Chapter – 4

Construction Project
Costs Management
 What is Cost and Project Cost Management?

 Project cost management includes the

processes required to ensure that the
project is completed within an
approved budget.
 Project Cost Management
 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.
 Cost Estimating – developing an approximation of the costs of
the resources needed to complete project activities.
 Cost Budgeting – aggregating the estimated costs of individual
activities or work packages to establish a cost baseline.
 Cost Control – influencing the factors that create cost variances
and controlling changes to the project budget.
 Cost Budgeting: Processes
 Cost Aggregation
 Schedule activity cost estimates are aggregated by work packages in
accordance with the WBS.
 Reserve Analysis
 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.
 Funding Limit Reconciliation
 Large variations in the periodic expenditure of funds are usually
undesirable for organizational operations. Therefore, the expenditure
of funds is reconciled with the funding limits set by the customer or
performing organization on the disbursement of funds for the project.
 Reserves
 Reserves are included in a cost estimate to mitigate cost risk by
allowing for future situations that are difficult to predict.
 Contingency reserves allow for future situations that may
be partially planned for (sometimes called known
unknowns) and are included in the project cost baseline.
 Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns).
 Reserve Analysis
 Many cost estimators include reserves, also called
contingency allowances, as costs in many schedule activity
cost estimates. This has the inherent problem of potentially
overstating the cost estimate for the schedule activity.
 Cost Budgeting:
 Cost budgeting involves aggregating the estimated costs of
individual schedule activities or work packages to establish a
total cost baseline for measuring project performance.
 What is a budget? “A planned expression of money” (Wright .D
1994 “A practical foundation in costing”
 A Plan Routledge)
 A Limit For a defined activity shows;
 A Schedule Income & Expenditure
 A Reality Check Total estimated costs
 An Allocation Defined period of time
“ Cash is a King”
 Project Budget
 The Project Budget is the time-based
spreadsheet that shows the project team's intent to
spend the organization's resources on project
activities.(The process of conversion of a resource
schedule into financial schedule).
 It is the determination of costs associated with the
defined activities
 Project Budget
 It provides the baseline reference for subsequent
project monitoring and control (via The construction
plan and the associated cash flow estimates). Or it is a
guide for management.
 It provides management with an understanding of how
funds will be utilized and expended over time for
projects or operations.
 Project Budget
 Reflects the actual scope at the site and the actual
quantities from construction issued drawings and a
standard productivity rate.
 Include change orders and extra work orders in terms
of changed quantities and costs.
 Should reflect the actual quantities placed and a
standard unit rate for each work activity.
 Cost Budgeting: Outputs

 Cost Baseline
 The cost baseline is a time-phased
budget that is used as a basis against
which to measure, monitor, and control
overall cost performance on the project.
 Project Funding Requirements
 Funding requirements, total and
periodic (e.g., annual or quarterly), are
derived from the cost baseline and can
be established to exceed, usually by a
margin, to allow for either early
progress or cost overruns.
 Funding usually occurs in incremental
amounts that are not continuous, and,
therefore, appears as a step function.
 Why Project Budgeting?
 Why needs for preparing a project budget :
 To identify the monetary requirement in time both in
the forms of how much and when so as to be able to
implement according to plans or contract
agreements constraints
 To indicate organizations whether their projects are
in a position to look for diversified sources of
finances in order to carry them out successfully
 To enable organization to rethink and overhaul their
operational systems so that they can meet their
contractual performance targets
 Building the Planned Project Budget
 Establishing the WBS is the first step in defining the
project and in establishing the baseline.
 All of the efforts used in producing the deliverable of
each task can be defined in terms of cost (Labor,
materials, facilities, services and overhead).

Building the Planned Project Budget

• The sum of all tasks within the WBS constitutes the
total budget of the project.
 Developing a Baseline Budget
for a Project
• Once a detailed budget is developed and
approved, the project manager should publish
this baseline and set it as a point of
comparison for actual performance progress.
• The baseline budget is the tool for measuring
how project changes affect our schedule and
budget.
Cost Budget Baseline
 This process aggregates the estimated costs of
individual activities or work packages to establish
and authorized cost baseline.
 Establish the Schedule Baseline
Based on the Project Scope and available resources, the work
activities in the WBS are scheduled to establish the Schedule
Baseline.
Schedule Baseline
Preliminary Design 1.1.1 Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req.

1.1.1.2 Develop Preliminary Design

1.1.1.3 Review Preliminary Design

1.1.1.4 Incorporate Comments

1.1.1.5 Preliminary Design Complete

 Establish the Cost Baseline
Notice in the chart the time phased hours associated with each task.
Cost Baseline
Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req. 1,500 1,000

1.1.1.2 Develop Preliminary Design 2,000 2,000

1.1.1.3 Review Preliminary Design 500 500

1.1.1.4 Incorporate Comments 320 320

1.1.1.5 Preliminary Design Complete 1,000

Integrated Scope, Schedule and Cost
As the chart shows below , each task has an associated schedule
and time phased cost.
Integrated Cost/Schedule Baseline
Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req.

1,500 1,000

1.1.1.2 Develop Preliminary Design

2,000 2,000

1.1.1.3 Review Preliminary Design

500 500

1.1.1.4 Incorporate Comments

320 320

1.1.1.5 Preliminary Design Complete

1,000
 The Budgeting Process
Profit/Fee is not part of the Contract Budget Base (CBB)
The Contract Budget Base (CBB) represents the total budget for
all authorized contractual work, minus Profit/Fee.
The CBB can only be modified when duly authorized changes to
the contract are received. CBB is always calculated as follows:
Estimated cost of additional
Current negotiated
contract cost
+ authorized unpriced work = CBB
(yet to be negotiated)

The Awarded Amount to the Builder is $219,999. This includes

Profit/Fee.
The Negotiated Total Cost, without Profit/Fee, for the project equals
$183,852. This will be the basis for developing the Contract Budget
Baseline (CBB). Again, remember that this amount is exclusive of
Fee.
 20

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 Cost Control
 Project cost control includes:
 Influencing the factors that create changes to the cost baseline
 Ensuring requested changes are agreed upon
 Managing the actual changes when and as they occur
 Assuring that potential cost overruns do not exceed the authorized
funding periodically and in total for the project
 Monitoring cost performance to detect and understand variances from
the cost baseline
 Recording all appropriate changes accurately against the cost baseline
 Preventing incorrect, inappropriate, or unapproved changes from being
included in the reported cost or resource usage
 Informing appropriate stakeholders of approved changes
 Acting to bring expected cost overruns within acceptable limits.
 Cost Control Inputs:
 Cost Baseline
 Project Funding Requirements
 Performance Reports
 Work Performance Information
 Approved Change Requests
 Project Management Plan
 Cost Control: Tools and Techniques
 Cost Change Control System
 A cost change control system, documented in the cost management
plan, defines the procedures by which the cost baseline can be
changed.
 Performance Measurement Analysis
 Performance measurement techniques help to assess the magnitude of
any variances that will invariably occur.
 The earned value technique (EVT) compares the cumulative value of
the budgeted cost of work performed (earned) at the original allocated
budget amount to both the budgeted cost of work scheduled (planned)
and to the actual cost of work performed (actual).
 This technique is especially useful for cost control, resource
management, and production.
 Cost Control Tools:
 Cost Change Control System

 A cost change control system, documented in the cost management plan, defines
the procedures by which the cost baseline can be changed. It includes the forms,
documentation, tracking systems, and approval levels necessary for authorizing
changes.

 Performance Measurement Analysis

 Performance measurement techniques help to assess the magnitude of any

variances that will invariably occur. The earned value technique (EVT) compares
the cumulative value of the budgeted cost of work performed (earned) at the
original allocated budget amount to both the budgeted cost of work scheduled
(planned) and to the actual cost of work performed (actual). This technique is
especially useful for cost control, resource management, and production.
 EVM: Earned Values Management
 The Earned Value Technique ( EV) involves developing these
key values for each schedule activity, work package, or control
account:
 It is a method measuring project performance by comparing the
amount of work planned with actually accomplished, in order to
determine if cost and schedule performance as planned.
Data Element Term Acronyms
Scheduled Work Budgeted Cost of Work Scheduled PV
Earned Value Budgeted Cost of work performed EV
Actuals Actual Cost of Work performed AC
Authorized Work Budget at Completion BAC
Forecasted Cost Estimate at Completion EAC
Work variance Schedule Variance SV
Cost Variance Cost Variance CV
Completion Variance Completion Variance VAC
 Variance Calculations:
 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
 A negative value of CV would mean Cost over run
 Schedule Variance:
 SV equals earned value (EV) minus planned (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
 Negative SV would mean Time over run.
 Performance Indices
 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 under
run of the estimates.
 CPI = EV /AC.
 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
 Estimate At Completion EAC:
 EAC = AC+ETC
 Estimate to Complete ETC:
 ETC equals the revised estimate
for the work remaining.
The earned value technique in its various forms is a commonly
used method of performance measurement. It integrates project
scope, cost (or resource) and schedule measures to help the
project management team assess project performance.
 Cost and Schedule Forecasting
 Exercises:
 Exercise #1:Schedule Variance Example.
 PV = $ 42000
 EV = $ 38000
 AC = $ 48000
 Budget at Completion BAC = $80000
 SV = EV – PV = $38000 – 42000 = - $4000
 SV % = SV/PV = -4000/42000 = -9.5 % Hence there is schedule
overrun of 9.5%
 Exercise #2: Cost Variance Example.
 CV = EV- AC = 38000 – 48000 = - 10000
 CV% = CV/EV = -10000/38000 = -26 % Schedule overrun by 26%
 # 3 Cost Performance Index ( CPI)
 CPI = EV/AC = 38000/48000 = 0.79
 Hence $0.79 worth of work was done for every $ 1 spent.
 #4 Schedule Performance Index: SPI
 SPI = EV/PV = 38000/42000 = 0.90
 $ 0.90 worth of work has been for each done for each $1.00
worth of work that was planned to be done.
 #5. Estimate at Completion and Variance at
Completion
 EAC = BAC/CPI = 80000/0.79 = $101265
 VAC = BAC – EAC = 80000-101265 = - $ 21265. The
project will exceed the planned budget by $21265
Problems:
#1:
 BAC = 40 K
 EV = 20 K
 PV = 28 K
 AC = 26 K
Determine:
 % of work scheduled
 % of budget spent
 Cost Variance CV
 Scheduled Variance SV
 Case 1:
 PV = 1600
 EV = 1600
 AC = 1600
 Ideal Case where every thing goes as per plan.
 Case2:
 PV= 1900
 EV= 1500
 ACP= 1700
 400 worth of work is behind schedule
 SV = EV- PV = 1500-1900= -400
 SV%= ( SV/PV)x100 = -21%
 CV = EV – AC = 1500 – 1700= -200 Cost overrun by 200
 CV% = (CV/EV)x100 = -13%
 SPI = EV/PV = $0.79
 CPI= EV/AC = $0.88