BSBPMG533

Manage project cost

Student Book
Topic 2 - Monitor and control project costs
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Table of Contents

2. Monitor and control project costs .................................................................................................. 2

2.1 – Implement agreed financial-management processes and procedures for monitoring actual
expenditure against budget ..................................................................................................................... 3
Monitoring actual expenditure ............................................................................................................ 3
Critical path schedule........................................................................................................................... 4
Key performance indicators (KPIs) ....................................................................................................... 5
2.2 – Identify cost variations and evaluate alternative actions ............................................................... 6
Cost-analysis methods and tools ......................................................................................................... 6
Evaluating alternative actions .............................................................................................................. 7
Further analysis .................................................................................................................................... 8
2.3 – Implement and monitor agreed actions for maintaining financial objectives................................ 9
Implementing and monitoring agreed actions .................................................................................... 9
2.4 – Provide accurate and timely financial reports .............................................................................. 11
Financial reports ................................................................................................................................ 11
References ............................................................................................................................................. 14
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2. Monitor and control project costs

2.1. Implement agreed financial-management processes and procedures for monitoring actual
expenditure against budget

2.2. Identify cost variations and evaluate alternative actions

2.3. Implement and monitor agreed actions for maintaining financial objectives

2.4. Provide accurate and timely financial reports

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2.1 – Implement agreed financial-management processes and procedures for

monitoring actual expenditure against budget
By the end of this chapter, the learner should be able to:
➢ Use a common financial-management process to monitor actual expenditure against
the budget

➢ Calculate differences between actual expenditure and the budget to determine impact
on the overall project.

Monitoring actual expenditure

The actual expenditure of your project will need to be monitored against your budget. This will allow
you to verify that your expenditures are in accordance with your project plan and to address any
deviations. This can be done by implementing the agreed financial management processes and
procedures.

Before the monitoring process, there are many things that should already be agreed, including:
➢ Your cost-management plan and its purpose (to compare actual expenses to planned
expenses)

➢ Any assumptions or constraints

➢ Your WBS

➢ Your change control management processes

➢ Your cost/budget.

What are financial management processes and procedures?

Financial management processes and procedures help to guide a project
and outline how money is used and managed.

Financial management processes and procedures may include:

➢ Approval processes

➢ Communication and reporting processes

➢ Financial authorisations and delegations

➢ Invoice procedures

➢ Organisational chart of accounts links.

These financial management processes and procedures should be agreed upon by everyone working on
a project. In order to monitor the actual expenditure against your project budget, you may need to
create a checklist to assist you. You can use an existing template and/or a program to highlight the likely
overruns.
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Before starting the monitoring process, determine:

➢ What item(s) need to be monitored?

➢ Who is responsible for this?

➢ How will the monitoring be done?

➢ What should you look for?

➢ What date will the monitoring start?

➢ What is the proposed end date?

Critical path schedule

For the ongoing monitoring of your finances, you could use a critical path schedule; a ‘living’ document
that can be used to check your actual expenditure against your budget. There are many templates that
are available for you to create your critical path schedule; choose one that fits your project and
organisation.

Use your critical path schedule as the deadlines approach to assess how your project is doing – in terms
of finances. It can be altered when necessary; the previous issue should be destroyed if changes are
ever made.

Example critical path schedule:

WBS Period of Current

component Total
performance date

Ref Title Budget Actual Difference Budget Actual Difference Budget Remaining

Typical accounting example:

Category Month Month Month To date To date To date Project

Actual Budget Variance Actual Budget Variance Budget

Further breakdown:

Breakdown categories Actual Budget Variance

2
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Key performance indicators (KPIs)

You may wish to use KPIs in the assessment of your project expenditures. These KPIs will tell you
whether your project is being successful and, if so, to what degree. They will enable you to assess the
performance of your project in terms of the achievement of the desired objectives. There are no right or
wrong KPIs; they will depend on your project.

Examples of KPIs that may be used in the assessment of project expenditures may include:
➢ Deviations from the planned budget

➢ Deviations from the planned project schedule

➢ Variations to the planned hours of work

➢ Actual cost of work performed

➢ Cost of any approved requirements that are not yet

implemented

➢ Deviations from the cost of managing your nominated

process

➢ Cost of the scope items without prioritised

requirements

➢ Percentage of re-working costs that are attributable to

the project scope.

There are many things that may affect your project budget, including:
➢ Extras

➢ ‘Mystery’ hidden expenses

➢ Poor supplier management.

In order to handle these, you should ensure that you obtain any required approval before starting and
have a good knowledge of costs and processes.

If your actual expenditure is more than your outlined budget, you may need to seek approval to
proceed. If, throughout the life cycle of your project, you find that your actual expenditure is starting to
resemble a pattern, there may be changes that you can make to get your project back on track. Just
remember, any changes that are made should be done so in accordance with any organisational policies
or procedures that are in place.
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2.2 – Identify cost variations and evaluate alternative actions

By the end of this chapter, the learner should be able to:
➢ Identify a range of cost variation calculations

➢ Describe methods to evaluate alternative actions during a project.

Cost-analysis methods and tools

It is the project manager’s responsibility to select the appropriate cost-analysis methods and tools for
the project and use these to identify any cost variations. From this, they will need to evaluate any
alternative actions. The tools that are available for project managers to use are very useful. They can
help to record the financial activity throughout a project’s life cycle and can give the project manager an
insight into any potential cost problems.

It is often difficult to interpret the costs involved with a project until it is completed; even then, it can
still be confusing. This chapter aims to look at how you can use the methods and tools that are available
to interpret the information that you do have to your best ability.

For any cost-analysis method or tool that is used within your project, the original detailed cost estimate
baseline is your project budget. The specific items within your cost-analysis are the cost elements. For
example, the expenses that are incurred throughout the life cycle of your project can be recorded in
specific accounts and then compared to your original cost estimates.

These accounts can then be broken down into work activities – the scheduled activities for your project.
These relate to the actual costs incurred by your project; actual cost of work performed. These methods
and tools can also identify the labour and resources that were consumed, saved and overrun. Any items
that indicate a significant deviation from your budget should be the ones that you focus on.

When you are choosing cost-analysis methods and tools for your project, you will need to have outlined
the estimated total cost and the budgeted cost of your project. Also, you should have highlighted the
approved cost, the cost exposure and the cost to date. Finally, whether you are over or under budget
should be recorded.

Cost control procedures

These cost control procedures can be used within a project
and are intended to identify any cost variations from the
project plan; not to suggest areas in which savings can be
made.

These cost-saving suggestions should be considered during

the planning and design stages of your project. During your
project’s life cycle, it is inevitable that change will occur.
Any changes or alternative actions are likely to affect the
cost of your project.
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Schedule variance
Schedule variance = earned value – planned value.

Earned value is the estimated value of the work completed by your project as of today. Planned value is
the estimated values of the work to be completed by your project within a specific time period.
Schedule variance is the measurement of the schedule performance of a project.

Schedule performance index

Schedule performance index = earned value/planned value.

Earned value is the estimated value of the work completed by your project as of today. Planned value is
the estimated values of the work to be completed by your project within a specific time period. A
schedule performance index measures the progress achieved against the progress that was planned.

Cost variance
Cost variance = earned value – actual cost.

Earned value is the estimated value of the work completed by

your project as of today. Actual costs are the costs incurred by
your project as of a certain point in time (actual cost of work
performed). Cost variance is the measurement of the budget
performance of a project.

Cost performance index

Cost performance index = earned value/actual cost.

Earned value is the estimated value of the work completed by your project as of today. Actual costs are
the costs incurred by your project as of a certain point in time (actual cost of work performed). A cost
performance index measures the value of the work completed compared to the actual cost of the work
completed.

Evaluating alternative actions

The alternative actions that you may consider will depend on the nature of your project and its
objectives. You may need to look closely at the contracted labour rates and seek any changes in
purchasing – this will be reflected in the estimation of future expenditures. In order to gain a more
informed status as to what your alternatives may be, you should place your evaluations incrementally
along your critical path schedule.

When using cost-analysis methods or tools along your project’s critical path schedule, you may need to
engage qualified experts or supervisors.
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Further analysis
In order to look into any deviations in more detail, further analysis is required. Within this analysis, the
particular components that contribute to the variation can be identified.

For example:
➢ Low productivity can be caused by a lack of specific resources (specialist equipment) or
insufficient training

➢ High costs of resources may not necessarily be down to the costs of the resources, but
the lower than expected project productivity

➢ An increase in labour may:

o indicate overtime rates

o indicate higher than expected payments

o be caused by unscheduled work to correct

any problems with quality.
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2.3 – Implement and monitor agreed actions for maintaining financial objectives
By the end of this chapter, the learner should be able to:
➢ Describe necessary characteristics of implementing agreed actions and essential
components of monitoring and reporting agreed actions

➢ Explain how to use a range of corrective actions to maintain financial objectives.

Implementing and monitoring agreed actions

As discussed in the previous chapter, once you have identified any cost variations within your project,
you will need to look at alternative actions. These actions should be agreed upon by the relevant
person/people. Think about a project you have been involved with; in order to maintain the financial
objectives for the project, did you have to implement any alternative actions? How did you do this?
How were these actions monitored?

Agreed actions may include reference to new laws, regulations or standards. They may also include
actual or potential problems. For example, you may need to revise the forecast for the costs and
schedule – totally or partially. You may be required to make changes to the existing timeframes in order
for the project tasks to be completed by a specific time.

Your agreed actions may include monitoring the existing accounting management areas such as:
➢ Managing financial risks

➢ Generating project financial reports

➢ Account analysis versus budget

➢ Project plan

➢ Budget and budget adjustments based on agreed actions

➢ Forecasting.

Any agreed actions should be described clearly and need to include all the
relevant limitations (e.g., timescales and deliverables). It should also be
outlined which team member is responsible for these actions and monitoring
their effects. If these actions are not explained fully, agreed with the team
members, or monitored properly, then the implementation process will likely
fail. In order to maintain the financial objectives within a project, these agreed
actions will need to be documented correctly and communicated to all team
members. Agreed financial actions may differ from operational actions.

The process of applying these actions involves implementing them efficiently, monitoring them closely
and evaluating them to see if they were effective.

The implementation stage relies on the actions being challenging, yet achievable. They should be
specific and outline clearly what is required. They should also include the time that is available to plan,
monitor, report and evaluate the implementation of the agreed actions.
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Any agreed action should be measurable; how will the team know if the agreed actions have been
successful? In order to deal with deviations, a process that deals with corrections and adjustments
should be included.

What does the monitoring process involve? How will the

project team manage the progress and resource usage?
These answers should be detailed within any agreed action –
using a financial perspective. Whilst monitoring the action, it
may be necessary to report on the impact of it. Give details
on anything relevant.

For example, were any changes made to the process of

obtaining resources or requesting materials?
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2.4 – Provide accurate and timely financial reports

By the end of this chapter, the learner should be able to:
➢ Create an appropriate financial report using project completion information

➢ Identify and use different sections within a financial report

➢ Describe records that can be drawn upon when producing a report.

Financial reports
A financial report is a vital part of project management as it communicates the essential information. It
provides details of the budget, time frame and the performance of the project. Although there are many
types of reports, the general function is to give an account of the project at a specific time or after
completion. As well as giving a result or a status of the project, a financial report is an analytical
document.

These reports can be communicated to a wide audience and are likely to be distributed electronically.
They can be referenced easily, and there are many templates available if necessary. There should be
software available within your organisation to assist you in the development of these reports (e.g.
Project Manager or more specific accounting software). The format and style of your reports will
depend on your organisation and the policies regarding the reporting process.

Regardless of the format, every report should be:

➢ Clear and concise

➢ Logical

➢ Well organised

➢ Appropriate

➢ Accurate.

Your report may be formal or informal. Formal reports are

long and include complex information, whereas informal
reports can be presented as emails or notes and are shorter with lighter content.

A financial report should be designed in a way that allows the reader to scan through it quickly. Because
of this, short and concise paragraphs are essential. Along with this, bullet-point lists, headings, and sub-
headings are also useful.

The sections that may be in a financial report include:

➢ Terms of reference

➢ Summary of project systems

➢ Investigation reports
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➢ Presentation of alternatives

➢ Suggested remedy

➢ Cost/benefit analysis

➢ Conclusions

➢ Results

➢ Recommendations

➢ Attachments.

A financial report will draw upon a wide range of existing records, including:
➢ Banking information

➢ Cash flow

➢ Profit and loss

➢ Budgets

➢ Reports on variances.

Usually, a financial report will include a written summary. This summary provides the stakeholders with
information regarding the financial goals of the project and the financial progress. The summary can be
used within discussions about project problems and overruns that are affecting, or may affect, the
financial performance of the project.

Your financial report will give details on how much revenue was gained or lost during a particular period
within a project. It can also be used to make financial decisions (e.g., the ongoing financial support of
the project).

In order to demonstrate your professionalism, these reports will need to be provided in a timely
manner.
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Example financial report:

Project budget Actual expenditure Variation

Direct project
costs

Materials

Salaries

Consultancies

Transport

Insurance

Other

Subtotal

Certified name:

Signature:
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References

These suggested references are for further reading and do not necessarily represent the contents of
this unit.

Websites
Budget planning: https://opentextbc.ca/projectmanagement/chapter/chapter-12-budget-planning-
project-management/

Project costs blog: http://projectmanager.com.au/?s=project+cost

Project cost-management: http://www.projectsmart.co.uk/project-cost-management.html

Publications
Friedman, L., and Miles, S. (2006) Stakeholders Theory and Practice. Oxford University Press.

Rad, P.F. (2002). Project Estimating and Cost-management. Kogan Page.

All references accessed on and correct as of 15th June 2021, unless otherwise stated.