Most businesses and organizations break down their objectives into projects. It helps you define tasks and activities that will help you reach your goals. Projects also have a time limit and aim to achieve measurable goals. As such, you must allocate enough financial resources. You also need effective project cost management to keep you within budget. It will involve resource planning, cost estimation, budgeting, and cost control.
Project cost management can easily become overwhelming, especially for non-specialists. That's why it is essential to have a toolkit that will help you tackle your work. Project cost management toolkits provide the resources and guidance necessary to manage financial resources within a project effectively. They allow you to optimize resources, improve stakeholder confidence, and make informed decisions.
This article examines the project cost management toolkit. We'll look at EVM templates, reporting formats, and value engineering guides. The goal is to ensure you can effectively manage project costs.
Earned Value Management Templates
Earned value management (EVM) is a technique to measure a project's performance and progress. The tool focuses on three main factors: schedule, cost, and scope. It compares the amount of work planned, actual work completed, and expenses incurred. The goal is to determine the value achieved with the invested resources at a specific point in time. It is based on assigning value to each activity according to the budgeted costs. Successful completion of these activities equals a portion of the project’s value earned.
Earned value management helps project cost management officials answer the following questions:
- Are we on track with the schedule?
- Are we staying within the budget?
- How effectively are we utilizing our resources?
Key Components of Earned Value Management
The best way to understand EVM is to familiarize yourself with the main EVM metrics.
1. Planned Value
Planned value is also known as the budgeted cost of work scheduled (BCWS). It represents the portion of the budget allocated to work expected to be completed by a specific time. This is the value to which to compare the earned value, as it indicates how much of the planned work has been completed.
Calculate planned value using the formula:
Percent of work scheduled for completion (percent planned) x Budget at completion (BAC)
2. Earned Value
Earned value is the actual value of work completed at a specific time. It highlights the portion of the budget that corresponds to completed work. It is also known as the Budgeted Cost of Work Performed (BCWP). EV is the amount allocated to completed work, and PV is the budget allocated to work scheduled for completion.
Calculate earned value using the formula:
% of work actually completed (% complete) x Budget at Completion (BAC)
3. Actual Cost
Actual cost refers to the total amount of money spent up to a specific point in a project. This could include labor, materials, overhead, and any other costs. It is also known as the actual cost of work performed (ACWP). You can calculate the exact cost by summing all the expenses incurred in your project up to a specific point in time.
Earned Value Management Metrics, Formulas, and Templates
Now that you understand the core EVM metrics, let's look at the others. These metrics will provide a clearer picture of your project's cost health. We'll discuss what each metric means and offer the formula or template to calculate them.
1. Scheduled Variance
Scheduled variance is the difference between the value estimated to be finished and the finished work at a specific time. It is the difference between the earned value and the planned value. You can use it to identify whether the project is ahead of or behind schedule.
Calculate scheduled variance using the following formula:
Earned value - Planned value
2. Cost Variance
Cost variance is the difference between the budgeted value of work done by a specific time and the actual value of work completed. In simple terms, it is the difference between earned value and actual value. You can use it to know if you are over or under budget.
Calculate cost variance using the following EVM template:
Earned value - Actual value
3. Scheduled Performance Index
Scheduled performance index (SPI) is the ratio of earned value to planned value. It helps you measure your time usage efficiency. An SPI greater than one indicates that the project is progressing faster than planned. An SPI lower than one indicates that the project is behind schedule.
Calculate the SPI using the following formula:
Earned value ÷ Planned value
4. Cost Performance Index
Cost performance index (CPI) is the ratio of earned value to actual cost. It is ideal for identifying the cost efficiency of the work you have completed. A ratio higher than one means you're utilizing funds effectively. A ratio lower than one means the work is costing more than budgeted.
Calculate the CPI using the following:
Earned value ÷ Actual value
5. Estimate to Complete
The estimate to complete (ETC) represents the projected total cost needed to finish all remaining work. While you can calculate the ETC using various methods, we will focus on a specific approach.
Calculate the estimate to complete using the following formula:
Budget at Completion (total planned budget for the project) - Earned Value
6. Estimate at Completion
An estimate at completion predicts the total cost required to finish the project. You can determine it using various methods based on the assumptions about future performance. One of the methods to use is the following:
Actual cost + Estimate at completion
Value Engineering Guide
Value Engineering (VE) is a systematic approach used to assess and enhance the value of products, projects, or processes. The goal is to maximize functionality, quality, and performance while keeping costs low. VE promotes the use of less expensive alternatives that help reduce project costs. However, it does not mean that you will compromise on functionality and quality.
Value is determined as a ratio of function to cost. A business can increase the value of a product by either reducing costs or enhancing its functionality. Most companies employ value engineering as a strategy to cut costs. The core function of a product remains intact and is not compromised during the pursuit of value improvement.
What Are the Different Value Engineering Steps?
You can break the value engineering process into the following five steps.
1. Information
This is the initial step, which involves collecting all relevant information and defining your goals. You'll collect and analyze data to gain critical insights. You can use that information to prioritize your objectives. This includes understanding the product as it currently stands and examining the functional project issues. The step also involves identifying how you'll evaluate project progress.
2. Function Analysis
The function analysis step involves analyzing the functions of a project. A function is the set of targets to reach during the execution of an element. You'll determine whether a function needs improvement or if you need a new one. It is vital to make the function non-specific to allow room for multiple options. Finish by allocating costs to each of the functions.
3. Creative
The creative phase involves exploring various ways to perform the identified function(s). It enables you and your team to discover more effective alternatives to your current approach. Using brainstorming sessions fosters creativity among team members, allowing them to generate more innovative ideas. You must develop a comprehensive list of all possible solutions to the functions.
4. Evaluation
This step involves listing the advantages and disadvantages of the solutions and alternatives. You must describe these benefits and demerits in terms that everyone can understand. A solution with more demerits than merits should be dropped for a better one. You rank the alternatives using the best matrix to find the most ideal one for your function.
5. Presentation
This phase involves presenting your findings to the relevant stakeholders. These are typically decision-makers who require information to make informed decisions. You can leverage reports, charts, and other visual tools to bring them on board. Ensure that you clearly state the costs, benefits, and potential issues associated with the project.
Project Cost Management Reporting Formats
Project cost management professionals are required to provide reports on value engineering and earned value management. But how do you go about making reports for the appropriate stakeholders? Here are the various reporting formats available for use.
1. Regular Reports
One of the best ways to keep stakeholders informed is by providing regular updates. You can provide regular reports at specific intervals, such as weekly or monthly. It ensures that everyone can track progress and identify deviations that require correction.
2. Key Performance Indicators (KPIs)
Another effective way to report, especially for value engineering, is to use key performance indicators. You should highlight various metrics such as the cost performance indicator and the schedule performance indicator. KPIs will provide a clearer picture of the project's health and progress.
3. Variance Analysis
Another way to report in EVM is by using variance analysis. You can assess cost and schedule variance, which looks at your cost and time effectiveness. Analyzing such variations will help you explain the deviations from the baseline.
4. Trend Analysis
You must always ensure that stakeholders understand the reports you provide. One way to ensure this is by using trend analysis to provide a clearer picture. An analysis can help you demonstrate the difference between two periods, which in turn aids in making predictions.
5. Visualization
Most people understand concepts better through visualization. You can rely on various tools to help users better understand the report. The best tools to use include charts and graphs.
Learn Project Cost Control at Atton Institute
Every business strives to keep operational costs low while achieving peak performance. The same applies when managing different types of organizational projects. Using a project cost management toolkit can help you have a structured and practical approach. It will provide the tools and guidance you need to succeed. Ensure you master what a toolkit entails so that you can utilize one efficiently.
You can also master project cost control at the Atton Institute. Our Project Cost Control Mastery program is ideal for professionals willing to learn. The course will teach you to develop a comprehensive project cost management plan. You'll also learn to utilize EVM metrics for cost variance analysis and management. You'll also learn to design clear cost reports for effective communication with stakeholders.
We use experienced industry experts as tutors and leverage the latest materials. The course lasts five days and provides a certificate of completion upon completion. Join us today for the world's best training programs.