Project Management

EBS MBA Program

Module 6: Cost Planning & Control
Presented by :
Karim Hamza
MPhil / MBA | PMP
 Agenda
Project Cost Planning

Project Cost Control System

 Project Cost Planning and Control Systems

Cost planning is process of breaking the project down into

elements or work packages & assigning a realistic estimate of what
they should cost
Approach : Strategic project function that establishes aims before project work actually starts.
provides a cost “map” for the project

Cost control is the process of ensuring that the cost limits

established by the cost plan are adhered to wherever possible
Approach: a Tactical or Reactive function intended to monitor and control to ensure that the
project strategic cost objectives are met
Cost Control stages involves:
1) Monitoring on-going actual expenditure against cost limits
2) Identifying any variances that occur
3) Identifying the reasons for any variances
4) Taking appropriate corrective action
5) Ensure that the corrective action resolved the variance
6) Taking further action if necessary
 Cost planning and control as a concept
Time A to B : positive variance:
actual expenditure is less than
planned.
At time B, actual expenditure
overall equals the plan.
At time C : negative variance:
actual expenditure exceeds the
plan.
Projections at time C suggest
that, at the end of the project,
actual costs will exceed those
planned unless some form of
corrective action takes place.
 General requirements of cost control system
1. Project schedule must be accurate: All relevant information for each work
package must be take into account
For external contractors and suppliers this takes the form of a SOW
For an internal planner or estimator it would involve a full breakdown of all resources required, in
addition to all direct and indirect cost likely to be involved
2. Estimating system must be reliable:
3. Scope of the project must be clear: The parameters of the task must be
clearly and unambiguously determined
4. Task responsibilities must be clearly defined and communicated
5. Budgets must be realistic: Must reflect the likely cost of performing the budget
in a proficient manner
6. Authorisation system must be clear:
7. The system must be flexible and responsive:
8. Reliable approach to cost tracking and variance analysis:
9. variation detection sensitivity envelope must be time dependent:
10. Flexible approach to the use of reserves and contingencies:
 Types of control system
Cybernetic control:
Low level: simple response mechanism (thermostat), operate automatically
Mid-level: More analysis incorporated in the process where pre-set values
interact with the environment and modify themselves as the environment
changes (learning process)
High-level: Introduces the concept of intelligence, which allows the system to
move beyond the level of pre-programmed responses,
Analogue control: Based on the assessment of individual work components
in terms of whether or not they have been completed satisfactorily by a
certain time
An analogue system comprises a series of simple yes or no answers
Feedback control: based on post-project evaluation and feedback, with the
intention of feeding back any lessons learned to future projects, widely
used in organisations with a constant stream of projects
 Considerations for Control Systems
The level of response required;
The flexibility of response required;
The level of innovation and original (thought) response required;
The level of detail required in reporting systems;
The degree to which responses can be automated;
The degree of variance that is acceptable (as a function of time);
The range of acceptable solutions that are available;
Degree of time lag (between identification & response) that is
acceptable;
The authority systems that are in place and associated time
implications;
The extent to which corrective actions may be limited or controlled.
 Cost allowances classification
Fixed and variable costs:
Fixed costs: incurred irrespective of the level of activity on the project
(management and administrative salaries, rent, heating, insurance etc)
Variable costs: are incurred at a rate that depends on the level of project
work activity. These are usually direct costs
Direct and indirect costs:
Direct costs: costs directly attributable to the project task (labour,
materials and equipment charges)
Indirect costs (overheads): facilities, services and personnel costs that exist
in an organisation irrespective of the project
Measured works : Describe works & identify individual unit prices for individual
sections
Contingencies and reserve : Makes allowance for unforeseen costs due to the
highly unpredictable nature of projects (poor scope definition, design errors,
poor planning, poor resource estimation, production mistakes, untried
methods, changes in the environment)
Fluctuations (Cost escalation) : Cost escalation is generally more relevant to
longer-term projects and is mainly the direct result of inflation
 Cost allowances classification
Prime costs and provisional sums:
Prime cost have been agreed specialist or nominated suppliers or subcontractors.
Provisional sums estimated to cover work that is foreseen but not clearly
defined at the outset.
Direct payments: Large projects often require the input of external bodies. These may
be statutory bodies, such as local authorities, or service bodies such as the local
power company.
Bonds and warranties:
Bond covers contractor performance up to practical completion and handover.
Warranty or guarantee covers the quality and reliability of the finished product
after handover and during use.
Contracts involving public finance often require detailed bond cover.
Exchange rate and currency fluctuations:
Insurance:
Client insurable risks: Fire Flood Lightning
Contractor insurable risks: Employers liability for employees , Liability for
damage to third-party persons and property
 Life-cycle costs
Life-cycle costing (LCC) is the process of
attaching costs to individual life-cycle stages of
the project
LCC is concerned with the overall cost
incurred in the ownership of a product,
structure or system over its entire life-span
primary objective of LCC is to help project
manager and client to identify and evaluate
the economic consequences of their decisions,
 Project Cost Control System
The US's PMI and the UK's APM, together with BS6079, all
now recommend the use of some form of standard
project cost control system (PCCS).
A PCCS is a format for the development of cost plans
and for mechanisms for monitoring and controlling
actual expenditure with planned expenditure.
5 phases of the PCCS:
1) Cost planning
2) Work initiation
3) Cost data collection
4) Generation of variances
5) Cost reporting
 The PCCS Planning Cycle
Involves breaking the project down into manageable packages/elements and
then attaching individual budget totals to these packages based on an estimate
of the likely cost
Estimating procedure main approaches :

professional estimator or The project team

Estimating elements
Labour costs (total number hours X unit price)
Material/equipment costs: 1) financial cost 2) Availability estimate
Plant costs
Data gathering: usually based around the WBS, and work packages are then split
into separate labour, plant and materials elements, with individual costs
attached
Sources of estimating data include:
Company specific tables
Previous project data
Estimator skill and knowledge
 The PCCS Planning Cycle

Project estimating : depends on the accuracy of work

measurements and the reasonableness and accuracy of rates
that have been assigned to measured works
Top-down estimating: (Market driven) Senior management sets the
overall project budget using experience, knowledge and accessible
data
Bottom-up estimating: (Process driven) Project budget is estimated
from the individual activity level and summarised upwards to arrive
at total cost
Iterative estimating: Is based on negotiation
Computerised Database Estimating Systems
The project budget plan: is the end result of the planning
phase in the PCCS, and it is the sum of all the individual
work package budgets for the project
 The Project Budget Plan
Sequence of preparation of the project budget
normally developed in a number of stages,
usually based on a SOW as a starting point, and SOW has to be broken down
into a WBS
Using a CDES, the cost consultant then prepares accurate estimates at
different levels in the WBS
Project Budget is therefore the estimated cost of the whole project.
Project Budget is not the same as the selling price,
Project Budget is the effective cost limit as authorised and set by the client,
and as confirmed by the project cost consultants as the designs have
evolved.
The project cost consultants will use the project budget as a target when
carrying out pre-tender cost checks, and they will increase or decrease the
amount of work involved in the project in order to match the project
budget with the anticipated tender totals.
 The Project Budget Plan
Role of the project budget:
normally considered to be a management, planning and decision-making tool.
Establishing the overall budget baseline for the project,
which acts as the basis for EVA (earned value analysis)
Developing the projected cost curves for each element
Establishing a reference for variance analysis
Moderating the spending of element and package managers
Generating the basic data for scenario analysis in trade-offs
Estimating the likely effects of change notices and variation
orders
In addition, a project budget can have an intended or unintended motivational or de-
motivational effect.
 PCCS Operating Cycle (cost & control system):
monitors actual expenditure against planned expenditure to generate cost variances
Comprises 4 stages,
Phase 1: Planning Stage:
Phase 2: Work initiation: the formal issue of a contract, or
through change control notices such as variation orders (VO) or
works orders (PWO)- correct cost centres are identified both
on the PWO and the VO.
Phase 3: Cost data collection: Actual cost data are recorded and
entered into the system by individual work package. These
data are then compared with the latest budget revision and
variances are calculated.
Milestone monitoring: EVA is based on milestone monitoring, which involves comparing target
milestones to actual progress.
Phase 4: Generation of variances
Phase 5: Cost reporting
Q&
A