Project Cost Control: Definition & Steps

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  • 0:02 Controlling Costs on a Project
  • 1:42 Earned Value Management
  • 3:13 Forecasting
  • 4:33 To-Complete Performance Index
  • 5:22 Lesson Summary
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Lesson Transcript
Instructor: Carl Lovell, PMP

Carl has taught grad-level college Project Management and Quality. He holds a Masters degree in Business and is a certified Project Management Professional.

The planning, monitoring, and control of project costs is critical to successful project delivery. In this lesson, you will learn about cost control systems and why cost control is important to project delivery.

Controlling Costs on a Project

Have you ever planned a home improvement project, like adding a patio or decorating a room, and the costs seemed to increase on a daily basis? Don't feel bad; it's not that unusual. The good news is there are some cost control methods you can use.

Project Triple Constraint
Project Triple Constraint

Bur first, there is a fundamental principle of project management that you need to grasp. This principle, called the triple constraint, explains the relationship between cost, schedule, and scope (newer models add quality as well, particularly for highly technical projects). The triple constraint shows that you cannot manage cost independently, but rather must manage cost as it relates to the schedule and scope of the project.

So, how do you do that? First you develop a schedule for the scope of the project. Then you relate the project costs to the schedule by developing a time-phased budget, which allocates the budget to the specific work scheduled. Budgeting costs to the schedule allows you to relate costs to work performed. For example, on your patio project, you've scheduled two days for the contractor to level and compact the ground. Now you allocate the estimated cost for that work to that scheduled activity. When the contractor is finished, you can then relate the actual costs to the work performed for that part of the project.

There are several cost control systems or approaches that can be used on projects such as Earned Value Management, forecasting, and a To-Complete Performance Index. The selection of which method to use on any particular project will be based on the project complexity and the requirements of the project customer or sponsor. Let's investigate these approaches.

Earned Value Management

The best project management system to use for cost control is Earned Value Management (EVM), which helps identify project variances between the value of work planned and the value of work performed. For EVM to work, your project must have a resource-loaded schedule, meaning the project must be time-phased with the scheduled work. A resource-loaded schedule allows you to calculate the value of work scheduled compared to the budgeted cost of work performed. At the same time, you can use your accounting system to get a value for the actual cost of work performed.

Once you have values for the work scheduled, the budgeted cost of work performed, and the actual costs, you can calculate a Schedule Performance Index (SPI), which measures and compares the actual progress to the planned progress, and a Cost Performance Index (CPI), which measures and compares the actual costs to the planned costs. Interpretation of these two indices is straightforward and easy: a positive value is good and a negative value is bad. So for CPI, a positive value says that you underspent for the work you've completed, while a negative value says you have overspent your budget for the work performed.

Using the EVM for your patio project, it would be easy to see if you have spent 75% of your budget, but have only completed 50% of the actual work. This lets you know that if you want to finish on budget, you need to take action to reduce the cost of the remaining 50% of the work.

Forecasting

Another method of controlling project costs is forecasting, which is the process of using data on the current project status to predict future project performance. Again, you first need to have the budget planned in a time-phased manner, although it may not be a fully resource-loaded schedule. The forecast will then be fairly simple to calculate: simply take your Actual Cost of Work Performed (ACWP), the actual cost to date, and add it to the budgeted estimated cost of the remaining work, known as the Estimate to Completion (ETC). The resulting value (ACWP + ETC) is the Estimate at Completion (EAC).

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