HNC/D Project Management

Transcription

1 Session 8 - Monitoring cost and slippage in progress Monitoring the project cost The normal accounting systems used in a business are rarely adequate for monitoring project costs. (An exception to this are those businesses whose main function is to undertake projects, such as engineering contractors.) In most businesses the material and labour expenses are not usually recorded in precisely attributable way that is required for project control, and often the reports from the accounting system are available too late for the manager to exercise a control. Furthermore, it is rare for a non-project business to record alongside the expenditure the value of the work achieved by that expenditure. Measurement of expenditure alone is almost useless: it is essential to know what has been achieved as a result of this expenditure. The consequence of these deficiencies is that many project managers have to their own system for monitoring and controlling project costs and achievement The system that is described here is called an earned value system, so called because it seeks to show the manager not only the cost of the work performed so far but the value earned by that work. Such systems are now quite common among performing organisations. Some clients may insist on the use of such a system. The earned value of the work performed on a project is the value that the estimator attached to that work when the project budget was defined. Another term for which is rather more explicit is budgeted cost of work performed, or BCWP. the term we shall employ in this course but it is interchangeable with earned value. The budgeted cost of work performed at any stage during the project can be calculated by adding up the component values of the elements of work that contribute to the project, taking account of the fractional completion of each element. Suppose the budgeted values in a project are as shown in Table 1.

2 Table 1 Calculating BCWP for a new plant project If milestones have been passed corresponding to 50% completion of the site preparation and equipment procurement then the BCWP is calculated in Table 1 as Although no breakdown has been shown for these packages assume that milestones have been defined to allow satisfactory estimates of` percentage completion to be made. A more complete version of Table 1 show each work package subdivided into work elements, most of which either 0% or 100% complete, leaving the partial progress on only a minority elements to be assessed. * Estimating the cost at completion As the project progresses the actual cost of work performed (ACWP) can be monitored by collecting data on the costs of the labour and materials used by the project. The ACWP can then be compared to the BCWP as shown in Figure 1. The cost variance (CV) is the difference between ACWP and BCWP: CV = ACWP BCWP CV represents the expenditure over budget for the work performed so far. At the end of the project BCWP will reach the agreed budgeted cost at completion, the project budget, PB. The cost variance at that time will be the cost over-run of the project. (Here we make no distinction between inflation and other causes of escalation. Inflation could be factored out.) The estimated cost at completion will depend on what assumption the project manager chooses to make about the cost of work still to be performed. One assumption that could be made is that the work still to be performed will be done at the budgeted cost, the original estimate. In this case the estimated cost at completion (ECAC) will be given by:

3 ECAC = PB + CV Assumption 1 A more realistic assumption may be that the remaining work will suffer the same cost inflation factor that has been observed in the work performed so far. In that case the estimated cost at completion will be given by: ECAC = (ACWP/BCWP) PB Assumption 2 The ratio BCWP/ACWP is sometimes called the performance index, PI. Early in the project, when the fraction of work completed is small, the performance index may be an unreliable guide to the costs of the rest of the project because it is based on too little data, so it is probably better to use Assumption 1 until at least 30% of the work has been done. Later on, it is probably more appropriate to use Assumption 2. As the project approaches 100% completion the two estimates approach each other so it then does not matter which assumption is used. Another term frequently required in a monthly cost report is the cost to complete (CTC). The cost to complete (as opposed to the cost at completion) is the estimated cost of the work still to be done. Since the cost so far is ACWP, the relationship between the cost to complete and the estimated cost at completion is: CTC = ECAC ACWP

4 The value of CTC is the relevant figure if you had to decide whether to continue with a project or to cut your losses and cancel it. Other costs are water under the bridge, called sunk costs, but CTC is the money still to be spent. A number of cost control terms have now been introduced and it may be useful to see a summary of them, together with some others that have not yet been mentioned, as shown in Table 2 TABLE 3.3 Cost control terms Table 2 Summary of cost control terms ** Monitoring the achievement against the schedule Although this section is primarily about monitoring cost it is convenient to anticipate the next section, on monitoring the achievement against schedule, by introducing here the budgeted cost of work scheduled, BCWS. You have already met BCWP, the budgeted cost of work performed, which represents the achievement. BCWS represents the planned achievement. Although both BCWP

5 and BCWS are measured in terms of cash they are really measurements of quantities of work (or achievement) expressed for the sake of compatibility in cash terms. BCWS represents the scheduled work while BCWP represents the performed work. The graph of BCWS against time can be plotted at the outset of the project once the cost of each activity has been estimated and a schedule of the activities has been prepared. To calculate BCWS we need to know the budgeted cost of each activity and the time at which that activity is scheduled to be performed. This can be found from the bar chart once each activity has been given a scheduled start time. It is necessary to assume the expenditure profile of each activity, the simplest assumption being that the rate of expenditure is constant during the activity. This will usually be accurate enough. For example, in the new plant project we might assume that the installation activity starts at week 20 and finishes at week 25 and that the cost will be spent at f per week as shown in Figure 2. By adding together the rates of expenditure of all the activities each week, the total rate of expenditure on the whole project can be predicted for each week. These can be accumulated to give a scheduled cumulative cost, the budgeted cost of work scheduled (BCWS) as shown in Figure 3. A further elaboration is possible. The bar chart used as the basis for the BCWS calculation will usually include activities that have float. To obtain a BCWS curve it is necessary to fix the start time of each of these activities, usually the earliest start time. However, for planning purposes it is possible to calculate two extreme BCWS curves, one assuming earliest starts and one assuming latest starts, as shown in Figure 4. These two extremes show the limits between which any actual BCWS curve must lie. ***

6 Schedule variance The schedule variance (SV) may be rather difficult to understand when you first meet it. It is the apparent underspending on the project so far because the work has not progressed as far as scheduled, an apparent saving due to delay: SV = BCWS BCWP The schedule variance is not a true cost saving; it is simply the effect on the current cash balance if expenditure on the project is delayed. In an extreme case, for example, you might have planned to spend f 1 million by June but in fact you have not yet started, and have spent nothing, so the schedule variance is 1 million. A more realistic situation is shown in Figure 5 where all three curves, BCWS, BCWP and ACWP, are plotted. FIGURE 5 Performance on atypical project The state of the project shown in Figure 5 is typical of many projects. The BCWS is shown as an S-shaped curve, representing the planned accumulated expenditure. It reaches the project budget at the scheduled completion date. The next lower curve is the actual cost of work performed. In the example illustrated it is lower than the budgeted cost of work scheduled, not because of actual under-expenditure, but simply due to delay in the project. This can be seen from the third curve, BCWP, which is even lower than ACWP. The cost variance (CV) is positive, showing that the work performed has actually cost more than planned. The work is well behind schedule, causing a large schedule variance (SV). ****

7 We will be returning to the subject of the schedule variance and the interpretation of the BCWS and BCWP curves in the next section, which is concerned with maintaining the schedule. Controlling the project cost Controlling cost is much more difficult than monitoring cost and it is almost impossible to prescribe how it should be done. There are numerous books on cost control which, in spite of optimistic-sounding titles, are really mostly about techniques for cost monitoring. Cost monitoring is of course an essential prerequisite for cost control because without it the project manager is left in the position of one who can only exhort the team to do their best, but does not know whether to praise them or blame them for their past performance. It comes back to the project control loop. The status measurement is essential for control. One axiom should be stated at the outset: you cannot control the cost of an item when the money has already been spent or irrevocably committed. A consequence of this axiom is that cost control is all about controlling future commitments, not about controlling the past expenditure. So the main element of cost control is the authorization to spend money, which will be discussed below. This being so, what then is the point of cost monitoring-gathering and reporting the costs of historical spending? It may be argued that such monitoring is done purely to satisfy the accountants about where the money has gone. Perhaps cost monitoring is useless as a tool for controlling cost? How does it help? The answer to this is three-fold. First, there is the effect upon the attitude of the project staff towards spending. The fact that the project manager is cost conscious must be strongly communicated to the project team so that their attitude towards expenditure reflects this. This attitude can be either fostered or neglected according to the mechanisms which are instituted by the project manager for authorizing expenditure and for calling staff to account for their spending. Second, the cost monitoring system gives feedback so that the project manager knows whether the authorization controls are working. Third, if costs do over-run, it gives the project manager advance warning to seek more funds before the cash runs out.

8 Authorisation During the execution of the project the control of cost is mainly exercised by authorising only those commitments which are detailed in the project budget breakdown with some margin, perhaps 10%, to allow for inaccuracies in the estimate. In some companies each order for external expenditure will carry a cost code so detailed that it can be checked against the estimate for that individual item before the official order is placed. More commonly the cost code embraces a number of component orders because the cost account is set at a higher level in the work breakdown structure (WBS) than the component level. Even so the engineer responsible for initiating the order will be expected to ensure that the cost of all the components within the cost account does not exceed the estimate by more than the tolerable error. Similar control is required for the expenditure on labour. For close control a system is required in which every unit of time is booked against a cost code, representing an activity within the WBS. Authority to book against a given code has to be given in advance. The only difference from the system of monitoring commitments for equipment is that the units of measurement are usually days or hours rather than pounds. The translation of time to cost charged against the project is usually based on some formula according to the grade of the employee, and includes a factor to cover all the overheads, such as the provision of office accommodation, heating, lighting and phones. Timing The project manager's power to influence the final cost diminishes as the project progresses. The most effective time in the project at which to exercise control is at the conceptual stage when the scope of the project is being defined. At each successive stage as the project progresses, the scope for exercising control diminishes, until at the finishing stages the project manager is almost powerless to affect the outcome. At the conceptual stage there has as yet been little expenditure on the project and it is still possible, by cancelling the project, to save nearly 100% of the project budget. Although this may seem to express a rather pessimistic attitude there is no doubt that it would have saved a great deal of money for many project sponsors if some projects had been aborted at an early stage. Of course this is easier to see with hindsight, but it shows the importance of getting the concept right. If a project is to he aborted it is cheapest to do it early.

9 The next most effective stage at which to save money is at scope definition. Perhaps some parts of the project are less valuable than others. The cost of each function needs to be carefully estimated to ensure that each piece of the project is worthwhile. The specification may need pruning to get the best value for money. (Very occasionally the reverse is true: the scope needs to be expanded to achieve better returns.) Once the scope has been defined the most important of all documents for cost control can be produced: the project budget breakdown. This budget will give a detailed breakdown of the cost of the project showing the budgeted cost of every item to be ordered and every task to be performed down to the lowest level of detail that it is economically possible to achieve, given the knowledge available at that stage. Calculating slippage from earned value S-curves You have seen in the previous section how an earned value system can be used to calculate the slippage of costs. The same system, using the same data and the same curves, can be used to estimate the overall slippage of the schedule. The scheduled rate of completion of the project is represented by the BCWS curve, the budgeted cost of work scheduled. Remember that the term 'budgeted cost' is really a measurement of work, but is presented in cost terms in order to have a standard unit of measurement. So BCWS represents the accumulated value of the work which should be achieved at any date if all is performed to schedule. However, we also have available, through the earned value system, a measurement of the budgeted cost of work performed (BCWP) which measures the work actually done, in the same cost units. So the time lag of one curve behind the other at any date in the project is a measure of the slippage. Figure 6 shows a typical situation. At the end of June the value of BCWP has reached the value scheduled at the end of May. The current slippage is therefore one month. It is important to appreciate that, as BCWS and BCWP are both budgeted costs, not actual costs, there is no need to take any account of cost escalation in making this calculation. This has been taken care of by using budgeted cost in both curves. To extrapolate to the end of the project assumptions about the rate of progress on the remaining work must be made similar to those made earlier for cost predictions.

10 Figure 6 Earned value S curve for a typical project ***** The effect on the projected completion date of making different assumptions is shown in Figure 7. If it is assumed that all remaining work is performed at the scheduled rate, then the projected completion date will be one month behind the original scheduled completion date. If, however, it is assumed that the time scale for the outstanding work has to be inflated by the same factor as for work performed so far then the projected slippage is much greater. The work scheduled to be done in 5 months has taken 6 months, so the time scale inflation factor is 1.2. The scheduled 1-year project will take 1.2 x 12 months, i.e months. The projected slippage is 2.4 months. As the effect of different assumptions is so large how can you, as project manager, choose between them? You must decide whether the factors that have affected progress so far are likely to persist or whether they are factors that belong only to the past. You must exercise your judgement according to the apparent cause of the previous slippage.

11 Figure 7 Alternative assumptions for predicted achievement Significance of S-curve slippage The slippage estimated by the time difference between BCWS and BCWP is a measure of the delay in the overall rate of work on the project. If the slip between the two curves is one month it cannot necessarily be inferred that each activity is now one month behind schedule. The aggregation of all the components that make up the earned value means that we may have reached this earned value by being ahead on some parts of the work and behind on others so that the total achievement is as reported. The value represented by BCWP is an overall measure of work done and does not distinguish between work that it is critical to perform to reach the final target and work that is less critical. To understand this distinction it is necessary to look at the project network. You will be taught networking theory in the business module in semester 2.