Cost Management

Delivering successful projects
7.0 Introduction to the

module
This module discusses cost management as an integral part of the project work.
7.0.1 Learning outcomes

By the end of this module you will be able to:
Critically evaluate the concepts of cost estimating and project budgeting;

Apply the concept and structure of project cost planning and control systems; and
Carry out earned value analysis (EVA) and reporting.
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KNOWLEDGE BUILDING
7.0.2 The concept of project cost Size S
planning and control

Any stakeholder involved in a project, including senior managers, sponsors and the client, whether they
are paying for the project or being paid, will ask, 'How much?'.
Accurate and justified cost management sustains the project. It gives the stakeholder confidence and
enhances governance.
Managing the project cost-effectively is an important discipline. Although we call it 'cost management', the
context is about evaluating the project from a combined time-cost-quality perspective and being able to
effectively report it in order to provide the stakeholder with the up-to-date financial picture and the
expected expenditure moving forward. The reason is the interlinkage between the time-cost-quality
1 © Edinburgh Business School | Version 19-September-2019-13:58

parameters and the options for trade-off. Simply put, we cannot determine how much a task (or whole
project) will cost before we understand what the scope of the task is, who will perform it and how long it
will take; and by then an adjustment, or trade-off, will be needed to finalise the work. So, the actual
resourcing of the project contains a number of cost element considerations, such as:
Labour
the number of people employed;
whether they are internal or external e.g. contractors or consultants;
the skill level they have;
the rate of pay they expect;
health and safety;
union issues, etc.
Equipment
what kind and how much machinery;
where will it be used, etc.
Facilities
type, size and location;
rent;
utility bills, etc.
Material and Supplies

availability;
where they come from;
how they are transported, etc.
Other and General

risk contingencies (e.g. for natural disasters);
overhead payments for corporate services;
fees and licensing;
financial events (e.g. inflation, changes in exchange rates, legal penalties).
The project cost management concept relies on cost estimating and budgeting to develop a planning and
control mechanism. The management of the actual expenditure is an exercise in accountancy and book-
keeping and therefore will not be covered by this course.

7.1 Cost planning

When a project starts the project sponsor or senior management indicates where the money for the
project will be coming from. The project manager has to obtain the commitment of the sponsor or senior
management to provide financial back-up throughout the project lifecycle, before actually starting the
project cost planning.
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KNOWLEDGE BUILDING
7.1.1 How projects are funded Size M
A project may be financed using internal and / or external sources.
Funding may come from an external source such as the client who is paying for the end result. An
example is the installation of a computer server farm, where the client provides the funds. Another
external funding source is a loan from a financial broker, e.g. a bank.
Funding may also come from an internal source, such as budget allocated within an organisation. An
example of internal funding is a project that is a joint venture between organisations. In this case, the
work may be completely self-funded by the parties to the joint venture, with revenues generated from
earlier stages of work providing funds to deliver the later stages. One such example is a public-private
partnership (PPP ) between public and private sector organisations, such as government and a
construction company, to build a toll road. The public sector (i.e. the ministry of transport) will design the
project. The private sector organisation (i.e. the construction company) will finance the building of the
road and, in return, will be able to generate toll revenue for, say, 30 years before transferring the road
back to the government.
When a project is funded internally, it will be resourced from reserves already allocated to either
operational expenditure (OPEX) or capital expenditure (CAPEX). Usually, the funding is distributed across
the budget of different functions and the project can use one or more of these budgets.
Comparison of CAPEX and OPEX projects

Capital Expenditure Project Operational Expenditure Project
Adding value Related to routine process (ongoing)
Long-term investment Material, staff, maintenance

High complexity
Fixed assets - Property, Plant, Equipment
In terms of an organisation's financial goals, most projects will aim to deliver as much CAPEX as possible,
while lowering OPEX.
Now that you are familiar with the available options for funding the project, let's discover the cost types
used to develop the project cost estimation.
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KNOWLEDGE BUILDING
7.1.2 Cost types and headings Size S
We have already noticed that cost elements can be related to labour, equipment, facilities, materials and
more. For example, the cost of software development is mainly the work time of developers and
programmers,but there are also the costs of training, procurement and maintenance of equipment,
servers and software, cloud storage and testing labs for quality checks. Some will argue that the
overheads of marketing and management are also added to the cost.
Project cost types and headings typically reflect the WBS: they are a result of breaking the project down
into work packages and then assigning individual cost estimates or limits to each of these packages. This
produces a kind of dynamic map of how much money can be spent and when. The 'when' aspect was
discussed in module 5. There are different ways to present and calculate costs, which are subject to
interpretation and the convention agreed upon.
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KNOWLEDGE BUILDING
7.1.3 Cost types Size M
Project cost types are classified according to whether they are:
fixed: costs that are constant throughout the project, no matter what work is done (e.g. rent for
offices, machinery and equipment)
variable: costs that change in relation to the project scope and work (e.g. salaries for human
resources, utility bills)
direct: costs that are exclusive to the project (e.g. paying for resources directly involved in the project
work).

indirect: costs that are shared across other activities (e.g. operations and organisational managerial
overheads).
non-recurring: costs that are one-off expenses (e.g. training of the team before the project starts,
furniture for the team's offices)
recurring: costs that continue throughout the project lifecycle (e.g. raw material, transportation).
Most projects include a standard range of specific cost types. Some typical examples are:
Labour cost – the cost of the labour required from the project. This may include salaries, overtime,
bonuses, holidays with pay, pension contributions, etc.
Materials cost – the cost of the materials required for the project. This may include everything from
wiring for electrical circuits to software for IT upgrades.
Equipment cost – the cost of all plant and equipment. This could include everything from heavy
cranes to glass for windows.
Fees – the cost of all fees paid to professional consultants, inspectors, local authorities, etc.
Subcontractor and supplier payments – the cost of all payments made to subcontractors and
suppliers through the contract.
Expenses – the cost of all chargeable expenses including operatives’ travel costs, tool costs where
appropriate, accommodation, etc.
Overheads – the cost of all fixed overheads such as contribution towards head office, site security,
lighting and power for the works, etc.
Risk premium – the cost of any provision or mark-up to cover risk. This could include insurance cost
or other mitigation response costs.
Contingencies and reserves – the cost of any sums set aside to cover unforeseen and additional
works.
The sum of all the above cost types is the cost plan total for the project.
For most businesses the goal is to make a profit, which is the return made by the client or contractor on
the project. The profit should be greater than the total sum of the costs.
In the diagram below we can see an example of costs being aggregated so that the eventual sale price
and profit margin can be calculated.

Cost will usually also have a baseline (normal) figure and a deviated (expedited) figure.
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KNOWLEDGE BUILDING
7.1.4 Cost headings Size M
Project cost headings typically include:
preliminary items: these are basically project overheads. They are time-dependent fixed costs that
apply irrespective of the rate of progress on the project. Examples would be a percentage allowance
to cover security for exposed parts of the works, or a percentage contribution to cover the overheads
of the main organisation.
prime cost sums: these are sums that are set aside for payment to nominated subcontractors and

suppliers. They are usually agreed as separate sums and are inserted into the contract
documentation so that the main contractor is aware of them and so that they can add any
percentages for attendance, etc.
provisional sums: these are sums set aside for works where the exact amount of work is unknown.
When the exact amount of work cannot be measured in advance, unit rates are sometimes agreed
beforehand. Alternatively, rates taken from the contract documentation may be used as a basis for
agreeing new rates in connection with the expenditure of the provisional sum. An example would be
where excavations are to be carried out in unknown ground before building a road.
dayworks: these may be used where there is a suspicion that wholly new work may arise, for which
there will be little or no basis on which to agree a rate based on the rest of the contract
documentation. Because such work is unforeseeable, the contractor is entitled to claim a premium
rate for it. Dayworks are often priced by the hour with corresponding unit costs for labour, plant and
materials. An example would be pumping out water after a flood.
direct payments: these are sums that are agreed with parties outside the contract, usually for works
that are only connected to the main works, e.g. payments for power connections, etc. Direct
payments are usually made directly by the client, but are included in the contract documentation so
that the main contractor is aware of them, e.g. invoiced payments to utilities.
measured works: these are works that are quantified and measured from working drawings or a
schedule. They are usually measured in terms of standard works’ descriptions and a standard
method of measurement that determines the units used. Measured works can usually be specifically
priced by contractors and suppliers.
fees: these are the sums payable to external agencies and other bodies for services rendered.
Examples include payments to external consultant professionals, such as cost consultants, who are
generally paid on a fee basis, and payments to local authorities for issuing certificates, etc.
contingencies and reserves: for those ‘unknown unknowns’. Contingencies are usually stated as a
percentage of the contract sum. Contingencies are usually not specifically quantified or allocated and
operate as a pooled reserve that can be used by any part of the project that encounters unforeseen
risk impacts.
tax: this may or may not be applicable. In the UK value added tax (VAT) is charged at 20% on a wide
range of goods and services. On large projects the VAT element can be very significant.
insurance: a premium paid in return for protection, usually in the form of compensation /
reimbursement, against a possible risk such as loss or damage. Examples include professional
indemnity insurance for consultants and professionals, insurance against accidents, 'acts of God',
insolvency of contractors, etc.
There may be other expenses or costs as a result of:
performance bonds and sureties: a guarantee issued by a bank, insurance company or other
financial institution to an obligee (e.g. the client) to pay them a certain amount if the other party (e.g.
a contractor) fails to fulfill a particular obligation (e.g. meeting the deadlines for the project
completion) up to practical completion and handover of the project. The project may bear the
expenses related to the establishment of such an arrangement: these are premium payments or
deposits payed to the guarantor.
warranties: a type of guarantee that covers the quality and reliability of the finished product or
deliverable after handover and during use. It refers to the terms and conditions for repairing /
exchanging in case of fault. Warranties may endure for several years after the project is complete. In

addition the terms of the contract may require that the warranty is secured in some way, perhaps by
being insured. Projects should consider and plan related costs such as collection and replacement of
faulty items, insuring the warranty, etc.
exchange rates and currency fluctuations: changes in currency valuations during the course of the
project. An example would be a project that is being carried out in South America, with a budget in
the local currency and raw material to be purchased abroad, where there is an unstable economic or
political environment that leads to a sharp and sudden devaluation of the local currency against the
US dollar.
fluctuations: a way of allowing for cost increases during the course of the project. For example, if the
cost of labour, plant or materials increases, the cost will be borne either by the client or by the
contractor. Another example is where there is a change in interest rates in a long-term financed
project.
Projects may also have sunk costs. These are costs that have already been incurred and cannot be
recovered and, therefore, are irrelevant to future decisions on the project. For example, a machine that
cost £40,000 was bought specifically for an earlier project, but is now to be used on this project. It
depreciates at 20% a year. In any future decision about using or disposing of the machine, its original
purchase price and the depreciation charged are both irrelevant, as the money has been spent and the
machine bought. The same would apply to any existing inventory used for the project. Where an item has
already been bought and paid for, the cost is irrelevant to any decision whether to use the item or not, as
it is 'sunk'.
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KNOWLEDGE BUILDING
7.1.5 Cost estimation Size M
In cost estimating, the cost headings are matched with their forecast valuation figure. An evaluation is
made of how much money will be spent against each heading throughout the project lifecycle. The cost
plan, just like the time plan, is therefore an important control tool for the project, and together these
plans map what should be spent and when. The project manager uses the cost plan to keep the
final expenditure on the project within acceptable limits. An accurate and reliable cost plan can
reduce the project risk, yet it is also a function of the accuracy and reliability of the data,
assumptions and techniques used in preparing it.
In a project team there are a few team members who may be estimators. Their estimation capabilities are
mainly based on their knowledge and experience.
Project manager
The project manager is familiar with the organisation and other stakeholders. The project manager's
position allows him / her to better understand the processes, procedures and risks related to the project.
In addition, the project manager typically has experience from other projects that he / she can build on.

However, in large or complex projects this may not be sufficient.
Project team
The project team is directly responsible for executing work packages and activities and is familiar with
their components and characteristics.
Professional estimator
A professional estimator, typically an external expert consultant, who is hired specially to estimate costs.
Such estimators are generally qualified professionals, e.g. accountants, finance controllers and business
analysts. They are usually experienced in estimating large and complex systems, such as mega-projects,
and in using estimation modelling tools and techniques. In addition, they are not biased by
organisational politics or interests.
Subject-matter expert
A subject-matter expert (SME), like a professional estimator, is an expert who is considered an authority in
a particular domain, area or topic. Examples include technical experts, system engineers and
organisational consultants. They can be internal or external to the organisation.
The estimation process

The estimation process is challenging. Unforeseen risks and hidden costs are expected to arise during
project execution. When estimating, the project manager is also expected to indicate the degree of
accuracy they are aiming for. The usual practice is to indicate a variance of plus or minus a certain
percentage. This is known as the tolerance level. The tolerance level decreases as the cost estimation rolls
through the project lifecycle and the detail and knowledge levels increase.
Cost estimation should consider the following factors:
1. success criteria;
2. project type, size, location(s) and complexity (linkages between activities);
3. degree of completeness of the specification;
4. approach to standardisation;
5. feedback; and
6. risk.
Estimation elements include:
1. labour costs;
2. materials costs;
3. equipment costs; and
4. overheads.
Sources for estimations are:

1. industry standards and benchmarks: for example, the UK IT industry benchmark daily rate for an IT
infrastructure consultant is £800 and the price of 1 metre of coaxial RF grade 3 cable for antennas is
£2.50. Knowing this, cost can be designed better for works and activities that require such
consultants or material.
2. company-specific;
3. past projects data;
4. reference lessons learned; and
5. skill and knowledge.
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KNOWLEDGE BUILDING
7.1.6 Budgeting Size M
Projects use a budget to pay for a particular activity or resource. The cost planning process is the basis for
budgeting, but it cannot be completed until the estimations are assembled into a framework.
The framework is usually based on standardised financial tools or practice, such as cash flow and balance
sheets, or any other agreed convention to share the data. The project cost plan identifies each element in
the WBS throughout the project lifecycle in order to get the approval of management for the
expenditures. Each element in the WBS is assigned a unique code numerator (also known as a Cost
Account Code or CAC), which represents a hierarchical position in the WBS, but also allows the specific
cost to be assigned to that element.

Other cost elements that are not directly part of the WBS, such as overhead expenses, insurance,
contingencies etc., are aggregated into the budget requirements.
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KNOWLEDGE BUILDING
7.1.7 Reading Size M
You have reviewed the components of the cost planning process. Now, in order to enhance your
understanding, read chapter 8 (pp. 298-320) of your textbook.
 Please go to your student portal to interact with your eBook account

As you read, make yourself familiar with the cost types, the techniques used in cost estimating and
developing the project budget. Appreciate that cost planning is not an easy task and requires technical,
numerical and logical competences.
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ACTIVITY
7.1.8 Mini case study: Megadams Size L
Read case study 8.1 on p. 325 of your textbook:
And then consider the following question:

Question Given the history of large cost overruns associated with the construction of megadams, why do
you believe they are so popular, especially in the developing world?
Note down your thoughts before continuing
One obvious answer is the prestige they offer, especially in regard to presenting evidence of
development and improvement to the national economy. Some developing countries pursue them
as a sign of international legitimacy. There is also the darker reason that large projects offer the
opportunity for large-scale graft and corruption, as has been rumoured with the Sochi Olympics
construction projects.
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DISCUSSION
7.1.9 What are the advantages / Size M
disadvantages of megadams?
What do you think are the advantages or disadvantages of megadams? Do some research of your own into
the construction of megadams and decide whether you are in favour of or against these large projects.
Then construct a short comment arguing your position - no longer than 250 words. Share your argument
with fellow students by posting in the box below.
 Please go to your student portal to participate in this discussion

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ACTIVITY
7.1.10 Mini case study: The Sochi Size X
Olympics
Read case study 8.2 on p 327 of the textbook and consider the following question:
Question Project success is defined as adherence to budget, schedule, functionality (performance), and
client satisfaction. Under these criteria, cite evidence that suggests the 2014 Winter Olympics Games in
Sochi (Russia) project was a success and / or failure.
Project success is defined as adherence to budget, schedule, functionality (performance), and client
satisfaction. Under these criteria, cite evidence that suggests the Sochi Olympics project was a
success and/or failure. Clearly, there is very little to recommend the Sochi Olympics from the
standard success criteria relating to cost. On the other hand, it could be argued that with a looming
deadline and unmovable completion date (the starting date for the Olympics is established years in
advance), one “card” that the Games developers have to play is their willingness to spend as much
money as possible to get the venues ready on time. Because the Games were ready and went off
without significant problems, one could argue that they were a success, in spite of a dreadful
budget performance. .
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DISCUSSION
7.1.11 How do you judge the success Size M
of 'prestige projects'?
Consider the following statement: 'Government-funded projects intended to serve as "prestige projects",
such as the "Big Dig", should not be judged on the basis of cost.' Do you agree or disagree with this
statement?

Post a short answer (no more than 250 words), giving your reasons, on the forum for discussion with
fellow students.
 Please go to your student portal to participate in this discussion
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TEST YOURSELF
7.1.12 Project costs Size S
Please answer this question to test yourself on this topic.
The result of this question counts towards your average test mark, which can be viewed on your Course
Dashboard.
Question
Now it's time to test your understanding of project costs.
Look at the following cost headings. Can you remember what each heading refers to? Match each heading
to its definition.

Preliminary items Sums set aside for works where the exact amount
of work is unknown
Prime cost sums
A premium paid in return for a protection, usually
Provisional sums
in the form of compensation/reimbursement,
Dayworks against a possible risk such as loss or damage
Direct payments Sums set aside for payment to nominated

subcontractors and suppliers
Measured works
Works quantified and measured from some kind of
Fees
working drawings or schedule
Contingencies and reserves
This may or may not be applicable. In the UK value
Tax added tax (VAT) is charged at 20% on a wide range
of goods and services. The VAT element on large
Insurance
projects can be very significant
May be used where there is a suspicion that wholly

new work may arise for which there will be little or
no basis for agreeing a rate based on the rest of the
contract documentation
Usually stated as a percentage of the contract sum,

not specifically quantified or allocated and usually
operate as a pooled reserve that can be used by
any part of the project that encounters
unforeseeable risk impacts
Sums agreed with parties outside the contract,

usually for works that are only connected to the
main works (e.g. payments for power connections,
etc.)
Sums payable to external agencies and other forms

of body for services rendered
Time-dependent fixed costs that apply irrespective

of the rate of project progress

7.2 Project monitoring and

control
Look again at section 1.3.1 to remind yourself about the project lifecycle. Once the project execution has
actually commenced, the allocated budget starts to be consumed and spent.
Each activity costs money: labour, utility bills, travel and insurance are expenses to be paid out. As the
work progresses data about the actual costs incurred are collected automatically (for example, using an
attendance log and materials consumption records), or manually (for example, invoices from contractors
and suppliers, status surveys and reports).
Project costs need to be monitored and controlled throughout the lifecycle of the project. One technique
for accomplishing this is variance analysis. Variance analysis is a quantitative technique for measuring the
difference between planned and actual performance. The results of variance analysis are then used to
identify the likely cause for the variance and assist in correcting the situation to better suit the plan.
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KNOWLEDGE BUILDING
7.2.1 Variance analysis Size M
In variance analysis actual expenditure (the actual cost including all sums paid as well as sums
being processed) is compared against planned (budgeted) expenditure (from the cost plan), in
light of the variance limits at each stage of the project. For example, it might take three weeks
for an invoice to be paid. The money is still chargeable against the work package or cost centre
even though it has not actually been paid through the system.
Modern technological developments are improving project monitoring and the accuracy of the
variance analysis. For example, drones are increasingly being used to accurately measure the
progress of construction projects: you can find more information about this here. 
In the graph below the cost plan expenditure curve is shown in green and the actual cost expenditure is
shown in blue. Usually, there is a set range of acceptable variance around the cost plan curve. The actual
cost can vary within this zone without the project manager taking any action. This zone is the variance

envelope. The actual cost sets off a kind of alarm at the grey line 'Time' (now), when it reaches the upper
variability limit of the variance envelope. In most cases the variance envelope starts out big and gets
smaller as the project progresses, as the project becomes fixed or 'mature'. It means that the work
remaining is getting smaller and easier to quantify.
When a variance is identified, it should be quantified, verified and validated against the project success
criteria to understand its impact in the short to long term and across the project. The project manager will
come up with options for mitigating the situation. Each option should be assessed to understand its
impact on the scope / time / risk / cost constraints on the remainder of the project. When a selected /
preferred option is chosen, it becomes the recommended corrective action and will have an impact on
both the remaining planned cost (funding for which should be secured) and the actual remaining
expenditure. You may recall that this is based on the conceptual variance envelope and the approach
towards project planning, discussed in section 6.0.2.
The variance analysis process can be summarised as follows:

Ask yourself
Can you think why the variance limits of the project become narrower as the project progresses?
As the project progresses, more of its remaining work becomes fixed or known. The work that
remains therefore forms a smaller and smaller proportion of total project costs. As the work
proceeds towards completion there is less and less the project manager can do about any over-
spend in the time remaining. This is why tight monitoring and early identification of variance and

any possible trend are so important: if an early intervention is made it will cost less to reduce the
risk involved.
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READING
7.2.2 Reading Size M
In chapter 13 of your textbook, read the introduction: pp. 475-482.
Note that the book uses different terminology for a general control model. However, the logic is the same.
In practice, most project managers use the S-curve and tracking Gantt chart, usually comparing a planned
baseline against actual progress.

7.3 Earned value based cost

control
'If you can't measure it, you can't manage it', as Peter Drucker used to say. Earned value analysis (EVA) is
the method used by project managers to do this task. EVA is all about managing, based on measuring and
comparing (analysing) cost with time.
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KNOWLEDGE BUILDING
7.3.1 EVA Size S
EVA answers the following questions:
How much work did you plan to complete?

How much work did you actually complete?
How much did you spend to complete the work?
How much work remains to complete?
In other words, EVA amalgamates time, cost and performance that are expressed and differ in their
parameters, into a coherent unified set of measurements. It allows the 'comparison of apples and
pears'.
Therefore, EVA is also both a reactive and a predictive control.

There is also an international standard for EVA: ISO 21508:2018 Earned value management in project and
programme management.
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READING
7.3.2 Reading Size S
Now please read sections entitled Earned Value Management on p. 482:
And Issues in the Effective Use of Earned Value Management on p. 494 of your textbook:
Note that in the readings EVA is called Earned Value Management. The terms mean the same but we will
use Earned Value Analysis within the course because this is the term the ISO standard uses.

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VIDEO
7.3.3 Using EVA to monitor project Size S
status
Watch the following video to understand how EVA is used to monitor the progress of a project.
https://player.vimeo.com/video/300498980
View transcript
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VIDEO
7.3.4 Using EVA to forecast project Size S
status
Watch the following video to understand how EVA is used to forecast the status of a project.
https://player.vimeo.com/video/300498940
View transcript
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ACTIVITY
7.3.5 Understand earned value Size M
analysis variables
Using what you have learned about earned value analysis look at this table and complete the blank cells

(highlighted in green) with the relevant information.
The solution can be found here
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ACTIVITY
7.3.6 Interpreting earned value Size M
performance data
EVA is useful for analysing the work performance.
Look at the following scenario accompanied by this excel file. In this scenario you'll find it helpful to use
the filter function of Excel. If you are unfamiliar with this function, you can click on any filter icon to show
only the data to wish to view.
The example below shows how you would filter to show data for a specific team (or teams):
Assume you are in charge of a project in a series of projects that will form a larger programme of works
for the development of a new water supply and waste water treatment system.
Your project involves the design and construction of a new 40km network of water mains. The actual
excavation and water pipe installation is to be carried out by four teams over a 10-week period, at a
contractual rate of £100/metre, with each team laying an equal proportion of the overall total. The works
have started and you are now monitoring week 6.
Question Based on the data and graphs in your project dashboard, comment on the performance of each
team and for the project work package as a whole up to week 6, and estimate the performance at
completion of the project work package as a whole (in week 10).

Project goal: installation of 40,000 metre pipes in 10 weeks, by 4 teams.

Total budget: £100/metre X 40,000 metres = £4,000,000.
Team objectives (Teams 1-4): 10,000 metre pipes with £1million budget, over 10 weeks.
Team 1 is producing exactly as planned. The rate of installation and the cost per unit is as per the
contract. This should be regarded as an adequate performance.
Team 2 starts off both behind schedule and over cost. The rate of installation is slower than
planned and the cost per unit is higher than planned. This condition slowly improves until by week
4, Team 2 is on programme and only very slightly over cost. The performance of Team 2 in weeks 5
and 6 is exactly as planned. This suggests a learning curve where the team is struggling initially but
reaches the required levels of output within a reasonable time.
Team 3 starts off on schedule and to the required cost. Team 3 then starts to produce above the
planned installation rate and consistently works faster than planned. In addition, the team
produces at the planned cost per unit up to week 2 after which it produces at lower than planned
cost per unit. This team is obviously working very well indeed and is both ahead of programme and
producing more efficiently than expected.
Team 4 is extremely slow and is considerably behind schedule. The delay appears to be worsening
as the work package continues. Team 4 is also producing at a much higher cost per unit than
planned. In other words, Team 4 is very much slower than planned and very much more expensive.
Team 4 is performing very badly and the extent of this performance is so great that it is affecting
the performance of the whole package to a considerable degree.
Overall, the package is behind schedule largely because of the very poor performance of Team 4.
Teams 1–3 are generally performing on or ahead of schedule. This good performance is being more
than cancelled out by the very slow performance of Team 4. Initially, the cost performance for the
package is poor largely because of the excessive cost deficit of Team 4. Teams 1–3 are performing at
or below the required cost limits, but this good performance is again being cancelled out by the
very poor performance of Team 4.
Based on the project performance in week 6, the project is estimated to complete late and over
cost.
Project goal: installation of 40,000 metre pipes in 10 weeks, by 4 teams.
Total budget: £100/metre X 40,000 metres = £4,000,000.
Team objectives (Teams 1-4): 10,000 metre pipes with £1million budget, over 10 weeks.
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ACTIVITY
7.3.7 EVA exercises Size L
These questions will test your understanding of the calculation of EVA variables.

The results of these questions do not count towards the average test mark on your Course Dashboard. The
feedback provided once you have saved your answer will help you to see whether you have answered the
question correctly.
Question 1
Calculate:
EV?
PV?
CV?
SV?
CPI?
SPI?
Hint: AC = £750,000
Notes:

Question 2
Based on your answer to Question 1 comment on / interpret the project's performance.
Notes:

Question 3
The following information applies to Questions 3-5:
A £10,000 drilling project is scheduled for 4 weeks.
At the end of the third week, the project is 50% complete and the actual cost to date is £9,000
Planned Value (PV) = £7,500
Earned Value (EV) = £5,000
Actual Cost (AC) = £9,000
What is the health of the project?
Notes:
Question 4
Use the information in Question 3 to answer this question.
If the project continues at the current performance, what is the true cost of the project?
Notes:

Question 5
Use the information in Question 3 to answer this question.
What are the remaining project costs to be incurred to satisfy the complete scope at week 3?
Notes:

7.4 Cost reporting

A report is a 'snapshot' of a certain point in time. A project report is of course a snapshot of the status of
the project and it plays an important part in the project's success and demonstrates the project manager's
professionalism. Typically, there will be several reports as part of managing a project. We have already
mentioned a risk report (based on the risk register) and a time report (which could be based on a Gantt
chart or project timetable). Some reports will be made by the project manager (and team), some by
functional managers, consultants, contractors, authorities, auditors, senior management, customers. The
list is long.

KNOWLEDGE BUILDING
7.4.1 Project status reporting through Size M
EVA
With modern technology, data analysis has advanced considerably and so have the quality and insights of
the reports themselves. Reporting has therefore become a crucial tool for decision making. Project reports
can be generated automatically and may even be based on machine-learning capabilities.
A project report should always refer to the timeline: past, present and future. Therefore, its layout is
expected to contain:
a summary of the project performance to date;

current performance with its strengths and weaknesses;
projections of future performance based on current and past performance;
areas where immediate corrective actions are required, together with proposed actions / action plans
to address such areas; and
status (monitoring) of performance in response to previous corrective actions.
To be effective reports should be generated at set intervals, in order to better measure progress (e.g.
weekly, bi-weekly, quarterly), and responsibilities for actions and deadlines should be clearly defined.
For more tips on how to create an effective project management report, watch this short video.


https://www.youtube.com/embed/5mvXSAJgqec?feature=oembed&rel=0
 3rd party content may be unavailable in your region and may contain ads.
Using EVA variables in a project report can be very helpful. As discussed in section 7.3, EVA demonstrates
the relationship between time, cost and performance.

7.5 Module summary

Cost is another element of the triple constraint. The project manager’s task is to ensure, as far as possible,
that the project finishes within cost. To do this project managers prepare a cost plan and then manage
and control the costs as the project work proceeds. If necessary, the project manager will adjust the cost
plan to take account of changes in the work or the surrounding circumstances of the project, including any
risks that materialise.

KNOWLEDGE BUILDING
7.5.1 Module summary Size S
The cost plan is prepared by breaking down the project work into tasks and estimating the cost of each
task, using combined top-down and bottom-up budgeting approaches. The total planned cost is the sum
of the estimated cost of all the tasks plus an additional amount set aside to cover contingencies or as a
reserve.
Project managers generally use standard headings for the cost plan. These include headings for:
works that can be measured and costed in advance;

works that are likely to be needed but cannot be costed in advance, as they cannot be pre-
quantified;
unforeseen or unforeseeable works;
contingencies and reserves to cover any changes or additional works required;
overheads, fees and direct payments to third parties;
taxes, insurance and warranties; and
fluctuations and financing expenses.
There are a number of different processes and techniques for estimating costs, such as:
ballpark estimates;
comparative estimates;
feasibility estimates; and
definitive estimates.
Using parametric cost estimation and learning curves, the project manager can use a multiplier, or other
means of formulation, to account for changes from previous projects.

Once the cost plan is complete it is assembled into a project budget, which shows how much is to be
spent on each task and by when.
The evaluation of actual progress against the planned budget, or project cost control, is a challenging task
for project managers. Proper control should be based on a control cycle: setting goals, measuring
progress, comparing the actual against the plan, and correcting the deviations.
Even when a process is used, cost estimation and control can be poorly done. There may be a number of
reasons for this, including:
low initial estimation;

unexpected technical difficulties;
lack of scope definition;
changes in scope and scope creep; or
other factors such as unforeseen / unforeseeable risks.
Nowadays the standard technique for preparing and implementing cost plans is earned value analysis.
The advantages of using EVA are that it:
enables cost and schedule performance to be assessed simultaneously;

allows a comparison of planned and actual values so that the variance between them can be
evaluated; and
allows the project manager to predict the likely final cost of the project, based on past / current rates
of expenditure.
Effective reports should be generated at set intervals, in order to better measure progress.

EXAM PREPARATION
7.5.2 End of module test Size L
Please answer the following questions, which are designed to help prepare you for your exam.
The results of these questions count towards your average test mark, which can be viewed on your Course
Dashboard.
Question 1
A provisional sum is an amount set aside within the contract to cover:
wholly unforeseeable additional works.

works that must be insured.
works that are expected but cannot be pre-quantified or measured in advance.
Question 2
Which of the following methods could a project manager employ in attempting to achieve the most
accurate estimate of how much their budget is going to cost?
Get rough estimates from the various contractors carrying out the work on site.
Refer to recent projects undertaken by their company and use the costs cautiously.
Search the internet for similar projects and see if they can get costings from it.
Question 3
EVA can be used to give detailed and accurate assessments of time and cost performance. It is important
to consider time and cost performance together as the two are intrinsically linked. Assume that a
particular work package shows AC = £140,000, EV = £75,000, PV = £120,000. This work package is:
over cost and behind schedule.
over cost and on schedule.
over cost and ahead of schedule.
Question 4
Assume that another package shows CVI = 0.87, SVI = 0.50. This work package is:
over cost and behind schedule.
on cost and behind schedule.
under cost and on schedule.
Question 5
The estimate at completion (EAC) can be calculated using a number of approaches. The two most used
approximations are the original estimate approach and the revised estimate approach. The original
estimate approach makes the assumption that:
corrective performance will occur for the rest of the project.
planned performance will occur for the rest of the project.
current performance will continue for the rest of the project.
Question 6
Consider how recent global economic events might influence the importance of cost estimation and cost

control for organisations embarking on projects.
Notes:
Question 7
Questions 7 and 8 relate to the information in the table below, which shows cumulative CV and SV values
for a theoretical project over a three-month period.
Month / team CV (£ 000) SV (£ 000)

Month 1
Team 1 −10,000 −10,000
Team 2 0 0
Team 3 +10,000 +5000
Month 2
Team 1 −20,000 −20,000
Team 2 −1000 +1000
Team 3 +20,000 +25,000
Month 3
Team 1 −30,000 −30,000
Team 2 0 0
Team 3 +22,000 +23,000
Assume that the estimate at completion (EAC) is £100,000 at Month 10 on a linear expenditure curve and
that ‘significant’ means plus or minus 5% from projected. Over the three-month period, the performance
of the project as a whole has:

slightly improved.
significantly improved.
significantly deteriorated.
Question 8
Look at the table from Question 7 again. What do the data suggest about Team 1?
They have done nothing but have recorded full costs.
They have performed adequately at an acceptable cost.
They are behind on programme but have recorded lower costs to suit.
Question 9
Place the following five steps of Earned Value Analysis in the correct logical sequence.
1. Develop a time-phased budget that shows expenditures across the project’s life. The total budget is
the baseline and referred to as planned value (PV).
2. Clearly define each activity or task that will be performed on the project, including its resource needs
as well as the detailed budget. Project managers can use the work breakdown structure as a starting
point for this.
3. Create the activity and resource usage schedules. Project managers should assign a portion of the
budget for each task, and calculate the budget which is to be used across a certain time period (i.e.
days / weeks), and directly linked to the project time schedule.
4. Calculate a project’s budget variance and schedule variance while it is still in process.
5. Total the actual costs of doing each task to arrive at the actual cost of work performed (AC). A project
manager can also calculate the budgeted values on the work which is being performed and is
referred to as earned value (EV).
Notes:

7.6 Longitudinal case study

Another element of the triple constraint is that of cost and it is important to manage the cost element of
the project. This process starts within the planning phase with the formulation of a project budget.
In our project, the total budget of €1.2 million has been approved, but there is a need to outline the
activities and their related cost to ensure that the total cost is within the approved budget.

ACTIVITY
7.6.1 Case study questions Size M
Using the information given above and your knowledge of the whole project, attempt the following
questions.
Remember to save each piece of work as you complete a module. You will need to refer to all your work
on the case study as you progress through the modules, and use it to complete the tasks in module 9.
The results of these questions do not count towards the average test mark on your Course Dashboard. The
feedback provided once you have saved your answer will help you to see whether you have answered the
question correctly.
Question 1
One of the main tools used in managing cost is Earned Value Analysis (EVA). Explain the concept and how
it can be useful in this context.
Notes:

Question 2
Review the narrative of the longitudinal case and develop a Cost Plan for the project.
The spreadsheet Case study baseline cost (provided in the solution in section 6.9.1) outlines the activities,
and may be used as a guide. Please note that your result will depend on the level of detail that you
include.
Please also remember that other cost elements that are not directly part of the WBS, such as insurance,
contingencies etc., are aggregated into the budget requirements.
Notes:

Cost Management

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Delivering successful projects

7.0 Introduction to the

7.0.1 Learning outcomes

Critically evaluate the concepts of cost estimating and project budgeting;

7.0.2 The concept of project cost Size S

planning and control

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Material and Supplies

Other and General

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7.1 Cost planning

7.1.1 How projects are funded Size M

A project may be financed using internal and / or external sources.

Comparison of CAPEX and OPEX projects

Long-term investment Material, staff, maintenance

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Fixed assets - Property, Plant, Equipment

7.1.2 Cost types and headings Size S

7.1.3 Cost types Size M

Project cost types are classified according to whether they are:

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7.1.4 Cost headings Size M

Project cost headings typically include:

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There may be other expenses or costs as a result of:

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7.1.5 Cost estimation Size M

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The estimation process

Cost estimation should consider the following factors:

Estimation elements include:

Sources for estimations are:

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7.1.6 Budgeting Size M

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7.1.7 Reading Size M

 Please go to your student portal to interact with your eBook account

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7.1.8 Mini case study: Megadams Size L

Read case study 8.1 on p. 325 of your textbook:

 Please go to your student portal to interact with your eBook account

And then consider the following question:

Note down your thoughts before continuing

7.1.9 What are the advantages / Size M

 Please go to your student portal to participate in this discussion

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7.1.10 Mini case study: The Sochi Size X

 Please go to your student portal to interact with your eBook account

Note down your thoughts before continuing

7.1.11 How do you judge the success Size M

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 Please go to your student portal to participate in this discussion

7.1.12 Project costs Size S

Please answer this question to test yourself on this topic.

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Direct payments Sums set aside for payment to nominated

May be used where there is a suspicion that wholly

Usually stated as a percentage of the contract sum,

Sums agreed with parties outside the contract,

Sums payable to external agencies and other forms

Time-dependent fixed costs that apply irrespective

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