Control Costs – PMP Tools and Techniques
Let me start by first considering the necessary information and data needed to control costs, by looking at the inputs to the control costs process:
Just like the Control Scope and Control Schedule processes, the inputs consist of the project management plan, work performance information, and organizational process assets.
In addition, the project funding requirements are also an input.
Here then are the main sources of data or inputs needed to control costs:
- The project management plan
- The two components you will use in this process are:
- Cost performance baseline. Use this to compare planned expenditures against actual costs
- Cost management plan. The cost management plan should identify the acceptable variances for cost performance
As an example, if you are over budget by 20% on a deliverable, but under budget on the project overall, should you report the variance?
Under what circumstances can you use reserve, and what process is do you use to update the plan to show that?
How do you measure cost performance for work that is in progress?
Here is a diagram showing the full PMBOK Control Costs process:
Work performance information
Which costs have been authorized, which of been incurred, and the estimates for completing the remaining work.
Project funding requirements
The periodic required funds for expenditures and reserves
Organizational process assets
Organizational policies, templates, and procedures you need to manage and report project costs
One of the methods you used to determine how well you are performing, is to look at the work performance information to determine how much work has been completed on work in progress.
A common way of doing this is to ask the appropriate team member what the percentage complete is.
However, there are two problems with this approach:
- This is subjective and can be abused
- For short-term activities, it’s time consuming
One way to reduce the time associated with recording progress, is to set up a fixed formula for short-term activities. Short-term being defined as spanning one or two reporting periods.
You select a ratio that adds up to 100%, such as 50:50, 25:75, or 20:80
When an activity starts, the first percentage is credited. When the activity is complete, the remainder is credited. Using a 50:50 measure is the most aggressive, and 20:80 is the most conservative.
Although percentage is not a true measure of accomplishment, after all, is only short term, but the overall performance equalizes quickly because of the short-term nature of the measurement method.
The diagram below shows an example of each method:
Some measurements methods are 0:100. This is a whole discipline, so I will give you a full explanation of this technique before moving on to additional techniques.
Earned value management
The PMP exam just scratches the surface of EVM, but nonetheless, you should expect five also questions on this topic.
After you understand the underlying concept, it is quite simple, and before reading further, you may like to what should my very popular short video that will guarantee you fully understand EVM:
EVM integrates scope, schedule, and costs in the planning, monitoring, and controlling disciplines.
Although implementation of a full scale EV system is quite complex, the following nine steps summarize what you need to know to understand the concept for the PMP Exam:
- Plan the work by using a work breakdown structure (WBS)
- Identify resources and person’s accountable for the work
- Schedule the work
- Estimate the costs
- Develop a performance measurement baseline
- Monitor the work against the baseline to determine variances
- Control the work to keep the project on schedule and on budget
- Manage changes to maintain the baseline integrity
- Develop forecasts for future performance
Note that all these steps are consistent with good project management. In fact, there is a saying,’ you can do good project management without using earned value, but you can’t do earned value without using good project management’
Many terms are associated with EV as well as many abbreviations and acronyms. I introduce these terms and acronyms in chunks as I explain the concepts.
Here are some definitions:
Earned value management (EVM)
A management methodology for integrating scope, schedule, and resources, and for objectively measuring project performance and progress. Performance is measured by determining the budgeted cost of work performed (the earned value), and comparing it to the actual cost of work performed (the actual cost)
Planned value (PV)
The authorized the budget assigned to the scheduled work to be accomplished for a schedule activity or work breakdown structure (WBS) component. This is also referred to as the budgeted cost of work scheduled (BCWS)
Earned value (EV)
The value of work performed expressed in terms of the approved budget assigned to that work for schedule activity or work breakdown structure (WBS) component. Also referred to as the budgeted cost of work performed (BCWP)
Actual cost (AC)
Two costs actually incurred and recorded in accomplishing work performed during a given time. For a schedule activity or work breakdown structure (WBS) component.
Actual costs can sometimes be direct labour hours alone, direct costs alone, or all costs including indirect costs. Also referred to as the actual cost of work performed (ACWP)
Budget at completion (BAC)
The sum of all the budgets established for the work to be performed on a project or a work breakdown structure (WBS) components or a schedule activity. This is the total planned value for the project.