Control Costs

00:02 Hello and welcome.

00:03 This module will cover the control costs process of the PMBOK guide. It's particularly important that you pay very close attention to this module.

00:14 There will definitely be multiple questions in the exam about the content of this module, and that's why it's rated so highly with exam importance, difficulty and memorization, particularly the areas of the module relating to earn value management, where you're going to have to remember up to 20 different formula and take them all into that exam with you.

00:39 Remember practice your brain dump practice writing down those mnemonics and the formula that you need to know, including all of these formula.

00:52 The control costs process is one of four processes in the project cost management knowledge area.

01:00 It's the only monitoring and controlling process, though the other three processes are planning processes and they are the planned cost management process which produces our cost management plan, which of course will need to control cost.

01:17 And the other two planning processes are the estimated cost process, which gives us activity, cost estimates and our budget.

01:27 The determined budget process, which combines our individual activity cost estimates with our project schedule to give us the cost, baseline or budget.

01:41 The particular domain task that the control cost process helps us understand better is the monitoring and controlling task one which says measure project performance using appropriate tools and techniques in order to identify and quantify any variances and corrective actions.

02:07 The key themes of the control costs process are that we are going to take the cost management plan and appropriate and specific tools, such as the earned value management technique to determine if the project is performing on budget.

02:23 Are we ahead of budget? Are we behind budget, but then using this information? Forecasting possible or likely future cost performance.

02:38 The particular inputs that we will find useful are our project management plan, particularly our cost management plan, because that provides guidance on how we're going to look at cost performance on our project.

02:55 We may also want to look at our change management plan and of course, the other aspects of the project management plan that we will want are the baselines.

03:05 Yes, we will want the scope baseline.

03:07 Remember, that's the scope statement, the work breakdown structure and the work breakdown structure dictionary.

03:13 Well, want our schedule baseline or our project schedule, but the one that we'll really want is our cost baseline or budget.

03:22 We'll also want our project funding requirements.

03:27 This is an output of developed budget.

03:33 This tells us when we need the money and the timing of the funds coming in.

03:39 We'll also want some raw work performance data about how we're performing in relation to cost.

03:47 Now, one of the key elements of any controlling process is that the inputs always include a description of the work that we plan to do and some information about the work that's actually going on here.

04:02 You can see that the first two inputs the project management plan and the project funding requirements are a description of the work we plan to do on the project. The work performance data is a description of the work that's actually performing on the project.

04:20 The tools and techniques will come to shortly, always have ways to detect variance between those two.

04:25 And of course, if we find variance between those two, we must act.

04:29 That's the essence of the plan.

04:31 Do check cycle.

04:34 The final input that we may find useful are organizational processes, parts of our project management methodology dedicated to controlling costs.

04:48 The particular tools and techniques that we can use, if appropriate to control our costs include the earned value management technique, and we're going to spend quite a bit of time in this module going into this in depth and all the associated formula.

05:06 But in essence, what it does is it takes a snapshot of historical information, and using these formula turns it into useful work performance information that can comment on not just cost performance, but also scheduled performance as well.

05:24 We can then use these metrics to do some forecasting and extrapolate from historical performance what a likely or possible future performance will be.

05:36 So, for example, we'll be able to get a forecast estimate at completion. We can also use the to complete performance index. Which is a metric that tells us how fast we need to work to either hit our original budget at completion or our new estimate at completion.

05:59 Of course, as part of controlling costs will carry out performance reviews, particularly those about our cost performance, are we experiencing variances? Did we routinely underestimate or overestimate what are the trends we're observing? These are all aspects of performance reviews relating to cost.

06:21 We'll find it easier to do this if we use appropriate project management software, which of course, is no point trying to do this with pen and paper.

06:31 We'll use project management software, everything from a plain old spreadsheet right up to dedicated project management software right up to a full ERP systems that run entire organizations.

06:46 And that part of doing this as well, we may choose, if appropriate, to carry out reserves analysis.

06:54 Now we've already allocated reserves to our project when we determined the budget and estimated the costs.

07:03 We allocated contingency reserves, and we may have even set up a process for accessing management reserves as necessary during the control cost process.

07:14 We're going to reexamine those decisions and see if that's still accurate. Do we need more contingency reserve because of increased uncertainty? Or should we be giving some of that continued reserve up and back to the organization for other projects to use? Do we need to make a case for accessing management reserve with the permission of management because of unexpected uncertainty in the project? These are all part of reserves analysis at this point and the project.

07:49 Let's go through the value management technique now, pay particular attention because there will be several questions in the exam about this.

08:00 And before we get onto the formula, it's a good idea to start by explaining what it is in terms of a graph.

08:09 Here's some real data from a project I did many years ago.

08:14 Now, the Dark Green Line, that's our approved project budget, and that's normally the only line that a lot of project managers ever deal with.

08:24 Any point on that line is our planned value or PV, the value of work we plan to have created at this point in time in the project. Now, the total PV, that point right at the end of that line is our budget at completion.

08:43 Our BAC, our original approved project budget.

08:48 Now, the other line that a lot of project managers do track is the red line.

08:53 That's our actual cost spent to date.

08:56 And as you can see, for most of the project, our actual costs tracked below our planned value and at the end of the project, our actual costs are below our total PV, which is our budget at completion. But the one that most project managers don't track is that light green line, the earned value, it's a hard one to track and takes a bit of extra effort.

09:25 But that is actually the value of work we've created at any point in a project, not what we had planned to do, but the work that we created at any point in the project.

09:36 And that's absolutely necessary to us for without it.

09:40 You could have the following scenario a project manager comes up to you.

09:45 Maybe you're the project sponsor or the client and they say to you, I'm here to tell you good news about the project with 50 per cent of the way through the project, and we've only spent 20 per cent of the budget.

09:57 It's all going good.

09:59 Of course, what they haven't told you is how much work they've done.

10:03 Maybe they've only done 10 per cent of the planned work, in which case the projects in a lot of trouble. So that's the missing part of the equation.

10:12 The earned value.

10:14 So we're going to need all three of these and the budget at completion in order to do our earn value management calculations in the exam. Often the hardest part is not applying the equations that you've learnt, but getting those four numbers out of the scenario successfully.

10:35 So practice extracting budget at completion, planned value, earned value and actual cost from the scenario you're presented with. Let's start with the first of the formulas. Cost variance.

10:53 Cost variance is the difference between what you've done should have cost you and what it actually costs you, and the formula is cost variance CV equals earn value minus actual cost. So let's take a look at a simple example.

11:11 We have got a more complex example coming up at the end of this, but according to your project plan, you should spend $18 to make three widgets.

11:21 You've produced three widgets, but you've spent $20.

11:26 Your earned value was $18.

11:29 Your actual cost was $20.

11:32 Therefore, your cost variance is negative $2.

11:36 Now, a negative cost variance is bad.

11:40 We don't want that a positive variance is good.

11:46 The next formula is not in relation to cost, but it's in relation to time. So remember that even though this process is called the control costs, the earned value management technique also gives us information about time performance on the project.

12:03 So SV equals schedule variance and the formula is earned value minus plan value.

12:10 And it's the difference between how much you've accomplished and how much you had planned to accomplish by now.

12:18 So, for example, according to your project plan, at this point in time and the project, you should have produced five widgets for a value of 30 dollars.

12:32 You've produced three widgets with a value of $18.

12:36 So your planned value was $30 at this point in time in the project, but you've only produced three widgets with a value of $18. Now we don't know what it cost to produce those widgets, by the way, but the value given to each one was $6 each.

12:53 You produce three of them.

12:54 That's $18 of earned value.

12:56 Therefore, 18 minus 30 gives us a schedule variance of negative 12.

13:02 And once again, remember a negative number is bad.

13:07 So for both cost variance and schedule variance, a positive number is positive. A negative number is negative.

13:17 Next, we're going to take those variances, though, and turn them into something useful. How relevant is a negative $12 variance? We don't know that.

13:31 Is it relevant to a $100 project, a thousand dollar project, a million dollar project turning those into indices helps us understand the magnitude of them.

13:42 The first one is SPI or our scheduled performance index.

13:47 It's the ratio of how much you've accomplished to how much you plan to accomplish. And it's every divide by PV. Remember, that schedule variance was EV minus PV if I is EV divide by PV. So, for example, you've produced three widgets with $18.

14:12 You should have produced five widgets worth $30.

14:15 Now, before using those same numbers, we ended up with an SV of Negative 12.

14:21 But this time we divide the two numbers, so we get 18 divided by 30.

14:28 And this time we get an index of 0.6.

14:32 This means for every days, if it were putting into this project, we're getting 0.6 of a day's return.

14:40 Now that's definitely not good.

14:42 Obviously, for an index, one is perfect means we're right on track below. One is not good and above one is very good.

14:51 So for example, if our SPI was 1.2, it would mean for every day we worked on this project, we were getting 1.2 Days return.

15:04 Cost performance index or CPI? It's the ratio of how much it should have cost to how much it actually cost for a given period of time.

15:12 And the formula CPI equals earn value divided by actual cost. Remember that cost variance equals every minus AC.

15:24 Same parameters this time divide EV divide by AC.

15:30 So, for example, in September, you should have made three widgets at a cost of eighteen dollars. You spent 20 dollars to make them your cost. Performance index for September is 0.9.

15:43 This means for every dollar you're putting into this project, you're getting 90 cents return. Now, that's not good.

15:51 So once again, if the index is below one, that's not good above one, that's good.

16:00 Let's talk about CPI cumulative and non cumulative forms of cost performance index. You will encounter these in the exam and it's important to know the difference. The default position, by the way, is CPI, with a little see above it to represent cumulative CPI, and that is your cost performance index right from the beginning of the project, not just for any given period of time. So, for example, by now, you should have made 10 widgets at a cost of $30.

16:30 You've made 10, but it cost you $40.

16:33 So for your entire project, you'll CPI with a little cumulative sine is 0.75, and we know that's not good for every dollar being invested.

16:42 We're making 75 cents now.

16:45 Non cumulative CPI is useful when you've experienced atypical variations in price, for example fluctuations that you do not expect to see again. This is when we would use non cumulative CPI, which is calculated for a specific period of time in the project that avoids the atypical variance. So, for example, in the graph, we can see that roughly a third of the way through cost spending spiked.

17:12 It could have been to do with fuel price increases, or maybe a spike in inflation. Now, if we use CPI, cumulative right from the beginning of the project will take into account that atypical variance.

17:25 So instead, we may wish to just calculate CPI for the period after that. Remember, though, for cost performance index and schedule performance index greater than one as great below one, not so good.

17:44 Here's some other handy hints to help you remember the formula we never earn value is used in a formula at nearly always comes first.

17:52 Remember if it's a variance, schedule variance or cost variance, it's EV minus something.

18:00 If it's an index, it is EV divide by something except for CPI, which will get onto in a moment if the formula relates to cost cost variance or cost performance index use actual cost.

18:17 If the formula relates to schedule, schedule variance or should you Performance Index use planned value or PV.

18:27 Let's take a look at some other formula now.

18:29 So now that we've used those group of formula to take a snapshot of both cost and time performance on our project, it's time to use that information to forecast likely future scenarios.

18:43 And one of the ones that everybody wants to know is, well, great.

18:47 You've told me how much it's cost you to date on the project.

18:49 What do you now think this project is going to cost at the end of it? And for that, we use the estimate at completion formula.

18:57 Now I've seen books that lists 16, 17, 18 different formula for counting estimate completion for the purpose of the exam.

19:08 We're just going to give you four formula.

19:10 So try and remember each of them.

19:13 The first one to calculate our new estimate at completion is to simply take our original budget at completion and apply our cost performance to date to it, fairly simple.

19:26 So we take our budget at completion and divide it by a cost performance.

19:31 And there you can see we can either use non cumulative CPI or cumulative CPI, depending on which one's more appropriate for us to use. So for example, if our project was to create 300 widgets for nine hundred dollars and we had a CPI of 0.7 five.

19:53 So our budget at completion was nine hundred, we divide that by 0.7 five. We now think our project is going to cost $1200. Not nine hundred dollars.

20:04 Twelve hundred dollars now.

20:09 Let's take a look at another formula.

20:11 This one simply says that our estimate at completion equals our actual cost, plus our estimate to complete.

20:21 This formula simply takes what we've spent to date and adds to it the remaining work to be done.

20:29 Now, some people, in order to calculate the estimate to complete, will go back to first principles, estimating and re estimate the amount of work to be done and simply add that to the actual cost spent to date.

20:44 So, for example, your project was to create three hundred widgets for nine hundred dollars.

20:52 You've created one hundred widgets for four hundred dollars and you estimate it will cost another $700 to create the next two hundred.

21:03 So our actual cost is four hundred dollars, our estimate to complete a $700.

21:11 Using this formula.

21:12 Our estimate to complete or estimate at completion is $1,100. Now this brings up an interesting point.

21:21 We're going to show you four different formula for estimate at completion.

21:25 I can guarantee you that if you use each of the formula on the same scenario, you will get four different answers.

21:33 So in the exam, it should be pretty obvious which one you should use.

21:39 Here's the formula number three for estimate at completion.

21:42 In this instance, we take our actual cost and we add to that back minus EV, which if you think about it, is just another way of saying the value of remaining work to be done at the project.

21:57 If we take BAC to represent our total planned value was simply subtracting from our total planned value the value of work we've done already.

22:08 So this formula takes our actual cost and adds to it the remaining value of work to be done on the project.

22:16 So, for example, if your project was to create 300 widgets for nine hundred dollars and you've created 100 widgets with an actual cost of four hundred dollars but an earned value of only three hundred, meaning you still have $600 dollars of value left to create your estimate at completion, using that formula will be $1000.

22:42 The final formula is actually my favorite formula, and it's the one that I routinely use in my projects.

22:48 It's also the most complex because it takes into account our actual cost. The remaining value of work on the project, but then also our cost performance and our time performance to date.

23:02 The three previous formulas didn't take into account our time performance to date, whereas this one does with the inclusion of Spy.

23:13 So this formula estimate at completion equals our actual costs plus back minus EV divided by our cost performance index times our scheduled performance index.

23:27 So let's take a look at the example here.

23:31 If your project was to create 300 widgets for nine hundred dollars, you've created one hundred widgets with an actual cost of four hundred dollars, but an earned value of only $300, according to the plan, you should have created one hundred and fifty widgets by now.

23:48 You still have $600 of value left to create.

23:52 But it will likely cost you $1200 to create that value.

23:56 Put all those numbers into that formula, and you have an estimate at completion of sixteen hundred dollars.

24:04 Now we've shown you four formula for estimate completion.

24:07 It is important that you take all of those formula in.

24:11 We're fairly confident you're going to get a question in the exam about estimate at completion, but we can't tell you which formula they're going to expect you to use.

24:19 So take all four of the men.

24:20 Better yet, if you can remember the logic behind all of the formula, it will help you to remember them. Otherwise, simply rote, learn them.

24:28 Make sure, though, that they are part of your brain dump at the beginning of the exam. Some other formulas, the estimate to complete, which is simply how much more it's going to cost to finish this project.

24:43 So this is a nice, logical thing that is simply the difference between what you now think it's going to cost your estimate at completion and your actual cost spent today.

24:56 So based on your current calculations, you expect it will cost $100,000 To build your house.

25:03 They've already spent $60,000.

25:05 There's your actual cost.

25:07 So your estimate to complete is simply $100,000 minus $60,000.

25:13 You need $40,000 more and funds to complete this project. The variance that completion is perhaps one of the easiest to understand.

25:26 It is simply the difference between what you originally thought this project was going to cost your budget at completion and what you now think it's going to cost.

25:35 Your estimate at completion.

25:37 So the formula is simply basi minus EIC.

25:43 So, for example, you hoped your house was going to cost $80,000, but it's actually looking like it's going to cost $100,000.

25:52 So our back was $80,000, our estimate at completion is now $100,000. So a variance at completion is a negative number and remember negatives not good in this case negative $20,000.

26:10 One of the final formulae we've got to show you is the two complete performance index, and this is simply a calculation the rate at which you have to go to achieve the desired outcome.

26:23 Now this is the speed at which you need to work to hit either your new estimate at completion or your original budget at completion.

26:33 So the formulas are very similar with the exception of changing BAC and EAC between them.

26:40 So you'll see if you want to calculate your to complete performance index to achieve your budget at completion.

26:47 It's BAC minus EAC divide by BAC minus AC. And if you want to calculate your TCPI for your new estimate at completion, the first part of the formula is the same back minus EV.

27:04 But this time it's divide by AC minus AC.

27:09 So in this instance, having a ratio above one is bad, below one is good.

27:15 So if you had a two complete performance index for your EAC of 0.9, it would mean to achieve your AC, you simply need to put in 0.9 Days effort for every day being worked on the project.

27:31 So remember, this is the only time that less than one is good and greater than one is bad.

27:37 So let's take you through a big example and see if you can work this out.

27:42 Now the key to this example and the exam questions is getting those first four numbers out successfully.

27:50 This is the budget at completion.

27:52 Your actual cost, your planned value and your earned value. You must get those four numbers out of the scenario correctly. Otherwise, remembering the formula doesn't matter.

28:05 You put the wrong numbers in, and the chances are there could be an answer waiting for you based on the most common errors people make and extracting those parameters. So let's say you are the project manager on a project to build 40 kilometers of road at a cost of $10000 per kilometer over 20 months.

28:30 Ok. At 14 months into the project, you've built 22 kilometers of road and spent a total of two hundred and five thousand dollars. So let's get those first four numbers out of the scenario, the first one.

28:49 What is our budget at completion? This is our originally approved budget for this project.

28:55 And that's simply $400000.

29:00 We're approved 40 kilometers of road to build at a cost of $10000 per kilometre.

29:05 Therefore, our back four hundred thousand dollars.

29:12 What about our actual cost that's usually the next easiest one to get out of there? Here it's right in front of us, it seems very clearly that at this point in the project, we've spent a total of $205,000. So that's our actual cost.

29:29 $205,000.

29:33 Let's work on our planned value and then our earned value.

29:37 So our plan value is calculated using time.

29:42 So we need to look at how far through this project we are in terms of time.

29:47 And use that as a percentage on our budget at completion.

29:51 So in this example, we are 14 months into a 20 month project.

29:58 14 into 20 is 70 per cent.

30:02 So, then our plan value, at 70 per cent of our budget at completion. Remember, our budget completion is $400,000. 70 per cent of that is $280,000. Now this is a simple example.

30:20 Obviously, we're assuming a linear spin throughout our project.

30:24 In the absence of having a graph in front of us that we can read off, showing our actual proposed spend using that method is the best we have.

30:33 You may be presented with a graph where you can read off exactly what you'd plan to spend, but if not, simply take the percentage of time through the project and multiply that by your budget at completion.

30:47 Let's take a look at the last number earned value, EV.

30:51 This is often the most difficult to get.

30:54 This is the value of work created at this point in the project, not the actual cost, but the value.

31:01 So we know what we've done.

31:02 We've built twenty two kilometers at this point in the project.

31:08 And we know, according to our original approved budget, that each kilometer is worth $10000 to us.

31:16 So ignore what it cost us.

31:19 The value is $220,000, that's our earned value.

31:25 So there we are.

31:26 Those are the four numbers you need to get out a budget at completion of $400,000. An actual cost of $250,000, a planned value of $280,000 and an earned value of $220,000.

31:45 Now if you get all of those out successfully and use the right formula, you should be able to calculate cost variance, cost performance index schedule variance, should your performance index estimate at completion, estimate to complete and variance at completion.

32:01 And if you want to do this as an exercise, give yourself some bonus points for using at least three different formula for estimate for completion.

32:09 But he has some answers to help you along.

32:12 First up, there are the first four numbers, and I do stress you must get those out of the question successfully.

32:20 If we get those out, we see for this example, we have a cost variance of positive $15,000.

32:27 And remember, positive is good.

32:30 We have a cost performance index of 1.07, which means for every dollar we're putting into this project, we're getting a dollar and seven cents return.

32:39 That's good as well for schedule variance.

32:41 However, though we have a negative number negative $60,000 and that translates into an SPI of 0.79.

32:51 That means we're behind time for every day that we've been working on this project. We're only getting 0.79 Days return.

33:00 Now, just a word of caution for the exam.

33:04 Be careful with your rounding techniques.

33:07 They may be slightly different, so always round to two digits. And if your calculations are within a dollar or two of the answers, that's probably the right answer.

33:19 Now, if we take all of those numbers and apply them to the following, we'll just use to estimate at completion formula here.

33:26 The first one budget at completion divide by Cost Performance Index says that we now think this project remember, instead of costing $400,000, will now cost us $373,831.

33:41 If we use the other estimate at completion, when the big one, my personal favorite, this time we get an estimate of completion of $. You can see between those two calculations is quite a difference. One is indicating that we're coming in under budget.

34:01 The other is indicating that were coming in over budget.

34:05 And that's why our estimate to complete and our variance at complete calculation all depend on which estimate at completion formula you use. So take care to use the correct one.

34:17 And as I've already said, that's why I prefer to use the longer estimate at completion one because it takes into account our time performance to date as well as our cost performance.

34:30 So after using all of those tech tools and techniques in this control cost process, we will turn our work performance data into relevant work performance information that we can understand and make sense of.

34:44 And obviously, in this instance, we can see we've got our cost information and our schedule information, and we've got our forecasting information there with our cost forecasts. As a result of controlling costs, we may also generate some change requests, making changes to whatever we plan to do or what we're actually doing.

35:04 And don't forget, these change requests go on to be inputs into the form integrated change control, where they will be assessed and processed, and decisions made, according to our particular change management plan.

35:17 Some of the other outputs we may make, if appropriate, we may update our project management plan or any part of it just to improve it a little bit.

35:26 Tweak it a little bit.

35:27 We may choose to update project documents like our lessons learned or historical information, and we may also choose to update as a result of our commitment to continuous improvement.

35:38 Our organizational process assets to always make sure we're doing great cost control in our project.

35:47 So in summary, the control cost process uses the cost management plan to provide guidance to all of our cost monitoring and controlling activities. And the biggest part of it is the use of the earned value management technique to gather information about cost and time performance to date. And then using formula like estimate at completion to forecast a likely future time and cost performance.

36:16 So I want to stress this.

36:18 You need to remember all of those formulas and have an understanding of them for the exam. I can't tell you how many questions in the exam will require you to use the formula or which particular formula you will need.

36:33 You just need to take them all in with you.

36:38 So thank you. This has been an introduction and overview of the control cost process of the PMBOK guide.