PMP Project Management Professional Study Guide, Third Edition (Certification Press)

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Cost control is an ongoing process throughout the project. The project manager must actively monitor the project for variances to costs. Specifically, the project manager always does the following:

Revising the Cost Estimates

As the project progresses and more detail comes available, there may be a need to update the cost estimates. A revision to the cost estimates requires communication with the key stakeholders to share why the costs were revised. A revision to the cost estimates may have a ripple effect: other parts of the project may need to be adjusted to account for the changes in cost, the sequence of events may be reordered, and resources may have to be changed. In some instances, the revision of the estimates may be expected, as with phased-gate estimating in a long project.

Updating the Budget

Updating the budget is slightly different than revising a cost estimate. Budget updates allow the cost baseline to be changed. The cost baseline is the “before project snapshot” of what the total project scope and the individual WBS components should cost. Should the project scope grow, as shown here, the cost will also likely change to be able to fulfill the new scope.

If a project undergoes drastic changes—due to large changes to the project scope, false assumptions, or new demands from the customer—it may be necessary to rebaseline the project cost. Rebaselining is done only in drastic changes, as it essentially resets the project. All historical information up to the rebaseline is cleared, and the project starts fresh.

Applying Corrective Actions

Throughout a project, the project manager will apply corrective actions. Corrective actions are any actions applied to project performance to bring the project back into alignment with the project plan. Corrective actions can be scheduling changes, a shift in resources, a different approach to completing the project work—any action, even nudges or shoves, to bring the project back to its expected level of performance.

Preparing for the Estimate at Completion

The Estimate at Completion (EAC) is a hypothesis of what the total cost of the project will be. Before the project begins, the project manager completes an estimate for the project deliverables based on the WBS. As the project progresses, there will be in most projects some variances between what the cost estimate was and what the actual cost is. The difference between these estimates is the variance for the deliverable.

EAC is part of the Earned Value Management approach. We’ve talked about Earned Value, Planned Value, and Actual Costs earlier in this chapter. To complete this discussion on EAC, we’ll need another formula from the EVM family. We’ll discuss the entire EVM process in Chapter 10; for now, the one we’re after is the Cost Performance Index (CPI).

Calculating the CPI

CPI is a value that demonstrates how the project costs are performing. CPI is a value that reveals how much money the project is losing. Or, if you’re an optimist, how much money the project is making. For example, a project with a CPI of .93 is losing seven cents on the dollar, assuming U.S. dollars. Or, for the optimist, it’s making .93 cents on the dollar. The fact of the matter is, a project with this CPI value is likely to be over budget because for every dollar spent seven cents evaporates. This shows the CPI in action:

CPI is a value that shows how the project costs are performing to plan. It relates the work you have accomplished to the amount you have spent to accomplish it. A project with a CPI of .93 means you are spending 1.00 for every .93 worth of work accomplished. Therefore, a CPI under 1.00 means the project is performing poorly against the plan. However, a CPI over 1.00 does not necessarily mean that the project is performing well. It could mean that estimates were inflated or that an expenditure for equipment is late or sitting in accounts payable and has not yet been entered into the project accounting cycle.

If you don’t want to think of the CPI value as making or losing money, that’s fine too. Just know the CPI value should be as close to 1.00 as possible. Oh, and don’t celebrate too loudly if the CPI is greater than 1.00. A CPI greater than 1.00 may just reflect poor, bloated estimates, rather than an over-performing project.

Calculating Estimate at Completion

Now that the CPI is known, the project manager can calculate the Estimate at Completion. There are actually a few different ways to calculate the EAC. The project manager should choose the approach that best matches what has been experienced in the project. Figure 7-6 shows all of the EAC formulas in action. The next sections describe the different formulas and the conditions in which to use them.

Figure 7-6: There are many approaches to calculating the EAC.

Experiencing Expected Conditions

If the project is going as planned with little variances, the project manager can use the most basic EAC formula to predict the EAC. Here’s the formula for this condition: EAC=Budget at Completion (BAC)/Cost Performance Index (CPI); you can also write this formula as EAC=BAC/CPI.

For example, if the project’s BAC is $575,000 and the CPI is .91, the EAC for this project is $631,868. Those nine cents on every dollar sure do add up!

Accounting for Flawed Estimates

Imagine a project to install a new operating system on 1,000 workstations. One of the assumptions the project team made was that each workstation had the correct hardware to install the operating system automatically. As it turns out, this assumption was wrong, and now the project team must change their approach to installing the operating system.

Exam Watch

Know this formula for calculating the EAC: EAC=BAC/CPI. It’s the most common of the formulas presented.

Because the assumption to install the operating system was flawed, a new estimate to complete the project is needed. This new estimate to complete the work is known as the “Estimate to Complete (ETC).” The ETC represents how much more money is needed to complete the project work, and its formula is ETC=EAC-AC.

In this scenario of a flawed assumption, the project manager will use a slightly different formula to predict the EAC: EAC = AC +ETC. For example, if the project’s original BAC was $100,000 and the project team had spent $20,000 before realizing the project assumption was flawed, they’d have to create a new estimate to complete the remaining work. Let’s pretend the ETC the project team arrived at was $175,000. The formula EAC=AC+ETC would result in $20,000+$175,000=$195,000. This is because the project had spent $20,000, and $175,000 more is needed to complete the work.

Accounting for Anomalies

Sometimes in a project weird stuff happens. These anomalies, or weird stuff, can cause project costs to skew. For example, consider a project to construct a wooden fence around a property line. One of the project team members makes a mistake while installing the wooden fence and reverses the face of the fencing material. In other words, the material for the outside of the fence faces the wrong direction.

The project now has to invest additional time to remove the fence material, correct the problem, and replace any wood that may have been damaged in the incorrect installation. This anomaly likely won’t happen again, but it will add costs to the project.

Exam Watch

Monies that have been spent on a project are called sunk costs. In evaluating whether a project should continue or not, the sunk costs should not be considered—they are gone forever.

For these instances, when events happen but the project manager doesn’t expect similar events to happen again, this EAC formula should be used: EAC=AC+BAC-EV. Let’s try this out with our fencing project. The project’s AC so far was $7,000; the BAC was $24,500; the EV is only $2,450, as the project has barely started. The formula would read EAC=$7,000+$24,500-$2,450 and result in an EAC of $29,050— a costly mistake.

Accounting for Permanent Variances

This last EAC formula is used when existing variances in the project are expected to be typical of the remaining variances in the project. For example, a project manager has overestimated the competence of the workers to complete the project work. Because the project team is not performing at the level the project manager had expected, work is completed late and in a faulty manner. Rework has been a common theme for this project.

The EAC formula for these instances is EAC=AC+((BAC-EV)/CPI). In our example, let’s say the AC is $45,000; the BAC is $250,000; the EV is $37,5000; and our CPI is calculated to be .83. The EAC formula for this project is EAC=$45,000+(($250,000-$37,500)/.83). The result of the formula (following the order of operations) is $301,024.

Closing Out the Project

Cost control requires accountability for the funds spent. As part of project closeout, phase closeout, or even project cancellation, there must be identified processes and procedures on how to shut down the project. A formal audit may be called for to review the time, costs, materials, and budget of the project. In some instances, a review may happen with management or the Project Sponsor to account for the project budget and how well cost control was managed within the project.

Updating Lessons Learned

As part of Cost Control, the project manager should update the Lessons Learned document to reflect the decisions behind the actions taken. For example, the project manager should identify:

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