Construction Cost

Management
Samantha Manawadu
 What is Cost and
Project Cost Management?

• Cost is a resource sacrificed or foregone to achieve a specific

objective or something given up in exchange
• Costs are usually measured in monetary units like dollars

• Project cost management includes the processes required to ensure

that the project is completed within an approved budget
• Project managers must make sure their projects are well defined,
have accurate time and costs estimates and have a realistic budget
that they were involved in approving

2
Costs Associated with Constructed Facilities

The costs of a constructed facility to the owner

initial capital cost

subsequent operation and maintenance costs.

 Project Cost Management

• PMI definition

“Project Cost Management includes the processes involved

in planning, estimating, budgeting, and controlling costs so
that the project can be completed within the approved
budget”
:

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 Project Cost Management (PCM)

 You might think that PCM is managing the "costs" on your

project
 The reality is that you must manage everything else that
incurs cost
 Because if you don't, the costs will just keep on climbing
 Whether you like it or not!
 So What is PCM

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 Project Cost Management is

The placing of responsibility on those in charge of any aspect of the project

Eg. the managers, designers and implementers

To perform their respective roles and responsibilities within prescribed limits
Specifically, agreed cost allowances or budgets

Then collecting cost data and comparing it to the corresponding allowances

And taking appropriate management action

To contain the final results

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 How would you define PCM?
Project Cost Management may be defined as
 The process of placing responsibility on the project's designers and
implementers
 To perform within agreed budget limits ,Either under contract
Or, through verbal commitment
 The collecting of actual cost data in a suitable format and Comparing that to
corresponding budget data
 And taking corrective action as necessary Throughout, and as appropriate to,
the project life span

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 What does PCM encompass?
• As with time management
 You have to carefully manage what you do with the money
available
 PCM is another vital function of project
management that includes
 Resource planning
 Cost estimating
 Cost budgeting
 Cost control
 Change control

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 But Only future costs can be controlled

Therefore, PCM involves

 Careful project planning
 Especially a WBS extended to the activity level
 Estimating the costs of the planned resources
 Converting that estimate to a viable control budget
 Monitoring expenditures as work proceeds, and
 Modifying the approach if the findings are not satisfactory

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 Requirement of cost management?
The fact is, cost management is essential if you want to

 Highlight misuse or wastage of resources

 Track budget change approvals
 Finish a project within approved budgets
 Avoid unwelcome surprises, for your corporate or financial
sponsor!

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 PCM so important?

PCM has a high profile in project management because

 Management is a way of life in all organizations

Financially successful organizations depend on strict financial control and the
corporate accounting to support it

 They are comfortable with the idea of budgeting and expenditure

 Most people understand the consequences of the money running out
 Cost is seen as a major metric of successful project management

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 .

The Project Cost Management processes include the following:

Cost Estimating

Developing an approximation of the costs of the resources needed

to complete project activities.
Cost budgeting
Aggregating the estimated costs of individual schedule activities or work
packages to establish a total cost baseline for measuring project
performance
Cost Control
Influencing the factors that create changes to the cost baseline

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Cost of Construction Projects
The capital cost for a construction project includes the expenses related to
the initial establishment of the facility:
 Land acquisition, including assembly, holding and improvement
 Planning and feasibility studies
 Architectural and engineering design
 Construction, including materials, equipment and labor
 Field supervision of construction
 Construction financing
 Insurance and taxes during construction
 Owner's general office overhead
 Equipment and furnishings not included in construction
 Inspection and testing
The operation and maintenance cost in subsequent years over the project life
cycle includes the following expenses:
 Land rent, if applicable
 Operating staff
 Labor and material for maintenance and repairs
 Periodic renovations
 Insurance and taxes
 Financing costs
 Utilities
 Owner's other expenses
 Classification of project costs

Direct Vs. Indirect

Recurring Vs. Nonrecurring

Fixed Vs. Variable

Normal Vs. Expedited

 Direct Vs. Indirect
Direct costs

can be directly charged against the project; for example, the costs of
personnel who are directly involved in the project, or the costs of
materials directly used for project work

Indirect costs

include overhead, as well as selling and administrative expenses Examples

of overhead costs include costs associated with taxes, insurance, utilities,
and so forth. Costs associated with selling and administrative expenses,
commissions, advertising, etc
 Recurring Vs. Nonrecurring
Recurring costs

such as labor and materials, are repeatedly incurred throughout the project
life cycle

Nonrecurring costs

are one-time costs that are typically incurred at the beginning or at the end
of the project, such as market research and labor training
 Fixed Vs. Variable
Fixed costs

do not vary with usage.

Example, costs incurred in the purchase of capital equipment remain fixed,
regardless of the extent of equipment use

Variable costs

vary directly with usage. They are typically associated with labor and
materials
 Normal Vs. Expedited

Normal costs

are incurred when project tasks are completed according to the

original planned duration

Expedited costs

or crash costs are unplanned costs incurred as a result of steps taken to

accelerate project completion
Cost classifications
 Why Do We Manage Cost?
• Part of triple constraint, can’t manage one without the others (scope,
time, and quality)
• Plots of cost and scope against plan can help spot problems early

Is this project
over/under budget?
Is it ahead of/behind
schedule?

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What Do We Want to Know by Managing Cost?

 through answering three questions,

 How did we perform ?
 How much we differ from plan?
 What is the implication for future!

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 Cost Management Key Terms
• PV - Planned Value, estimated value of the planned work
• EV – Earned Value, estimated value of work done
• AC – Actual Cost, what you paid
• BAC – Budget at Completion, the budget for the total job
• EAC –Estimate at Completion, what is the total job expected
• to cost?
• ETC – Estimate to Complete, forecasted costs to complete
• job
• VAC – Variance at Completion, how much over/under budget
• do we expect to be?

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 How Do We Manage Cost?
Three processes
Cost Estimating
Cost Budgeting
Cost Control

Cost Cost Budgeting Cost Control

Estimating

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 Project cost management processes
 Plan cost management
establishes the policies, procedures, and documentation for planning,
managing, expending, and controlling project costs
 Estimate costs
an approximation of the monetary resources needed to complete
project activities
 Determine budget
aggregating the estimated costs of individual activities or work
packages to establish an authorized cost baseline
 Control costs
monitoring the status of the project to update the project costs and
managing changes to the cost baseline
 Cost Estimating
Enterprise Inputs Tools & Techniques
Environmental
Factors Analogous estimating Outputs
Organizational Activity Cost Estimates
Determine resource cost rates
Process Assets
Project Scope Bottom up estimating Activity Cost
Statement Parametric estimating Estimates
Supporting
Work Breakdown Project management software Detail
Structure Vendor bid analysis
Requested
Reserve analysis
WBS Dictionary
Changes
Cost of quality
Project Management Cost
Plan Management
•Schedule Mgmt Pln
Plan Updates

•Staffing Mgmt Pln

•Risk Register

Cost Estimating Cost Budgeting Cost Control

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 Importance of cost estimation

 Provides standard against which actual expenditures incurred during the

course of a project can be compared, and serve as the basis for cost
control

 They provide the mechanism for managing cash flow during the course
of the project

 They give the project manager a framework for allocating scarce

resources as the project progresses
 Estimating Methods
• Analogous (Top Down) estimating – Managers use expert judgment
or similar project costs [quick, less accurate]
• Bottom-Up estimating – People doing work estimate based on
WBS, rolled up into project estimate [slow, most accurate]
• Parametric estimating – Use mathematical model
• (i.e. cost per sq ft). [accuracy varies] Two types:
• Regression analysis – based on analysis of multiple
• data points
• Learning Curve – The first unit costs more than the
• 100th, forecasts efficiency gains

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 Estimating Methods

• Vendor Bid Analysis – Estimating using bids + allowances for gaps in

bid scope [slow,
accuracy depends on gaps]

• Reserve Analysis – Adding contingency to each activity cost

estimates as zero duration item
[slow, overstates cost]

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 Comparative or analogous estimation
Comparative or analogous estimation

If your current project is similar to past ones, take the data from previous
work and extrapolate it to provide your estimates for the new job. Before
proceeding, make sure to check whether those projects were successful!

Expert Judgment

This is probably the most common way people get an estimate. Talk to the
men and women with the best hands-on experience and understanding of
the project requirements. Just make sure that everyone has the same
understanding of what needs to be delivered. And try to find experts who
will actually be working on the project.
 Bottom-up and Top Down methods
Bottom Up
This method uses a detailed work breakdown structure, and is best for
projects you’re committed to. Each task is estimated individually, and
then those estimates are rolled up to give the higher-level numbers.
This process makes you think about what’s required in order to take a
step back to see if the big picture still makes sense. You’ll receive
more accurate results than the top-down method, but it’s also a
greater investment of time

Top Down
Using a high-level work breakdown structure and data from previous
projects, you can add estimates for each project work item to
determine the overall effort and cost. The top-down method lacks
detailed analysis, which makes it best suited for a quick first-pass at a
prospective project to assess its viability
 Parametric model estimating
This is a more scientific method that essentially auto-calculates
estimates using detailed data from previous activities. Let’s say
you have data from your last three apartment construction
projects .
You can use this to get a cost per square feet value or something
similar. You then plug in the number of Square feet's for your new
apartment construction project and out pop the estimates. This
can be a quick method but needs robust data to feed it. And
because it’s all about the math, it’s hard to adjust for the
environmental, political and cultural differences between
projects
Determine Resource Cost Rate
The person determining the rates or the group preparing the estimates must
know the unit cost rates, such as staff cost per hour and bulk material cost per
cubic yard, for each
resource to estimate schedule activity costs. Gathering quotes is one method
of obtaining rates. For products, services, or results to be obtained under
contract, standardrates with escalation factors can be included in the contract.

Reserve Analysis
reserves are estimated costs to be used at the discretion of the project
manager to deal with anticipated, but not certain, events. These events
are “known unknowns” and are part of the project scope and cost
baselines

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 How Do We Manage Cost?
• Three processes
 Cost Estimating
 Cost Budgeting
 Cost Control

Cost Cost Budgeting Cost Control

Estimating

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 Cost Budgeting
Tools & Techniques
Outputs
Project Scope Cost aggregation Cost Baseline
Statement Reserve analysis
Work Breakdown Project Funding
Structure Parametric estimating Requirements
WBS Dictionary
Inputs
Activity Cost Estimates Funding limit reconciliation
Cost
Activity Cost Estimates Management
Supporting Detail Plan Updates

Project Schedule Requested Changes

Resource Calendars

Contract
Cost Management Plan
Cost Estimating Cost Budgeting Cost Control

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 Essential definitions
Enterprise Environmental factors-refer to both internal and external factors that surround or
influence a project’s success. These factors may come from any or all of the enterprises involved in
the project. Enterprise environmental factors may enhance or constrain project management options
and may have a positive or negative influence on the outcome. They are considered as inputs to most
planning processes

Organisational process Assets- are any or all process related assets, from any or all of the organizations
involved in the project that can be used to influence the project’s success.” Examples include: plans,
procedures, lessons learned, historical information, schedules, risk data and earned value data.
Organizational Process Assets fall into two broad categories—Processes and Procedures, and the Corporate
Knowledge Base.

WBS Dictionary-The WBS dictionary includes entries for each WBS component that briefly
defines the scope or statement of the work, defines deliverables, contains a list of associated
activities, and provides a list of recognized milestones to gage progress

Approved change requests-refers to a change request that has been submitted by the requestors, has been
reviewed by the appropriate parties through use of the integrated change control process, and has been
granted authorization to be take place

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 Essential definitions

Risk Register-The risk register or risk log becomes essential as it records

identified risks, their severity, and the actions steps to be taken. It can be
a simple document, spread sheet, or a database system, but the most
effective format is a table. A table presents a great deal of information in
just a few pages
Cost Baseline-ultimately, project management includes a variety of
responsibilities within one’s team in order to achieve maximum results for
their employer. In regards to money and remaining in business, providing a
budget that is adjusted to time is considered a cost baseline.
Performance reports- is filled out by the project manager and submitted on a
regular basis to the sponsor, project portfolio management group, Project
Management Office or other project oversight person or group
Earned Value Analysis-report shows specific mathematical metrics that are
designed to reflect the health of the project by integrating scope,
schedule, and cost information. Information can be reported for the current
reporting period and on a cumulative basis

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 Essential Definitions
Resource Calendar-Keeping track of schedules and time management is one of the most
fundamentally important tasks that are the responsibility of the project management team
and or the project management team leader. One of the best ways to accomplish this feat
is through the careful and well orchestrated use of calendars to keep track of the
multitude of project related events, occurrences, and dates that will take place during the
project’s life cycle.

Enterprise environmental factors

– Market condition
– Published commercial information
Cost performance baseline
– Authorized time‐phased Budget at Completion
(BAC) used to measure, monitor and control
overall cost performance (S shape curve)

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 Cost Budgeting
• Budgeting is allocating costs to work packages to establish a cost
baseline to measure project performance
• Remember Contingency items are for unplanned but required changes
it is not to cover things such as:
 Price escalation
 Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out the
project spend to meet management expectations

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Cost Aggregation
Schedule activity cost estimates are aggregated by work packages in accordance with
the WBS. The work package cost estimates are then aggregated for the higher
component levels of the WBS, such as control accounts, and ultimately for the entire
project. Reserve analysis establishes contingency reserves, such as the management
contingency reserve, that are allowances for unplanned, but potentially required,
changes. Such changes may result from risks identified in the risk register
Reserve Analysis
Management contingency reserves are budgets reserved for unplanned, but potentially
required, changes to project scope and cost. These are “unknown unknowns,” and the
project manager must obtain approval before obligating or spending this reserve.
Management contingency reserves are not a part of the project cost baseline, but are
included in the budget for the project. They are not distributed as budget and, therefore,
are not a part of the earned value calculations
Parametric
). estimating
The parametric estimating technique involves using project characteristics (parameters)
in a mathematical model to predict total project costs. Models can be simple (e.g., one
model of software development costs uses thirteen separate adjustment factors, each of
which has five to seven points within it).
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 Cost Types
Direct Costs
Related “Directly” to the project
ex. Labor hours, material, equipment, food, travel
Indirect Costs
Overhead used for more than one project
ex. Building rent, taxes, janitorial services

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 Cost Types
A cost by any other name, really isn’t the same!
Variable Cost – Changes with volume
Fixed Cost – Stays the same, regardless of volume

TC = VC+FC

COST vs VOLUME

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 Cost Types
Project Costs
Are incurred while the project is being fulfilled.

Life Cycle Costs

includes the costs after project completion.
There may be temptation to lower project costs at the expense of long term
costs. Life Cycle Costing
gives the PM a way to consider costs outside
of the scope of project fulfillment

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 Important Concepts
Sunk Costs
Forget ‘em, they’re gone

Working Capital
- Current Assets (Cash, Inventories, Accounts Receivable)
- Liabilities (Notes, AP, Accruals)

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 Cost and Project Selection
Present Value
Is Rs.10,000 in your pocket now worth more than
the Rs.10,000 in your pocket one year from now?
Yes! You can use the money now to make more money.
The 10,000 in a year from now should be “discounted” to
the present, since it’s not worth as much.

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 Present Value of Your PMP Consulting Gig

Time
Income Present Value

1 10,000 10,000

2 10,000 9,090

3 10,000 8,264

4 10,000 7,513

5 10,000 6,830

TOTAL 50,000 41,697

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 Internal Rate of Return
What is the return on the money invested?

Expressed as percentage

Great for comparing between two projects of different value

Project A has an IRR of 21% and Project B has an IRR of

14%. Which would I choose?

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 Payback Period
How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money

Your Project costs $50,000, and the cash flow it will bring is $11,000
a year.

The Payback Period is. . . 5 years

Discount rate/Interest Rate....10%

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 Payback Period
Cumulative Inflow
(with discount@10%)
Cumulative Inflow Resulting Value of cash Note:the two (with or
Return (without discount flow(end of year, with without discount do not
@10%) discount) differ too much in duration

11,000 11,000 10,891 10,891

11,000 22,000 10,783 21,674

11,000 33,000 10,676 32,347

11,000 44,000 10,571 42,914

11,000 55,000 10,476 53,394

Break Even at 50,000 The BE Point is 4yrs With Discount Pay- Back is Pay-Back Period is 4yrs 8
7mths Different mths.
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 Net Present Value
NPV, like Present Value, discounts future cash flows to the
present

PV of Revenue – PV of Costs

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 Net Present Value: Your PMP Gig
Time Revenue Present Value Costs PV of Costs NPV

0 10,000 10,000 12,000 12,000 -2,000

1 10,000 9,090 2,000 1,818 7,272

2 10,000 8,264 2,000 1,653 6,611

3 10,000 7,513 2,000 1,502 6,011

4 10,000 6,830 2,000 1,366 5.464

Total 50,000 41,697 20,000 18,339 23,358

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 How Do We Manage Cost?
Three processes
Cost Estimating
Cost Budgeting
Cost Control

Cost Estimating Cost Budgeting Cost Control

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 Cost Control
Inputs Tools & Techniques Outputs
Cost Baseline Cost Estimate Updates
Cost change control system

Project Funding Performance measurement analysis Cost Baseline Updates

Requirements Forecasting
Performance
Performance Project performance reviews Measurements
Reports
Project management software Forecasted Completion
Work Performance
Variance management
Information Requested Changes

Approved Change Recommended

Requests Corrective Actions
Project Management
Plan Organizational
Cost Estimating Cost Budgeting Cost Control Process Assets
Updates

Project
Management
Plan Updates

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 Payback Period
How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money

Your Project costs Rs.50,000, and the cash flow it will

bring is Rs.11,000 a year.

The Payback Period is. . . 5 years

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 Earned Value
• Progress is compared against the baseline to Planned Value (PV) –
Budgeted Cost
determine whether project is ahead of or Earned Value (EV) –
behind plan Actual work completed
• Percent complete can be difficult to measure, Actual Cost (AC) – Costs
incurred
some managers use rules Estimate to Complete
 50/50 Rule – Assumed 50% complete when task (ETC) – What’s Left
started, final 50% at completion Estimate at Completion
(EAC) – What final cost
 20/80 Rule – 20% at start will be
 0/100 Rule – No credit until complete

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The earned value Management involves developing these key values for each schedule activity,
work package, or control account:
Planned value (PV). PV is the budgeted cost for the work scheduled to be completed on an activity
or WBS component up to a given point in time.
Earned value (EV). EV is the budgeted amount for the work actually completed on the schedule
activity or WBS component during a given time period.
Actual cost (AC). AC is the total cost incurred in accomplishing work on the schedule activity or
WBS component during a given time period. This AC must correspond in definition and coverage to
whatever was budgeted for the PV and the EV (e.g., direct hours only, direct costs only, or all costs
including indirect costs).
Cost variance (CV). CV equals earned value (EV) minus actual cost (AC). The cost variance at the
end of the project will be the difference between the budget at completion (BAC) and the actual
amount spent. Formula: CV= EV - AC

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 The earned value Management involves developing these key values for each schedule
activity, work package, or control account:
Schedule variance (SV). SV equals earned value (EV) minus planned value (PV). Schedule
variance will ultimately equal zero when the project is completed because all of the planned
values will have been earned. Formula: SV = EV - PV.These two values, the CV and SV, can be
converted to efficiency indicators to reflect the cost and schedule performance of any project.
Cost performance index (CPI). A CPI value less than 1.0 indicates a cost overrun of the
estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI equals
the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator.
Formula: CPI = EV/AC
Schedule performance index (SPI). The SPI is used, in addition to the schedule status to
predict the completion date and is sometimes used in conjunction with the CPI to forecast the
project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PV

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Earned Variance at

Value
Completion (VAC)

Graph Target Cost &

Schedule

Planned Value
Schedule Variance
(PV) (Time)

Earned Value
(EV)

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 Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance EV-PV Negative = Behind
(SV) Schedule
Positive = Ahead of
Schedule
Cost Performance EV/AC How much are we
Index (CPI) getting for every dollar
we spend?
Schedule Perform EV/PV Progress as % against
Index (SPI) plan
Estimate to Complete EAC-AC How much more do we
(ETC) have to spend?

Variance at BAC-EAC At the end of the day,

Completion (VAC) how close will we be to
plan?

Estimate at See the following page

Completion (EAC)

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 Earned Value Formulas (Cont’d)
NAME FORMULA NOTES

Estimate at Complrtion
(EAC)
Use if no variances from
BAC/CPI BAC have occurred

Use when original estimate

AC+ETC was bad. Actuals + New
estimate

Use when current

AC+BAC variances are not
-EV expected to be there in
the future

Use when current

AC+(BAC variances are expected to
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-EV)/CPI continue 61
FORECASTING
Forecasting includes making estimates or predictions of conditions in the project's future based on
information and knowledge available at the time of the forecast.( Forecasts are generated, updated,
and reissued based on work performance information provided as the project is executed and
progressed).
BAC is equal to the total PV at completion for a schedule activity, work package, control account, or
other WBS component. Formula: BAC = total cumulative PV at completion.
ETC is the estimate for completing the remaining work for a schedule activity, work package, or
control account.
ETC based on new estimate. ETC equals the revised estimate for the work remaining, as
determined by the performing organization. This more accurate and comprehensive completion
estimate is an independent, non-calculated estimate to complete for all the work remaining, and
considers the performance or production of the resource(s) to date.
Alternatively, to calculate ETC using earned value data, one of two formulas is typically used:
ETC based on atypical variances. This approach is most often used when current variances are
seen as atypical and the project management team expectations are that similar variances will not
occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC).
Formula: ETC = (BAC - EVC)

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FORECASTING
ETC based on typical variances. This approach is most often used when current variances are
seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining
PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC - EVC) / CPIC
EAC is the projected or anticipated total final value for a schedule activity, WBS component, or
project when the defined work of the project is completed. One EAC forecasting technique is based
upon the performing organization providing an estimate at completion:
EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is
provided by the performing organization. This approach is most often used when past performance
shows that the original estimating assumptions were fundamentally flawed or that they are no
longer relevant due to a change in conditions. Formula: EAC = ACC + ETC
The two most common forecasting techniques for calculating EAC using earned value data are
some variation of:
EAC using remaining budget. EAC equals ACC plus the budget required to complete the remaining
work, which is the budget at completion (BAC) minus the earned value (EV). This approach is most
often used when current variances are seen as atypical and the project management team
expectations are that similar variances will not occur in the future. Formula: EAC = ACC + BAC - EV
EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete the
remaining project work, which is the BAC minus the EV, modified by a performance factor (often the
CPIC). This approach is most often used when current variances are seen as typical of future
variances. Formula: EAC = ACC + ((BAC - EV) / CPIC)
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 Tools and Techniques
• Performance reviews
– Compare cost performance over time, schedule activities or work packages
overrunning and under running the budget, and the estimated funds needed
to complete work in progress
– In EVM:
• Variance analysis: compares actual project (cost or schedule) performance to planned or
expected performance
• Trend analysis: examines project performance over time to determine if performance is
improving or deteriorating.
Graphical comparison of BAC versus EAC and completion dates
• Earned value performance: compares the baseline plan to actual schedule and cost
performance

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Outputs
• Work performance measurements
– Calculated CV, SV, CPI, and SPI values for WBS components, work packages
and control accounts are documented and communicated to stakeholders
• Budget forecasts
– Calculated EAC value or bottom‐up EAC value is documented and
communicated to stakeholders
• Organizational Process Assets updates
– Cause of variance
– Corrective actions chosen and the reasons
– Other types of lessons learned from project cost control
• Change requests (through the Perform Integrated Change Control Process)
• Project management plan updates
– Cost performance baseline (scope, activity resources, cost estimates.
Sometimes new cost baseline should be prepared as cost variance is severe)
– Cost management plan
• Project document plan
– Cost estimates
– Basis of estimates
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 Tricks for Earned Value
• EV is always first
• Variance = EV minus something
• Index = EV divided by something
• If the formula relates to cost use AC
• If the formula relates to schedule use PV
• Interpreting results: negative is bad and positive is good
• Interpreting results: greater than one is good, less than one is bad

Project Current
Start Status BAC
PV

EAC
AC ETC

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 Terms to Remember
• Present Value Working Capital
• Net Present Value (NPV) Straight Line Depreciation
• Internal Rate of Return (IRR) Accelerated Depreciation
• Payback Period  Double Declining Balance
• Benefit Cost Ratio = BCR>1, Payback is  Sum of Years Digits
greater than the cost Value Analysis (Value Engineering)
• Opportunity Cost
• Sunk Cost

You won’t be calculating most of these numbers on the test, just remember the
concepts for general questions

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 Examples
Started construction on 1991 and planned completion by 1997 (6
years), it was to costRs.3 Billion, the project included 6 highways
(Rs.0.5 Billion per highway/year)
At the end of the first year, 1/2 highway was completed and the cost
was Rs.2 Billion.
Do the EV analysis

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 Examples

EV = Earned Value = Rs.0.25 Billion ($0.5/2)

PV = Planned Value = Rs.0.5 Billion

AC = Actual Cost = Rs.2 Billion

BAC = Budget At Completion = Rs.3 Billion

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 Examples
Performance

CV = EV - AC =Rs.0.25 – Rs.2 = - Rs.1.75 Billion

Over Budget by $1.75 Billion

SV = EV - PV = Rs.0.25 – Rs.0.5 = - $0.25 Billion

Behind of schedule

CPI =EV / AC = Rs.0.25 / Rs.2 = 0.12

Getting 0.12 cents out of every dollar budgeted

SPI = EV / PV = Rs.0.25 / Rs.0.5 = 0.50

50% of progress planned

EAC = BAC / CPI = Rs.3 / 0.50 = Rs.6 Billion

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 Examples

 ABC Started construction of sky-bridges in 2001 and planned

completion by 2008 (8 years).They were to cost Rs.12 Billion, the
project included 8 sky-bridges (Rs.1.5 Billion per bridge/year)
 At the end of the year 4 three were completed and the cost was
Rs.2.5Billion.
 Do the EV analysis

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 Examples: The Numbers

EV = Earned Value = Rs.3.5 Billion($1.5m*3)

PV = Planned Value = Rs.6.0 Billion($1.5*4)

AC = Actual Cost =Rs.2.5 Billion

BAC = Budget At Completion = Rs.12 Billion

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 Big Dig: Performance

CV = EV - AC =Rs.3.5 – Rs.2.5 = Rs.1.00 Billion

Under Budget by $1.00 Billion

SV = EV - PV = Rs.3.5 – Rs.6.5 = - $3.00 Billion

Behind of schedule

CPI =EV / AC = Rs.3.5 / Rs.2.5 = 1.4

Getting 1.14 cents out of every dollar budgeted

SPI = EV / PV = Rs.3.5 / Rs.6.5 = 0.50

50% of progress planned

EAC = BAC / CPI = Rs.12 / 0.50 = Rs. 24 Billion

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 Exercise
a) In a project, which is consisting of 03 work packages, progress review
observations are as follows.
Project Work EV (Earned Value) AC ( Actual Cost) PV (Planned
Package (WP) Value)
WP1 25,000.00 25,000.00 25,000.00
WP2 15,900.00 14,500.00 30,000.00
WP3 30,000.00 34,000.00 26,000.00
Carry out the earn value analysis to find out following parameters in the above project
I. CV (Cost variance ) and CPI ( cost performance index ) each work package and total project
II. SV (Schedule Variance) and SPI (Schedule performance Index) of each WP and total project
III. EAC (Estimate at Completion)
a. EAC = AC + (BAC – EV)
b. EAC = AC + (BAC – EV)
CPI
Note ; BAC - Budget at Completion
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