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The Typical Cost Model in Project Management

The problem with managing expenditure In Project Management is that you have to see the whole iceberg. The Typical Cost Model in Project Management. ACWP: Actual cost of work performed: Actual costs in performing the work so far.

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The Typical Cost Model in Project Management

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  1. The problem with managing expenditure In Project Management is that you have to see the whole iceberg The Typical Cost Model in Project Management ACWP: Actual cost of work performed: Actual costs in performing the work so far. BCWP: Budgeted cost of work performed: The budgeted (planned) cost for the work performed so far. BCWS: Budgeted cost of work scheduled: The planned profile of expenditure against time for the project. CPI: Cost performance index: The ratio of the value of the work to the actual incurred cost: CPI = BCWP:ACWP BCTC: Cost to complete: Budgeted cost of work still to be achieved. CV: Cost variance: A measure of performance in cost terms: CV = BCWP – ACWP ECAC: Estimated cost at completion: The projected completion cost of the project. ECD: Estimated completion date: The date at which the project is estimated to be completed. PB: Project Budget. The budgeted cost of work performed when the project is completed. SPI: Schedule performance index: The ratio of the work performed to the work scheduled: SPI = BCWP/BCWS SV: Scheduled variance: The difference between the budgeted cost of work performed and work scheduled: SV = BCWP - BCWS Project Management – Unit 4 – Part 1 Cost Model

  2. Example Data € Project Management – Unit 4 – Part 1 Cost Model

  3. Budgeted cost to Completion Actual Cost of Work Performed Cost variance Budgeted Cost of Work Scheduled Budgeted Cost of Work Performed 0 1 7 3 5 9 11 13 15 17 Time Period (tp) Date of calculation Example using Data 400 300 Planned Cost 200 100 Project Management – Unit 4 – Part 1 Cost Model

  4. Calculations Using the data on the previous slide and calculating from the mid point of time period 9 • Actual cost of work performed = €270 • Budgeted cost of work scheduled = €390 • Budgeted cost of work performed = €240 • Cost performance index = BCWP:ACWP = €240:€270 = 1:1.125 • Budgeted cost to completion = BCWS – BCWP = €390 – €240 = €€150 • Cost variance = BCWP – ACWP = €240 – €270 = € –30 • ECAC = BCWS xCPI = €390 x 1.125 = €438.75 Project Management – Unit 4 – Part 1 Cost Model

  5. Negative cost variance Positive cost variance Monitoring Costs – Cost Variance (CV) CV is a value that should be regularly updated throughout the life of the project and is the difference between BCWP and ACWP Base Cost Line BCWS Planned cost Time periods • Remember: • This exercise is based on the S curve – the budgeted cost of work scheduled for the project. Actual expenditure invariably follows. Project Management – Unit 4 – Part 1 Cost Model

  6. 160 Beta 140 120 Actual 100 Alpha Days 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 Work Package – Activity ID Remember this? Project Management – Unit 4 – Part 1 Cost Model

  7. Cost Cost Cost Time period Time period Time period Days Days Days Time period Time period Time period Example 2 Example 3 Example 1 Managing Time and Cost Project Management – Unit 4 – Part 1 Cost Model

  8. €100,000 ACWP C V ACTUAL EXPENDITURE SV BCWP BCWS €100,000 VALUE OF WORK COMPLETED Comparing the Planned and Actual Values of Work Completed Planned month end points Actual month end points ACWP Actual cost of work performed BCWP Budgeted Cost of Work performed BCWS Budgeted cost of work scheduled CV = Cost variance SV = Scheduled variance Slack et al. Ed 5. pp514 Project Management – Unit 4 – Part 1 Cost Model

  9. . . . .. .. .. Estimating Costs at Completion (ECAC) • Depends on what assumptions the PM chooses to make about the cost of work still to be performed • Assumption 1. The work still to be achieved will be done at the budgeted cost, the original estimate ECAC = PB – CV • Assumption 2. (Probably more realistic) is that the remaining work will be performed at the same cost / budget factor that has been observed in the work performed so far ECAC = PB * (ACWP/BCWP) ~ this is sometimes known as the cost performance index (CPI) • Cost to completion (CTC) (NB. not the cost at completion) since the cost so far is ACWP, the estimated cost of the work to be done CTC = ECAC - ACWP Project Management – Unit 4 – Part 1 Cost Model

  10. Summary • Developing the cost model • The use of S Curves • Monitoring cost variance Project Management – Unit 4 – Part 1 Cost Model

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