Project Management

[ Project Management Topics ]

Cost Management - II of II

According to the Bureau of Labor Statistics, more than half of all cost estimators work in the construction industry, and another 17 percent are employed in manufacturing industries. Overall employment of cost estimators is expected to grow faster than average for all occupations through the year 2014. In addition to openings created by growth, some job openings will arise from the need to replace workers who transfer to other occupations or leave the labor force. In construction and manufacturing—the primary employers of cost estimators—job prospects should be best for those with industry work experience and a bachelor’s degree in a related field.

Cost Estimation

Conceptual cost estimating for project work (construction, industrial maintenance, etc.) is usually derived from a mix of estimating software, industry standards (formulas in books) and personal/corporate experience. Estimating software and formulas from books may produce "black box" estimates that lack qualification of one or many issues:

In these cases, estimating becomes more of an art than a science. Normally, there are discrepancies between conceptual cost estimates and project schedules which are planned later. The differences between these two different cost figures can have serious consequences:

In an ideal situation, cost estimating and project planning will match up in a one to one relationship. The only way to achieve this consistently is to actually base cost estimates upon detailed plans/schedules.

Accurately forecasting the cost of future projects is vital to the survival of any business. Cost estimators develop the cost information that business owners or managers need to make a bid for a contract or to decide whether a proposed new product will be profitable. They also determine which endeavors are making a profit.

In some cases diagraming is quite helpful in understanding project costs. Below is a diagram that shows estimated cost for completion based on expenses to date:

cost chart

Earned Value Reporting

As noted, the purpose of cost management is to control costs and take corrective action when necessary. A commonly used tool for measuring the budget as compared to the project schedule is called Earned Value Reporting. Earned value reporting measures the value of work performed to date and assesses if the costs are on budget and on time according to the baseline originally set. Earned value reports are cumulative, meaning current values are added to the total of all past values. Earned value reporting is based on three measurements:

  1. Budgeted cost of work scheduled (BCWS) also known as planned value (PV) - Planned cost of the total amount of work scheduled to be performed by the milestone date.
  2. Actual cost of work performed (ACWP) also known as actual cost (AC) - Cost incurred to accomplish the work that has been done to date.
  3. Budgeted cost of work performed (BCWP) also known as earned value (EV) - The planned (not actual) cost to complete the work that has been done.

If the budget is on track then all three of these number should be the same. When there are significant differences there is cause for concern. Here is a sample earned value chart:

Earned Value