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Understanding Project Costs and Why They Went Up or Down

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

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.

  1. Are we ahead or behind schedule?
  2. How efficiently are we using our time?
  3. When is the project likely to be completed?
  4. Are we currently over or under budget?
  5. How efficiently are we using our resources?
  6. What is the remaining work likely to cost?
Read the Complete Article

The Financial Soup in Project Management: DCF, EVA, IRR, and NPV

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

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:

  1. Consistent progress reporting on tasks or work packages is crucial.
Read the Complete Article

Net Present Value of the Project

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

Know the ROI of Your Project Before You Start

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

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:

Year Project A Project B Project C
0 -100,000 -2,000,000 -1,000,000
1 20,000 400,000 400,000
2 20,000 400,000 400,000
3 20,000 400,000 100,000
4 10,000 400,000 100,000
5 70,000 100,000 10,000

Net Profit

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

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 (-)

Notes

Project cost reports are an essential component of cost management. Read the Complete Article

Utilizing Earned Value Management During Economic Downturn

Utilizing Earned Value Management During Economic Downturn
By Kevin L. Smith, MBA, PMP

The current economic turmoil that is impacting the globe is forcing corporations to creatively identify opportunities to cut cost. CFOs are focusing investments on short-term paybacks rather than long-term strategic objectives. Projects that are not part of a company’s direct line of business are being reevaluated to determine immediate impact on profitability. As a result, corporate executives and PMO directors are being asked to tightening the checkbook on PMO projects.

According to research performed by the Standish Group, an international IT research firm with an expertise in project and value performance, 71 percent of IT projects are either over budget, over time, or under scope. Based on this historical data along with the troubling times of the U.S. economy, it is anticipated that CFOs and Procurement Managers will begin awarding contracts to firms that demonstrate a strong capacity to effectively manage project costs. Read the Complete Article

An Alternative to EVM: The Zone Method

An Alternative to EVM: The Zone Method
By Michael D. Taylor

The Zone Method1 was developed as an alternative to the Earned Value Management (EVM) when projects cannot support the administrative load of EVM. The Zone Method uses two metrics, “schedule events” and “labor hours” to track project progress. A schedule event is defined as the measurable start or finish of a given activity. Since project costs are determined primarily by direct labor hours, most project managers find that costs can be tracked by tracking direct labor hours. These two metrics can reveal schedule and cost variances from the planned baseline. To determine the variances from the planned baseline one must accumulate the planned versus actual schedule events within a certain period of time (weeks, quarters, months, etc.). Once the planned schedule events have been established, the actual schedule events are subtracted to determine the variance of the schedule. The same idea holds for the variance of the cost of the project. Read the Complete Article

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