Chapter 9
Cost Planning and Performance
Learning Objectives
Items to consider when estimating cost
 Preparing a baseline budget
 Cumulating actual costs
 Determining the earned value of work
performed
 Analyzing cost performance
 Forecasting project cost at completion
 Controlling project costs
 Managing cash flow
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Real World Example
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Vignette: Feds Miscalculate Costs
Department of Defense (DOD) knew that data used to calculate costs of
closing Fort Monmouth were incorrect and would lead to underestimating
the project’s cost by hundreds of millions of dollars.
Officials had written a memo warning DOD about the inaccurate data.
The Base Realignment and Closure (BRAC) commission voted in August
2005 to close the fort and move it to Aberdeen Proving Ground for a cost
of about $780 million. The correct estimate to close the fort could be
closer to $1.5 billion.
Two years later, the DOD was forced to admit the miscalculation when its
Fiscal Year 2008 budget estimated the total cost at about $1.5 billion.
A Gannett New Jersey review revealed that a warning about the incorrect
information that was sent to the DOD on July 8, 2005 by Fort Monmouth
officials.
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Real World Example
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Vignette: A $4 million Landscape Project
Total cost of fixing the massive landslide problem next to Rancho Santa
Fe Road in Carlsbad, California had risen from $1 million to almost $4
million. City officials remained optimistic.
Initially the project was estimated to cost less than $1 million. Once work
had begun the city realized they underestimated the scope and complexity.
They believe they finalized their projects after adding in another $1.95
million bringing the new total to almost $3.9 million.
Meanwhile across town, another project has been started on another
landslide site, the Marbella landslide.
After extended legal battles, the Homeowners Association decided that
they would work with the city to revise their landslide agreement.
City officials are hoping they won’t face the same kind of project cost
overruns that happened on the Agua Dulce landslide!
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Project Cost Estimates
Cost planning starts with the proposal.
 The cost section may include:
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Labor
 Materials
 Subcontractors and consultants (if used)
 Equipment and facilities rental
 Travel
 Contingencies
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Project Budgeting:
Two Steps
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First, the project cost estimate is allocated to
the various work packages in the project
work breakdown structure.
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Second, the budget for each work package is
distributed over the duration of the work
package.
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Allocating the
Total Budgeted Cost
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Allocating total project costs for the various
elements 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.
When all budgets are summed, they cannot
exceed the TBC.
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Developing the
Cumulative Budgeted Cost
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The second step is to distribute each TBC over the
duration of its work package.
A cost is determined for each period.
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.
One uses the CBC as the standard against which
actual cost is compared.
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Determining Actual Cost
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Track actual cost by establishing a system to
collect data on funds actually expended.
Periodically assign a portion of the total committed
cost to actual cost.
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Funds may be committed but not yet paid
Total actual and committed cost by work package
for comparison to the CBC.
Cumulative actual cost (CAC) should be
calculated.
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Determining the
Value of Work Performed
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Earned value is the value of the work actually
performed.
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Determine earned value by collecting data on the
percent complete for each work package.
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Convert this percentage to a dollar amount by
multiplying the TBC of the work package by the
percent complete.
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Cost Performance Analysis
Four Measures
TBC
 CBC
 CAC
 CEV
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(total budgeted cost)
(cumulative budgeted cost)
(cumulative actual cost)
(cumulative earned value)
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Cost Performance Index
(CPI)
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A measure of the cost efficiency with which
the project is being performed.
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CPI = Cumulative Earned Val
------------------------------Cumulative Actual Cost
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Cost Variance (CV)
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The difference between the cumulative earned value
of the work performed and the cumulative actual cost.
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Cost variance = Cum earned value –
Cum actual cost
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Cost Forecasting:
Three Methods
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Three methods for determining forecasted cost at
completion (FCAC):
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FCAC = TBC / CPI
• Project continues at same rate of efficiency
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FCAC = CAC + (TBC - CEV)
• Remaining work performed at CPI = 1
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FCAC = CAC + Re-estimate of remaining work
• New forecast for remaining work
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Cost Control
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The key is to analyze cost performance on a
regular and timely basis.
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Identify cost variances and inefficiencies
early.
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Cost Control (Cont.)
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Involves the following:
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Analyzing cost performance to determine which work
packages may require corrective action.
Deciding what corrective action should be taken
Revising the project plan.
When evaluating work packages that have a negative
cost variance, focus should be on taking corrective
actions to reduce the costs of:
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Activities that will be performed in the near term.
Activities that have a large cost estimate.
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Ways to Reduce
Costs of Activities
Substitute less expensive materials.
 Assign a person with greater expertise to
perform or help with the activity.
 Reduce the scope or requirements.
 Increase productivity through improved
methods or technology.
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Managing Cash Flow
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Make sure that sufficient payments are
received from the customer in time for you to
cover the costs of performing the project.
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The key to managing cash flow is to ensure
that cash comes in faster than it goes out.
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Project Management
Software
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All costs associated resources can be stored. The
software calculates the budget for each work
package and for the entire project.
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The software allows the user to define different
rate structures for each resource and when charges
for those resources will be accrued.
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Cost tables and graphs are available to help
analyze cost performance.
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