Control of the Budget of a Project

00:03 So how does this all affect our cost? Will we complete the scope within the budget? Well, let's be proactive and find out, shall we? We know what planned value and earned value are, the value of the work planned and the value of the work completed respectively.

00:22 We calculate the cost variance to learn if we are on budget and the cost performance index to learn if the rate of our spending will allow us to remain within budget for this activity and the project as a whole.

00:34 So first things first.

00:36 Let's transform our planned value and earned value into dollar amounts.

00:42 Let's say the budget for the build walls activity is $200,000.

00:47 This would mean each war would cost $50,000.

00:50 And our earned value so far is 1.8 walls.

00:55 To convert this into dollars, we multiply it by the number of dollars.

00:58 So 1.8 times 50,000 equals 90,000.

01:04 We do the exact same thing for planned value.

01:07 So 2.0 walls multiplied by 50,000 equals 100,000.

01:14 Okay. Once we've calculated, planned and earned value, we need to add the actual cost to the equation.

01:22 Like the good project manager you are.

01:25 You have been recording how much money has been spent up to this point.

01:30 That said, it's time for a formula.

01:33 The calculation for cost variance goes like this.

01:37 You can see from your budget you have spent $83,000 on wall so far. So the formula would be earned value minus actual cost. So $90,000.

01:50 -$83,000, which equals $7,000.

01:55 This is a positive number, which means we are doing better than planned and are under budget.

02:02 As you can guess, if it was a negative number, the opposite would be true.

02:07 So while your team is behind schedule, they are spending less on the walls. Now let's predict the future with the cost performance index.

02:20 Once again, we divide.

02:22 So it's earned value divided by actual cost, $90,000 divided by $83,000, which equals 1.08. Because the same rules apply.

02:35 If the number is above one, then we will be under budget if the work continues at the same rate of spending.

02:41 If the number is below one, then we expect to be over budget.

02:46 Awesome stuff. With this information, we can see that we are behind on time, but ahead on budget.

02:52 And if you remember our triple constraint triangle.

02:57 We've become a bit unbalanced.

03:00 Even if we save money on the project but are over the deadline, then the project is still a failure. So you must focus on fixing the area where the problem lies.

03:10 By performing these calculations, you can see that perhaps if you spend some of the extra money you saved and hire more labor, then you'll get the work back on schedule and balance out the triangle.

03:21 Next lesson we'll talk about controlling quality.

03:24 We need to make sure that the output we're generating is to the standard we want.

03:29 There's no point in saving money in time if what we produces of the lowest quality.

03:34 Thanks for watching.