Cost Control, Essay Example

Abstract

Project cost controls are vital in managing and establishing a framework for success of any project.  Depending on the complexity and intricicies of the project there are multiple ways to manage and control the costs.  The important aspects of managing and controlling costs include establishing a baseline, determining the tools necessary to manage and control the variations and taking corrective actions to keep the project on track regarding schedule and cost variance.  This project is utilizing a bottom-up cost estimation analysis which provides a cost and duration for specific work packages.  With this information we can use Earned Value Management to help monitor the cost and schedule variances.  With this information the project team can take corrective actions to ensure success at the project’s closure.

Project Cost

Once the costs of the project have been identified and the budget has been allocated to perform the work the next steps are to monitor and control the efforts of the project and to control the costs associated with those efforts.  Project control is of utmost importance to the project’s successful implementation.  The implementation of the new Enterprise Resource Planning tool involves not only a new information technology system but also the corollary business processes to facilitate the new tool (Magal 2011).  As a baseline for this project, the overall objectives of the first rollout and the associated budget involves implementation of specific finished goods models assigned to specific plants.  Each functional area is responsible for collecting and analyzing their specific inputs for their budgetary needs.  These estimates were based on the bottom-up estimation technique.  This type of analysis included a detailed work break-down structure in which each functional area developed a breakdown for the tasks needed to implement their area.  Costs were then assigned to each breakdown and rolled up by functional area and then integrated into the program level.  These estimates included hardware, software, expertise, management and a buffer for potential risks associated with a project of this magnitude.  These costs provide a rough order of magnitude for the entire project and establish a baseline cost for the entire project.  While it needs to be communicated among stakeholders and the project team that these associated costs are an estimate it must also be understood that the stakeholders have allotted a specified budget for the project and that the monitoring and controlling of this budget is ultimately the responsibility of the project manager.  As the project lifecycle progresses the bulk of the cost and staffing levels increase to their highest levels directly after the organization and preparation are completed for the project (PMI 2008).  These costs must be controlled and monitored in a way that is conducive to the project being implemented.  Each project may need a different method of controlling and monitoring.

Cost Controls

The project cost control system and the management of the system is not very difficult to follow academically.  The first step is to establish a reference point or a baseline.  This baseline has been established through the cost estimation process and assigning specific dollar amounts to all of the deliverable actions assigned to the project.  As these costs were rolled up into the project the budget was then justified by the stakeholders deeming the project deliverables worthy of the inherent costs associated with those deliverables.  In the below figure the total project cost for the initial rollout is approximately $6.6 million.  Based upon the needs of the business and the benefits associated with implementing the ERP system the project is flagged for implementation.

fig1.

After the baseline is established the next concern is monitoring the work performed.  As the work progresses assessments need to be made to understand if the amount of funding utilized for the amount of work being performed is on track with the estimations.  If the progress is not as expected it may require modifications to the plan to either increase the amount of work being performed or decrease the associated costs for the work being performed.  There may also be an issue of the amount of time it is taking for the specific tasks to be completed.  If modifications are necessary the project manager will need to make adjustments to the schedule, cost or quality and ultimately the scope of the project to ensure the governing parameters are met.  If the scope of the project changes then ultimately the baseline estimates will also need to be changed.  It is not a preferred situation for the project manager to change the scope of the project every time a schedule slips or a certain work package goes over budget.  The project manager will need to understand how to consistently manage and control the cost of the overall project and not lose sight of the specific project objectives and budget.

So now both the stakeholders and the project team understand that there are inherent risks and potential deviations from the budget.  Although this is known, it is not normally accepted to have underperforming project teams in conjunction with cost overruns.  For this project there will be tailored tools that will help the project team understand their performance for both schedule and cost as an overall project as well as for each of the functional work packages.  This will be accomplished by utilized Earned Value Management (EVM) to compare work performed with expected work perform and the associated costs with each deliverable area.  The reason EVM will be used is for the simple fact that it has the ability to combine the areas of scope, schedule and cost, all of which the project manager is ultimately responsible.  The earned value of the project is a calculation of the planned value versus the earned value.  The resulting graphical representation can show the project’s schedule variance.  The same can be concluded by comparing the earned value and the actual cost of the project to show the cost variance.  By concatenating these types of graphs together the technical performance of the project team can be viewed at glance (Fleming, 2006).  This tool would be one check on how the project team would show the accountability of their efforts for the project.  The example below is a graphical representation of a project that has the associated variances assigned to a work package.

fig2.

Business Processes

Throughout the project execution there will be multiple tollgates the project must proceed through in order to not only level set the stakeholders on the process of the project but to also ensure the project track the team is on is still on track for delivery of the expect results.  Through the project management life, the business will go through operating cycles, budget cycles and project evaluation.  Through the use of project cost management and the tools of monitoring and controlling the project by documenting and utilizing EVM, the stakeholders will have a fair and accurate depiction of the project’s scope, schedule and cost as well as areas that have meet, exceeded or missed meeting their intended objectives.  Each functional area will report up their costs associated to each work package and it will individually be measured against the scope, schedule and costs associated to that work package.  The overall project will then include all of the individual tasks brought together into an overall project budget, including overhead and other associated costs that are necessary for the project as a whole but not necessarily attached to a specific task.  If each of the functional areas are moving along according to the project plan, meeting their specified deliverables while also meeting their intended schedule requirements there are no necessary changes.  If there are areas that need adjustment the project manager must take action and make the appropriate changes to scope, schedule or costs.  It is ultimately the responsibility of the project manager to identify and flag risks to the project (Cooper, Grey, Raymond, & Walker. 2005).

Project Risks

To better understand the cost control methods we must first fully understand the risks of the project.  Risks to the project include everything that could or could not be controlled by the project manager including scope creep, inflation, lack of technological advances or reprioritization of business needs (Hansen, Mowen & Guan, 2009).  Identifying risks prior to them occurring will help control the costs of the project overall.  The earlier these risks are identified the easier adjustments to the project can occur and thus leave less impact to the project overall.  If the risks are identified in the estimate creation stage, additional resources could be budgeted to mitigate that risk or a different method for accomplishing the same task could be utilized.  If the risk is identified during the early stages of the work package or early in the execution phase resources could be temporarily allocated to the effort and the project manager could crash certain tasks to adjust the project timeline or the project manager could run certain tasks in parallel to reduce schedule.  The project manager could also reduce the amount of certain tasks that are on the fringe of the project and are seen as just nice to have as part of the project but not necessary for the execution of the project as a whole.  As the project progresses toward its scheduled completion date the risks impact to the project exponentially increase.  With little schedule, scope or cost left for the project manager to manage it becomes more difficult to adjust out the negative ramifications of an unforeseen risk.

Project Cost Monitoring and Management

In order to properly manage the costs of the project, the project team needs the appropriate tools to monitor and control these items.  The project is based on the bottoms-up estimate analysis which allows each sub-section of the project to have its own set of measurable deliverables.  This type of analysis lends itself perfectly with the type of management tool the project team plans to use to monitor and control schedule and cost variances.  The EVM analysis will provide the insight into the schedule variance for each work package as well as the project as a whole.  The associated cost variance will show if the project is over budget or under budget.  When these two types of variances are put together, the project manager will be able to report out to the stakeholders if the project is on-schedule, within budget and if we are getting the quality of work for the amount of funding we have spent.  The project will then go through monthly reviews with the project team to ensure the appropriate progress is being completed.  This will allow the entire project team to fully understand the status of each functional area and gain a broader perspective of the project as a whole.

The coordination between how the estimates for each work package was developed and how the project team uses them in the EVM analysis is important in the fact that the numbers are close to their root estimation and have not been manipulated to fit the method in which the project manager is going to manage and control he costs.  With this information regarding cost, schedule and scope, the project manager will be able to manage the risks associated with the project.  The tools including EVM and status updates will provide the data the project manager needs to make educated business decisions on how to manage the variances in cost and schedule.  The project manager will continuously work to monitor the actual costs throughout the life-cycle of the project and the tools chosen will help enable project management actions to ensure project success.

References

Cooper, D. F., Grey, S., Raymond, G., & Walker, P. (2005). Project risk management guidelines, managing risk in large projects and complex procurements. John Wiley & Sons.

Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: accounting & control. (6th ed.). Mason, OH: South-western cengage Learning.

Fleming , Q. (2006). Earned value project management. (3rd ed.). Newtown Square, PA: Project Management Institute.

Magal, S. R., & Word, J. (2011). Integrated business processes with erp systems. RRD/Jefferson City: Wiley.

Monk, E., & Wagner, B. (2009). Concepts in enterprise resource planning. (3 ed.). Boston, MA: Course Technology Cengage Learning.

Project Management Institute, P. M. (2008). A guide to the project management body of knowledge. (4th ed.). Newtown Square: Project Management Inst.