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Control Costs with Earned Value

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control cost in PMBOK

Control Costs within a PMBOK Project With Earned Value

As the project manager, you will need to monitor and control your budget and to make sure that you compare the actual cost with the baseline cost for each deliverable, and hence control cost.  It makes sense than that using the control cost process means that your project must stay within funding limitations and manage your project expenditure.

Like any aspect of control cost, once you find that there is a variance from the baseline you must determine what caused the variance and therefore decide what the most appropriate response is.

The use of earned value management is crucial here for objectively measuring project cost performance, progress, and hence applying cost control.

The project manager must be proactive – don’t just wait for variances to occur, but influence and control the factors that contribute to the variance.  The focus should be on taking appropriate steps to bring the actual cost back in line with the plan either by modifying future plans or by changing the way in which to work is being performed.

This earned value process is all about cost variances.  If I a positive that is good, if negative that is bad.

In summary, the ‘control costs’ process is defined as a monitoring the status of the project, updating the project budget, and managing changes to the cost baseline.

There are many reasons why cost overruns and variances can occur:

Scope creep, the impact of issues or risks, inaccurate estimating, required activities that were not identified during planning, differing resources and their costs, and poor change control.

Control Costs – the four inputs to this process:

Project management plan.

There are two main earned value elements here that are relevant to costs.  The cost performance baseline, also known as the budget, is used to compare planned expenditures against actual costs.  The second main element is the cost management plan which defines how costs will be managed throughout the project life.

The cost management plan describes how earned value cost performance will be measured for work that is in-progress.  It should also state acceptable variances for cost performance and when you can use reserve.

Project funding requirements.

Positive or negative earned value variances from the plan funding will need to be re-evaluated hear so that corrective action can be taken if required and hence control cost.  Some projects are given all their funding from the very start in which case all that is required is to determine variances and take appropriate action to ensure that the project remains in budget.

But many projects receive their funding on a piecemeal basis, typically at key milestone points.  Such funding is usually given on the basis of a key deliverable being produced.

Work performance information

Like any aspect of control cost this lays down which costs have been authorized, how much has been spent to date, and what are the estimates for completing any remaining work.  A typical way of determining actual progress is to ask the team the percentage complete of the task in hand, and of course this is one of the most important inputs when using the earned value management technique in the control cost process.

Control Cost Organisational process assets.

This refers to any control cost related assets such as policies, procedures, the use of templates or reports, etc.

There are six main outputs from the control cost process:

Earned Value Work performance measurements.

With regard to control cost, it is important to capture all the of the relevant costs when claiming a deliverable(in earned value, this deliverable will be assigned an earned value cost and the ratio of money expended for monetary value created must be kept honest).

Work performance measurements are used to show project performance against the plan so the earned value management metrics that are most important are; CV, SV, CPI, SPI, and SPIc.

Earned Value Budget forecasts in control costs.

These determine the extra funding that will be required from this point onwards and is based on actual costs are accrued so far.  Again earned value is particularly useful, in particular estimate at completion (EAC) and estimate to completion (ETC) as these help forecast not just remaining costs but also the required total cost for the project.

Change requests.

These refer to cost related change requests of course, may be needed if the control cost process shows that the project will be costing more or less than the cost baseline in which case it changes will be needed to bring the project back on track.

Such changes may request scope for reduction, budgetary increase, or a change to the way the work is being executed.

Project management plan updates.

This relates to any changes such as those to the cost baseline or the cost management plan.  It may also relate to other aspects of the project management plan for example a modification to project scope.

Project document updates.

This is normally needed as a consequence to project management plan updates for example a change to contractual terms and conditions.

Organisational process assets updates.

These may take the form of lessons learned or whether such lessons are positive or negative, and may result in improved control cost management for future projects.

There are five tools and techniques used in the control cost process:

pmp earned valueEarned value management.

This is a detailed topic and the reader may like to refer to my YouTube video which teaches the PMP basics in just 10 minutes flat! Find Earned Value HERE

The objective of earned value measurement is to identify if the project is at variance with the cost baseline.  As well as determining variances such as CV, it will also help identify trends (CPI) which will help control  cost.

Earned Value TCPI.  This is an earned value term which describes the performance needed for you to achieve your earned value targets, and hence to control cost.

Control Cost Performance reviews.

These are used to determine those areas where costs are under or over performing, and yet again uses earned value management to compare actual results with the cost baseline and hence the ability to be able to control cost via forecast trends and indexes.

Earned Value Variance analysis.

The cost management plan will lay down how variances should be analyzed and managed so that the cost baseline can be updated to reflect future cost forecasts and hence control cost.

Control cost with Project management software.

A typical application here might be the use of Microsoft Project 2010 or the use of spreadsheets if your project is not too important, small, or low risk.

The capturing managing and forecasting of costs can be a detailed control cost process often taking up much of the project manager’s time, and the use of project management software can be a very efficient way of obtaining the data required and can avoid human error.

For more great information on helping you to pass your PMP® Exam – click on my PMP Primer!

“PMI” and “PMP” are registered marks of Project Management Institute, Inc. I hope you enjoyed my control costs article!