Wednesday 16 March 2022

Project Cost Management

Why you need to manage the cost of the project
The project manager is primarily concerned with the management of the direct costs of the project, but the current trend in project management leads to the fact that his role in managing the cost of the project will increase due to the increasing inclusion of non-traditional areas of cost management. It can be assumed that in the future, more project managers will deal with the management of indirect costs and project costs.

The idea that the project manager should be more responsible for the cost of the project comes from an analogy with the responsibility of the manager or owner of a small business. To do this, the project manager must know many aspects of doing business, including how to manage the cost of the project. The competence of the project manager in this area can be even more important than his possession of certain technical skills and abilities. Usually, each project involves a large number of technical specialists, but there are not enough people who pay attention to the business aspects of the project.

However, regardless of what exactly the project manager is responsible for, it is critical that his work be evaluated according to those and only those indicators for which he is responsible. For example, if the project manager is not responsible for the cost of materials in the project, then there is no point in evaluating his work by this indicator.

For cost accounting, it is also very important to establish an appropriate temporal procedure for the collection of actual cost data. The project budget should be synchronized with the procedure for their collection. For example, if the project manager is responsible for the cost of materials, you must determine when the expense should be shown in the budget. Should this happen when the project manager makes a purchase decision, or when delivering the purchased one? Or maybe you should fix the expense after the completion of acceptance of the purchased, or at the time when the purchase is paid? Problems like these can turn project cost management into a nightmare.

Thus, if the project does not carry out appropriate value management, then it will necessarily get out of control, and more money than expected will be spent to complete it. Project cost management is aimed precisely at preventing such a situation.

Consider one of the methods of managing the cost of the project.

Earned Value Report

The earned value report is the preferred method for reflecting the progress of the project. Its advantage lies in the fact that on one sheet of paper you can show the state of a significant criterion for the implementation of the project. In the report on the earned value, you can see how the planned costs of the project are distributed over time, as well as the real costs of cash and the amount of work actually performed. Based on the data in this report, deviations in cost and time can be calculated.

There are several indicators, the meaning of which must be understood in order to effectively use the report on the earned volume in your practice. Consider the three main indicators – BCWS, BCWP and ACWP.

The first indicator is BCWS (Budgeted Cost of Work Scheduled) - the planned (estimated) cost of planned (for implementation for the period of time under review) work (PSPP). The Project Management Institute (PMI) renamed the BCWS indicator, and now it is called Planned Value, or PV (which can be translated into Russian as "planned volume". – Editor's note). Let's see if this new terminology will be adopted in the professional environment, or people will continue to use the old abbreviation. It is enough to understand the way this indicator is calculated to understand that its name accurately conveys the meaning: it is the sum of the planned budget costs of the project work that must be completed in the period under consideration. All elementary project works have a planned budget value, which is determined on the basis of the cost estimate and the project schedule (the schedule contains the start dates and duration of each work). Thus, BCWS is simply the sum of these values, combined by the planned time of the upcoming implementation of costs, that is, the project plan, presented in the form of budget amounts tied to the points in time when these amounts were planned to be spent.


ACWP (Actual Cost of Work Performed) 

And finally, the third indicator, which is slightly more complicated than the previous ones, is BCWP (Budgeted Cost of Work Performed) - the planned (estimated) cost of work performed (PSVR). It is also sometimes called Earned Value, or abbreviated EV (which in Russian can be translated as "mastered volume". – Editor's note). 


This indicator gave the name to both the method of earned value and the report on the earned volume. The planned cost of the work performed by BCWP (EV), like the two previous indicators, is the pooling of funds for the period under consideration. Above, we have indicated that each of the elementary works of the project has a planned budget cost and deadlines. BCWP is a consolidation of the planned costs of the work actually performed during the reporting period. For example, if a work is performed with a planned (estimated) cost of $ 1000, then the BCWP for this work at the end of it will be equal to $ 1,000. Just as for other indicators, in order to get the BCWP of the project, the BCWP summarizes all the work completed by the end of the reporting period.

The earned value report provides all three indicators. If the project goes in strict accordance with the planned deadlines and budget, then, obviously, all three indicators will coincide.

No comments:

Post a Comment