Cost Control

Dr. Sohaib Gutub

Agenda

• Cost Control as a Management Tool

• Project Cost Control Systems
• Earned Value Method
Cost Control as a Management Tool
• The early detection of actual or potential cost overruns in field
construction activities is vital to management.
• It provides the opportunity to initiate remedial action and increases
the chance of eliminating such overruns or minimizing their impact.
• Because cost overruns increase project costs and diminish profits, it is
easy to see why both project management and upper-level
management must become sensitive to the costs of all project
activities.
Cost Control as a Management Tool
• An important byproduct of an effective cost reporting system is the
information that it can generate for management on the general cost
performance of field construction activities.
• This information can be brought to bear on problems of great interest
to project management.
• The determination of current project status, effectiveness of work
progress, and preparation of progress payment requests require data
generated by both project planning and cost control reporting
systems.
Cost Control as a Management Tool
• Project cost control data are important not only to project
management in decision-making processes but also to the company’s
estimating and planning departments because these data provide
feedback information essential for effective estimates and bids on
new projects.
• Thus, a project control system should both serve current project
management efforts and provide the field performance database for
estimating future projects.
Earned Value Method: Background
• One widely accepted way of calculating progress on complex projects
using a work or account based breakdown system is the earned value
method.
• This system of determining project progress addresses both schedule
status (i.e., on schedule, behind schedule or ahead of schedule.) and
cost status (i.e., on budget, over budget or under budget).
• This method of tracking cost and schedule was originally
implemented by the Department of Defense in the late 1970s to help
better control complex projects.
• The system was called the Cost and Schedule Control Systems Criteria
or C/SCSC.
Earned Value Method: Background
• This method of monitoring contracts proved to be so effective that
other government agencies (e.g., Department of Energy, Veterans
Administration) adopted C/SCSC as a means of maintaining oversight
on complex projects such as nuclear and conventional power plants.
• Private owners such as power companies implemented similar
systems since reporting to various government authorities
encouraged or required the use of C/SCSC and earned value concepts.
• Ultimately, owners of complex industrial projects began to use the
system as well.
Earned Value Method
• The idea of earned value is based upon a rigorous development of
percentage complete of the budgeted costs associated with individual
work packages or line items.
• Each work package has an initial budget or estimate which is defined
as the budgeted cost at completion or BCAC.
• As work proceeds on an individual work package or account,
assessment of the percentage complete is made at various study
dates.
• The initial schedule establishes an expected level of work completion
as of the study date.
Earned Value Method
• The level of expected production is often shown as an S-Curve
plotting the cost or units of production (e.g., units produced, work
hours expended, and so on) against time.
• This cost/production curve is referred to as the baseline.
• At any given time (study date), the units of cost/production indicated
by the baseline are called the budgeted cost of work scheduled
(BCWS).
Earned Value Method
• The tracking system requires that field reports provide information
about the actual cost of work performed (ACWP) and the actual
quantity of work performed (AQWP).
• The earned value is the budgeted cost of work performed (BCWP).
• The relative values for a given work package or account at a given
point in time (see Figure 17.10) provide information about the status
in terms of cost and schedule variance.
Earned Value
Method
Earned Value Method
• The six parameters which form the foundation of the earned value concept are:
1. BCWS: Budgeted Cost of Work Scheduled = Value of the baseline at a given time
2. ACWP: Actual Cost of Work Performed - Measured in the field
3. BCWP: Budgeted Cost of Work Performed = [% Complete] x BCAC
4. BCAC: Budgeted Cost At Completion = Contracted Total Cost for the Work Package
5. AQWP: Actual Quantity of Work Performed - Measured in the field
6. BQAC: Budgeted Quantity at Completion - Value of the Quantity Baseline as
Projected at a given Point.
Earned Value method: Estimated Cost at
Completion (ECAC)
Case 1: ECAC = BCAC / CPI
• You assume that the project will continue to perform, to the end, as it has been
performing in this scenario.
• In other words, your future performance will be the same as past performance.
Therefore, the CPI will remain unchanged until the project ends.
• Formula for the Estimate at Completion
• You can calculate Estimate at Completion by dividing the Budget at Completion by
the Cost Performance Index.
• Estimate at Completion = (Budget Cost at Completion) / (Cost Performance Index)
• Or,
• ECAC = BCAC / CPI

Dr. Mahmoud Abdel Salam Taha

Earned Value method: Estimated Cost at
Completion (ECAC)
Case 2: ECAC = ACWP + (BCAC – BCWP) = BCAC + (BQWP – ACWP) = BCAC – CV
• Here, you have deviated from your budget estimate, but from now on you can
complete the remaining work as planned.
• Unforeseen circumstances or one-time incidents can cause this to happen and
will increase costs. However, it will not happen again and you can complete the
remaining work as planned.
• In this formula, you add the money spent to date to the budgeted cost of the
remaining work.
• Formula for the Estimate at Completion
• The formula to calculate the Estimate at Completion in this case is:
• Estimate Cost at Completion = Money spent to date + budgeted cost for the
remaining work

Dr. Mahmoud Abdel Salam Taha

 Chart Title

Earned Value Method

2500
2000
BCAC

1500
1000
500
Report Day 0
1 2 3 4 5

BCWS ACWP BCWP

Day 1 2 3 4 5

$1000

ACWP: Actual Cost of Work Performed - Measured in the field = $1000

BCWP: Budgeted Cost of Work Performed = $800

BCWS: Budgeted Cost of Work Scheduled = $1200

BCAC: Budgeted Cost At Completion = 400 * 5 = $2000
Earned Value Method:
A
B
C

Example
D
E
0 1 2 3 4 5 6 7 8 9 10

Activity Predessor Duration (Days) Cost/Day Tptal Cost

A - 2 300 600
B A 3 400 1200
C B 3 400 1200
D B 2 200 400
E D 3 100 300

Field report at end of day 7 Activity ACWP BCWP BCWS CPI CV SPI SV
Activity Actual % Completion Incurred Cost A 600 600 600 1 0 1 0
A 100 600 B 1400 1200 1200 0.85714286 -200 1 0
B 100 1400 C 500 400 800 0.8 -100 0.5 -400
C 33 500 D 200 200 400 1 0 0.5 -200
D 50 200 E 0 0 0 - 0 0 0
E 0 0 Total 2700 2400 3000 0.88888889 -300 0.8 -600
 Earned Value Method
Cost Variance, CV = BCWP - ACWP Cost Performance Index
CSI = (BCWP/ACWP)
CV = 0, Contractor estimate = Field cost =1
CV > 0, Contractor cost < estimate >1
CV < 0, Contractor cost overrun (losing money) <1

Schedule Variance SV = BCWP – BCWS Schedule Performance Index

SPI = (BCWP/BCWS)
SV = 0, Contractor on schedule =1
SV > 0, Contractor ahead of schedule >1
SV < 0, Contractor behind schedule <1

CE 321 - Construction Management

Earned Value Method

Scenarios for Permutations Between

ACWP, BCWP, and BCWS (Singh,
1991).
Earned Value
Method
?
 Example
For a project with following characteristics:
BCAC = 960,000, 9 months duration
BCWS(4) = 315,000
BCWP(4) = 276,600
ACWP(4) = 375,000
---------
- CV = 276,600-375,000 = -98,400 – Cost Overrun
- SV = 276,600-315,000 = -38,400 – Behind Schedule
- Project Percent Complete PPC = 276,600/960,000*100 = 29% complete
- CPI = 276,600/375,000 = 0.74
- SPI = 276,600/315,000 = 0.88
- ECAC = BCAC-CV = 960,000 + 98,400 = 1,058,400 , or
= BCAC/CPI = 960,000/0.74 = 1,297,300
Project Duration, PD = ?