Chapter – 4

Construction Project
Costs Management
 What is Cost and Project Cost Management?

 Project cost management includes the

processes required to ensure that the
project is completed within an
approved budget.
 Project Cost

Management
Project Cost Management includes the processes involved in
planning, estimating, budgeting, and controlling costs so that the
project can be completed within the approved budget.
 Cost Estimating – developing an approximation of the costs of
the resources needed to complete project activities.
 Cost Budgeting – aggregating the estimated costs of individual
activities or work packages to establish a cost baseline.
 Cost Control – influencing the factors that create cost variances
and controlling changes to the project budget.
 Cost Budgeting: Processes
 Cost Aggregation
 Schedule activity cost estimates are aggregated by work packages in
accordance with the WBS.
 Reserve Analysis
 Reserve analysis establishes contingency reserves, such as the
management contingency reserve, that are allowances for unplanned,
but potentially required, changes. Such changes may result from risks
identified in the risk register.
 Funding Limit Reconciliation
 Large variations in the periodic expenditure of funds are usually
undesirable for organizational operations. Therefore, the expenditure
of funds is reconciled with the funding limits set by the customer or
performing organization on the disbursement of funds for the project.
 Reserves
 Reserves are included in a cost estimate to mitigate cost risk by
allowing for future situations that are difficult to predict.
 Contingency reserves allow for future situations that may
be partially planned for (sometimes called known
unknowns) and are included in the project cost baseline.
 Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns).
 Reserve Analysis
 Many cost estimators include reserves, also called
contingency allowances, as costs in many schedule activity
cost estimates. This has the inherent problem of potentially
overstating the cost estimate for the schedule activity.
 Cost Budgeting:
 Cost budgeting involves aggregating the estimated costs of
individual schedule activities or work packages to establish a
total cost baseline for measuring project performance.
 What is a budget? “A planned expression of money” (Wright .D
1994 “A practical foundation in costing”
 A Plan Routledge)
 A Limit For a defined activity shows;
 A Schedule Income & Expenditure
 A Reality Check Total estimated costs
 An Allocation Defined period of time
“ Cash is a King”
 Project Budget
 The Project Budget is the time-based
spreadsheet that shows the project team's intent to
spend the organization's resources on project
activities.(The process of conversion of a resource
schedule into financial schedule).
 It is the determination of costs associated with the
defined activities
 Project Budget
 It provides the baseline reference for subsequent
project monitoring and control (via The construction
plan and the associated cash flow estimates). Or it is a
guide for management.
 It provides management with an understanding of how
funds will be utilized and expended over time for
projects or operations.
 Project Budget
 Reflects the actual scope at the site and the actual
quantities from construction issued drawings and a
standard productivity rate.
 Include change orders and extra work orders in terms
of changed quantities and costs.
 Should reflect the actual quantities placed and a
standard unit rate for each work activity.
 Cost Budgeting: Outputs

 Cost Baseline
 The cost baseline is a time-phased
budget that is used as a basis against
which to measure, monitor, and control
overall cost performance on the project.
 Project Funding Requirements
 Funding requirements, total and
periodic (e.g., annual or quarterly), are
derived from the cost baseline and can
be established to exceed, usually by a
margin, to allow for either early
progress or cost overruns.
 Funding usually occurs in incremental
amounts that are not continuous, and,
therefore, appears as a step function.
 Why Project Budgeting?
 Why needs for preparing a project budget :
 To identify the monetary requirement in time both in
the forms of how much and when so as to be able to
implement according to plans or contract
agreements constraints
 To indicate organizations whether their projects are
in a position to look for diversified sources of
finances in order to carry them out successfully
 To enable organization to rethink and overhaul their
operational systems so that they can meet their
contractual performance targets
 Building the Planned Project
Budget the WBS is the first step in
 Establishing
defining the project and in establishing the
baseline.
 All of the efforts used in producing the
deliverable of each task can be defined in
terms of cost (Labor, materials, facilities,
services and overhead).
Building the Planned Project Budget
• The sum of all tasks within the WBS constitutes the
total budget of the project.
 Developing a Baseline Budget
for a Project
• Once a detailed budget is developed and
approved, the project manager should publish
this baseline and set it as a point of
comparison for actual performance progress.
• The baseline budget is the tool for measuring
how project changes affect our schedule and
budget.
Cost Budget Baseline
 This process aggregates the estimated costs of
individual activities or work packages to establish
and authorized cost baseline.
 Establish the Schedule
Based Baseline
on the Project Scope and available resources, the work
activities in the WBS are scheduled to establish the Schedule
Baseline.
Schedule Baseline
Preliminary Design 1.1.1 Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req.

1.1.1.2 Develop Preliminary Design

1.1.1.3 Review Preliminary Design

1.1.1.4 Incorporate Comments

1.1.1.5 Preliminary Design Complete

 Establish the Cost Baseline
Notice in the chart the time phased hours associated with each task.
Cost Baseline
Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req. 1,500 1,000

1.1.1.2 Develop Preliminary Design 2,000 2,000

1.1.1.3 Review Preliminary Design 500 500

1.1.1.4 Incorporate Comments 320 320

1.1.1.5 Preliminary Design Complete 1,000

Integrated Scope, Schedule
and Cost
As the chart shows below , each task has an associated schedule
and time phased cost.
Integrated Cost/Schedule Baseline
Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req.

1,500 1,000

1.1.1.2 Develop Preliminary Design

2,000 2,000

1.1.1.3 Review Preliminary Design

500 500

1.1.1.4 Incorporate Comments

320 320

1.1.1.5 Preliminary Design Complete

1,000
 The Budgeting Process
Profit/Fee is not part of the Contract Budget Base (CBB)
The Contract Budget Base (CBB) represents the total budget for
all authorized contractual work, minus Profit/Fee.
The CBB can only be modified when duly authorized changes to
the contract are received. CBB is always calculated as follows:
Estimated cost of additional
Current negotiated
contract cost
+ authorized unpriced work = CBB
(yet to be negotiated)

The Awarded Amount to the Builder is $219,999. This includes

Profit/Fee.
The Negotiated Total Cost, without Profit/Fee, for the project equals
$183,852. This will be the basis for developing the Contract Budget
Baseline (CBB). Again, remember that this amount is exclusive of
Fee.
 20

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 Project Control Costs
 It is the process of monitoring the status of the project to
update the project costs and managing changes to the cost
baseline.
 The key benefit of cost control is to provides the means to
recognize variance from the plan in order to take corrective
action and minimize risk.

Control Costs: Inputs, Tools & Techniques, and

 Control Costs: Inputs
1. Project management plan which contains
A. The Cost Baseline is compared with actual results to
determine if a change, corrective action, or preventive action is
necessary.
B. The Cost Management Plan describes how the project costs
will be planned, managed and controlled.
2. Project Funding Requirements include projected expenditures
plus anticipated liabilities.
3. Work Performance Data includes information about project
progress, their progress, and which deliverables have finished.
Information also includes costs that have been authorized and
incurred.
4. Organizational Process Assets that can influence the Control
Costs process include, but are not limited to:
Existing formal and informal cost control-related policies, procedures, and guidelines;
Cost control tools; and
Monitoring and reporting methods to be used.
 Project cost control includes:
 Influencing the factors that create changes to the cost baseline
 Ensuring requested changes are agreed upon
 Managing the actual changes when and as they occur
 Assuring that potential cost overruns do not exceed the
authorized funding periodically and in total for the project
 Monitoring cost performance to detect and understand variances
from the cost baseline
 Recording all appropriate changes accurately against the cost
baseline
 Preventing incorrect, inappropriate, or unapproved changes from
being included in the reported cost or resource usage
 Informing appropriate stakeholders of approved changes
 Acting to bring expected cost overruns within acceptable limits.
 Cost Control: Tools and Techniques
A. Cost Change Control System, documented in the cost
management plan, defines the procedures by which the cost
baseline can be changed.
 It includes the forms, documentation, tracking systems, and
approval levels necessary for authorizing changes.
B. Performance Measurement Analysis
 It helps to assess the magnitude of any variances that will
invariably occur.
 The earned value technique (EVT) compares the cumulative
value of the budgeted cost of work performed (earned) at the
original allocated budget amount to both the budgeted cost of
work scheduled (planned) and to the actual cost of work
performed (actual).
 This technique is especially useful for cost control, resource
management, and production.
A. Earned Value Management /EVM/
It is a methodology that combines scope, schedule, and resource
measurements to assess project performance and progress.
It develops and monitors three key dimensions for each work
package and control account:
1.Planned value (PV) is the authorized budget assigned to scheduled work,
not including management reserve. The total of the PV is sometimes referred to
as the performance measurement baseline (PMB). The total planned value for the
project is also known as budget at completion (BAC).
2.Earned value (EV) is a measure of work performed expressed in terms of
the budget authorized for that work. The EV being measured needs to be related
to the PMB, and the EV measured cannot be greater than the authorized PV
budget for a component.
3.Actual Cost (AC) is the realized cost incurred for the work performed on
an activity during a specific time period.
EVM: Earned Values Management
Variances from the approved baseline will also be
monitored:
A.Schedule variance (SV) is a measure of schedule
performance expressed as the difference between the earned
value and the planned value. It is the amount by which the
project is ahead or behind the planned delivery date, at a given
point in time. Equation: SV = EV – PV
B.Cost variance (CV) is the amount of budget deficit or
surplus at a given point in time, expressed as the difference
between earned value and the actual cost. It is a measure of
cost performance on a project. The cost variance at the end of
the project will be the difference between the budget at
completion (BAC) and the actual amount spent. Equation:
CV= EV−AC. The SV and CV values can be converted to
efficiency indicators.
Variances from the approved baseline will also be monitored:
C.Schedule performance index /SPI/ is a measure of
schedule efficiency expressed as the ratio of earned value to
planned value. It measures how efficiently the project team is using
its time.
 An SPI value less than 1.0 indicates less work was completed
than was planned.
 An SPI greater than 1.0 indicates that more work was
completed than was planned.
 Since the SPI measures all project work, the performance on
the critical path also needs to be analyzed to determine
whether the project will finish ahead of or behind its planned
finish date.
 The SPI is equal to the ratio of the EV to the PV.
Equation: SPI = EV/PV
Variances from the approved baseline will also be monitored:
D.Cost performance index /CPI/ is a measure of the cost
efficiency of budgeted resources, expressed as a ratio of earned
value to actual cost. It is considered the most critical EVM metric
and measures the cost efficiency for the work completed .
 A CPI value of less than 1.0 indicates a cost overrun for work
completed.
 A CPI value greater than 1.0 indicates a cost underrun of
performance to date.
 The CPI is equal to the ratio of the EV to the AC. The indices
are useful for determining project status and providing a basis
for estimating project cost and schedule outcome.
Equation: CPI = EV/AC
 The three parameters of planned value, earned value, and actual
cost can be monitored and reported on both a period-by-period
basis (typically weekly or monthly) and on a cumulative basis.
B. Forecasting
 As the project progresses, the project team may develop a
forecast for the estimate at completion (EAC) that may differ
from the budget at completion (BAC) based on the project
performance.
 Forecasting the EAC involves making projections of conditions
and events in the project’s future based on current performance
information and other knowledge available at the time of the
forecast.
 Forecasts are generated, updated, and reissued based on work
performance data that is provided as the project is executed.
 The work performance information covers the project’s past
performance and any information that could impact the project
in the future.
B. Forecasting
 EACs are typically based on the actual costs incurred for work
completed, plus an estimate to complete (ETC) the remaining
work.
 It is incumbent on the project team to predict what it may
encounter to perform the ETC, based on its experience to date.
 The EVM method works well in conjunction with manual
forecasts of the required EAC costs.
 The most common EAC forecasting approach is a manual,
bottom-up summation by the project manager and project team.
 The project manager’s bottom-up EAC method builds upon the
actual costs and experience incurred for the work completed,
and requires a new estimate to complete the remaining project
work. Equation: EAC = AC + Bottom-up ETC.
B. Forecasting
Three of the more common methods to compute EACs are described
as follows:
 EAC forecast for ETC work performed at the budgeted rate.
 This EAC method accepts the actual project performance to date (whether
favorable or unfavorable) as represented by the actual costs, and predicts
that all future ETC work will be accomplished at the budgeted rate.
 When actual performance is unfavorable, the assumption that future
performance will improve should be accepted only when supported by
project risk analysis. Equation: EAC = AC + (BAC – EV)
 EAC forecast for ETC work performed at the present CPI.

 This method assumes what the project has experienced to date can be
expected to continue in the future. The ETC work is assumed to be
performed at the same cumulative cost performance index (CPI) as that
incurred by the project to date. Equation: EAC = BAC / CPI
B. Forecasting
Three of the more common methods to compute EACs are described
as follows:
 EAC forecast for ETC work considering both SPI and CPI factors.
 In this forecast, the ETC work will be performed at an efficiency
rate that considers both the cost and schedule performance indices.
 This method is most useful when the project schedule is a factor
impacting the ETC effort.
 Variations of this method weight the CPI and SPI at different values
(e.g., 80/20, 50/50, or some other ratio) according to the project
manager’s judgment.
Equation: EAC = AC + [(BAC–EV) / (CPI × SPI)]
 Each of these approaches is applicable for any given project and
will provide the project management team with an “early warning”
signal if the EAC forecasts are not within acceptable tolerances.
 Estimate At Completion EAC:
 EAC = AC+ETC
 Estimate to Complete ETC:
 ETC equals the revised estimate for the work
remaining.
The earned value technique in its various forms is a commonly
used method of performance measurement. It integrates project
scope, cost (or resource) and schedule measures to help the
project management team assess project performance.
 Cost and Schedule Forecasting
 Exercises:
 Exercise #1:Schedule Variance Example.
 PV = $ 42000
 EV = $ 38000
 AC = $ 48000
 Budget at Completion BAC = $80000
 SV = EV – PV = $38000 – 42000 = - $4000
 SV % = SV/PV = -4000/42000 = -9.5 % Hence there is schedule
overrun of 9.5%
 Exercise #2: Cost Variance Example.
 CV = EV- AC = 38000 – 48000 = - 10000
 CV% = CV/EV = -10000/38000 = -26 % Schedule overrun by 26%
 # 3 Cost Performance Index ( CPI)
 CPI = EV/AC = 38000/48000 = 0.79
 Hence $0.79 worth of work was done for every $ 1 spent.
 #4 Schedule Performance Index: SPI
 SPI = EV/PV = 38000/42000 = 0.90
 $ 0.90 worth of work has been for each done for each $1.00
worth of work that was planned to be done.
 #5. Estimate at Completion and Variance at
Completion
 EAC = BAC/CPI = 80000/0.79 = $101265
 VAC = BAC – EAC = 80000-101265 = - $ 21265. The
project will exceed the planned budget by $21265
Problems:
#1:
 BAC = 40 K
 EV = 20 K
 PV = 28 K
 AC = 26 K
Determine:
 % of work scheduled
 % of budget spent
 Cost Variance CV
 Scheduled Variance SV
 Case 1:
 PV = 1600
 EV = 1600
 AC = 1600
 Ideal Case where every thing goes as per plan.
 Case2:
 PV= 1900
 EV= 1500
 ACP= 1700
 400 worth of work is behind schedule
 SV = EV- PV = 1500-1900= -400
 SV%= ( SV/PV)x100 = -21%
 CV = EV – AC = 1500 – 1700= -200 Cost overrun by 200
 CV% = (CV/EV)x100 = -13%
 SPI = EV/PV = $0.79
 CPI= EV/AC = $0.88
C. To-Complete Performance Index (TCPI)
 It is a measure of the cost performance that is required to be
achieved with the remaining resources in order to meet a
specified management goal, expressed as the ratio of the cost
to finish the outstanding work to the remaining budget.
 TCPI is the calculated cost performance index that is achieved
on the remaining work to meet a specified management goal,
such as the BAC or the EAC. The equation for the TCPI
based on the BAC: (BAC–EV)/(BAC–AC).
 The efficiency that must be maintained in order to
complete on plan. TCPI = (BAC– EV)/(BAC– AC)
 Greater than 1.0 = Harder to complete
 Exactly 1.0 = Same to complete
 Less than 1.0 = Easier to complete
 The efficiency that must be maintained in order to
complete the current EAC. TCPI = (BAC – EV)/(EAC – AC)
 Greater than 1.0 = Harder to complete
 Exactly 1.0 = Same to complete
 Less than 1.0 = Easier to complete
Exercise 1
 You are managing a highway construction project. Your
total budget is $650,000 and there are a total of 7,500
hours of work scheduled on the project. You check with
your accounting department, and they tell you that you’ve
spent a total of $400,000. According to the schedule, your
crew should have worked 4,500 hours, but your foremen
says that the crew was allowed to work some overtime,
and they’ve actually put in 5,100 hours of work. Based on
this calculate the following earned value numbers:
 PV, EV = ?
 CV, SV = ?
 BAC = ?
 AC = ?
 SPI, CPI = ?

Sem. II, 2018 Construction Management- Ch. 4 – Cost Mgt 44

Solution

 BAC = $650,000

 AC = $400,000

 PV = 650,000 x 60% = $390,000

 EV = 650,000 x 68% = $442,000

 CV = 442,000 – 400,000 = $42,000

 SV = 442,000 – 390,000 = $52,000

 SPI = 442,000/390,000 = 1.13

 CPI = 442,000/400,000 = 1.11

Sem. II, 2018 Construction Management- Ch. 4 – Cost Mgt 45

Exercise 2

 It’s nine months into your project. The total budget for your
project is $4,200,000. You have spent $1,650,000 so far
and you’ve got a CPI of 0.85. Use EVM from forecasting to
figure out where things stand. Find the following:
 EAC = ?

 ETC = ?

 VAC = ?

Sem. II, 2018 Construction Management- Ch. 4 – Cost Mgt 46