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Project replanning and product redesign involve major changes to the project. Both approaches require an assessment of the impact on the overall product quality and its ultimate usability by the Client. Taking either of these approaches too far could render the product or service substandard. When actual cost deviates from earned value, it may be necessary to change the budget, rather than adjusting costs to match a previously determined monetary ceiling. The following are valid reasons to change the budget: • Change to the product or service that will have an impact on cost • Change to the project scope that will have an impact on cost • Major, unforeseen changes to the costs of resources or materials The following are not valid reasons to change the budget: • Cost variances that are normal and based on accurate estimations • Cost variances that are due to poor planning or poor estimating • Costs that would normally occur have been forgotten in the cost management plan The Client must agree to the budget change request prior to seeking approval of additional funds.
Finalize Cost Management PlanWhen finalizing the cost management plan, the Contracting Officer should work with the Client to ensure that the planned variance responses are realistic and that they understand cost variance implications (e.g., if it would be possible to lower labor rates or adjust the scope and quantity to reduce the financial impact of a cost increase). The Client is responsible for the final cost management plan, including obtaining applicable reviews and approvals. Implement Cost Management PlanDuring the contract management process, the Contracting Officer reviews the cost management plan regularly to ensure that its guidelines continue to be appropriate throughout the duration of the contract. The Pricing Analyst closely monitors the cost variance to ensure that significant variance is addressed appropriately and in a timely manner. The Item Manager informs the Pricing Analyst of any anticipated resources and inventory changes, and the Pricing Analyst updates the cost management plan accordingly. Several techniques are available for measuring cost performance: • Earned value management (EVM) • Cost performance index (CPI) Cost Variance (CV)Cost variance (CV) is the most basic performance measure, defined as the difference between planned costs and actual costs. CV is calculated by comparing the actual cost of the work (AC) with the earned value (EV), typically expressed as a ratio or percentage: CV = [(EV - AC) / EV] x 100 The goal of calculating cost variances is to provide the basis for earned value management. The Pricing Analyst must understand the problems behind variances and the action that will correct any problems.
Earned Value Management (EVM)Some costs are incurred by tasks that are incomplete and have not yet earned any value. These costs are considered during cost analysis, but are not used when assessing the current earned value to the project. Earned value management (EVM) is perhaps the most useful activity in cost control because it combines costs and the schedule into one indicator. EVM shows how much the project is physically accomplishing in terms of both cost and time, giving management a more accurate and timely report on project progress. Earned value (EV) is the cost originally budgeted to accomplish the work that has been completed as of the analysis date. It answers the question, "How much work has actually been completed?" EV is calculated from the measured work completed and the budgeted costs for that work: EV = (percentage of project completed) x (project budget) Figure 5.3 illustrates EV (represented by "$") as being associated with the percentage of work completed at various points throughout the project. Figure 5.3 Earned Value (EV)
Actual cost (AC) is what it actually costs to accomplish all the work completed as of the analysis date. It answers the question, "How much have we actually spent?" This is usually determined from the organization's accounting system or can often be approximated by multiplying the number of people by the number of hours, days, or weeks worked. AC = [(actual hours incurred at the task level) x (individual resource cost)] + sum (actual expense amounts for the task) Planned value (PV) is the total budgeted cost up to the analysis date. It answers the question, "How much did we plan to spend as of this date?" A variant of this question is, "How much work should have been completed by this date?" PV can be computed from the project plan, or it can be approximated by multiplying the total budget by the fraction of total project duration at the analysis date. For example, if the project budget is $100 and 20 percent of the project's time has elapsed, the approximate PV is $20. PV = [(task % complete) x (baselined estimated hours) x (individual resource cost)] + sum (baselined estimated expense amounts for the task for all baselined expenses with actual expense dates)
Cost Performance Index (CPI)The cost performance index (CPI) illustrates how efficiently a project team is accomplishing the completed work. CPI is determined by calculating the ratio of earned value (EV) to the actual cost (AC). CPI = EV / AC When the CPI is measured periodically, the CPI figures can be plotted in a line graph that illustrates trends over the life of the project (known as a "trend analysis"). Schedule Performance Index (SPI)The CPI is often reported along with the schedule performance index (SPI). Both CPI and SPI are measures of efficiency, but the SPI is the ratio of earned value (EV) to planned value (PV), or budgeted costs. SPI = EV / PV For example, an SPI of 0.75 means that the project has earned only 75 percent of the value that was anticipated to have been earned. Rating PerformanceCPI and SPI are used to rate the cost and schedule performance of a project. A poor rating provides a warning signal, allowing for corrective measures to be taken at the early stages of issue development. If the index is: • Equal to 1.0 - performance is exactly as planned • Greater than 1.0 - performance is better than planned • Less than 1.0 - performance is poor Estimate at Completion (EAC)The estimate at completion (EAC) is a calculated prediction of the total costs of a project at completion, based on performance to date. The Pricing Analyst calculates the EAC when assessing the EV for a project, as part of a periodic evaluation. The EAC is the Pricing Analyst's educated guess regarding the total cost of a project. Before calculating EAC, the Pricing Analyst should determine how future cost variances may compare with current cost variances, because the formula differs based on the assumption about future variances. As with other outputs, the periodic assessment of the EAC will contribute a vital part of the project's history. The EAC is a useful tool for project management and is primarily used to: • Indicate the expected cost of the total project • Estimate the total costs of an activity or groups of activities • Provide the best estimate of potential project profitability If the current EAC for any project indicates potential for cost overruns, the Pricing Analyst must assess cost variances to anticipate whether the overruns will recur in the future. The Pricing Analyst is also responsible for checking the original cost estimates to determine whether the estimates were inaccurate and require revision. In addition to future cost variances, the Pricing Analyst also needs to know the budget at completion (BAC), which is the sum of all budgets established for the contract: BAC = (baselined estimated hours assigned at the task level x individual resource cost) + sum (baselined estimated expense amounts for the task) Generally, the EAC can be calculated in four different ways, depending on whether the CPI is readily available and on assumptions about future cost variances. The standard formula for calculating EAC, when CPI is not available, is based on the project's cost performance to date, or the ratio between actual cost and earned value, as part of the budget at completion. This formula is used when current cost variances reflect future variances: EAC = (AC / EV) x BAC If the CPI is available, simply divide it into the total budget at completion. This is presented in the second formula for calculating EAC: EAC = BAC / CPI The third formula combines actual costs to date and the estimate to complete (ETC). The ETC is the total of all estimated costs of work that has not yet been performed, or the difference between budget at completion and earned value (i.e., ETC = BAC - EV): EAC = AC + ETC This approach is most often used when: • Past variances would have continued to occur into the future • Original estimates have been revised significantly • The revised estimates are deemed accurate The final formula that can be used to calculate the EAC adds the actual-costs-to-date to the expected earned value of the work not yet completed. To find this "future earned value," simply multiply the PV by the percentage of work that has not yet been performed: EAC = AC + (PV x % of work remaining) This approach is most often used when the variances to date are seen as atypical and the project team expects that similar variances will not occur in the future. Whichever method the Pricing Analyst uses to arrive at a final estimate, EAC can be used to calculate the variance at completion for the project. The final variance can be expressed as a dollar amount or as a percentage. It is commonly seen as a ratio of the total variance, or the difference between the budgeted and estimated cost at completion of a project, to the budget at completion: VAC = (BAC - EAC) / BAC For a project with a BAC of $75,000 and an EAC of $85,000, the variance at completion would be $10,000. Expressed as a percentage, the VAC would be $10,000 divided by $75,000. This project would be 13 percent over budget.
Revised Cost Estimates and Budget UpdatesIf early measurement of cost efficiency reveals that the project is going to have trouble remaining within budget, the Pricing Analyst will need to revise the cost estimates and update the overall budget as required. Preliminary estimates that were set during the planning stages of the project may need to be revised. The Pricing Analyst should consult the latest total cost of ownership (TCO) estimates produced in the Update/Refine Total Cost of Ownership (TCO) Analysis topic of the Prepare Project task of Process Step 2: Evaluate Sources. In some cases, changes in cost estimates would require updating the budget. Budget updates involve a change to the approved cost baseline and may not be performed without approval by the Client. Contract ReviewAt the end of a contract, the Pricing Analyst gathers all of the cost management documentation and evaluates cost management procedures. Documentation related to project cost management includes the cost management plan, budget reports, performance analyses, budget change requests, and progress updates. The Contracting Officer should prepare a summary document that confirms that all cost control decisions for the project adhere to quality guidelines. Outputs such as revision to the budget and estimates at completion should be used for quality and time management purposes to ensure the overall success of the project. They can also be used as inputs for similar projects in the future. The summary report and other documentation must be included in the contract file. The lessons learned during cost control efforts should be posted to the Postal Service intranet knowledge site. The lessons-learned document includes: • Main causes of cost control variances • Reasons behind the corrective action chosen • Alternative actions in future projects For example, this document might indicate that changes of project scope caused the greatest variance and that poor project team performance and lack of detail in some planning areas caused cost overruns. In future projects, better expenditure detail in the planning phase and more experienced team members could be leveraged to improve performance. The Contracting Officer must share lessons learned with the Purchase/SCM Team and the Client and will archive them for future reference. Specific guidance on communicating lessons learned is discussed in detail in the Share Lessons Learned topic of the Manage Delivery and Contract Performance task of Process Step 5: Measure and Manage Supply. The purpose of cost management is to help ensure project objectives are achieved. By documenting the lessons learned and completing project closeout activities, the Purchase/SCM Team will help ensure achievement of project goals.
Other Topics ConsideredStart Request for Proposals (RFP) Development topic, Prepare Project task, Process Step 2: Evaluate Source Update/Refine Total Cost of Ownership (TCO) Analysis topic, Prepare Project task, Process Step 2: Evaluate Sources Formulate Project Budget and Request Funding topic, Prepare Project task, Process Step 2: Evaluate Sources Perform Value Chain Mapping and Analysis topic, Prepare Project task, Process Step 2: Evaluate Sources Develop Life Cycle Support Plan topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources Review and Finalize Request for Proposals (RFP) topic, Perform Solicitation-Related Activities task, Process Step 2: Evaluate Sources Share Lessons Learned topic, Manage Delivery and Contract Performance task, Process Step 5: Measure and Manage Supply
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