Budget Management

Budget Management

Budget Development
• Good scheduling skills and abilities
• Understanding of the project scope
• Well developed WBS and project
schedule

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 Budget Management

Key reasons for overspending…

• Bad Luck
• Overly optimistic initial estimates
• Poor communication
• Poor cost/time estimating practices

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 Budget Management

Three methods of estimating

1. Analogous Estimating
Uses values from previous, similar
projects as the basis for estimating the
same values for future activities or
projects. Also called “Top-down”
estimating.

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 Budget Management

Three methods of estimating

2. Parametric Estimating
Uses statistical relationship between
historical data and other variables to
calculate an estimate for an activity or
project.

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 Budget Management

Three methods of estimating

3. Bottom-up Estimating
Decomposition of the work into smaller
packages or more detail. Estimates are
made at the lowest level and then
summarizes, or aggregated, into the
higher level activities.

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 Budget Management

Cost Budgeting
• The planning process that involves
summarizing, or aggregating, the
estimated costs for individual
activities to establish a total cost
baseline for the project.

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 Budget Management

Cost Baseline
• Time based budget that is used as a
basis for measuring, monitoring, and
controlling the overall cost
performance of the project.
• Also represents “Planned Value”

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 Budget Management

Cost Baseline
Cumulative Costs

Time
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 Budget Management

Cost Control
• The process of influencing factors
that create variances, and controlling
changes to the project budget.

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 Budget Management

Project cost control includes:

• Ensuring changes are agreed upon
• Managing changes when they occur
• Assure potential cost overruns do
not exceed authorized funding
• Monitor cost performance and
understand variances
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 Budget Management

Project cost control includes:

• Recording all appropriate changes
against the cost baseline
• Preventing incorrect, inappropriate,
or unapproved changes
• Inform stakeholders of approved
changes
59 • Acting to bring overruns within limits
 Budget Management

Cost Change Control System

• Defines the procedures by which the
cost baseline can be changed.
• WSDOT policy found in the Project
Control & Reporting Guide
• Also documented in the Project
Management Plan
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 Earned Value Management

What is Earned Value Management

(EVM)?
• A method of integrating scope, schedule,
and resources, and for measuring project
performance.
• It compares the amount of work that was
planned with what was actually earned
with what was actually spent to determine
if cost and schedule performance are as
59 planned.
 Earned Value Management

What is needed for EVM?

• A baseline plan
• A project budget (BAC – Budget at
Completion)
• A project end date
• Tasks are identified & scheduled
• Each task has a budget or effort (resource
loaded / weighting)
• Actuals tracked
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 Earned Value Management

To perform EVM, three values need

to be determined
• Planned Value (PV or BCWS)
• Actual Costs (AC or ACWP)
• Earned Value (EV or BCWP)

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 Earned Value Management

Planned Value (PV)

What are the budgeted costs of
the work scheduled?
•Time phased based on baseline
budget
•Only changes when baseline is
changed
•Also referred as “BCWS” & “BAC”

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 Earned Value Management

Actual Costs (AC)

What are the actual costs of the
work performed?
•Based on the actual completion of
work packages
•Actual costs for reported work
•Also referred as “ACWP”

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 Earned Value Management

Earned Value (EV)

What are the budgeted costs of
the work performed?
•Based on the actual completion of
work packages
•Baseline value of the reported work
•Also referred as “BCWP”

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 Earned Value Management Example

Task – Drill & install 10 piezometers

• Budget - $100,000 ($10K per piezometer)
• Time – 10 weeks (1 piezometer per week)
At week 5:
• 4 piezometers drilled and installed
• $47,500 spent to date
PV = $50,000
AC = $47,500
EV = $40,000
 Earned Value Management

Calculating Earned Value and

interpreting results
• to measure the progress of the project
• help identify trends
• forecast costs
• and identify ways to correct/mitigate
project pitfalls.

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 Earned Value Management

Cost Variance (CV)

CV = EV - AC

•Good News: If CV value is positive, the project is

currently under budget (spending less than
planned for the work)
•Bad News: If CV value is negative, the project is
currently over budget (spending more than
planned for the work)

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 Earned Value Management

Cost Performance Index

(CPI)
CPI = EV / AC
•Good News: If CPI value is >1 or =1, the project
cost trend is currently under or at planned budget
•Bad News: If CPI value <1, the project cost trend
is currently over budget

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 Earned Value Management

Cost Variance % (CV%)

CV% = CV / EV

•Good News: If CV% value is positive, the project

is currently under budget by the CV%
•Bad News: If CV% value is negative, the project
is currently over budget by the CV%

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 Earned Value Management

Schedule Variance (SV)

SV = EV - PV

•Good News*: If SV value is positive, the project is

currently ahead of schedule
•Bad News: If SV value is negative, the project is
currently behind schedule

* - not all positive SVs are good

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 Earned Value Management

Schedule Performance
Index (SPI)
SPI = EV / PV
•Good News: If SPI value is >1 or =1, the project
schedule trend is currently ahead or on planned
schedule
•Bad News: If SPI value <1, the project schedule
trend is currently behind schedule

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 Earned Value Management

Schedule Variance % (SV%)

SV% = SV / PV

•Good News: If SV value is positive, the project is

currently ahead of schedule
•Bad News: If SV value is negative, the project is
currently behind schedule

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 Earned Value Management

Estimate at Completion
(EAC)
#1
Actual costs to date plus a new estimate for all
remaining work (original plan no longer valid)

EAC = AC + ETC
(ETC  Estimate to Complete)
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 Earned Value Management

Estimate at Completion
(EAC)
#2
Actual costs to date plus remaining budget
(current variances are viewed as atypical of future
variances)

EAC = AC + BAC - EV
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 Earned Value Management

Estimate at Completion
(EAC)
#3 & #4
Actual costs to date plus remaining budget
modified by a performance factor (CPI) (current
variances are viewed as typical of future
variances).

EAC = AC + [(BAC - EV) / CPI]

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EAC = BAC / CPI
 Earned Value Management Example

Task – Drill & install 10 piezometers

• Budget - $100,000 ($10K per piezometer)
• Time – 10 weeks (1 piezometer per week)
At week 5:
• 4 piezometers drilled and installed
• $47,500 spent to date
PV = $50,000 CV = -$7,500 SV = -$10,000
AC = $47,500 CPI = 0.82 SPI = 0.80
EV = $40,000 CV% = -19% SV% = -20%
 Earned Value Scenario

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 Earned Value Scenario

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 Earned Value Scenario

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 Earned Value Scenario

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 Earned Value Scenario

BAC = $100,000 (current project budget)

EV = $42,000 (42% of project completed,
$100,000 planned)
PV = $56,000 (56% of project planned $100,000
completed – initial aging report)
AC = $48,000 (from actual expenditures
reporting)

Is this project on schedule / budget?

Or is it in trouble?
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 Earned Value Scenario
Cost Variance (CV):
CV = EV – AC
= $42,000 - $48,000
= - $6,000

Cost Performance Index (CPI):

CPI = EV / AC
= $42,000 / $48,000
= 0.875

Cost Variance % (CV%):

CV% = CV / EV
= - $6,000 / $42,000
= 14% OVER BUDGET
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 Earned Value Scenario
Schedule Variance (SV):
SV = EV – PV
= $42,000 - $56,000
= - $14,000

Schedule Performance Index (SPI):

SPI = EV / PV
= $42,000 / $56,000
= 0.750

Schedule Variance % (SV%):

SV% = SV / PV
= - $14,000 / $56,000
= 25% BEHIND SCHEDULE
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 Earned Value Scenario
Estimate at Completion (EAC):
Method #1:
EAC = AC + ETC (say $68,000)
= $48,000 + $68,000
= $116,000
(Change Management for $16,000 funds
request)

Method #2:
EAC = AC + BAC – EV
= $48,000 + $100,000 - $42,000
= $106,000
(Change Management for $6,000 funds
request)
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 Earned Value Scenario
Estimate to Complete (ETC):
Method #3
EAC = AC + [(BAC – EV) / CPI]
= $48,000 + [($100,000 - $42,000) / 0.875]
= $48,000 + $66,285
= $114,285
(Change Management for $14,285 funds
request)

Method #4
EAC = BAC / CPI
= $100,000 / 0.875
= $114,285
(Change Management for $14,285 funds
67 request)
 Earned Value Scenario

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 Budget Management

Module 6 Exercise
• Work as a team to perform EVM on
assigned project on page 69.
• Prepare a report similar to the
module scenario reporting project
progress.
• Brief class on methods of recovery, if
69
needed, for project.
 Budget Management

Graphing Earned Value exercise

• Gantt chart baseline (report)
• EVM graph
• Task information
• Cost distribution
• EVM worksheets
 Budget Management

Graphing Earned Value exercise

• Planned Value (PV) is always shown
in blue with circle nodes
• Actual Cost (AC) is always shown in
red with square nodes
• Earned Value (EV) is always shown in
green with triangle nodes
 Budget Management

Graphing Earned Value exercise

• Work together as a team to calculate the
task cost (task budget) for each task
• Record these values on the worksheet
with the total (BAC) calculated
• Warning: Wait to plot on the EVM graph as
a class – we will use the Cost Distribution
Report
$60K

$50K

$40K

$30K

$20K

$10K

1w 2w 3w 4w 5w 6w 7w 8w 9w 10w
 Budget Management

Graphing Earned Value – week 1

• Task A started on time – 30% complete
• Task B started 2 days late – 30% complete
• Task C started 1 day late – 25% complete
• Tasks D, E, F, G, H, and J have not started
• Project Management is on-going
• Actual Costs reported for week 1 = $5000
$60K

$50K

$40K

$30K

$20K

$10K

1w 2w 3w 4w 5w 6w 7w 8w 9w 10w
$60K

$50K

$40K

Cost
$30K
Variance

$20K
Schedule
Variance
$10K

1w 2w 3w 4w 5w 6w 7w 8w 9w 10w