How to Manage Variances and Project Costs

Introduction
During the implementation of a project, processes for project control along with record keeping come to be vital components to managers and other participants in the entire project process. Imperatively, these components provide the twofold objective of recording the financial transactions that take place in addition to handing managers a sign of the progress and the issues linked with the project. Notably, the issues of project cost control are fittingly encapsulated in a long-standing delineation of a project as any group of ambiguously associated activities that are 90 percent, over budgeted and late (Walker, 2015). The supposition is that the similar cost control approaches will not work efficaciously for all projects. Cost control does not just encompass monitoring costs and recording data but also takes into account the analysis of such data so as to undertake remedial action prior to being too late. The purpose of this paper is to provide a comprehensive delineation of the cost control processes or procedures to be carried out for the project environment. It will encompass the operating cycle, budgets, the earned value measurement system, and the approach to a prospective cost overrun predicament.
Operating Cycle in Cost Control
The operating cycle is basically the amount of cash flow that is necessitated by a project to sustain and grow it. In other words, it is the cash flow that is required to move the project process. In particular, when a project has a short operating cycle, then the projects necessitates less cash in maintaining the operations of the project in order to retail at minimal margins. On the other hand, when there is a long operating cycle, in the end the project will cost more even at reasonable and adequate levels. As a manager in the project process, the main objective is to maintain the operating cycle as short as possible in order to minimalize the costs necessitate in conducting the project process. Notably, it is the process that dispenses the cash of the project, convert the cash into a product, and render it out to the end consumer so as to generate back the project cash. According to Kerzner (2013), failure of a cost control system to fittingly and precisely delineate the true status of a project does not basically give the implication that the cost control system is to blame or incorrect. The illustration below delineates the phases of a management cost and control system. Imperatively, any system of cost control is only as good as the initial plan against which measurement of performance will be undertaken. As a result, the designing of a system of planning must take into consideration the cost control system. As a result, the operating cycle is commonly referred to as cost and control (Kerzner, 2013).
Budgeting
Cost control takes into account practicing the identification and reduction of business costs to increase profit, and this process usually begins with the budgeting procedure. This comprises of making comparison of actual outcomes to the budget expectations, and in the event that the actual costs incurred are greater than the planned costs, then it becomes necessary to take action. Budgeting encompasses the appreciation of what costs will be sustained, when and why, and evidently trails on from the estimating activities and the award of the project (Burtonshaw-Gunn, 2009). A budget ascertains the planned spending for a project, program or portfolio. It is utilized as a reference point against which the actual spending and projected eventual cost of the work can be reported. Basically, initial cost approximations can be comparative or parametric. These are distinguished as the viability and desirability of the initiative are examined and a better understanding of scope, schedule and resources is established. Once sanction is given, these distinguished estimates create the baseline cost. By apportioning costs to the activities in a schedule, a profile of spending is formed (Association for Project Management, 2017).
Costs have four conceivable aspects including direct, indirect, fixed, or variable. To begin with, direct costs are exclusive to the project and consist of resources that are directly involved in managing the work. Secondly, indirect costs encompass overheads and other costs that may be shared across numerous activities or dissimilar departments. Third, fixed costs continue to the same irrespective of how much output is attained. For instance, the procurement of an item of plant. Lastly, variable costs, for instance, salaries, change reliant on how much resource is utilized. Most of all, the costs may be organized into a cost work breakdown structure in which dissimilar levels apportion costs into progressively more detailed classifications. The work breakdown structure is the foundation for any budget. This takes into account all of the work that is essential in the creation of the product of the project. The work breakdown structure is formed through a breakdown process giving rise to deliverables delineated at the lowest level. The summation of all the tasks within the work breakdown structure comprise of the total budget of the project (Association of Project Management, 2017).
The project budget can be illustrated below using the S-Curve. In delineation, the S-curve shows the projected accumulative costs of the project in the course of time. On the whole, a project disburses resources in a slow manner, ramps up comparatively faster as more resources are utilized and subsequently reduces or declines as the project comes to completion. A great deal of expenditures in project adhere to this pattern.




Time Phased Budget Profile (S-Curve)



Dollar Cost





















Time


The Earned Value Management System
Earned value analysis is an approach that permits the project manager to have the ability to measure the amount of work that is actually undertaken on a project past the basis appraisal of cost and schedule reports. Notably, this provides an approach that allows the project to be measured and quantified by the progress attained. As a result, the project manager has the capability of employing this quantified progress, to project a project’s entire cost as well as date of completion, on the basis of a trend analysis. Taking this into consideration, earned value management permits the project manager to answer the following questions as associated to the project, including where the project has been, where it is at the present moment, and where it is headed. The three sources of data that are beneficial in resolving these questions include the budget value of the amount of work that is scheduled, the actual value of work that is completed, as well as the earned value of the physical work that is finished (Reichel, 2006). The earned value analysis encompasses the supposition of figures that facilitate the creation of a work breakdown structure and budget analysis.
The following is an example of an EVM:
Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS)









WBS
Task Name
TBC
1
2
3
4
5
6
7
8
9
10
11
12

1.1
Task 1
4,500
2,000
1,000
2000
 
 
 
 
 
 
 
 
 

1.2
Task 2
5,200
 
800
1200
900
2000
 
 
 
 
 
 
 

1.3
Task 3
5,500
 
 
900
2000
1000
800
 
 
 
 
 
 

1.4
Task 4
4,300
 
 
200
600
1000
1500
 
 
 
 
 
 

1.5
Task 5
4,000
 
 
 
 
700
500
1000
800
 
 
 
 

1.6
Task 6
8,700
 
 
 
 
 
 
 
700
2000
1000
2000
1000


Total Budgeted Cost
32200
2000
1800
4300
3500
4700
2800
1000
1500
2000
1000
2000
1000



Cumulative Planned Value (PV)
2000
3800
8100
11600
16300
19100
20100
21600
23600
24600
26600
27600

















Actual Cost and Earned Value















Cumulative Actual Cost (AC)
800
1950
4550
6550
10800
13600
14500
 
 
 
 
 



Cumulative Earned Value (EV)
675
3550
7435
9820
12225
19120
26420
 
 
 
 
 

















Project Performance Metrics















Cost Variance (CV = EV - AC)
-125
1600
2885
3270
1425
5520
11920
-
-
-
-
-



Schedule Variance (SV = EV - PV)
-1325
-250
-665
-1780
-4075
20
6320
-
-
-
-
-



Cost Performance Index (CPI = EV/AC)
0.84
1.82
1.63
1.50
1.13
1.41
1.82
-
-
-
-
-



Schedule Performance Index (SPI = EV/PV)
0.34
0.93
0.92
0.85
0.75
1.00
1.31
-
-
-
-
-



Estimated Cost at Completion (EAC)
38163
17687
19705
21478
28447
22904
17672
-
-
-
-
-





















Cost Overruns
One of the key functions of project management encompasses the prediction and tracking of costs to evade cost overruns. Whereas poor implementation of project management tasks can give rise to increased costs, it is conceivable to associate less palpable reasons to the processes of project management and the underlying nature of intricate projects. Project management that is efficacious acknowledged sources of cost overruns as early as possible and subsequently mitigating their impact (Markgraf, 2017). One of the key reasons that could lead to cost overruns is the imprecision of cost estimates. More often than not, when the actual costs are obtain, they are usually greater than expected. These sort of cost overruns are owing to either wrong estimates or owing to altered conditions within the marketplace. Another reason is planning. It is imperative to note that a project advances based on a plan that apportions durations to project tasks. If these projected durations can be extremely short, the project can be longer than expected and create cost overruns (Markgraf, 2017).
As project manager, there are different approaches I can undertake to deal with a possible cost overrun dilemma. One of the key approaches encompasses paying a great deal of attention to project planning. Imperatively, planning is the most vital element of project management and the leading resolve against cost overruns and delays. This takes into account projecting all of the key scenarios and bring out the complete scope of the project prior to coding of the project. Another important approach is to employ proper scheduling tools and charts. It is imperative to have proper scheduling, especially in intricate projects. Scheduling that is imprecise can lead to incorrect cost estimations and increase the idle times and therefore cost overruns (Kerzner, 2013). In addition, monitoring of project tasks that are on the critical path is another significant approach. The critical path, which is the task arrangement and order from the beginning of the project to its end that takes the lengthiest time to finish, facilitates the reduction of risk of delays. In addition, project tasks that are off the critical path have slack time in between the tasks, which can be employed for compensating any delays (Markgraf, 2017).












References
Association for Project Management. (2017). Budgeting and cost control. Retrieved from: https://www.apm.org.uk/body-of-knowledge/delivery/financial-cost-management/budgeting-and-cost-control/
Burtonshaw-Gunn, S. A. (2009). Risk and financial management in construction. Gower Publishing, Ltd..
Kerzner, H. (2013). Project management: a systems approach to planning, scheduling, and controlling. Hoboken: John Wiley & Sons.
Markgraf, B. (2017). What Are Reasons for Cost Overruns in Project Management? Chron. Retrieved from: http://smallbusiness.chron.com/reasons-cost-overruns-project-management-63225.html
Reichel, C. W. (2006). Earned value management systems (EVMS): "you too can do earned value management" Paper presented at PMI® Global Congress 2006—North America, Seattle, WA. Newtown Square, PA: Project Management Institute.
Walker, A. (2015). Project management in construction. Hoboken: John Wiley & Sons.