The Cost Management Plan clearly describes specifically the methodology for monitoring and control of project costs during the project lifecycle. It includes the system and baseline for measurement of the project costs, their reporting, and controlling mechanism. It also includes the following:
The Project Manager has been assigned the responsibility for the management and control of the project cost during the project life cycle. During the project fortnightly status meeting, the Project Manager will explain the project cost performance, with measures adopted for its control. Earned value management will be used for measuring cost performance. The Project Manager is accountable for all cost variance, and recommending alternatives for completing the project back on planned budget. The Project Sponsor will use discretionary measures for authorizing cost changes to exceed budget, if necessary.
Cost Management Approach
Approach to be maintained for the management of cost is documented in this part of the Cost Management Plan. Cost Accounts will be created at the third level of the Work Breakdown Structure. If a suitable Project Management Information System is being used, then it is recommended that the costs should be managed till the level of work package. If a detailed Project Management Information System is not available, then the level of cost control in the Work Breakdown Structure should be such till the cost can be efficiently reported and managed. The lower the cost is managed in the Work Breakdown Structure, the greater will be the effort required. Thus, the level should be balanced with the effort that can be utilized for this purpose.
Project costs will be controlled at the third level of the WBS, by creation of Control Accounts at this level for the cost tracking. Project financial cost performance will be measured and controlled by using the methodology of Earned Value Management, to be applied for the Control Accounts. Although cost estimates of the activities will be detailed in work packages of the Work Breakdown Structure, the accuracy level will be determined at the third level of the WBS. Work will be monitored at the level of Work Package. 50% credit to work will be granted on its initiation, while remaining 50% will be assigned on its completion. Work hours will be determined to the level of hours, while the level of accuracy for the costs will be nearest dollar.
Variance of +/- 0.2 in the Schedule Performance Index ( SPI ) and Cost Performance Index ( CPI ) will indicate a caution to the Project Manager, and will be reflected in the status reports of the project. If these variances exceed +/- 0.3, an alert stage will be created, where appropriate remedial measures will be necessary by the Project Manager, to ensure reduction of the variances below the alert level. Corrective actions to be undertaken will be recommended to the Project Sponsor, by the initiation of a Change Request.
Project Costs Measurement
This part of the Cost Management Plan describes the procedure for measuring the project cost. Earned Value Management is a useful tool that is used globally for the measurement and control of the costs in a project. It is recommended that Project Managers should be conversant in this methodology by undertaking formal training in this discipline.
Detailed procedure should be mentioned in this section, including the measurements that will be captured and analyzed. If any software is to be used, like Primavera P6, then it should be mentioned, including its installing and training to the users of this application. This section will also describe if the cost performance will be reviewed with reference to work packages, time, or schedule of activities. In this section of the Cost Management Plan, four measurements have been specified, namely Cost Variance (CV), Cost Performance Index ( CPI ), Schedule Variance (SV), and Schedule Performance Index ( SPI ). These measurements will provide adequate status of the project cost performance for efficient control and management.
Cost Variance (CV) : It is a measurement that determines the project budget performance, and can be measured at any stage of the project. CV is the difference of Earned Value (EV) and the Actual Costs (AC). EV represents the budgeted cost of an activity, and is the real value achieved for the project. AC is the amount actually spent for the completion of that activity. CV will indicate if the cost performance is below, equal, or above the planned budget at any stage of the project.
If value of CV is zero, then it implies that the project coast performance is the same as was planned, and project is on budget. If value of CV is greater than zero, then it is a good indicator, representing that more is being earned by the project than was planned, and the project is under budget. If CV is less than zero, then cost performance is not good, and needs to be analyzed for remedial action. The project in this situation is earning less than what was planned, and the project is over budget.
Cost Performance Index ( CPI ) : It measures the value of the completed work, comparing the actual cost incurred for the completion of that work. CPI is determined by dividing EV by AC, EV/AC. If the value of CPI is 1, then the project is precisely on budget. If the value of CPI is greater than 1, then it is a good indicator for the project cost performance, and the project is under budget. If CV is less than 1, then the project is being completed over budget, and corrective actions are necessary.
Schedule Variance (SV) : It is a measurement that indicates the project schedule performance. It is calculated by subtracting the Planned Value (PV) from the Earned Value (EV), and formula is SV = EV – PV. Since EV is the real value earned at any stage of the project, and PV is the value that was planned at that stage, then SV will indicate the variance, whether the project is behind or ahead of the schedule baseline, or on schedule. If SV is greater than zero, then the project performance is good, and it is earning more value than that was planned, and project is ahead of schedule. If value of SV is less than zero, then the project schedule performance is not satisfactory, and needs to be analyzed for necessary remedial actions.
Schedule Performance Index ( SPI ) : It signifies the project progress attained till any stage, against the value that was planned. SPI is the ratio of EV and PV, and calculated as EV/PV. If EV is same as PV, then SPI will be 1, implying that the project schedule status is exactly the same as that was planned. If the value of SPI is greater than 1, then the project schedule performance is good, and the project is ahead of schedule. A good planned and controlled project should have the value of SPI close to 1, and value less than 1 indicates that the schedule performance needs to be reviewed.
Project performance will be measured by the use of Earned Value Management. Following metrics concerning Earned Value Management will be utilized for the measurement of project cost performance:
If the variance of Cost Performance Index ( CPI ) or Schedule Performance Index ( SPI ) is between 0.2 and 0.3 the Project Manager will report the reasons for this status, including recommendations for improvement.
Format for Reporting
Reports regarding the project cost performance will be included in the project monthly status reports. The Project Monthly Status Report will comprise a part called “Cost Performance Management”. This portion will include the Earned Value Metrics, which were established in the previous part. All cost variances, which exceed the limits defined, will be communicated to all concerned, including any remedial actions planned. Change Requests which are necessitated due to project cost overruns, will be tracked in this report.
Cost Variance Response Process
This section of the Cost Management Plan defines the control thresholds for the project and what actions will be taken if the project triggers a control threshold. As a part of the response process the Project Manager typically presents options for corrective action to the Project Sponsor who will then approve an appropriate action in order to bring the project back on budget. The Project Manager may propose to increase the budget for the project, reduce scope or quality, or some other corrective action.
The thresholds for the financial control of this project are a SPI less than 0.8, and CPI of less than 0.9. If the project attains any one of the threshold, a corrective action will be necessary. Project Manager will analyze and recommend options to the Project Sponsor for remedial actions, within four business days of the occurrence of the variance. After approval by the Sponsor, the Project Manager will implement the desired course of action within three business days.
The budget assigned for this project is mentioned below.
Fixed Costs: $xxx,xxx.xx
Contractor Costs: $xxx,xxx.xx
Contingency Reserve: $xxx,xxx.xx