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Determining Costs, Budget, and Earned Value

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Teaching Strategies

The two vignettes reinforce the requirement to use lessons learned to inform the next project, increase consideration of risk management, have change control strategies, set appropriate responsibilities, have a communication plan, have procedures for addressing common issues, organize project sites, and align stakeholders. The goal is to detect and curb systematic cost underestimation and manage scope changes to avoid cost and schedule overruns. The first vignette explores a tidal project that incorporated lessons learned from a demonstration project and listened to key stakeholders to build trust. The second vignette reinforces the need to examine the relationships among scheduling, costs, benefits, and earned value in order to have successful projects
Tell students a story of a project that spent its entire budget but has not finished all the tasks.
Have students determine what could have been done to avoid the situation, remedy the situation, or absorb the cost overruns.
Have students use a work breakdown structure to work out the costs of a project they will complete during the semester.
Have students estimate the earned value at different stages of the project life cycle.
Have students simulate actual completion dates for the consumer market study in Microsoft Project to see how they accumulated actual costs and earned value change over time.

Optional Supplemental Activities

Have the students read the real-world vignettes for the chapter and create plans for managing the costs of projects.
Have the student read the chapter and answer all of the Reinforce Your Learning questions and the end-of-chapter questions.
Have students read the Plan of Attack vignette from Chapter 4.
The project manager worked through the project plan to have the cost of the project to be within the sponsor's budget by deleting any "nice to have" features and keeping the essential features.
Explore the articles on the PMFORUM site and in the PWWorldToday website. Have the students try to contact the author of an article to ask questions about how the author manages costs associated with a project.

Chapter Concepts

Estimating the costs of activities

Determining a time-phased baseline budget

Determining the earned value of the work performed

Analyzing cost performance

Forecasting project cost at completion

Controlling project costs

Managing cash flow

Chapter Concepts

Based on the material in this chapter, students will become familiar with:

Estimating the costs of activities
Determining a time-phased baseline budget
Determining the earned value of the work performed
Analyzing cost performance
Forecasting project cost at completion
Controlling project costs
Managing cash flow

Learning Outcomes

Estimate the cost of activities

Aggregate the total budgeted cost

Develop a time-phased baseline budget

Describe how to accumulate actual costs

Determine the earned value of work performed

Calculate and analyze key project performance measures

Discuss and apply approaches to control the project budget

Explain the importance of managing cash flow

Learning Outcomes

After studying this chapter, students should be able to:

Estimate the cost of activities
Aggregate the total budgeted cost
Develop a time-phased baseline budget
Describe how to accumulate actual costs
Determine the earned value of work performed
Calculate and analyze key project performance measures
Discuss and apply approaches to control the project budget
Explain the importance of managing cash flow

Project Cost Management

Project Management Knowledge Areas from PMBOK® Guide

Concepts in this chapter support the following Project Management Knowledge Areas of the PMI Guide to the Project Management Body of Knowledge (PMBOK® Guide):

Project Cost Management

Managing Costs of Tidal Feasibility

Renewable Projects
Increased investment
Traditional - solar power, wind power, hydroelectric, waste-to-energy, and biofuels
New – ocean’s tides
Locations
Wales
Scotland
China
Netherlands

Tidal Project
Newer technologies
Harsh and complicated environmental conditions
Demonstration projects successful
Avoid marine environment impact
Benefits to bay, carbon emissions, and employment

Vignette A: Managing Costs of Tidal Feasibility

Projects that have new proof of concept are deemed to be higher risk than projects with proven processes. Within the project plan for these proof of concept projects are feasibility studies and budget investments for the research and development. If the proof of concept project is deemed feasible, then the larger project is developed with its full budget. If it is not feasible, then the next concept is tested or the project is terminated. These decisions are based on the finances for the support of the research and development and on a comparison between the budget for actual costs of project investment and potential benefits.

Renewable energy projects have experienced increasing investment even though the prices of oil and gas have declined.
The types of investments have included projects related solar power, wind power, hydroelectric, waste-to-energy, and biofuels.
One source of renewable energy that has captured much new investment has been energy from the oceans’ tides.
From a project planning and budgeting standpoint, the ocean’s tides are relatively consistent whereas the amount of sun or wind for solar and wind energy projects is variable and, at times, unpredictable.
Tidal Project
Include funds for newer technologies, testing in harsh and complicated environmental conditions, and testing for strength, performance, and durability of the materials to be used for turbines and their support structures.
Smaller demonstration projects related to tidal stream and tidal barrage technologies have been successful.
Dam-like structures impact a number of environmental aspects such as water quality, fish migration, and noise pollution.
Benefits of the project included a reduction of debris in the bay, reduced carbon emissions, and increases in employment.
Other projects
Scotland
China
Netherlands

What Comes First, Schedule Delay or Cost Overrun?

Research Findings

Increased costs when workarounds and solutions to avoid schedule delays
Increased costs with labor and rate charges without a change in schedule
Schedule delay without cost overrun

Lessons Learned

Relationships have been found
No causation
Root causes need examined
Awareness in organization of relationships among scheduling, costs, benefits, and earned value

Vignette B: What Comes First, Schedule Delay or Cost Overrun?

Schedule delays have occurred in many projects that have experienced cost overruns. There are many projects that have had cost overruns that also have had schedule overruns. One could think that if a project had a cost overrun, it must have had a schedule overrun, or, the other order, if a project had a schedule overrun then it must have had a cost overrun.

Researchers from several institutions examined data from years of complex projects, their schedules, their costs, and other factors such as unrealistic estimates, supply chain failures, scope changes, scheduling practices and margins, risk events, and project manager experience.
Do schedule delays cause cost overruns? Do cost overruns cause schedule delays? Are they only related and not causing each other?
By implementing workarounds and solutions to avoid schedule delays, the costs of the projects increased.
The costs associated with labor and rate charges that impacted the cost overruns had nothing to do with the schedule.
Projects with sufficient margins of funds and time had experienced schedule delays but did not experience cost overruns.
Although there has been a relationship between schedule delays and cost overruns, there has been no causation.

Even though statistics suggest that cost overruns and schedule delays are directly related to each other, project managers need to look for the root causes for each and create an awareness in their organizations of other factors that could lead to either or both overruns. This effort could help to improve understanding of the relationships among scheduling, costs, benefits, and earned value.

Estimate Activity Costs

Elements

Labor
Materials
Equipment
Facilities
Subcontractors and consultants
Travel
Reserve

Good Practices

Have the person responsible estimate costs
Use historical data to inform current project
Be reasonable and realistic
Estimate near-term activities more accurately
Elaborate other costs as additional information known

Estimate Activity Costs

The total project cost is often estimated during the initiating phase of the project, or when the project charter or a proposal is prepared.

The estimated cost for each specific activity can include the following elements:
Labor: Estimated costs for the various classifications of people who are expected to work on the project
Are based on the estimated work time (not necessarily the same as the activity estimated duration) and the dollar labor rate for each person or classification
Materials: Are the estimated costs of materials that the project team or contractor needs to purchase for the project
Equipment: The equipment that must be purchased as part of the project
Facilities: Special facilities or additional space for the project team; for security reasons; to store materials; or to build, assemble, and test the project end item (deliverable)
Subcontractors and consultants: Are outsourced when project teams or contractors do not have the expertise or resources to conduct certain project tasks
Travel: Travel (other than local travel) may be required during the project
Reserve (also referred to as contingency): Funds set aside to cover unexpected situations that may come up during the project
Such as items that may have been overlooked when the initial project scope was defined, activities that may have to be redone because they may not work the first time (redesigns), or a high probability or high impact risk that may occur
There are a number of good practices that project managers should keep in mind when estimating costs
Have the person responsible for the task estimate costs
Use historical data to inform the current project because you can learn from past projects’ mistakes
Be reasonable and realistic
Estimate near-term activities as accurately as possible
Although, at the beginning of the project, it may not be possible to estimate the costs for all activities with a high degree of confidence regarding accuracy.
This is especially true for longer-term projects
Elaborate other costs as additional information becomes available

Consumer Market Study Project
Estimated Costs

Consumer Market Study Project Estimated Costs

The figure on this slide depicts the estimated costs for each activity in the consumer market study project.

Describe the two steps of the project budgeting process.

Student Discussion

Describe the two steps of the budgeting process.

Possible responses to Student Discussion

First step

Allocate costs to the work packages in the work breakdown structure

Second step

Distribute the cost of the work package over the duration of the work package

Describe the two steps of the project budgeting process.

The project budgeting process involves two steps.

The project cost estimate is allocated to the various work packages in the project work breakdown structure.
The budget for each work package is distributed over the duration of the work package.

Aggregate Total Budgeted Cost

Establish a TBC for each work package
Determine the process
Top-down
Bottom-up
If sum of initial estimates exceeds sponsor budget, then reduce costs and recalculate

Aggregate Total Budgeted Cost

Allocating total project costs to the appropriate work packages will establish a total budgeted cost (TBC) for each work package.
There are two approaches to establishing the TBC for each work package: top-down and bottom-up.
Often, the sum of the initial estimated costs is greater than the sponsor’s budget sponsor.
Several iterations of working out the costs may b required to reduce the costs to within an acceptable level.
The figure on this slide illustrates the cost allocations for a $600,000 project.
The costs are assigned to each work package.
When the budgets for all the work packages are summed up, they cannot exceed the total project budgeted cost.

Packaging Machine Project
Aggregate Total Budgeted Cost

Packaging Machine Project Aggregate Total Budgeted Cost

The two figures on this slide depict the network diagram and the work breakdown structure, with costs assigned.
You will see this example repeatedly throughout the remainder of this chapter.

Develop Cumulative Budgeted Cost

Distribute each total budgeted cost (TBC) over work package duration

Create the time-phased budget

Calculate cumulative budgeted cost

Provides a baseline against which actual cost and work performance are measured

Develop Cumulative Budgeted Cost

Once a total budgeted cost has been established for each work package, the second step in the project budgeting process is to distribute each TBC over the duration of its work package.

The cost determined for each period is based on when the activities that make up the work package are scheduled to be performed to create the time-phased budget.
The cumulative budgeted cost (CBC) is the amount that was budgeted to accomplish the work that was scheduled to be performed up to that point in time.
The CBC for the entire project or each work package provides a baseline against which actual cost and work performance can be compared at any time during the project.
It is important to use the cumulative budget as the standard against which actual cost is compared.

Packaging Machine Project
Develop Cumulative Budgeted Cost

Determine budgeted cost by period

Graph the cumulative budgeted cost curve

Packaging Machine Project Develop Cumulative Budgeted Cost

The two figures on this slide depict the development of the cumulative budgeted cost for a packaging machine project.
The figure on the top shows the budgeted cost by period for the packaging machine project.
The figure on the bottom shows the cumulative budgeted cost curve for the packaging machine project.
The points on the graph correspond to the cumulative total shown in the figure on the top.

Determine Actual Cost

Actual Cost

Collect data regularly for funds actually expended

Charge to work package numbers

Committed Costs

Periodically assign portion of total cost to actual cost

Include costs for items that will be paid for later

Compare Actual Cost To Budgeted Cost

Calculate cumulative actual cost

Compare to cumulative budgeted cost

Determine Actual Cost

Once the project starts, it is necessary to keep track of actual cost and committed cost so that they can be compared to the CBC.
To keep track of actual cost on a project, it is necessary to set up a system to collect, on a regular and timely basis, data on funds actually expended.
Large projects have charge codes assigned to different work package numbers to determine how the actual costs compare to the planned costs.
In many projects, large dollar amounts are expended for materials or services (such as on subcontractors or consultants) that are used over a period of time longer than one cost reporting period.
These committed costs need to be treated in a special way so that the system periodically assigns a portion of their total cost to actual cost.
Committed costs are also known as commitments or encumbered costs.
Costs are committed when an item is ordered even though actual payment may take place at some later time.
Cumulative actual cost (CAC) should be then be calculated.
As data are collected on actual cost, including portions of any committed cost, they need to be totaled by work package so that they can be compared to the cumulative budgeted cost.

Packaging Machine Project
Determine Actual Cost

End of Week 8
Planned cost = $64,000
Actual cost = $68,000

Compare CAC with CBC

Packaging Machine Project Determine Actual Cost

The figure on the top indicates that at the end of week 8 of the packaging machine project, $68,000 has actually been expended, although only $64,000 was budgeted.
With the CAC values, it’s possible to draw a cumulative actual cost curve, which you see in the figure on the bottom of this slide.

Determine Value of Work Performed

Example Project

Paint 10 similar rooms
Total budgeted cost of $2,000
Budget is $200 per room

At Day 5

$1,000 has been spent
3 rooms have been painted
Earned value =
0.30 X $2,000 = $600

Have expended $400 more than the Earned Value

Determine Value of Work Performed

Let’s take a moment to think about an example of determining the value of work performed.

Consider a project that involves painting ten similar rooms over ten days (one room per day) for a total budgeted cost of $2,000.
This makes the budget $200 per room.
At of the end of day 5, you determine that $1,000 has been spent, which is on track monetarily. The problem is that only three rooms have been painted.

Earned value, the value of the work actually performed, is a key parameter that must be determined throughout the project.

Determining the earned value involves collecting data on the percent completed for each work package and then converting this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.
In many cases, the estimate is subjective.
It is important that the person estimating the percent complete not only assess how much work has been performed. but also consider what work remains to be done.

For example, in the project involving painting ten rooms for $2,000:

If three rooms are completed, that means that 30 percent of the work has been performed.
The earned value is: 0.30 x $2,000 = $600
This means that the project has expended $400 more than the earned value by day 5.

Packaging Machine Project
Determine Value of Work Performed

Packaging Machine Project Determine Value of Work Performed

Here we see three figures that will help us understand how to determine the value of work performed on the packaging project.

The figure in the top left depicts the cumulative percent complete by period for the packaging machine project.
The figure on the bottom left depicts the cumulative earned value by period for the packaging machine project.

To help you understand the different costs visually, the figure on the right illustrates the CBC, CAC, and CEV for the entire project.

You will note that the CAC is running above the CBC, and the CEV is running below the CBC.

Analyze Cost Performance

Four cost-related measures

TBC – total budgeted cost

CBC – cumulative budgeted cost

CAC – cumulative actual cost

CEV – cumulative earned value

Use to analyze project cost performance

Plot CBC, CAC, and CEV curves on the same graph

Reveal any trends toward improving or deteriorating cost performance

Analyze Cost Performance

There are four cost-related measures that are used to analyze project cost performance:
TBC (total budgeted cost)
CBC (cumulative budgeted cost)
CAC (cumulative actual cost)
CEV (cumulative earned value)
One can analyze cost performance by plotting the CBC, CAC, and CEV curves on the same graph, as we just saw in the previous slide.
Plotting the curves can help to reveals trends toward improving or deteriorating cost performance.

Packaging Machine Project
Analyze Cost Performance

Packaging Machine Project Analyze Cost Performance

This figure shows the packaging machine project status, as of the end of week 8:

64% of funds were budgeted to have been spent
68% of overall funds were actually spent
54% of the total work was completed

Cost Performance Index

Measure of the cost efficiency with which the project is being performed

Cost performance index =

Cumulative earned value/Cumulative actual cost

CPI = CEV/CAC

Cost Performance Index

The cost performance index (CPI) is a measure of the cost efficiency with which the project is being performed.
The formula for determining the CPI is:
Cost performance index = Cumulative earned value/Cumulative actual cost (or CPI = CEV/CAC)

Packaging Machine Project
Cost Performance Index

End of Week 8

$64,000 was budgeted
$68,000 was actually expended
$54,000 was the earned value of work actually performed

CEV = $54,000
CAC = $68,000

Determine CPI

CPI = CEV/CAC

= $54,000/$68,000

= 0.79

For every $1.00 actually expended, only $0.79 of earned value was received.

Packaging Machine Project Cost Performance Index

Let’s take a minute to look at the CPI for the packaging machine project.
Remember that the CPI is calculated by: Cost performance index = Cumulative earned value/Cumulative actual cost (CPI = CEV/CAC)
In the packaging machine project, the CPI as of week 8 is: CPI = $54,000/$68,000 = 0.79
This ratio indicates that for every $1.00 actually expended, only $0.79 of earned value was received.
When the CPI dips below 1.0 or is trending smaller, corrective action should be taken.

Cost Variance

Indicator of cost performance

Difference between the cumulative earned value of the work performed and the cumulative actual cost

Cost variance =

Cumulative earned value – Cumulative actual cost

CV = CEV – CAC

Cost Variance

Another indicator of cost performance is cost variance (CV), which is the difference between the cumulative earned value of the work performed and the cumulative actual cost.

Cost variance = Cumulative earned value – Cumulative actual cost (or CV = CEV – CAC)

Packaging Machine Project
Cost Variance

End of Week 8

$64,000 was budgeted
$68,000 was actually expended
$54,000 was the earned value of work actually performed

CEV = $54,000
CAC = $68,000

Determine CV

CV = CEV – CAC

= $54,000 – $68,000

= – $14,000

The value of the work performed through week 8 is $14,000 less than the amount actually expended.

Packaging Machine Project Cost Variance

In the packaging machine project, the cost variance as of week 8 is: CV = $54,000 – $68,000 = –$14,000

This calculation indicates that the value of the work performed through week 8 is $14,000 less than the amount actually expended.

Estimate Cost at Completion

Forecast what the total costs will be at the completion of the project or work package

3 different methods

FCAC = TBC / CPI

FCAC = CAC + (TBC – CEV)

FCAC = CAC + Re-estimate of remaining work

Another method

TCPI = (TBC – CEV)/(TBC – CAC)

Estimate Cost at Completion

Based on analysis of actual cost, it is possible to forecast what the total costs will be at the completion of the project or work package.

There are three different methods for determining the forecasted cost at completion (FCAC).

The first method assumes that the work to be performed on the remaining portion of the project or work package will be done at the same rate of efficiency as the work performed up to that point.
Forecasted cost at completion = Total budgeted cost/Cost performance index
A second method for determining the FCAC assumes that, regardless of the efficiency rate the project or work package has had in the past, the work to be performed on the remaining portion of the project or work package will be in line with the budget.
Forecasted cost at completion = Cumulative actual cost+ (Total budgeted cost – Cumulative earned value)
A third method for determining the forecasted cost at completion is to re-estimate the costs for all the remaining work to be performed and then add this re-estimate to the cumulative actual cost.
FCAC = CAC + Re-estimate of remaining work to be performed
Another measure for estimating cost at completion is the to-complete performance index (TCPI)
It is calculated as: TCPI = (TBC – CEV)/(TBC – CAC)

Packaging Machine Project
Estimate Cost at Completion

End of Week 8

$64,000 was budgeted
$68,000 was actually expended
$54,000 was the earned value of work actually performed

CEV = $54,000
CAC = $68,000
CPI = 0.79
TBC = $100,000

Determine FCAC

FCAC = TBC / CPI

= $100,000/0.79 = $126,582

FCAC = CAC + (TBC – CEV)

= $68,000 + ($100,000 – $54,000)

= $68,000 + $46,000

= $114,000

TCPI = (TBC – CEV)/(TBC – CAC)

= ($100,000 − $54,000)/( $100,000 − $68,000)

= $46,000/$32,000

= 1.44

Packaging Machine Project Estimate Cost at Completion

Let us look that the packaging machine project again and apply the methods we just learned for determining the forecasted cost at completion.

Using the first method, the forecasted cost at completion is: FCAC = $100,000/0.79 = $126,582
Using the second method, the forecasted cost at completion is: FCAC = $68,000 + ($100,000 – $54,000)= $68,000 + $46,000= $114,000
We can also use the to-complete performance index (TCPI) to determined the FCAC.
Using this method, the to-complete performance index is: TCPI = ($100; 000 − $54; 000)/( $100; 000 − $68; 000)= $46,000/$32; 000= 1:44

Control Costs

Analyze cost performance on a regular basis

Determine which work packages require corrective action

Decide what specific corrective action

Revise the project plan

Evaluate negative cost variance

Take corrective actions

Near term activities

Activities with large cost estimate

Reduce costs of activities

Evaluate the trade-off of cost and scope

Control Costs

The key to effective cost control is to analyze cost performance on a regular and timely basis.
It is crucial that cost variances and inefficiencies be identified early so that corrective action can be taken before the situation gets worse.

Controlling costs involves the following:

Analyzing cost performance to determine which work packages may require corrective action
Deciding what specific corrective action should be taken
Revising the project plan—including time and cost estimates—to incorporate the planned corrective action
When evaluating work packages that have a negative cost variance, you should focus on taking corrective actions to reduce the costs of two types of activities:
Activities that will be performed in the near term
If you put off corrective actions until some point in the distant future, the negative cost variance may deteriorate.
Activities that have a large cost estimate
Taking corrective measures that reduce the cost of a $20,000 activity by 10 percent will have a larger impact than totally eliminating a $300 activity.
There are various ways to reduce the costs of activities:
One way is to substitute less expensive materials
Another is to assign a person with greater expertise or more experience to perform or help with the activity
Reducing the scope or requirements is another way
Increasing productivity through improved methods or technology
In many cases, there will be tradeoffs—reducing cost variances may involve a reduction in project scope or a delay in the project schedule.
The key to effective cost control is aggressively addressing negative cost variances and cost inefficiencies as soon as they are identified.

Manage Cash Flow

Ensure that cash comes in faster than it goes out

Negotiate payment terms

Provide a down payment

Make equal monthly payments

Provide frequent payments

Avoid only one payment at end of project

Control outflow of cash

Manage Cash Flow

It is important to manage the cash flow on a project.
Managing cash flow involves making sure that sufficient payments are received from the customer in time to cover the costs of performing the project.
The key to managing cash flow is to ensure that cash comes in faster than it goes out.
The contractor might try to negotiate payment terms that require the customer to do one or more of the following:
Provide a down payment at the start of the project
Make equal monthly payments based on the expected duration of the project
Provide frequent payments, such as weekly or monthly payments, rather than quarterly payments
The worst scenario from the contractor’s point of view is to have the customer make only one payment at the end of the project.
On the other hand, the contractor should control its outflow of cash by delaying payments as long as possible until they are due.

Cost Estimating
for Information Systems Development

Common errors in estimating costs

Underestimating the work time necessary to complete an activity

Requiring rework to meet the user requirements

Underestimating growth in the project scope

Not anticipating new hardware purchases

Making corrections to flaws in excess of the reserve planning

Changing the design strategy

Increasing resources to fast-track phases of the SDLC

Cost Estimating for Information Systems Development

Chapter 4 defined the information system (IS) as a computer-based system that accepts data as input, processes the data, and produces information required by users. Chapter 5 revealed that much scheduling is conducted in a haphazard manner, resulting in a large number of IS projects not finishing on time. Chapter 6 reinforced the resource requirements planning necessary for people, hardware, software, data, and network resources.
This chapter addresses cost estimating in an IS project.
Accurately estimating costs and including a reserve amount are essential in creating a realistic budget that allows the contractor to complete the work without cost overruns.
Having a good plan and schedule helps to develop good cost estimates and a baseline budget.
Common errors in estimating costs include:
Underestimating the work time necessary to complete an activity
Requiring rework to meet the user requirements
Underestimating growth in the project scope
Not anticipating new hardware purchases
Making corrections to flaws that cost more than what was allotted in the reserve planning
Changing the design strategy
Increasing resources to fast-track phases of the SDLC

IS Example: Estimated Activity Costs

Recall from Chapters 4, 5, and 6 that Beth Smith was assigned to be project manager by the IS Department of ABC Office Designs.

The figure on this slide depicts the estimated activity costs for the Web-Based Reporting Development project.
It has a 5% reserve for cost overruns, fast-tracking of the project, or increased costs of materials or travel for the interviews.
Chapter 5 described how Beth had scheduled the ES, EF, LS, and LF times for the activities necessary to complete the Web-based reporting system development project for ABC Office Designs.
Chapter 6 described how Beth and the project team planned the resources for the 60-day schedule for the project. Management approved a budget of $125,000 to complete the project and train the sales staff.
After confirming with the primary responsible resources that the tasks could be completed with the estimated level of effort on each task, Beth worked with the human resources team to use the hourly wage for each of the employees to determine the labor costs for each of the Web-based Reporting System project activities.
Beth and the project team estimated the costs associated with traveling to complete user interviews ($3,000), the price of packaged software ($500), and the costs of training materials ($1,300).
The budgeted costs of the work to complete the project were near the $125,000 limit, even without training the sales staff.

Project Management Information Systems

Store all costs associated with each resource

Calculate the budget for each work package

Determine cost for the entire project

Define different rate structures for each resource

Analyze cost performance

Project Management Information Systems

All costs associated with each resource in a project can be stored and software will calculate the budget for each work package and for the entire project.
Project management software usually allows the user to define different rate structures for each resource and when charges for those resources will actually be accrued.
Cost tables and graphs are often available to help analyze cost performance.
See Appendix A for a thorough discussion of Project Management Software.

Critical Success Factors

Estimated activity costs must be based on the estimated activity resources.

The person who will be responsible for performing the activity should estimate the costs for that activity. This generates commitment from the person.

Cost estimates should be reasonable and realistic.

Once the project starts, it is important to monitor actual costs and work performance to ensure that everything is within budget.

A system should be established to collect, on a regular and timely basis, data on costs actually expended and committed, and the earned value (percent complete) of the work performed, so they can be compared to the cumulative budgeted cost (CBC).

If at any time during the project it is determined that the project is overrunning the budget, or the value of the work performed is not keeping up with the actual amount of costs expended, corrective action must be taken immediately.

Critical Success Factors

Estimated activity costs must be based on the estimated activity resources.
The person who will be responsible for performing the activity should estimate the costs for that activity. This generates commitment from the person.
Cost estimates should be reasonable and realistic.
Once the project starts, it is important to monitor actual costs and work performance to ensure that everything is within budget.
A system should be established to collect, on a regular and timely basis, data on costs actually expended and committed, and the earned value (percent complete) of the work performed, so they can be compared to the cumulative budgeted cost (CBC).
If at any time during the project it is determined that the project is overrunning the budget, or the value of the work performed is not keeping up with the actual amount of costs expended, corrective action must be taken immediately.

Critical Success Factors (continued)

It is important to use the time-phased cumulative budgeted cost (CBC), rather than the total budgeted cost (TBC), as the baseline against which cumulative actual cost (CAC) is compared. It would be misleading to compare the actual costs expended to the total budgeted cost because cost performance will always look good as long as actual costs are below the TBC.

To permit a realistic comparison of cumulative actual cost to cumulative budgeted cost, portions of the committed costs should be assigned to actual costs while the associated work is in progress.

The earned value of the work actually performed is a key parameter that must be determined and reported throughout the project.

For each reporting period, the percent complete data should be obtained from the person responsible for the work. It is important that the person make an honest assessment of the work performed relative to the entire work scope.

One way to prevent inflated percent complete estimates is to keep the work packages or activities small in terms of scope and duration. It is important that the person estimating the percent complete assess not only how much work has been performed but also what work remains to be done.

Critical Success Factors (continued)

It is important to use the time-phased cumulative budgeted cost (CBC), rather than the total budgeted cost (TBC), as the baseline against which cumulative actual cost (CAC) is compared. It would be misleading to compare the actual costs expended to the total budgeted cost because cost performance will always look good as long as actual costs are below the TBC.
To permit a realistic comparison of cumulative actual cost to cumulative budgeted cost, portions of the committed costs should be assigned to actual costs while the associated work is in progress.
The earned value of the work actually performed is a key parameter that must be determined and reported throughout the project.
For each reporting period, the percent complete data should be obtained from the person responsible for the work. It is important that the person make an honest assessment of the work performed relative to the entire work scope.
One way to prevent inflated percent complete estimates is to keep the work packages or activities small in terms of scope and duration. It is important that the person estimating the percent complete assess not only how much work has been performed but also what work remains to be done.

Critical Success Factors (continued)

The key to effective cost control is to analyze cost performance on a timely and regular basis. Early identification of cost variances (CV) allows corrective actions to be taken immediately, before the situation gets worse.

For analyzing cost performance, it is important that all the data collected be as current as possible and be based on the same reporting period.

Trends in the cost performance index (CPI) should be monitored carefully. If the CPI goes below 1.0 or gradually decreases, corrective action should be taken.

As part of the regular cost performance analysis, the estimated or forecasted cost at completion (FCAC) should be calculated.

The key to effective cost control is to aggressively address work packages or activities with negative cost variances and cost inefficiencies as soon as they are identified. A concentrated effort must be applied to these areas. The amount of negative cost variance should determine the priority for applying these concentrated efforts.

Critical Success Factors (continued)

The key to effective cost control is to analyze cost performance on a timely and regular basis. Early identification of cost variances (CV) allows corrective actions to be taken immediately, before the situation gets worse.
For analyzing cost performance, it is important that all the data collected be as current as possible and be based on the same reporting period.
Trends in the cost performance index (CPI) should be monitored carefully. If the CPI goes below 1.0 or gradually decreases, corrective action should be taken.
As part of the regular cost performance analysis, the estimated or forecasted cost at completion (FCAC) should be calculated.
The key to effective cost control is to aggressively address work packages or activities with negative cost variances and cost inefficiencies as soon as they are identified. A concentrated effort must be applied to these areas. The amount of negative cost variance should determine the priority for applying these concentrated efforts.

Critical Success Factors (continued)

When attempting to reduce negative cost variances, focus on activities that will be performed in the near term and on activities that have large estimated costs.

Addressing cost problems early will minimize the negative impact on scope and schedule. Once costs get out of control, getting back within budget becomes more difficult and is likely to require reducing the project scope or quality, or extending the project schedule.

The key to managing cash flow is to ensure that cash comes in faster than it goes out.

It is desirable to receive payments (cash inflow) from the customer as early as possible, and to delay making payments (cash outflow) to suppliers or subcontractors as long as possible.

Critical Success Factors (continued)

When attempting to reduce negative cost variances, focus on activities that will be performed in the near term and on activities that have large estimated costs.
Addressing cost problems early will minimize the negative impact on scope and schedule. Once costs get out of control, getting back within budget becomes more difficult and is likely to require reducing the project scope or quality, or extending the project schedule.
The key to managing cash flow is to ensure that cash comes in faster than it goes out.
It is desirable to receive payments (cash inflow) from the customer as early as possible, and to delay making payments (cash outflow) to suppliers or subcontractors as long as possible.

Summary

The total project cost is often estimated during the initiating phase of the project when the project charter or a proposal is prepared, but detailed plans are not usually prepared at that time.

The project budgeting process involves two steps: the budget for each work package is determined and the budget for each work package is then distributed over the expected time.

Aggregating the estimated costs of the specific activities for the appropriate work packages in the work breakdown structure will establish a total budgeted cost (TBC).

The cumulative budgeted cost (CBC) is the time-phased baseline budget that will be used to analyze the cost performance of the project.

At any time during the project, it is possible to forecast what the total costs will be at the completion of the project or work package based on analysis of actual cost expended and the earned value of work performed.

The key to effective cost control is to analyze cost performance on a regular and timely basis.

It is important to manage the cash flow on a project.

Summary

The total project cost is often estimated during the initiating phase of the project when the project charter or a proposal is prepared, but detailed plans are not usually prepared at that time.
The project budgeting process involves two steps: the budget for each work package is determined and the budget for each work package is then distributed over the expected time.
Aggregating the estimated costs of the specific activities for the appropriate work packages in the work breakdown structure will establish a total budgeted cost (TBC).
The cumulative budgeted cost (CBC) is the time-phased baseline budget that will be used to analyze the cost performance of the project.
At any time during the project, it is possible to forecast what the total costs will be at the completion of the project or work package based on analysis of actual cost expended and the earned value of work performed.
The key to effective cost control is to analyze cost performance on a regular and timely basis.
It is important to manage the cash flow on a project.

Chapter Questions

Question 1

It is necessary to prepare a budget, or plan, for how and when funds will be spent over the duration of the project to ensure that everything is within budget.

Describe why it is necessary to develop a baseline budget for a project.

1. Describe why it is necessary to develop a baseline budget for a project.

It is necessary to prepare a budget, or plan, for how and when funds will be spent over the duration of the project to ensure that everything is within budget.

Question 2

Labor

Estimated hours and hourly rate for each person or classification

Materials

Need to be purchased for the project

Subcontractors and consultants

People who have the resources or experience to perform certain tasks that the project team cannot

Equipment and facilities rental

Special equipment, tools, or facilities for the project

Travel

If it is required during the project

Reserves

Amount saved out to cover unexpected situations that may arise during the project

List and describe items that should be included when estimating activity costs.

2. List and describe items that should be included when estimating activity costs.

The cost section of a proposal may consist of elements such as the following:

Labor. It might include the estimated hours and hourly rate for each person or classification.
Materials. The materials that need to be purchased for the project.
Subcontractors and consultants (if used). People who have the resources or experience to perform certain tasks that the project team cannot.
Equipment and facilities rental. If the contractor needs special equipment, tools, or facilities for the project.
Travel. If it is required during the project.
Reserves. An amount saved out to cover unexpected situations that may arise during the project.

Question 3

Reserves are funds to cover unexpected situations that may occur during the project.

The contractor or project team may include an amount for contingencies to cover unexpected situations that may come up during the project within the estimated budget in the proposal.

For example, items may have been overlooked when the project cost estimates were prepared, tasks may have to be redone because they did not work, or the costs of labor (wages, salaries) or materials may escalate during a multi-year project.

What does the term reserves mean?

Should a reserve amount be included in a project proposal? Explain your answer.

What does the term reserves mean? Should a reserve amount be included in a project proposal? Explain your answer.
Reserves are funds to cover unexpected situations that may occur during the project.
The contractor or project team may include an amount for reserves to cover unexpected situations that may come up during the project within the estimated budget in the proposal.
For example, items may have been overlooked when the project cost estimates were prepared, tasks may have to be redone because they did not work the first time, or the costs of labor (wages, salaries) or materials may escalate during a multi-year project.

Question 4

Cost estimates should be aggressive yet realistic.

If cost estimates are overly conservative, the total estimated cost for the project is likely to be more than the customer is willing to pay—and higher than competing contractors.

On the other hand, if cost estimates are overly optimistic and some unexpected expenditures need to be made, the contractor is likely to either lose money or have to suffer the embarrassment of going back to the customer to request additional funds to cover cost overruns.

What is the problem with making cost estimates too conservative or too aggressive?

4. What is the problem with making cost estimates too conservative or too aggressive?

Cost estimates should be aggressive yet realistic.
If cost estimates are overly conservative, the total estimated cost for the project is likely to be more than the customer is willing to pay—and higher than competing contractors.
On the other hand, if cost estimates are overly optimistic and some unexpected expenditures need to be made, the contractor is likely to either lose money or have to suffer the embarrassment of going back to the customer to request additional funds to cover cost overruns.

Question 5

The project budgeting process involves two steps.

First, the project cost estimate is allocated to the various work packages in the project work breakdown structure.

Second, the budget for each work package is distributed over the duration of the work package.

Describe the project budgeting process.

5. Describe the project budgeting process.

The project budgeting process involves two steps.

The project cost estimate is allocated to the various work packages in the project work breakdown structure.
The budget for each work package is distributed over the duration of the work package.

Question 6

TBC: total budgeted cost

Top-down = a portion of the total project cost is allocated to each work package

Bottom-up = the sum of the costs of all the activities that make up that work package

CBC: cumulative budgeted cost

The amount that was budgeted to accomplish the work that was schedule to be performed up to that point in time

CAC: cumulative actual cost

The amount that was actually spent to accomplish the work that was scheduled to be performed up to that point in time

CEV: cumulative earned value

= % complete X TBC (for the work package)

CPI: cost performance index

= CEV/CAC

CV: cost variance

= CEV – CAC

FCAC: forecasted cost at completion

FCAC = TBC/CPI

FCAC = CAC + (TBC – CEV)

FCAC = CAC + Re-estimate of remaining work to do

TCPI: to-complete performance index

= (TBC – CEV) / (TBC – CAC)

Define the following: TBC, CBC, CAC, CEV, CPI, CV, FCAC and TCPI.

How is each calculated?

6. Define the following: TBC, CBC, CAC, CEV, CPI, CV, and FCAC. How is each calculated?

TBC: total budgeted cost
Top-down = a portion of the total project cost is allocated to each work package
Bottom-up = the sum of the costs of all the activities that make up that work package
CBC: cumulative budgeted cost
The amount that was budgeted to accomplish the work that was schedule to be performed up to that point in time
CAC: cumulative actual cost
The amount that was actually spent to accomplish the work that was scheduled to be performed up to that point in time
CEV: cumulative earned value
= % complete X TBC (for the work package)
CPI: cost performance index
= CEV/CAC
CV: cost variance
= CEV – CAC
FCAC: forecasted cost at completion
FCAC = TBC/CPI
FCAC = CAC + (TBC – CEV)
FCAC = CAC + Re-estimate of remaining work to do
TCPI: to-complete performance index
= (TBC – CEV) / (TBC – CAC)

Question 7

It is necessary to track actual and committed costs so that they can be compared to the CBC.

In order to take corrective action before it’s too late.

Why is it necessary to track actual and committed costs once a project starts?

7. Why is it necessary to track actual and committed costs once a project starts?

It is necessary to track both actual and committed costs so that they can be compared to the CBC.
In order to take corrective action before it’s too late.

Question 8

It is important to calculate the earned value of work performed so that if the work performed is not keeping up with the actual cost, corrective action can be taken.

Even if the actual cost is in line with the CBC

Determining the earned value involves collecting data on the percent complete for each work package and then converting this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.

Why is it necessary to calculate the earned value of work performed?

How is this done?

8. Why is it necessary to calculate the earned value of work performed? How is this done?

It is important to calculate the earned value of work performed so that if the work performed is not keeping up with the actual cost, corrective action can be taken
Even if the actual cost is in line with the CBC
Determining the earned value involves collecting data on the percent complete for each work package and then converting this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.

Question 9

Cost performance index = CEV/CAC

If CPI is less than 1.0, it means that for every dollar expended, less than one dollar of earned value was received.

If CPI is greater than 1.0, it means that for every dollar expended, more than one dollar of earned value was received.

Give an example of calculating a cost performance index.

What does it mean when the CPI is below 1.0?

What does it mean when the CPI is above 1.0?

9. Give an example of calculating a cost performance index. What does it mean when the CPI is below 1.0? What does it mean when the CPI is above 1.0?

Cost performance index = CEV/CAC
If CPI is less than 1.0, it means that for every dollar expended, less than one dollar of earned value was received.
If CPI is greater than 1.0, it means that for every dollar expended, more than one dollar of earned value was received.

Question 10

Cost variance = Cumulative earned value – Cumulative actual cost

If the CV is negative, it means that the value of the work performed is less than the amount actually expended.

If the CV is positive, it means that the value of the work performed is more than the amount expended.

One should focus on:

Activities that will be performed in the near term. If you put off corrective actions until some point in the distant future, the negative cost variance may deteriorate.

Activities that have a large cost estimate. Usually, the larger the estimated cost for an activity, the greater the opportunity for a large cost reduction.

What does it mean when cost variance is negative?

What does it mean when cost variance is positive?

When evaluating a work package with a negative cost variance, on what two types of activities should you focus? Why?

10. What does it mean when cost variance is negative? What does it mean when cost variance is positive? When evaluating a work package with a negative cost variance, on what two types of activities should you focus? Why?

Cost variance = Cumulative earned value – Cumulative actual cost
If the CV is negative, it means that the value of the work performed is less than the amount actually expended.
If the CV is positive, it means that the value of the work performed is more than the amount expended.

One should focus on:

Activities that will be performed in the near term. If you put off corrective actions until some point in the distant future, the negative cost variance may deteriorate.
Activities that have a large cost estimate. Usually, the larger the estimated cost for an activity, the greater the opportunity for a large cost reduction.

Question 11

The key to managing cash flow is to ensure that cash comes in faster than it goes out.

This can be accomplished by asking the customer to:

Provide a down payment at the start of the project

Make equal monthly payments based on the expected duration of the project

Provide frequent payments, such as weekly or monthly payments, rather than quarterly payments

What is the key to managing cash flow?

How can this goal be accomplished?

11. What is the key to managing cash flow? How can this goal be accomplished?

The key to managing cash flow is to ensure that cash comes in faster than it goes out.
This can be accomplished by asking the customer to:
Provide a down payment at the start of the project
Make equal monthly payments based on the expected duration of the project
Provide frequent payments, such as weekly or monthly payments, rather than quarterly payments

Question 12 a

The cumulative budgeted cost at the end of week 6 is $100,000.

Refer to the table below.

What is the cumulative budgeted cost at the end of week 6?

Amounts are in thousands of dollars.

12a. Refer to the table below. What is the cumulative budgeted cost at the end of week 6? Amounts are in thousands of dollars.

The cumulative budgeted cost at the end of week 6 is $100,000.

Question 12 b

Week

1 2 3 4 5 6

Cumulative 10 36 54 66 95 112

There is a cost overrun of $12,000. The actual cost of Task 1 was $34,000 while only $30,000 was budgeted for it. The actual cost so far of Task 2 is $68,000, while only $60,000 had been budgeted up to week 6. The actual cost of Task 3 is $10,000 which equals its budgeted amount at week 6.

Below is a table of actual costs. What is the cumulative actual cost at the end of week 6?

Determine whether there is a cost overrun or underrun.

What is causing it?

Amounts are in thousands of dollars.

12b. Below is a table of actual costs. What is the cumulative actual cost at the end of week 6? Determine whether there is a cost overrun or underrun. What is causing it? Amounts are in thousands of dollars.

Week

1 2 3 4 5 6

Cumulative 10 36 54 66 95 112

There is a cost overrun of $12,000.

The actual cost of Task 1 was $34,000 while only $30,000 was budgeted for it.
The actual cost so far of Task 2 is $68,000, while only $60,000 had been budgeted up to week 6.
The actual cost of Task 3 is $10,000 which equals its budgeted amount at week 6.

Question 12 c

Cumulative Earned Value

By Week

Below is a table of the cumulative percentages of work completed by the end of week 6.

What is the cumulative earned value of the project at the end of week 6?

Is it good?

The cumulative earned value at the end of week 6 is only $83,500; however, $112,000 has already been spent.

TBC	1	2	3	4	5	6
Task 1	30	9	24	30	30	30	30
Task 2	70	7	17.5	24.5	38.5	45.5
Task 3	40	4	8
Task 4	30
Total	170	9	31	47.5	54.5	72.5	83.5

12c. Below is a table of the cumulative percentages of work completed by the end of week 6. What is the cumulative earned value of the project at the end of week 6? Is it good?

The cumulative earned value at the end of week 6 is only $83,500; however, $112,000 has already been spent.

Question 12 d

CPI = 83,500 / 112,000 = 0.7455

CV = 83,500 – 112,000 = -28,500

What is the CPI at the end of week 6?

What is the CV?

Cumulative Earned Value

Week

1 2 3 4 5 6

Cumulative 10 36 54 66 95 112

TBC	1	2	3	4	5	6
Task 1	30	9	24	30	30	30	30
Task 2	70	7	17.5	24.5	38.5	45.5
Task 3	40	4	8
Task 4	30
Total	170	9	31	47.5	54.5	72.5	83.5

12d. What is the CPI at the end of week 6? What is the CV?

CPI = 83,500 / 112,000 = .7455

CV = 83,500 – 112,000 = -28,500

Question 12 e

Method 1: Assuming the same rate of efficiency

FCAC = TBC / CPI

FCAC = $170,000 / 0.7455 = $228,034.87

Method 2: Perform the remainder of the work according to budget

FCAC = CAC + (TBC – CEV)

FCAC = $112,000 + ($170,000 - $83,500)

FCAC = $112,000 + $86,500

FCAC = $198,500

Calculate the FCAC using the first two methods described.

12e. Calculate the FCAC using the first two methods described

Method 1: Assuming the same rate of efficiency

FCAC = TBC / CPI
FCAC = $170,000 / .7455 = $228,034.87

Method 2: Perform the remainder of the work according to budget

FCAC = CAC + (TBC – CEV)
FCAC = $112,000 + ($170,000 - $83,500)
FCAC = $112,000 + $86,500
FCAC = $198,500

Cost Analysis Tools
Cost Forecasting
PMFORUM
PM World Today

Internet Exercises

The Web Exercises can be a very valuable part of this course. You should assign these exercises to your students as homework or complete them with them in a computer lab.

Internet Exercises

Add “project management” to the search and examine the difference in the results.

ProjectSmart provides project management resources for project managers at all levels. The site features articles, presentations, and other information of interest around the world.

The White Papers link contains to a number of papers on topics to help improve project management performance. The site’s articles, books, presentations, and case studies that help reinforce the project management concepts.

Using your favorite Web search engine, perform a search for cost analysis tools and cost forecasting. Describe what you found.

Visit Project Smart website.

Explore the site.

Click on the “Cost Management” or “Earned Value Management”. Explore the articles.

Click on the “Methods & Tools” link.

Do a search for “Cost Planning.”

Internet Exercises

A number of cost analysis tools are found on the Internet. Adding the term "project management" to the search will yield results focused on cost benefit analysis for projects. Results of the cost forecasting search are centered on management in general cost forecasting. Adding the term "project management" changes the sites found to those focused on cost forecasting in project management.
ProjectSmart provides project management resources for project managers at all levels. The site features articles, presentations, and other information of interest around the world.
The White Papers link contains to a number of papers on topics to help improve project management performance. The site’s articles, books, presentations, and case studies that help reinforce the project management concepts.

A Not-For-Profit Medical Research Center

Case Study 1

Case Study #1: A Not-For-Profit Medical Research Center

This is an open-ended case study. Allow students to use their creativity on this one.
This case continues through to chapter 8. Each chapter features questions that reinforce the concepts presented. Have students save their work from this case study for the work they will do in chapter 8.
As the director of external affairs for a national not-for-profit medical research center you are tasked with producing a shorter, simpler, easy-to-read annual report to show the benefits of the center's research and the impact on people's lives in an effort to help raise funds for the center.

Group Activity

Divide the course participants into the same groups as for the previous chapter’s group activity then address each of the steps listed in the activity.

Case Study 1
Question 1

If using Microsoft Project, enter the rates of the work and material resources on the Resource Sheet.

Assign the cost resource amount on the Task Information window for the task where the resource is assigned.

Any resources that are not assigned for the duration of a work package should have a percent of effort assigned, or change the task to a fixed duration and the amount of work changed.

Using the schedule from Chapter 5, estimate the cost for each activity.

1. Using the schedule from Chapter 5, estimate the cost for each activity.

If using Microsoft Project, enter the rates of the work and material resources on the Resource Sheet.
Assign the cost resource amount on the Task Information window for the task where the resource is assigned.
Any resources that are not assigned for the duration of a work package should have a percent of effort assigned, or change the task to a fixed duration and the amount of work changed.

Case Study 1
Question 2

The determination of the TBC for the project is completed using the top-down approach or the bottom-up approach.

If using Microsoft Project and the costs are assigned to the work packages, the approach is the bottom-up approach.

Approaches:

Top-down = a portion of the total project cost is allocated to each work package

Bottom-up = the sum of the costs of all the activities that make up that work package

Determine the total budgeted cost for the project.

2. Determine the total budgeted cost for the project.

The determination of the TBC for the project is completed using the top-down approach or the bottom-up approach.
If using Microsoft Project and the costs are assigned to the work packages, the approach is the bottom-up approach.

Approaches:

Top-down = a portion of the total project cost is allocated to each work package.
Bottom-up = the sum of the costs of all the activities that make up that work package.

Case Study 1
Question 3

If using Microsoft Project, the Cash Flow report depicts the amount of cost per quarter, week, or day and the cumulative budgeted cost curve.

The Cash Flow report provides a table of the costs and the total costs per week for the project.

Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted cost (CBC) curve (similar to Figure 7.6) for the project.

3. Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted cost (CBC) curve (similar to Figure 7.6) for the project.

If using Microsoft Project, the Cash Flow report depicts the amount of cost per quarter, week, or day and the cumulative budgeted cost curve.
The Cash Flow report provides a table of the costs and the total costs per week for the project.

The Wedding

Case Study 2

Case Study #2: The Wedding

Again, this is an open-ended case study. Encourage the students to be creative.
This case continues through to chapter 8. Each chapter has questions to reinforce the concepts presented. Have students save their work for this case study for the work they will do in chapter 8.
Tony and Peggy Sue want to get married and have family that want to plan the wedding for them without considering what Tony or Peggy Sue would want.

Group Activity

Divide the course participants into the same groups as for the previous chapter’s group activity then address each of the steps listed in the activity.

Case Study 2
Question 1

If using Microsoft Project, enter the rates of the work and material resources on the Resource Sheet.

Assign the cost resource amount on the Task Information window for the task where the resource is assigned.

Any resources that are not assigned to work the duration of a work package should have a percent of effort assigned or the task changed to fixed duration and the amount of work changed.

Using the schedule from Chapter 5, estimate the cost for each activity.

1. Using the schedule from Chapter 5, estimate the cost for each activity.

If using Microsoft Project, enter the rates of the work and material resources on the Resource Sheet.
Assign the cost resource amount on the Task Information window for the task where the resource is assigned.
Any resources that are not assigned for the duration of a work package should have a percent of effort assigned, or change the task to a fixed duration and the amount of work changed.

Case Study 2
Question 2

The determination of the TBC for the project is completed using the top-down approach or the bottom-up approach.

If using Microsoft Project and the costs are assigned to the work packages, the approach is the bottom-up approach.

Approaches:

Top-down = a portion of the total project cost is allocated to each work package

Bottom-up = the sum of the costs of all the activities that make up that work package

Determine the total budgeted cost for the project.

2. Determine the total budgeted cost for the project.

The determination of the TBC for the project is completed using the top-down approach or the bottom-up approach.
If using Microsoft Project and the costs are assigned to the work packages, the approach is the bottom-up approach.

Approaches:

Top-down = a portion of the total project cost is allocated to each work package.
Bottom-up = the sum of the costs of all the activities that make up that work package.

Case Study 2
Question 3

If using Microsoft Project, the visual report, Cash Flow report, depicts the amount of cost per quarter, week, or day and the cumulative budgeted cost curve.

The Cash Flow report provides a table of the costs and the total costs per week for the project.

Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted cost (CBC) curve (similar to Figure 7.6) for the project.

Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted cost (CBC) curve (similar to Figure 7.6) for the project.
If using Microsoft Project, the Cash Flow report depicts the amount of cost per quarter, week, or day and the cumulative budgeted cost curve.
The Cash Flow report provides a table of the costs and the total costs per week for the project.

Time–Cost Trade-Off

Appendix

This appendix address the time–cost trade-off.

Time–Cost Trade-Off Methodology

Used to reduce the project duration with the smallest associated increase in cost

Each activity has a normal and crash duration and cost

Normal duration – time under normal conditions

Normal cost – cost if complete in normal time

Crash duration – shortest estimated time to complete

Crash cost – cost to complete in crash time

Incrementally accelerate the time with more resources

Assume acceleration cost is linear

Acceleration cost per time

(Crash Cost – Normal Cost)/(Normal Time – Crash Time)

Appendix #1 - Time–Cost Trade-Off

The time–cost trade-off methodology is used to incrementally reduce the project duration with the smallest associated increase in incremental cost.
It is based on the following assumptions:
Each activity has two pairs of duration and cost estimates: normal and crash.
The normal duration is the estimated length of time required to perform the activity under normal conditions.
The normal cost is the estimated cost to complete the activity in the normal time.
The crash duration is the shortest estimated length of time in which the activity can be completed.
The crash cost is the estimated cost to complete the activity in the crash time.
An activity’s duration can be incrementally accelerated from its normal time to its crash time by applying more resources.
An activity cannot be completed in less than its crash time.
The resources necessary to reduce an activity’s estimated duration from its normal time to its crash time will be available when needed.
Within the range between an activity’s normal and crash points, the relationship between time and cost is linear. This acceleration cost per time period is calculated as follows:
(Crash Cost – Normal Cost)/(Normal Time – Crash Time)

Acceleration Costs

The figure on the top of this slide depicts a network diagram for a project with normal and crash costs.
The table on the bottom depicts the costs associated with the Time-Cost Trade-off for the project.
The objective of the time–cost trade-off method is to determine the shortest project completion time based on crashing those activities that result in the smallest increase in total project cost.
To accomplish this, it is necessary to shorten the total project duration, one time period at a time, crashing only those activities that are on the critical path(s) and have the lowest acceleration cost per time period.

Time–Cost Trade-Off
Question 1

The time–cost trade-off methodology is a way to incrementally reduce the project duration with the smallest associated increase in incremental cost.

It is used when the project’s schedule needs to be accelerated.

What is the time–cost trade-off methodology, and when is it used?

1. What is the time–cost trade-off methodology, and when is it used?

The time–cost trade-off methodology is a way to incrementally reduce the project duration with the smallest associated increase in incremental cost.
It is used when the project’s schedule needs to be accelerated.

Time–Cost Trade-Off
Question 2

You need to calculate normal and crash times and costs in order to determine the costs associated with accelerating the project from a normal timeframe to a crash timeframe.

Why do you need both normal and crash times and costs for this procedure?

2. Why do you need both normal and crash times and costs for this procedure?

You need to calculate normal and crash times and costs in order to determine the costs associated with accelerating the project from a normal timeframe to a crash timeframe.

Time–Cost Trade-Off
Question 3

The activity’s duration can be reduced by 4 weeks at most.

This will result in an increased cost of $7,000/week.

Assume that an activity has a normal time of 20 weeks, a normal cost of $72,000, a crash time of 16 weeks, and a crash cost of $100,000.

By how many weeks, at most, can this activity’s duration be reduced?

What is the cost per week to accelerate this activity?

3. Assume that an activity has a normal time of 20 weeks, a normal cost of $72,000, a crash time of 16 weeks, and a crash cost of $100,000. By how many weeks, at most, can this activity’s duration be reduced? What is the cost per week to accelerate this activity?

The activity’s duration can be reduced by 4 weeks at most.

This will result in an increased cost of $7,000/week.

Time–Cost Trade-Off
Question 4

It is not appropriate to crash all of the activities because expediting activities not on the critical path will not reduce the project completion time but will increase total project cost.

Why isn’t it appropriate to crash all of the activities in a project to achieve the shortest project schedule?

4. Why isn’t it appropriate to crash all of the activities in a project to achieve the shortest project schedule?

It is not appropriate to crash all of the activities because expediting activities not on the critical path will not reduce the project completion time but will increase total project cost.

Microsoft Project

Appendix

Appendix #2 - Microsoft Project

This second appendix in this chapter continues discussing Microsoft Project.
Have the students produce the displays that are shown in the chapter. The images and text give direction on how to enter costs for resources, produce cost reports, and examine cash flow and earned value.

Appendix
Microsoft Project

This fourth appendix activities are

Enter costs for resources

Produce cost reports

Examine cash flow and earned value

Most widely used project management software system in the business environment today.

It is powerful, easy to use, and available at a very reasonable price.

A free trial version is or on the Microsoft website.

The Gantt Chart View and the Task ribbon are the default view when Microsoft Project is first opened.

Other views are chosen by clicking on the arrow in the View group on the Task ribbon and selecting the name from the drop down list.

Appendix: Microsoft Project

This appendix contains activities such as:

Entering costs for resources
Producing cost reports
Examining cash flow and earned value

Figure 7A.1, Resource Sheet with Work and Material Rates

Material and work resource rates are entered on the Resource Sheet.
Cost resource names can also be entered on the Resource Sheet.
The cost associated with a cost resource is added in the Task Information window for the specific task.
Resources are assigned either in the entry table or in the Task Information window.

Figure 7A.2, Cost Resource Entry for Task

The cost of a resource is entered in the Resource tab in the Task Information window. Open the Task Information window, double click on the task's name in the Task Name column and click on the Resource tab.
Choose the name of the cost resource using the drop down arrow in the Resource Name column for the next open row of Resources.
There is no entry for a cost resource in the Unit column. Only the amount of the cost is entered in the Cost column.

Figure 7A.3, Work Overview Report

The reports in Microsoft Project 2013 are available in the Reports ribbon.
If the task resource information is updated, then this report will show the actual versus baseline for work resources.
The Work Overview report provides a quick report for stakeholders about the key performance information for the project..

Figure 7A.4, Cash Flow Report

During the planning phase, the cash flow report communicates the amount expected to be expended during each week of the project.
The cash flow report helps to keep track of payments from the client or sponsor.
The dates printed in the report can be selected on the print menu to communicate costs to the stakeholders.

Figure 7A.5, Tracking Gantt to Display Actual Finish Dates

The tracking Gantt chart has two bars for each task. One bar depicts the planned time duration for the task. The second bar depicts the actual duration that has been recorded for the task.
As the project moves forward and the project manager enters actual information for each task, the tracking Gantt chart displays the project progress.

Figure 7A.6, Task Usage Sheet Assignment Information for Cost Resource

Figure 7A.6 depicts the Task Usage Sheet Assignment Information for Cost Resource window.

The expenses of a cost resource is recorded in this assignment window and the percent complete.
Entry of costs in this manner will have the costs accumulate in the costs reports but do not add to the earned value calculations

Figure 7A.7, Change in Status Date

Figure 7A.11, Change in Status Date

To calculate the Earned Value of a project, the status date must be set to today’s date or earlier.
If you are practicing with the project, be sure to change the Current Date setting to a date equal to or after the desired status before setting the status date for the project.

Figure 7A.8, Cash Flow Report

During the planning phase, the cash flow report communicates the amount expected to be expended during each week of the project.
The cash flow report helps to keep track of payments from the client or sponsor.
The dates printed in the report can be selected on the print menu to communicate costs to the stakeholders.
Because the status date has been updated, the actual costs will be reflected on this report for the status date if the actual work has been recorded for the activities and resources.

Figure 7A.9, Task Cost Overview Report

The budget report displays the total cost, baseline cost, and variance for each activity.
Be sure to save the project baseline when planning is complete in order to populate a report similar to the budget report. It tracks the actual costs versus the planned costs.
As with other reports, the number of pages and the dates for the report can be selected on the print menu for the budget report.

Figure 7A.10, Cost Variance Table for Tasks

This cost table is one of the table views available in Microsoft Project. Entry, Schedule, and cost are table types. If you view the Resource Sheet and choose the cost table view, you can see the costs for the resources by resource.
To make sure that you view the costs for the tasks, have the Gantt chart entry table visible before choosing to view the cost table. The Tracking Gantt is visible in the Gantt chart window by selecting Tracking Gantt in the Task Views group.

Figure 7A.11, Cost Variance Table for Resources

To view the costs for resources, first view the Resources Sheet in the Resource Views group. Choose the Cost table view in the Data group on the View ribbon. As with viewing the cost of the tasks, the baseline for the project must have been created for the comparison to be made to the actual progress of the project. If tasks finish early, the variance will indicate that the project is operating under budget.

Figure 7A.12, Earned Value Table

The table depicts the budgeted cost of work scheduled, earned value of work performed, actual cost of work performed, budgeted cost at completion, estimated cost at completion, and variances.
Tracking actual progress and setting the baseline are required to populate this table.
As with the Cost, Schedule, and Entry tables, the Earned Value table is another view in the Data group on the View ribbon.

Figure 7A.13, Resource Sheet with Change of Cost Resource to Material Resource

The Resource Sheet with the change for Travel Expense from a cost resource to a material resource.
If you are producing reports that require you to have all costs included in the Planned Value (BCWS) and the AC (ACWP), all resources for your project should be entered as work or material resources.

Figure 7A.14, Change of Percent Complete for Material Resource

Figure 7A.6 depicts Change of Percent Complete for Material Resource on the Task Usage Sheet Assignment Information window.

The expenses of a material resource is recorded in this assignment window and the percent complete.
The Task Usage Sheet Assignment Information window to update the material resource to is actual costs and completion.

Figure 7A.15, Update of Actual Cost for Material Resource

Figure 7A.15 depicts the update of the actual costs of the resource that was changed from a cost resource to a material resource.

This change was made to have the costs of the resource in the totals for in PV (BCWS) and AC (ACWP).

Figure 7A.16, Earned Value Table

Figure 7A.12, Earned Value Table

The table depicts the Earned Value Table on the Tracking Gantt chart that now updated to include the cost of the travel expense in PV (BCWS) and AC (ACWP).

Figure 7A.17, Visual Reports–Create Report Window

Figure 7A.12, Visual Reports–Create Report Window

This window shows the choices for creating the Earned Value visual report.
Visual reports are generated and open in Microsoft Excel and Microsoft Visio.
The icon next to the name indicates if the report will open in Excel or Visio.
You can set visual cash flow reports to display quarters, weeks, or days by clicking on the plus or minus next to the data label on the data worksheet in Microsoft Excel. The chart is linked to the data worksheet and will adjust the display. The histogram bars depict the periodic amount of expenses. The line depicts the cumulative budgeted cost for the project.

Figure 7A.18, Visual Earned Value Over Time Report, Displayed in Microsoft Excel

Figure 7A.13, Visual Earned Value Over Time Report, Displayed in Microsoft Excel

The graph shows the earned value, the planned value, and the actual costs for the project.
Setting a baseline and entering the project progress are necessary to provide the data needed to generate this report.

(Premium)

Teaching Strategies

The two vignettes reinforce the requirement to use lessons learned to inform the next project, increase consideration of risk management, have change control strategies, set appropriate responsibilities, have a communication plan, have procedures for addressing common issues, organize project sites, and align stakeholders. The goal is to detect and curb systematic cost underestimation and manage scope changes to avoid cost and schedule overruns. The first vignette explores a tidal project that incorporated lessons learned from a demonstration project and listened to key stakeholders to build trust. The second vignette reinforces the need to examine the relationships among scheduling, costs, benefits, and earned value in order to have successful projects
Tell students a story of a project that spent its entire budget but has not finished all the tasks.
Have students determine what could have been done to avoid the situation, remedy the situation, or absorb the cost overruns.
Have students use a work breakdown structure to work out the costs of a project they will complete during the semester.
Have students estimate the earned value at different stages of the project life cycle.
Have students simulate actual completion dates for the consumer market study in Microsoft Project to see how they accumulated actual costs and earned value change over time.

Optional Supplemental Activities

Have the students read the real-world vignettes for the chapter and create plans for managing the costs of projects.
Have the student read the chapter and answer all of the Reinforce Your Learning questions and the end-of-chapter questions.
Have students read the Plan of Attack vignette from Chapter 4.
The project manager worked through the project plan to have the cost of the project to be within the sponsor's budget by deleting any "nice to have" features and keeping the essential features.
Explore the articles on the PMFORUM site and in the PWWorldToday website. Have the students try to contact the author of an article to ask questions about how the author manages costs associated with a project.

Chapter Concepts

Based on the material in this chapter, students will become familiar with:

Estimating the costs of activities
Determining a time-phased baseline budget
Determining the earned value of the work performed
Analyzing cost performance
Forecasting project cost at completion
Controlling project costs
Managing cash flow

Learning Outcomes

After studying this chapter, students should be able to:

Estimate the cost of activities
Aggregate the total budgeted cost
Develop a time-phased baseline budget
Describe how to accumulate actual costs
Determine the earned value of work performed
Calculate and analyze key project performance measures
Discuss and apply approaches to control the project budget
Explain the importance of managing cash flow

Project Management Knowledge Areas from PMBOK® Guide

Concepts in this chapter support the following Project Management Knowledge Areas of the PMI Guide to the Project Management Body of Knowledge (PMBOK® Guide):

Project Cost Management

Vignette A: Managing Costs of Tidal Feasibility

Renewable energy projects have experienced increasing investment even though the prices of oil and gas have declined.
The types of investments have included projects related solar power, wind power, hydroelectric, waste-to-energy, and biofuels.
One source of renewable energy that has captured much new investment has been energy from the oceans’ tides.
From a project planning and budgeting standpoint, the ocean’s tides are relatively consistent whereas the amount of sun or wind for solar and wind energy projects is variable and, at times, unpredictable.
Tidal Project
Include funds for newer technologies, testing in harsh and complicated environmental conditions, and testing for strength, performance, and durability of the materials to be used for turbines and their support structures.
Smaller demonstration projects related to tidal stream and tidal barrage technologies have been successful.
Dam-like structures impact a number of environmental aspects such as water quality, fish migration, and noise pollution.
Benefits of the project included a reduction of debris in the bay, reduced carbon emissions, and increases in employment.
Other projects
Scotland
China
Netherlands

Vignette B: What Comes First, Schedule Delay or Cost Overrun?

Researchers from several institutions examined data from years of complex projects, their schedules, their costs, and other factors such as unrealistic estimates, supply chain failures, scope changes, scheduling practices and margins, risk events, and project manager experience.
Do schedule delays cause cost overruns? Do cost overruns cause schedule delays? Are they only related and not causing each other?
By implementing workarounds and solutions to avoid schedule delays, the costs of the projects increased.
The costs associated with labor and rate charges that impacted the cost overruns had nothing to do with the schedule.
Projects with sufficient margins of funds and time had experienced schedule delays but did not experience cost overruns.
Although there has been a relationship between schedule delays and cost overruns, there has been no causation.

Estimate Activity Costs

The total project cost is often estimated during the initiating phase of the project, or when the project charter or a proposal is prepared.

The estimated cost for each specific activity can include the following elements:
Labor: Estimated costs for the various classifications of people who are expected to work on the project
Are based on the estimated work time (not necessarily the same as the activity estimated duration) and the dollar labor rate for each person or classification
Materials: Are the estimated costs of materials that the project team or contractor needs to purchase for the project
Equipment: The equipment that must be purchased as part of the project
Facilities: Special facilities or additional space for the project team; for security reasons; to store materials; or to build, assemble, and test the project end item (deliverable)
Subcontractors and consultants: Are outsourced when project teams or contractors do not have the expertise or resources to conduct certain project tasks
Travel: Travel (other than local travel) may be required during the project
Reserve (also referred to as contingency): Funds set aside to cover unexpected situations that may come up during the project
Such as items that may have been overlooked when the initial project scope was defined, activities that may have to be redone because they may not work the first time (redesigns), or a high probability or high impact risk that may occur
There are a number of good practices that project managers should keep in mind when estimating costs
Have the person responsible for the task estimate costs
Use historical data to inform the current project because you can learn from past projects’ mistakes
Be reasonable and realistic
Estimate near-term activities as accurately as possible
Although, at the beginning of the project, it may not be possible to estimate the costs for all activities with a high degree of confidence regarding accuracy.
This is especially true for longer-term projects
Elaborate other costs as additional information becomes available

Consumer Market Study Project Estimated Costs

The figure on this slide depicts the estimated costs for each activity in the consumer market study project.

Describe the two steps of the budgeting process.

The project budgeting process involves two steps.

The project cost estimate is allocated to the various work packages in the project work breakdown structure.
The budget for each work package is distributed over the duration of the work package.

Aggregate Total Budgeted Cost

Allocating total project costs to the appropriate work packages will establish a total budgeted cost (TBC) for each work package.
There are two approaches to establishing the TBC for each work package: top-down and bottom-up.
Often, the sum of the initial estimated costs is greater than the sponsor’s budget sponsor.
Several iterations of working out the costs may b required to reduce the costs to within an acceptable level.
The figure on this slide illustrates the cost allocations for a $600,000 project.
The costs are assigned to each work package.
When the budgets for all the work packages are summed up, they cannot exceed the total project budgeted cost.

Packaging Machine Project Aggregate Total Budgeted Cost

The two figures on this slide depict the network diagram and the work breakdown structure, with costs assigned.
You will see this example repeatedly throughout the remainder of this chapter.

Develop Cumulative Budgeted Cost

Once a total budgeted cost has been established for each work package, the second step in the project budgeting process is to distribute each TBC over the duration of its work package.

The cost determined for each period is based on when the activities that make up the work package are scheduled to be performed to create the time-phased budget.
The cumulative budgeted cost (CBC) is the amount that was budgeted to accomplish the work that was scheduled to be performed up to that point in time.
The CBC for the entire project or each work package provides a baseline against which actual cost and work performance can be compared at any time during the project.
It is important to use the cumulative budget as the standard against which actual cost is compared.

Packaging Machine Project Develop Cumulative Budgeted Cost

The two figures on this slide depict the development of the cumulative budgeted cost for a packaging machine project.
The figure on the top shows the budgeted cost by period for the packaging machine project.
The figure on the bottom shows the cumulative budgeted cost curve for the packaging machine project.
The points on the graph correspond to the cumulative total shown in the figure on the top.

Determine Actual Cost

Once the project starts, it is necessary to keep track of actual cost and committed cost so that they can be compared to the CBC.
To keep track of actual cost on a project, it is necessary to set up a system to collect, on a regular and timely basis, data on funds actually expended.
Large projects have charge codes assigned to different work package numbers to determine how the actual costs compare to the planned costs.
In many projects, large dollar amounts are expended for materials or services (such as on subcontractors or consultants) that are used over a period of time longer than one cost reporting period.
These committed costs need to be treated in a special way so that the system periodically assigns a portion of their total cost to actual cost.
Committed costs are also known as commitments or encumbered costs.
Costs are committed when an item is ordered even though actual payment may take place at some later time.
Cumulative actual cost (CAC) should be then be calculated.
As data are collected on actual cost, including portions of any committed cost, they need to be totaled by work package so that they can be compared to the cumulative budgeted cost.

Packaging Machine Project Determine Actual Cost

The figure on the top indicates that at the end of week 8 of the packaging machine project, $68,000 has actually been expended, although only $64,000 was budgeted.
With the CAC values, it’s possible to draw a cumulative actual cost curve, which you see in the figure on the bottom of this slide.

Determine Value of Work Performed

Let’s take a moment to think about an example of determining the value of work performed.

Consider a project that involves painting ten similar rooms over ten days (one room per day) for a total budgeted cost of $2,000.
This makes the budget $200 per room.
At of the end of day 5, you determine that $1,000 has been spent, which is on track monetarily. The problem is that only three rooms have been painted.

Earned value, the value of the work actually performed, is a key parameter that must be determined throughout the project.

Determining the earned value involves collecting data on the percent completed for each work package and then converting this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.
In many cases, the estimate is subjective.
It is important that the person estimating the percent complete not only assess how much work has been performed. but also consider what work remains to be done.

For example, in the project involving painting ten rooms for $2,000:

If three rooms are completed, that means that 30 percent of the work has been performed.
The earned value is: 0.30 x $2,000 = $600
This means that the project has expended $400 more than the earned value by day 5.

Packaging Machine Project Determine Value of Work Performed

Here we see three figures that will help us understand how to determine the value of work performed on the packaging project.

The figure in the top left depicts the cumulative percent complete by period for the packaging machine project.
The figure on the bottom left depicts the cumulative earned value by period for the packaging machine project.

To help you understand the different costs visually, the figure on the right illustrates the CBC, CAC, and CEV for the entire project.

You will note that the CAC is running above the CBC, and the CEV is running below the CBC.

Analyze Cost Performance

There are four cost-related measures that are used to analyze project cost performance:
TBC (total budgeted cost)
CBC (cumulative budgeted cost)
CAC (cumulative actual cost)
CEV (cumulative earned value)
One can analyze cost performance by plotting the CBC, CAC, and CEV curves on the same graph, as we just saw in the previous slide.
Plotting the curves can help to reveals trends toward improving or deteriorating cost performance.

Packaging Machine Project Analyze Cost Performance

This figure shows the packaging machine project status, as of the end of week 8:

64% of funds were budgeted to have been spent
68% of overall funds were actually spent
54% of the total work was completed

Cost Performance Index

The cost performance index (CPI) is a measure of the cost efficiency with which the project is being performed.
The formula for determining the CPI is:
Cost performance index = Cumulative earned value/Cumulative actual cost (or CPI = CEV/CAC)

Packaging Machine Project Cost Performance Index

Let’s take a minute to look at the CPI for the packaging machine project.
Remember that the CPI is calculated by: Cost performance index = Cumulative earned value/Cumulative actual cost (CPI = CEV/CAC)
In the packaging machine project, the CPI as of week 8 is: CPI = $54,000/$68,000 = 0.79
This ratio indicates that for every $1.00 actually expended, only $0.79 of earned value was received.
When the CPI dips below 1.0 or is trending smaller, corrective action should be taken.

Cost Variance

Another indicator of cost performance is cost variance (CV), which is the difference between the cumulative earned value of the work performed and the cumulative actual cost.

Cost variance = Cumulative earned value – Cumulative actual cost (or CV = CEV – CAC)

Packaging Machine Project Cost Variance

In the packaging machine project, the cost variance as of week 8 is: CV = $54,000 – $68,000 = –$14,000

This calculation indicates that the value of the work performed through week 8 is $14,000 less than the amount actually expended.

Estimate Cost at Completion

Based on analysis of actual cost, it is possible to forecast what the total costs will be at the completion of the project or work package.

There are three different methods for determining the forecasted cost at completion (FCAC).

The first method assumes that the work to be performed on the remaining portion of the project or work package will be done at the same rate of efficiency as the work performed up to that point.
Forecasted cost at completion = Total budgeted cost/Cost performance index
A second method for determining the FCAC assumes that, regardless of the efficiency rate the project or work package has had in the past, the work to be performed on the remaining portion of the project or work package will be in line with the budget.
Forecasted cost at completion = Cumulative actual cost+ (Total budgeted cost – Cumulative earned value)
A third method for determining the forecasted cost at completion is to re-estimate the costs for all the remaining work to be performed and then add this re-estimate to the cumulative actual cost.
FCAC = CAC + Re-estimate of remaining work to be performed
Another measure for estimating cost at completion is the to-complete performance index (TCPI)
It is calculated as: TCPI = (TBC – CEV)/(TBC – CAC)

Packaging Machine Project Estimate Cost at Completion

Let us look that the packaging machine project again and apply the methods we just learned for determining the forecasted cost at completion.

Using the first method, the forecasted cost at completion is: FCAC = $100,000/0.79 = $126,582
Using the second method, the forecasted cost at completion is: FCAC = $68,000 + ($100,000 – $54,000)= $68,000 + $46,000= $114,000
We can also use the to-complete performance index (TCPI) to determined the FCAC.
Using this method, the to-complete performance index is: TCPI = ($100; 000 − $54; 000)/( $100; 000 − $68; 000)= $46,000/$32; 000= 1:44

Control Costs

The key to effective cost control is to analyze cost performance on a regular and timely basis.
It is crucial that cost variances and inefficiencies be identified early so that corrective action can be taken before the situation gets worse.

Controlling costs involves the following:

Analyzing cost performance to determine which work packages may require corrective action
Deciding what specific corrective action should be taken
Revising the project plan—including time and cost estimates—to incorporate the planned corrective action
When evaluating work packages that have a negative cost variance, you should focus on taking corrective actions to reduce the costs of two types of activities:
Activities that will be performed in the near term
If you put off corrective actions until some point in the distant future, the negative cost variance may deteriorate.
Activities that have a large cost estimate
Taking corrective measures that reduce the cost of a $20,000 activity by 10 percent will have a larger impact than totally eliminating a $300 activity.
There are various ways to reduce the costs of activities:
One way is to substitute less expensive materials
Another is to assign a person with greater expertise or more experience to perform or help with the activity
Reducing the scope or requirements is another way
Increasing productivity through improved methods or technology
In many cases, there will be tradeoffs—reducing cost variances may involve a reduction in project scope or a delay in the project schedule.
The key to effective cost control is aggressively addressing negative cost variances and cost inefficiencies as soon as they are identified.

Manage Cash Flow

It is important to manage the cash flow on a project.
Managing cash flow involves making sure that sufficient payments are received from the customer in time to cover the costs of performing the project.
The key to managing cash flow is to ensure that cash comes in faster than it goes out.
The contractor might try to negotiate payment terms that require the customer to do one or more of the following:
Provide a down payment at the start of the project
Make equal monthly payments based on the expected duration of the project
Provide frequent payments, such as weekly or monthly payments, rather than quarterly payments
The worst scenario from the contractor’s point of view is to have the customer make only one payment at the end of the project.
On the other hand, the contractor should control its outflow of cash by delaying payments as long as possible until they are due.

Cost Estimating for Information Systems Development

Chapter 4 defined the information system (IS) as a computer-based system that accepts data as input, processes the data, and produces information required by users. Chapter 5 revealed that much scheduling is conducted in a haphazard manner, resulting in a large number of IS projects not finishing on time. Chapter 6 reinforced the resource requirements planning necessary for people, hardware, software, data, and network resources.
This chapter addresses cost estimating in an IS project.
Accurately estimating costs and including a reserve amount are essential in creating a realistic budget that allows the contractor to complete the work without cost overruns.
Having a good plan and schedule helps to develop good cost estimates and a baseline budget.
Common errors in estimating costs include:
Underestimating the work time necessary to complete an activity
Requiring rework to meet the user requirements
Underestimating growth in the project scope
Not anticipating new hardware purchases
Making corrections to flaws that cost more than what was allotted in the reserve planning
Changing the design strategy
Increasing resources to fast-track phases of the SDLC

IS Example: Estimated Activity Costs

Recall from Chapters 4, 5, and 6 that Beth Smith was assigned to be project manager by the IS Department of ABC Office Designs.

The figure on this slide depicts the estimated activity costs for the Web-Based Reporting Development project.
It has a 5% reserve for cost overruns, fast-tracking of the project, or increased costs of materials or travel for the interviews.
Chapter 5 described how Beth had scheduled the ES, EF, LS, and LF times for the activities necessary to complete the Web-based reporting system development project for ABC Office Designs.
Chapter 6 described how Beth and the project team planned the resources for the 60-day schedule for the project. Management approved a budget of $125,000 to complete the project and train the sales staff.
After confirming with the primary responsible resources that the tasks could be completed with the estimated level of effort on each task, Beth worked with the human resources team to use the hourly wage for each of the employees to determine the labor costs for each of the Web-based Reporting System project activities.
Beth and the project team estimated the costs associated with traveling to complete user interviews ($3,000), the price of packaged software ($500), and the costs of training materials ($1,300).
The budgeted costs of the work to complete the project were near the $125,000 limit, even without training the sales staff.

Project Management Information Systems

All costs associated with each resource in a project can be stored and software will calculate the budget for each work package and for the entire project.
Project management software usually allows the user to define different rate structures for each resource and when charges for those resources will actually be accrued.
Cost tables and graphs are often available to help analyze cost performance.
See Appendix A for a thorough discussion of Project Management Software.

Critical Success Factors

Estimated activity costs must be based on the estimated activity resources.
The person who will be responsible for performing the activity should estimate the costs for that activity. This generates commitment from the person.
Cost estimates should be reasonable and realistic.
Once the project starts, it is important to monitor actual costs and work performance to ensure that everything is within budget.
A system should be established to collect, on a regular and timely basis, data on costs actually expended and committed, and the earned value (percent complete) of the work performed, so they can be compared to the cumulative budgeted cost (CBC).
If at any time during the project it is determined that the project is overrunning the budget, or the value of the work performed is not keeping up with the actual amount of costs expended, corrective action must be taken immediately.

Critical Success Factors (continued)

It is important to use the time-phased cumulative budgeted cost (CBC), rather than the total budgeted cost (TBC), as the baseline against which cumulative actual cost (CAC) is compared. It would be misleading to compare the actual costs expended to the total budgeted cost because cost performance will always look good as long as actual costs are below the TBC.
To permit a realistic comparison of cumulative actual cost to cumulative budgeted cost, portions of the committed costs should be assigned to actual costs while the associated work is in progress.
The earned value of the work actually performed is a key parameter that must be determined and reported throughout the project.
For each reporting period, the percent complete data should be obtained from the person responsible for the work. It is important that the person make an honest assessment of the work performed relative to the entire work scope.
One way to prevent inflated percent complete estimates is to keep the work packages or activities small in terms of scope and duration. It is important that the person estimating the percent complete assess not only how much work has been performed but also what work remains to be done.

Critical Success Factors (continued)

The key to effective cost control is to analyze cost performance on a timely and regular basis. Early identification of cost variances (CV) allows corrective actions to be taken immediately, before the situation gets worse.
For analyzing cost performance, it is important that all the data collected be as current as possible and be based on the same reporting period.
Trends in the cost performance index (CPI) should be monitored carefully. If the CPI goes below 1.0 or gradually decreases, corrective action should be taken.
As part of the regular cost performance analysis, the estimated or forecasted cost at completion (FCAC) should be calculated.
The key to effective cost control is to aggressively address work packages or activities with negative cost variances and cost inefficiencies as soon as they are identified. A concentrated effort must be applied to these areas. The amount of negative cost variance should determine the priority for applying these concentrated efforts.

Critical Success Factors (continued)

When attempting to reduce negative cost variances, focus on activities that will be performed in the near term and on activities that have large estimated costs.
Addressing cost problems early will minimize the negative impact on scope and schedule. Once costs get out of control, getting back within budget becomes more difficult and is likely to require reducing the project scope or quality, or extending the project schedule.
The key to managing cash flow is to ensure that cash comes in faster than it goes out.
It is desirable to receive payments (cash inflow) from the customer as early as possible, and to delay making payments (cash outflow) to suppliers or subcontractors as long as possible.

Summary

The total project cost is often estimated during the initiating phase of the project when the project charter or a proposal is prepared, but detailed plans are not usually prepared at that time.
The project budgeting process involves two steps: the budget for each work package is determined and the budget for each work package is then distributed over the expected time.
Aggregating the estimated costs of the specific activities for the appropriate work packages in the work breakdown structure will establish a total budgeted cost (TBC).
The cumulative budgeted cost (CBC) is the time-phased baseline budget that will be used to analyze the cost performance of the project.
At any time during the project, it is possible to forecast what the total costs will be at the completion of the project or work package based on analysis of actual cost expended and the earned value of work performed.
The key to effective cost control is to analyze cost performance on a regular and timely basis.
It is important to manage the cash flow on a project.

1. Describe why it is necessary to develop a baseline budget for a project.

It is necessary to prepare a budget, or plan, for how and when funds will be spent over the duration of the project to ensure that everything is within budget.

2. List and describe items that should be included when estimating activity costs.

The cost section of a proposal may consist of elements such as the following:

Labor. It might include the estimated hours and hourly rate for each person or classification.
Materials. The materials that need to be purchased for the project.
Subcontractors and consultants (if used). People who have the resources or experience to perform certain tasks that the project team cannot.
Equipment and facilities rental. If the contractor needs special equipment, tools, or facilities for the project.
Travel. If it is required during the project.
Reserves. An amount saved out to cover unexpected situations that may arise during the project.

What does the term reserves mean? Should a reserve amount be included in a project proposal? Explain your answer.
Reserves are funds to cover unexpected situations that may occur during the project.
The contractor or project team may include an amount for reserves to cover unexpected situations that may come up during the project within the estimated budget in the proposal.
For example, items may have been overlooked when the project cost estimates were prepared, tasks may have to be redone because they did not work the first time, or the costs of labor (wages, salaries) or materials may escalate during a multi-year project.

4. What is the problem with making cost estimates too conservative or too aggressive?

Cost estimates should be aggressive yet realistic.
If cost estimates are overly conservative, the total estimated cost for the project is likely to be more than the customer is willing to pay—and higher than competing contractors.
On the other hand, if cost estimates are overly optimistic and some unexpected expenditures need to be made, the contractor is likely to either lose money or have to suffer the embarrassment of going back to the customer to request additional funds to cover cost overruns.

5. Describe the project budgeting process.

The project budgeting process involves two steps.

The project cost estimate is allocated to the various work packages in the project work breakdown structure.
The budget for each work package is distributed over the duration of the work package.

6. Define the following: TBC, CBC, CAC, CEV, CPI, CV, and FCAC. How is each calculated?

TBC: total budgeted cost
Top-down = a portion of the total project cost is allocated to each work package
Bottom-up = the sum of the costs of all the activities that make up that work package
CBC: cumulative budgeted cost
The amount that was budgeted to accomplish the work that was schedule to be performed up to that point in time
CAC: cumulative actual cost
The amount that was actually spent to accomplish the work that was scheduled to be performed up to that point in time
CEV: cumulative earned value
= % complete X TBC (for the work package)
CPI: cost performance index
= CEV/CAC
CV: cost variance
= CEV – CAC
FCAC: forecasted cost at completion
FCAC = TBC/CPI
FCAC = CAC + (TBC – CEV)
FCAC = CAC + Re-estimate of remaining work to do
TCPI: to-complete performance index
= (TBC – CEV) / (TBC – CAC)

7. Why is it necessary to track actual and committed costs once a project starts?

It is necessary to track both actual and committed costs so that they can be compared to the CBC.
In order to take corrective action before it’s too late.

8. Why is it necessary to calculate the earned value of work performed? How is this done?

It is important to calculate the earned value of work performed so that if the work performed is not keeping up with the actual cost, corrective action can be taken
Even if the actual cost is in line with the CBC
Determining the earned value involves collecting data on the percent complete for each work package and then converting this percentage to a dollar amount by multiplying the TBC of the work package by the percent complete.

9. Give an example of calculating a cost performance index. What does it mean when the CPI is below 1.0? What does it mean when the CPI is above 1.0?

Cost performance index = CEV/CAC
If CPI is less than 1.0, it means that for every dollar expended, less than one dollar of earned value was received.
If CPI is greater than 1.0, it means that for every dollar expended, more than one dollar of earned value was received.

Cost variance = Cumulative earned value – Cumulative actual cost
If the CV is negative, it means that the value of the work performed is less than the amount actually expended.
If the CV is positive, it means that the value of the work performed is more than the amount expended.

One should focus on:

Activities that will be performed in the near term. If you put off corrective actions until some point in the distant future, the negative cost variance may deteriorate.
Activities that have a large cost estimate. Usually, the larger the estimated cost for an activity, the greater the opportunity for a large cost reduction.

11. What is the key to managing cash flow? How can this goal be accomplished?

The key to managing cash flow is to ensure that cash comes in faster than it goes out.
This can be accomplished by asking the customer to:
Provide a down payment at the start of the project
Make equal monthly payments based on the expected duration of the project
Provide frequent payments, such as weekly or monthly payments, rather than quarterly payments

12a. Refer to the table below. What is the cumulative budgeted cost at the end of week 6? Amounts are in thousands of dollars.

The cumulative budgeted cost at the end of week 6 is $100,000.

Week

1 2 3 4 5 6

Cumulative 10 36 54 66 95 112

There is a cost overrun of $12,000.

The actual cost of Task 1 was $34,000 while only $30,000 was budgeted for it.
The actual cost so far of Task 2 is $68,000, while only $60,000 had been budgeted up to week 6.
The actual cost of Task 3 is $10,000 which equals its budgeted amount at week 6.

12c. Below is a table of the cumulative percentages of work completed by the end of week 6. What is the cumulative earned value of the project at the end of week 6? Is it good?

The cumulative earned value at the end of week 6 is only $83,500; however, $112,000 has already been spent.

12d. What is the CPI at the end of week 6? What is the CV?

CPI = 83,500 / 112,000 = .7455

CV = 83,500 – 112,000 = -28,500

12e. Calculate the FCAC using the first two methods described

Method 1: Assuming the same rate of efficiency

FCAC = TBC / CPI
FCAC = $170,000 / .7455 = $228,034.87

Method 2: Perform the remainder of the work according to budget

FCAC = CAC + (TBC – CEV)
FCAC = $112,000 + ($170,000 - $83,500)
FCAC = $112,000 + $86,500
FCAC = $198,500

Internet Exercises

The Web Exercises can be a very valuable part of this course. You should assign these exercises to your students as homework or complete them with them in a computer lab.

Internet Exercises

A number of cost analysis tools are found on the Internet. Adding the term "project management" to the search will yield results focused on cost benefit analysis for projects. Results of the cost forecasting search are centered on management in general cost forecasting. Adding the term "project management" changes the sites found to those focused on cost forecasting in project management.
ProjectSmart provides project management resources for project managers at all levels. The site features articles, presentations, and other information of interest around the world.
The White Papers link contains to a number of papers on topics to help improve project management performance. The site’s articles, books, presentations, and case studies that help reinforce the project management concepts.

Case Study #1: A Not-For-Profit Medical Research Center

This is an open-ended case study. Allow students to use their creativity on this one.
This case continues through to chapter 8. Each chapter features questions that reinforce the concepts presented. Have students save their work from this case study for the work they will do in chapter 8.
As the director of external affairs for a national not-for-profit medical research center you are tasked with producing a shorter, simpler, easy-to-read annual report to show the benefits of the center's research and the impact on people's lives in an effort to help raise funds for the center.

Group Activity

Divide the course participants into the same groups as for the previous chapter’s group activity then address each of the steps listed in the activity.

1. Using the schedule from Chapter 5, estimate the cost for each activity.

If using Microsoft Project, enter the rates of the work and material resources on the Resource Sheet.
Assign the cost resource amount on the Task Information window for the task where the resource is assigned.
Any resources that are not assigned for the duration of a work package should have a percent of effort assigned, or change the task to a fixed duration and the amount of work changed.

2. Determine the total budgeted cost for the project.

The determination of the TBC for the project is completed using the top-down approach or the bottom-up approach.
If using Microsoft Project and the costs are assigned to the work packages, the approach is the bottom-up approach.

Approaches:

Top-down = a portion of the total project cost is allocated to each work package.
Bottom-up = the sum of the costs of all the activities that make up that work package.

3. Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted cost (CBC) curve (similar to Figure 7.6) for the project.

If using Microsoft Project, the Cash Flow report depicts the amount of cost per quarter, week, or day and the cumulative budgeted cost curve.
The Cash Flow report provides a table of the costs and the total costs per week for the project.

Case Study #2: The Wedding

Again, this is an open-ended case study. Encourage the students to be creative.
This case continues through to chapter 8. Each chapter has questions to reinforce the concepts presented. Have students save their work for this case study for the work they will do in chapter 8.
Tony and Peggy Sue want to get married and have family that want to plan the wedding for them without considering what Tony or Peggy Sue would want.

Group Activity

Divide the course participants into the same groups as for the previous chapter’s group activity then address each of the steps listed in the activity.

1. Using the schedule from Chapter 5, estimate the cost for each activity.

If using Microsoft Project, enter the rates of the work and material resources on the Resource Sheet.
Assign the cost resource amount on the Task Information window for the task where the resource is assigned.
Any resources that are not assigned for the duration of a work package should have a percent of effort assigned, or change the task to a fixed duration and the amount of work changed.

2. Determine the total budgeted cost for the project.

The determination of the TBC for the project is completed using the top-down approach or the bottom-up approach.
If using Microsoft Project and the costs are assigned to the work packages, the approach is the bottom-up approach.

Approaches:

Top-down = a portion of the total project cost is allocated to each work package.
Bottom-up = the sum of the costs of all the activities that make up that work package.

Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted cost (CBC) curve (similar to Figure 7.6) for the project.
If using Microsoft Project, the Cash Flow report depicts the amount of cost per quarter, week, or day and the cumulative budgeted cost curve.
The Cash Flow report provides a table of the costs and the total costs per week for the project.

This appendix address the time–cost trade-off.

Appendix #1 - Time–Cost Trade-Off

The time–cost trade-off methodology is used to incrementally reduce the project duration with the smallest associated increase in incremental cost.
It is based on the following assumptions:
Each activity has two pairs of duration and cost estimates: normal and crash.
The normal duration is the estimated length of time required to perform the activity under normal conditions.
The normal cost is the estimated cost to complete the activity in the normal time.
The crash duration is the shortest estimated length of time in which the activity can be completed.
The crash cost is the estimated cost to complete the activity in the crash time.
An activity’s duration can be incrementally accelerated from its normal time to its crash time by applying more resources.
An activity cannot be completed in less than its crash time.
The resources necessary to reduce an activity’s estimated duration from its normal time to its crash time will be available when needed.
Within the range between an activity’s normal and crash points, the relationship between time and cost is linear. This acceleration cost per time period is calculated as follows:
(Crash Cost – Normal Cost)/(Normal Time – Crash Time)

Acceleration Costs

The figure on the top of this slide depicts a network diagram for a project with normal and crash costs.
The table on the bottom depicts the costs associated with the Time-Cost Trade-off for the project.
The objective of the time–cost trade-off method is to determine the shortest project completion time based on crashing those activities that result in the smallest increase in total project cost.
To accomplish this, it is necessary to shorten the total project duration, one time period at a time, crashing only those activities that are on the critical path(s) and have the lowest acceleration cost per time period.

1. What is the time–cost trade-off methodology, and when is it used?

The time–cost trade-off methodology is a way to incrementally reduce the project duration with the smallest associated increase in incremental cost.
It is used when the project’s schedule needs to be accelerated.

2. Why do you need both normal and crash times and costs for this procedure?

You need to calculate normal and crash times and costs in order to determine the costs associated with accelerating the project from a normal timeframe to a crash timeframe.

The activity’s duration can be reduced by 4 weeks at most.

This will result in an increased cost of $7,000/week.

4. Why isn’t it appropriate to crash all of the activities in a project to achieve the shortest project schedule?

It is not appropriate to crash all of the activities because expediting activities not on the critical path will not reduce the project completion time but will increase total project cost.

Appendix #2 - Microsoft Project

This second appendix in this chapter continues discussing Microsoft Project.
Have the students produce the displays that are shown in the chapter. The images and text give direction on how to enter costs for resources, produce cost reports, and examine cash flow and earned value.

Appendix: Microsoft Project

This appendix contains activities such as:

Entering costs for resources
Producing cost reports
Examining cash flow and earned value

Figure 7A.1, Resource Sheet with Work and Material Rates

Material and work resource rates are entered on the Resource Sheet.
Cost resource names can also be entered on the Resource Sheet.
The cost associated with a cost resource is added in the Task Information window for the specific task.
Resources are assigned either in the entry table or in the Task Information window.

Figure 7A.2, Cost Resource Entry for Task

The cost of a resource is entered in the Resource tab in the Task Information window. Open the Task Information window, double click on the task's name in the Task Name column and click on the Resource tab.
Choose the name of the cost resource using the drop down arrow in the Resource Name column for the next open row of Resources.
There is no entry for a cost resource in the Unit column. Only the amount of the cost is entered in the Cost column.

Figure 7A.3, Work Overview Report

The reports in Microsoft Project 2013 are available in the Reports ribbon.
If the task resource information is updated, then this report will show the actual versus baseline for work resources.
The Work Overview report provides a quick report for stakeholders about the key performance information for the project..

Figure 7A.4, Cash Flow Report

During the planning phase, the cash flow report communicates the amount expected to be expended during each week of the project.
The cash flow report helps to keep track of payments from the client or sponsor.
The dates printed in the report can be selected on the print menu to communicate costs to the stakeholders.

Figure 7A.5, Tracking Gantt to Display Actual Finish Dates

The tracking Gantt chart has two bars for each task. One bar depicts the planned time duration for the task. The second bar depicts the actual duration that has been recorded for the task.
As the project moves forward and the project manager enters actual information for each task, the tracking Gantt chart displays the project progress.

Figure 7A.6 depicts the Task Usage Sheet Assignment Information for Cost Resource window.

The expenses of a cost resource is recorded in this assignment window and the percent complete.
Entry of costs in this manner will have the costs accumulate in the costs reports but do not add to the earned value calculations

Figure 7A.11, Change in Status Date

To calculate the Earned Value of a project, the status date must be set to today’s date or earlier.
If you are practicing with the project, be sure to change the Current Date setting to a date equal to or after the desired status before setting the status date for the project.

Figure 7A.8, Cash Flow Report

During the planning phase, the cash flow report communicates the amount expected to be expended during each week of the project.
The cash flow report helps to keep track of payments from the client or sponsor.
The dates printed in the report can be selected on the print menu to communicate costs to the stakeholders.
Because the status date has been updated, the actual costs will be reflected on this report for the status date if the actual work has been recorded for the activities and resources.

Figure 7A.9, Task Cost Overview Report

The budget report displays the total cost, baseline cost, and variance for each activity.
Be sure to save the project baseline when planning is complete in order to populate a report similar to the budget report. It tracks the actual costs versus the planned costs.
As with other reports, the number of pages and the dates for the report can be selected on the print menu for the budget report.

Figure 7A.10, Cost Variance Table for Tasks

This cost table is one of the table views available in Microsoft Project. Entry, Schedule, and cost are table types. If you view the Resource Sheet and choose the cost table view, you can see the costs for the resources by resource.
To make sure that you view the costs for the tasks, have the Gantt chart entry table visible before choosing to view the cost table. The Tracking Gantt is visible in the Gantt chart window by selecting Tracking Gantt in the Task Views group.

Figure 7A.11, Cost Variance Table for Resources

To view the costs for resources, first view the Resources Sheet in the Resource Views group. Choose the Cost table view in the Data group on the View ribbon. As with viewing the cost of the tasks, the baseline for the project must have been created for the comparison to be made to the actual progress of the project. If tasks finish early, the variance will indicate that the project is operating under budget.

Figure 7A.12, Earned Value Table

The table depicts the budgeted cost of work scheduled, earned value of work performed, actual cost of work performed, budgeted cost at completion, estimated cost at completion, and variances.
Tracking actual progress and setting the baseline are required to populate this table.
As with the Cost, Schedule, and Entry tables, the Earned Value table is another view in the Data group on the View ribbon.

Figure 7A.13, Resource Sheet with Change of Cost Resource to Material Resource

The Resource Sheet with the change for Travel Expense from a cost resource to a material resource.
If you are producing reports that require you to have all costs included in the Planned Value (BCWS) and the AC (ACWP), all resources for your project should be entered as work or material resources.

Figure 7A.6 depicts Change of Percent Complete for Material Resource on the Task Usage Sheet Assignment Information window.

The expenses of a material resource is recorded in this assignment window and the percent complete.
The Task Usage Sheet Assignment Information window to update the material resource to is actual costs and completion.

Figure 7A.15 depicts the update of the actual costs of the resource that was changed from a cost resource to a material resource.

This change was made to have the costs of the resource in the totals for in PV (BCWS) and AC (ACWP).

Figure 7A.12, Earned Value Table

The table depicts the Earned Value Table on the Tracking Gantt chart that now updated to include the cost of the travel expense in PV (BCWS) and AC (ACWP).

Figure 7A.12, Visual Reports–Create Report Window

This window shows the choices for creating the Earned Value visual report.
Visual reports are generated and open in Microsoft Excel and Microsoft Visio.
The icon next to the name indicates if the report will open in Excel or Visio.
You can set visual cash flow reports to display quarters, weeks, or days by clicking on the plus or minus next to the data label on the data worksheet in Microsoft Excel. The chart is linked to the data worksheet and will adjust the display. The histogram bars depict the periodic amount of expenses. The line depicts the cumulative budgeted cost for the project.

Figure 7A.13, Visual Earned Value Over Time Report, Displayed in Microsoft Excel

The graph shows the earned value, the planned value, and the actual costs for the project.
Setting a baseline and entering the project progress are necessary to provide the data needed to generate this report.