Project costs are estimated when a proposal is prepare for the project. Once the decision is made to go forward with the proposed project, it's necessary to prepare a budget, or plan, for how and when funds will be spent over the duration of the project. Once the project starts, it's important to monitor actual costs and performance to ensure that everything is within budget. Several parameters should be monitored at regular intervals during the project: cumulative actual amount spent since the start of the project, cumulative earned value of the work performed since the start of the project, and cumulative budgeted amount planned to be spent, based on the project schedule, from the start of the project.
Cost planning starts with the proposal for the project. The cost section of the proposal may consist of tabulations of the contractors estimated costs for such elements as labor, materials, subcontractors and consultants, equipment and facilities rental, and travel. In addition, the proposal might also include an amount for contingencies, to cover unplanned expenses.
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. Sakic, the budget for each work package is distributed over the duration of the work package so that it's possible to determine how much of its budget should have been spent at any point in time.
Allocating total project cost for the various elements, such as labor, materials, and subcontractors, to the appropriate work packages and the work breakdown structure will establish a total budget cost (TBC) for each work package. 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 in order to determine how much of the budget should have been spent at any point in time. This amount is calculated by adding up the budget cost for each time. Up to that point in time. This total amount, known as the cumulative budgeted cost (CBC), will be used in analyzing the cost performance of the project. 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.
Once the project starts, it's necessary to keep track of actual cost and committed cost so that they can be compared to the CBC. In addition, it is also necessary to monitor the earned value of the work that has been performed. 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. This figure can then be compared to the cumulative budgeted cost and the cumulative actual cost.
After this has been done, the project cost performance can be analyzed by looking at the total budgeted cost, the cumulative budgeted cost, the cumulative actual cost, and the cumulative earned value. They are used to determine whether the project is being performed within budget and whether the value of the work performed is in line with the actual cost.
Another indicator of cost performance is the cost performance Index (CPI), which is a measure of the cost efficiency with which the project is being performed. The CPI is calculated by dividing the cumulative earned value by the cumulative actual cost. 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.
Based on analysis of actual cost performance throughout the project, it's possible to forecast what the total cost will be at the completion of the project or work package. There are three different methods for determining the forecast cost at completion (FCAC). The first method assumes that the work is 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 so far. The second method assumes that, regardless of the efficiency rate the project or work package has experience in the past, the work to be performed on the remaining portion of the project or work package will be done according to budget. The third method for determining the forecasted cost at completion is to reestimate the cost for all the remaining work to be performed and then add this reestimate to the cumulative actual cost.
The key to effective cost control is to analyze cost performance on a regular and timely basis. It's crucial that cost variances and inefficiencies be identified early so that corrective action can be taken before the situation gets worse. Cost control involves analyzing cost performance to determine which work packages may require corrective action, deciding what specific corrective action should be taken, and revising the project planned (including time and cost estimates) to incorporate the play in corrective action.
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 and time so that you have enough money to cover the cost of performing the project (employee payroll, charges for materials, invoices from subcontractors, and travel expenses, for example). The key to managing cash flow is to ensure that cash comes in faster than it goes out.
