Understanding Project Costs and Why They Went Up or Down
By Preben Ormen
When we try to understand project costs and why they went up or down we invariably have to puzzle out the simultaneous effects of several variables. This can get quite complex, but at the heart of the matter is a very simple concept for project variance analysis.
Conceptually, costs are a function of quantities and rates (or prices). Pretty basic, yet still valid after all these years. When we analyse costs, we typically take something calculated now and compare that to some baseline. The baseline is usually the budget or plan numbers. Again, no surprise there.
It’s when we try to decide whether changes were more due to one factor than the other that things can get a little confusing. But cost accountants figured this out a good while back, so we don’t have to. As a matter of fact, they figured it out in so much detail that even that becomes a bit daunting, so let me pare this down to the bare essentials. Read the Complete Article
Earned Value Management Versus Traditional Management
By Atul Gaur
Earned Value Management (EVM): is a technique used to track the progress and status of a project and to forecast its future performance. EVM systematically integrates measurement of cost, schedule, and scope accomplishments on a project. EVM was developed in 1960’s by Department of Defense (DOD) to keep track of defense projects and currently is most preferred Project Management technique world over. EVM provides organizations with methodology needed to integrate the management of project scope, schedule and cost.
How Management Can Benefit? EVM can play a crucial role in answering the following management questions that are crucial to success of every project.
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- Are we ahead or behind schedule?
- How efficiently are we using our time?
- When is the project likely to be completed?
- Are we currently over or under budget?
- How efficiently are we using our resources?
- What is the remaining work likely to cost?
The Financial Soup in Project Management: DCF, EVA, IRR, and NPV
By John C. Goodpasture
Is your project being held hostage to the financial alphabet of the CFO’s office? Is there anything you can do to break it loose and get on with managing the project? Yes, certainly, if you have some understanding and familiarity with the concepts and the ways in which you can influence the outcomes of financial analysis. We are talking about the arcane acronyms of DCF, NPF, EVA, and IRR. The important idea embodied in all of these financial measures is risk management. As project managers, we know a fair amount about risk management. By applying the skills we have and adding a measure of extra knowledge about these risk-adjusted calculations we as project managers can greatly help the CFO and the Controller make good business decisions.
DCF is the root of the system. DCF stands for “discounted cash flow”. Read the Complete Article
Avoiding Potholes on the Road to Earned Value Management
By Kiron D. Bondale
You will be hard pressed to find a person that has taken some project management training who has not drunk the purple Kool Aid called Earned Value Management (EVM). You may have run into EVM “evangelists” at project management conferences or symposiums. You can recognize them by that glassy stare that comes from rolling up one too many work package cost calculations and you may have even learned to run for the hills when they have cornered some neophyte who expresses ignorance about the whole concept or (worse) challenges its practical applicability.
All joking aside, with the emphasis placed on EVM’s benefits, you may be inclined (or coerced) to apply it to your next project. To help you avoid some of the more common beginner pitfalls with use of EVM practices, here are three tips:
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- Consistent progress reporting on tasks or work packages is crucial.
Net Present Value of the Project
By Shyamala Sankaranrayanan
One method of deciding or not a firm should accept an investment project is to determine the net present value of the project. The net present value (NPV) of a project is equal to the present value of the expected stream of net cash flows from the project, discounted at the firm’s cost of capital, minus the initial cost of the project. The value of the firm will increase if the NPV of the project is positive and decline if the NPV is negative. Thus, the firm should undertake the project if the net present value is positive and reject proposals whose values are negative. This method is considered the best, as it takes into account the initial investment, and cost of capital and cash inflow over a period.
One of the most important and difficult aspects of capital budgeting is the estimation of the net cash flow from the project. Read the Complete Article
On Earned Value Management’s Acronyms
By William R. Duncan
In the beginning … the promoters of earned value management used FLAs (Four Letter Acronyms) for the 3 basic measures:
- BCWS = Budgeted Cost of Work Scheduled
- ACWP = Actual Cost of Work Performed
- BCWP = Budgeted Cost of Work Performed
But four letters seemed excessive in the world of TLAs (three letter acronyms), especially when two of them (CW) were the same in all cases. So ’round about 2000, some promoters of earned value management began to advocate for two letters:
- PV = Planned Value (instead of BCWS)
- AC = Actual Cost (instead of ACWP)
- EV = Earned Value (instead of BCWP)
As you can see, it seemed that the promoters wanted to emphasis “value” because … value is good!
Unfortunately, these two measures represent “value” mostly from the perspective of the project team, and most especially if the project team is composed of contractors:
- Planned value = the contractor’s plans for getting value by getting paid
- Earned value = the contractor’s actual value from earned payments
But if you are the customer/ client/ user/ owner/ sponsor of the project, your value usually comes after the project is over. Read the Complete Article
Know the ROI of Your Project Before You Start
By Samuel Prasad
ROI – Return on Investment – is a performance measure used to evaluate the efficiency of an investment. In other words, ROI helps in determining the extent of cost savings that are realized in return for use of a specific amount of money on a project. The Project Management Book of Knowledge (PMBOK) states that the project charter – a document that formally authorizes a project – must clearly state the business justification for the project including return on investment. In many companies the CFO or COO requires ROI to be presented before funding is approved for a project. The task of calculating ROI is not always easy because the cost savings of implementing a project cannot always be quantified in dollars. In many cases the benefits are intangible and non-financial as in providing a competitive advantage in the marketplace or delivering superior customer service. Read the Complete Article
Basic Project Management – Cost Evaluation
By Willy-Peter Schaub
This article is very simple explanation of Cost Evaluation in Project Management. The article uses easy to grasp examples to explain concept.
The following table showing cash flow projections for two 5 year projects, will serve as example data for the duration of this article:
Net Profit is the difference between the total cost and the total income of the project.
Looking at Project A, B and C we get:
- Project A: 20,000 + 20,000 + 20,000 + 10,000 + 70,000 – 100,000 = 40,000
- Project B: 400,000 + 400,000 + 400,000 + 400,000 + 100,000 – 2,000,000 = –300,000
- Project C: 400,000 + 400,000 + 100,000 + 100,000 + 10,000 – 1,000,000 = 10,000
Therefore Project A and C are making a profit, Project B is not. Read the Complete Article
Project Cost Report
By The Office of Government Commerce – OGC, UK
Purpose of the Project Cost Report
To provide an up-to-date record of commitments and expenditure within budgets so that unexpected over/under run costs do not result, ensuring that all transactions are properly recorded and authorised and, where appropriate, decisions are justified.
Fitness for Purpose Checklist
Reports show cost forecasts for each approval stage, supplemented by evidence that costs achieve value for money – that is, they reflect the most economically advantageous price compatible with the specified quality; reports provide an accurate and timely summary of full and proper accounts that monitor all transactions, payments and changes relating to the project.
Suggested Content in the Project Cost Report
A form containing columns headed as follows:
- Cost centre code/description
- Approved budget
- Expenditure to date
- % complete
- Estimated final cost
- Variation + or (-)
Project cost reports are an essential component of cost management. Read the Complete Article
Evaluating the True Value of a Proposed Project
By Demian Entrekin
Consider this thought experiment: let’s imagine for a moment that we (aka “they”) want to use quantifiable measures for evaluating the value of a proposed project. This sounds like a pretty darn good idea on the face of it. “Come on folks, we’re professionals!”
Many of us have used the tried and not-so-true method of sitting around a table and discussing which projects will become the best use of time and money. These discussions then lead to the closed door discussions where certain folks lobby most-logically for their project, other folks apply raw political pressure for what they want, and another group simply sits the whole skirmish out and waits for the decisions to get made.
In our little thought experiment, we now want to add some mathematical rigor to our decisions. How do we do this? There are the traditional mathematical formulas that have been popular from time to time, such as Internal Rate of Return (IRR) and Net Present Value (NPV), and Return on Investment (ROI). Read the Complete Article