDARD COST is defined as a pre-determined cost based upon
engineering specifications and representing highly efficient production for
quality standards and forecasts of future market trends.

IMPLIES THAT:
1. a) For the estimated total output for the future period, the cost per unit is
determined in advance for materials, labour and overheads.
b) The cost is based upon past experience, experiments and specifications
drawn up by the technical staff.
c) The cost is expressed in rupees, considering firm estimates in respect of
prices and rates that are likely to prevail.

2. Standards differ from estimates, as estimates are loosely drawn up

and are not meant as guide lines for action.
3. Standard costs are carefully determined and are actually used for
measuring actual costs & for locating un-necessary wastages.
4. Standard costs helps a concern to improve its performance & to
investigate causes of variance.
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ADVANTAGES OF STANDARD COSTING:

1. Standard costs help management in fixation of prices and in laying
down production policies.
2. They provide constant and uniform basis for management
regarding operational efficiency of workers and other staff
members.
3. Through study of variance, management needs to concentrate only
on areas and problems which require its attention.
4. Standard costs help in readily showing up and then , the
elimination of avoidable wastage and losses.
5. Performance of employees at all levels can be judged objectively.
Limitations:
1. Standards may be either too strict or too liberal
2. Standards once fixed rarely hold good for a long period. They
require revision.
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2.

HISTORICAL COSTS:

1. Past accounting records of costs are used as standards for

measuring performance.
2. The past or historical cost becomes the basis for the comparison
and evaluation of future performance.
Advantages:
1. For using as a standard, the historical costs can be ascertained
easily and economically from past accounting records.
2. The comparative efficiency of business over a number of years is
clearly indicated by it.
3. The standard is easy and simple for understanding on the part of
all sub-ordinates.
4. Small companies use historical costs widely as their standard.
5. Large companies have to depend on historical costs for those
areas where no other cost standard are available.
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HISTORICAL COSTS (cont.):

Limitations:
1. Past working conditions and facilities that produced a
certain result might not be present in subsequent
years, thus it may fail to serve as a measure of
performance in the years to come.
2. Past cost might not represent a satisfactory cost that
should be strived for.
3. The historical cost can never prescribe what cost
should be under planned conditions of work.

3.

ESTIMATED COSTS:

1. The estimated cost of future operations is used by many companies

as standards against which actual costs are compared and evaluated.
2. Estimated costs are established from the result of past experience,
the impact of present conditions and interpretations of future trends
and situations.
3. Estimated costs are the outcome of studies, analysis and judgment
on the part of managers.
Advantages:
1. In a business with changing situation as well as in enterprises having
non-repetitive character of activities, estimated cost supply the
sensible and practical standard for control purposes.
2. Intangible operations like research, public relations, etc., are not
subject to control by any standards except estimated costs.
3. Estimated costs are superior to historical costs as control standards.
As the estimated costs looks into the future and incorporates results
of forecasts, it provides a sound basis for evaluating actual costs.
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PROJECT COST CONTROL

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PROJECT COST CONTROL

We shall now see how the system of PROJECT COST CONTROL
is set-up and applied to control a PROJECT and ITS RUNNING COST:
1. First you establish a set of reference baselines (costs, standards,
milestones, etc.)
2. Then, as work progresses, you monitor the work, analyze the
findings, forecast the end results and compare those with reference
baselines.
3. If the end results are not satisfactory then you make adjustments as
necessary to the work in progress, and repeat this cycle at different
intervals.
4. It the end results get really out of line with the baseline plan, you
may have to change the plan.
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SCHEMATIC DIAGRAM OF PROJECT COST CONTROL

Set up Base Line Plan
Requirements:
Products
Standards
Milestones
Cost Forecasts
Uncertainties
Procurement
Strategies
Work Force
Success Indicators
etc.

Monitor & Report

Measure:
Progress
Quality
Schedule
Expenditure
Cash Flow

Evaluate:
Progress vs Plan
Variance
Trends
Productivity
Forecasts

Modify Plan

Control

Reforecast & Revise:

Cost Estimate
Schedule
Quality
Scope

OUTPUT

Analyze

For Critical Items:

Modify Activities:
People
Resources
Equipment
Methods

COST CONTROL: INPUTS

Following activities/ documents in the life of a project contribute to the
organizations ability to effectively control project costs:
1. Cost Baseline:
It is a time-phased budget that is used as a basis against which to
measure, monitor and control overall cost performance of the project.
It is made up by summing estimated costs by period. ( Has an S
shape and is known as an S-curve.
2. Project Funding Requirements:
Funding requirements, total and periodic (i.e. annual or quarterly), are
derived from the cost base line.
3. Performance Reports:
Performance reports provide information on cost and resource
performance as a result of actual work progress.
(cont..) 13

COST CONTROL INPUTS:

4. Work Performance Information:

Information pertaining to the status and cost of project activities being

performed is collected. This information includes:

Deliverables that have been completed and those not yet

completed

Costs authorized and incurred

Estimates to complete the schedule activities

Percent physically complete of the schedule activities

5. Approved Change Requests:

Approved change requests can include modifications to the cost terms of the
contract, project scope, cost baseline, or cost management plan.
6. Project Management Plan:
The project management plan and its cost management plan component
and other subsidiary plans are considered when performing the Cost
Control process.

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COST CONTROL TOOL :

EARNED VALUE TECHNIQUE (EVT) :

1. An important part of cost control is to determine the cause of
a variance, the magnitude of the variance, and to decide if the
variance requires corrective action.
2. The earned value technique uses the cost baseline
contained in the project management plan to assess project
progress and the magnitude of any variations that occur.

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COST CONTROL TOOL

EARNED VALUE TECHNIQUE (EVT) :

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EARNED VALUE TECHNIQUE (EVT) :

1. The PV, EV and AC values are used in combination to provide
performance measures whether or not work is being accomplished as
planned at any given point in time.
2. The most commonly used measures are:
a) Cost variance (CV)
b) Schedule variance (SV)
3. Determination of Variances:
a) Cost Variance (CV): CV equals earned value (EV) minus actual
cost (AC). The CV at the end of the project will be the difference
between the budget at completion (BAC) and the actual amount
spent, i.e.: CV = EV AC
b) Schedule Variance (SV): SV equals earned value (EV) minus
planned value (PV). Schedule variance will ultimately will be zero
when the project is completed because all the planned values will
have been earned. SV = EV - PV
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EARNED VALUE TECHNIQUE (EVT) :

The Earned Value Technique (EVT)
compares :
Budgeted cost of planned work, (planned
value) PV
Budgeted cost of accomplished work
(earned value) EV
Cost of Actual work performed, AC.

The best way to read these three-line charts

is:
(a) Compare EV curve to PV for SV
(b) Compare EV to AC for CV

(cont..)
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COST CONTROL TOOL (TECHNIQUE)

The figure uses S curves to display EV data for a project that

is over budgeted and behind the work plan.
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PROJECT PERFORMANCE REVIEWS

Planned reviews are meetings held to
compare:
Cost performance over time
Schedule activities or work packages
overrunning and under-running budget
Miles stone due, and
Milestones met.

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PROJECT MANAGEMENT SOFTWARE

Project Management software, such

as computerized spread sheets, is
often used to monitor PV versus AC,
and to forecast the effects of changes
and variances

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COST CONTROL: OUTPUTS

1.

2.

3.

4.

5.

Cost Estimate (Updates):

a) Scheduled activity cost estimates may be revised.
b) Revised cost estimates may require adjustments to other aspects of
the project plan.
Cost Baseline (Updates):
a) These values are generally revised only in response to approved
changes in project scope.
b) Sometimes, cost variance may be so severe that a revised cost
baseline is needed.
Requested Changes:
Analysis of project performance can generate a request for a change to
some aspect of the project.
Recommended Corrective Actions:
A corrective action is anything done to bring expected future performance
of the project in line with the project management plan.
Project Management Plan (Update):
Includes schedule activity, work package or package cost estimates, cost
base line, etc.

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End of Lecture

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