Cost control with statistic tools

Revision as of 10:04, 18 February 2021

Basic Concept

Cost control is one of the major parts in the cost management in Project management. Cost control is the process of monitoring project status to update project costs and managing changes to the cost baseline. The main benefit of this process is that the cost baseline is maintained throughout the project. The appropriateness of this process is that the cost baseline is maintained throughout the project. ^[1]

Under the conditions of a market economy, the pursuit of profit maximization and improving economic efficiency are the main goals of enterprises. Controlling project costs is an important way for companies to reduce costs and increase profits. Controlling project costs is an important guarantee for enhancing the competitiveness of enterprises. Therefore, it is necessary to strengthen project cost management, continuously reduce costs, improve enterprise competitiveness, and increase economic benefits.

The major component of the Project cost control includes:^[1]

• Influencing the factors that create changes to the authorized cost baseline;
• Ensuring that all change requests are acted on in a timely manner;
• Managing the actual changes when and as they occur;
• Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS component, by activity, and in total for the project;
• Monitoring cost performance to isolate and understand variances from the approved cost baseline;
• Monitoring work performance against funds expended;
• Preventing unapproved changes from being included in the reported cost or resource usage;
• Informing appropriate stakeholders of all approved changes and associated cost; and
• Bringing expected cost overruns within acceptable limits.

Cost control is vitally important in all kind of projects, especially significant in construction projects. If construction companies want to gain a competitive advantage in the fierce market competition, they must effectively control the production costs of construction projects. The reason is that during the entire project life cycle, people pay attention to the cost control work of the construction enterprise, which can effectively avoid unnecessary waste on the construction site. Conversely, as an important work content of construction enterprises, project cost management and control of construction enterprises can also reflect the overall management and control capabilities of enterprises to a certain extent. The effect of cost control is ideal, which means that the company's overall control ability is good. Therefore, improving the project cost control of construction enterprises is of great significance to improving the overall management and control level of construction enterprises.

Any construction company hopes to obtain more economic benefits through construction projects to promote the development of the company's business strategy. Company has to strengthen the project cost control of construction companies, make cost planning in the preparatory work of the project, do a good job of cost control during project implementation, analyze and summarize the experience of cost control after the project is completed, and continuously improve the level of project cost control of construction companies. It can guarantee the benefits of the project to the greatest extent, and effectively reduce the construction cost to the minimum through cost control measures, help construction companies accumulate more capital, and achieve the purpose of enhancing the competitiveness of construction companies in the same industry.

Cost Control Input^[1]

The input of the cost control includes following parts:

• Project management plan, which includes cost management plan, cost baseline and performance measurement baseline. The cost management plan indicates how the project cost will be managed and controlled. The cost baseline is applied as the comparison with actual results to determine if a change, corrective action, or preventive action is necessary. Similarly, performance measurement baseline is compared to actual results to determine if a change, corrective action, or preventive action is necessary.
• Project documents: Lessons learned earlier in the project can be applied to later phases in the project to improve cost control.
• Project funding requirements: The project funding requirements include projected expenditures and anticipated liabilities.
• Work performance data: Work performance data contains data on project status such as which costs have been authorized, incurred, invoiced, and paid
• Organizational process assets: The organizational process assets that can influence the Control Costs process include: Existing formal and informal cost control-related policies, procedures, and guidelines; Cost control tools; and Monitoring and reporting methods to be used.

Cost Control Analysis: Earned Value Method

Concept

The data analysis is always involved in the cost control and one common method is Earn value analysis. Earned value analysis compares the performance measurement baseline to the actual schedule and cost performance. EVM integrates the scope baseline with the cost baseline and schedule baseline to form the performance measurement baseline. EVM develops and monitors three key dimensions for each work package and control account:^{[1] [2]}

The following definitions are quoted from the Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide) 6th Edition (2017) Chapter 7.4^[1]

• Planned value. Planned value (PV) is the authorized budget assigned to scheduled work. It is the authorized budget planned for the work to be accomplished for an activity or work breakdown structure (WBS) component, not including management reserve. This budget is allocated by phase over the life of the project, but at a given point in time, planned value defines the physical work that should have been accomplished. The total of the fines the physical work that should have been accomplished. The total of the PV is sometimes referred to as the performance measurement baseline (PMB). The total planned value for the project is also known as budget at completion (BAC).^[1]

• Earned value. Earned value (EV) is a measure of work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed. ^[1]

• Actual cost. Actual cost (AC) is the realized cost incurred for the work performed on an activity during a specific time period. It is the total cost incurred in accomplishing the work that the EV measured. The AC needs to correspond in definition to what was budgeted in the PV and measured in the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). The AC will have no upper limit; whatever is spent to achieve the EV will be measured.^[1]

Figure 1: Earned Value Method ^[1]

Characteristic

Earned Value Management has proven itself to be one of the most effective performance measurement and feedback tools for managing projects. It enables managers to close the loop in the plan-do-check-act management cycle.

When projects are ahead of schedule, some are because they have improved the quality of work to avoid rework, and some are just because they have reduced the scope of the project; When some projects have delays, the main tasks have been completed in the early stage. The workload is not large and the risk is relatively small. However, some projects are loose in the front and tight in the back. The remaining work pressure is very high and the risk is high. The two situations have different impacts on the later stage of the project. When the actual cost of some projects is lower than the budget at the end of the project, some projects are achieved by improving work efficiency, and some projects are achieved because the project scope is reduced (the actual efficiency is not high).

It can be seen that if the planned value of the time schedule is compared with the actual value, or the budget value of the project cost is compared with the actual value, it cannot be guaranteed to fully reflect the performance of project management itself. It depends on the effect of the actual work done. Only on the premise of completing the same task, the difference in time and cost can be comparable. In the usual project management, the planned time and budget cost of each task in the plan can be obtained through the project plan, and the actual time and actual cost of each task in the project plan can be obtained by tracking the project process. However, when the two sets of data are directly compared, the problems mentioned above will appear, which may be unfair to evaluate project performance.

In order to be able to use the earned value method to manage the performance of the project, certain prerequisites are required, including a project plan and tracking the actual progress of the project. In the planning and actual tracking, there must be clear and specific project tasks, the budgeted cost can be calculated for each task, and the actual cost when each task is completed.

For the earned value method, the project manager should not only understand the concept and calculation method of the project’s earned value, but more importantly, the idea of its project management: the performance of the project needs to be compared with the actual plan, and the most essential thing is to pay attention to the project task itself. The completion situation requires comprehensive use of the content, time, and cost of the project task to measure project performance.

Application

Indices

Schedule Variance^[2]

The Schedule Variance (SV) determines whether a project is ahead of or behind schedule. It is calculated by subtracting the Planned Value (PV) from the Earned Value (EV). A positive value indicates a favorable condition and a negative value indicates an unfavorable condition.

SV=EV-PV

The Schedule Variance can be expressed as a percentage by dividing the Schedule Variance (SV) by the Planned Value (PV):

SV%=SV/PV

Schedule Performance Index(SPI)^[3]

SPI is a conformance measure of actual progress to schedule. SPI is measured as the ratio of EV to Planned Value (PV), that is

SPI=EV/PV

where PV, known also as the Budgeted Cost of Work Scheduled (BCWS), is planned to be used during the project.

Cost Variance^[2]

A project's Cost Variance (CV) shows whether a project is under or over budget. This measure is determined by subtracting the Actual Cost (AC) from the Earned Value (EV).

CV=EV-AC

This number can be expressed as a percentage by dividing the Cost Variance (CV) by the Earned Value (EV):

CV%=CV/EV

Cost Performance Index (CPI)^[3]

CPI is a measure of budgetary conformance of actual cost of work performed, and is the most useful index indicating the cumulative cost efficiency of a project. CPI is the ratio of EV to Actual Cost (AC), that is

CPI=EV/AC

where AC, known also as Actual Cost of Work Performed (ACWP), is an indication of the resources that have been used to achieve the actual work performed.

Statistical Process Control

Concept

Statistical Process Control (SPC) is the application of statistical methods to monitor a process for the purpose of ensuring that it produces conforming product or service.^[3] SPC is a widely used technique for quality control. The most popular technique in SPC is a control chart that can be used to monitor process stability, to detect any assignable variations, or to forecast process movements. Measuring the process capability has received significant attention in the last two decades, within the framework of the SPC techniques, especially in the univariate domain.^[4]

Statistical process control is a preventive method, emphasizing the participation of all staff, emphasizing the entire process, using control charts to analyze the stability of the process, and early warning of abnormal factors in the process.

Traditional earned value management is essentially a static analysis process. Judging the status of the project based on the size of the current observations, ignoring the inherent characteristics of the project itself, and lacking an examination of the stability of the project process. Due to the process factors of the project itself, the mean value of the whole process often shifts. This kind of shift may be caused by random reasons or special reasons. Earned value dynamic analysis is to measure CPI and SPI through SPC using control charts, analyze the stability of the project process, and identify the reasons for the deterioration of the project.

Characteristic

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8} Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide) 6th Edition (2017)
2. ↑ ^{2.0 2.1 2.2} Project Management Institute(PMI). (2005) "Practice Standard for Earned Value Management", [URL:https://blog.alevi.ru/wp-content/uploads/2015/08/Earned-Value-Management.pdf] Retrieved on 29 December 2017
3. ↑ ^{3.0 3.1 3.2} Aliverdi, R., Moslemi Naeni, L., & Salehipour, A. (2013). Monitoring project duration and cost in a construction project by applying statistical quality control charts. International Journal of Project Management, 31(3), 411–423. https://doi.org/10.1016/j.ijproman.2012.08.005
4. ↑ Hadian, H., & Rahimifard, A. (2019). Multivariate statistical control chart and process capability indices for simultaneous monitoring of project duration and cost. Computers and Industrial Engineering, 130(March), 788–797. https://doi.org/10.1016/j.cie.2019.03.021

Annotated Bibliography

1. Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide) 6th Edition (2017)
2. Project Management Institute(PMI). (2005) "Practice Standard for Earned Value Management"
3. Aliverdi, R., Moslemi Naeni, L., & Salehipour, A. (2013). Monitoring project duration and cost in a construction project by applying statistical quality control charts. International Journal of Project Management, 31(3), 411–423. https://doi.org/10.1016/j.ijproman.2012.08.005
4. Hadian, H., & Rahimifard, A. (2019). Multivariate statistical control chart and process capability indices for simultaneous monitoring of project duration and cost. Computers and Industrial Engineering, 130(March), 788–797. https://doi.org/10.1016/j.cie.2019.03.021