PERT-COST ANALYSIS AND PROJECT COST CONTROL

INTRODUCTION
Every Project Manager has 2 major problems when managing a large project
i.e.,
1. Time & Schedule aspect of the project (PERT/CPM can be a very useful
tool for scheduling and continually monitoring the schedule).
2. Cost budgets of the project.
PERT/Cost: The Network Cost Accounting System
PERT/Cost can be used to Planning, Scheduling & Controlling the cost of
the project.
Specifically, once the various work packages have been identified in the
WORK BREAKDOWN STRUCTURE (WBS) & their costs have been
estimated, the project manager must predict the cash flow for the project.
In addition, the project manager must periodically review expenditures to
determine if actual costs are exceeding budgeted cost so that he or she can take
the necessary corrective action to reduce or eliminate cost overruns.
The PERT/Cost analysis has been divided into 2 sections:
1. The prediction of cash flows.
2. The monitoring and control of project costs.
The estimation of a project cash flow using PERT/Cost is a 5-step process as
depicted below: (*Assuming the unit of time is a Month below)
 Step 3
Step 2
Step 1 Calculate Monthly*
Using PERT/CPM,
For each work package, expenditures assuming each
Find the critical path for the
estimate the cost activity starts at its Earliest
project
start tiime

Step 4
Step 5
Calculate Monthly*
Calculate the range of
expenditures assuming each monthly* cash flows using data
activity starts at its Latest calculated in step 3 and step 4
start tiime

EXAMPLE:
Table 1: Project Table
Time (Months)
Activity Immediate Predecessors
(1)*
A 2 -
B 3 -
C 3 A
D 2 A
E 2 B
F 7 B
G 4 C
H 3 D,E
I 2 H
J 4 G,I

Table 2: Project Budget

Total Estimated Cost Estimated Monthly Cost
Activity (Rs) (Rs)
(2)* (2/1)*
A 10,000 5,000
B 24,000 8,000
C 30,000 10,000
D 20,000 10,000
 E 40,000 20,000
F 140,000 20,000
G 160,000 40,000
H 90,000 30,000
I 100,000 50,000
J 100,000 25,000
Total = 714,000

NETWORK
= Critical Path (B-E-H-I-J)

C
G
A
D

H I J

E
B
F

Table 3: Data for the Network Algorithm

Time
Activity ES EF LS LF Slack
(1*)
A 2 0 2 1 3 1
B 3 0 3 0 3 0
C 3 2 5 3 6 1
D 2 2 4 3 5 1
E 2 3 5 3 5 0
 F 7 3 10 7 14 4
G 4 5 9 6 10 1
H 3 5 8 5 8 0
I 2 8 10 8 10 0
J 4 10 14 10 14 0

From above the Critical Path is B-E-H-I-J

STEP 3:
Calculate the expected monthly expenditure based on the assumptions that each
activity starts as soon as possible and that cost expenditures are at a uniform
rate.
TABLE 4: Budgeted Monthly Cash Expenditures Assuming the Earliest
Start Time
Month (Expenditure in x1000) from (1*), (2/1)* and ES from
Activity Table 3
1 2 3 4 5 6 7 8 9 10 11 12 13 14
A 5 5
B 8 8 8
C 1 10 10
0
D 1 10
0
E 20 20
F 20 20 20 20 20 20 20
G 40 40 40 40
H 30 30 30
I 50 50
J 25 25 25 25

Monthly 1 1 2 60 50 90 90 90 11 70 25 25 25 25
Cost 3 3 8 0

Accumulat 1 2 5 11 16 25 34 43 54 61 63 66 68 71
ed 3 6 4 4 4 4 4 4 4 4 9 4 9 4
Project
Cost
STEP 4:
Calculate the expected monthly expenditure based on the assumptions that each
activity starts at their latest starting times and that cost expenditure are at a
uniform rate.
TABLE 5: Budgeted Monthly Cash Expenditures Assuming the Latest
Start Time
Month (Expenditure in x1000) from (1*), (2/1)* & LS from Table 3
Activity
1 2 3 4 5 6 7 8 9 10 11 12 13 14
A 5 5
B 8 8 8
C 10 10 10
D 10 10
E 20 20
F 20 20 20 20 20 20 20
G 40 40 40 40
H 30 30 30
I 50 50
J 25 25 25 25

Monthly 8 13 13 40 40 40 70 90 110 110 45 45 45 45

Cost

Accumulate 8 21 34 74 114 15 224 314 424 534 57 624 669 714

d 4 9
Project Cost
Step 6:
The final step in predicting the monthly cumulative cash required for a project
is to examine the range between the expected monthly cumulative cash outflow
assuming the earliest start time and the expected monthly cumulative cash
outflow assuming the latest start time.
Table 6: