Cost control is very important in the management of projects. The real-life economics of the project as a whole depend on it.
The objective of cost control is to follow up what has been spent compared to what was already planned to be spent and to identify any deviations, so that appropriate action may be taken at an appropriate time. These matters therefore fall within the domain of the project manager, as the individual directly responsible for defining and deciding who is to execute and who is to supervise.
Calculation of actual cost should consider the different component costs for employment, materials, equipment, and subcontractors, in accordance with the contractual arrangements set out at the start of the project. If the actual costs increase beyond what was estimated, this could be due to any of several reasons:
• the cost estimate was too low;
• the circumstances of the project were not studied well;
• prices of raw materials and labor during the project increased;
• climatic conditions and other circumstances induced unanticipated delays in some project activities;
• there was poor selection of working equipment; and-or
• there was inefficient supervision.
It is difficult to correct for the impact of the first four factors. There is, however, usually some hope of improving the selection of the equipment and ensuring the department is aware and capable of choosing competent supervisors or increasing their capabilities. The cost control process involves more than collecting data on running costs. Cost control should help the project manager to analyze the performance rate for equipment productivities and manpower.
From an auditing standpoint, project costs will fall under one of three possibilities:
1. they were exactly equal to the spending planned in accordance with the implementation plan of the project and estimated budget for this plan.
2. more was spent than was planned, according to the project’s plan of implementation, which means an over expenditure "cost overrun."
3. less was spent than planned, generating savings in thr for of a "cost underrun."
In general, over-expenditure is not desirable and must be prevented, whereas savings in spending is desirable. This also requires looking into the causes of increasing costs, a true hallmark of successful project management of a project during its execution phase.
Among the main parameters of cost control accounting management are the following:
• ACWP – actual cost of work performed
• BCWP – budget cost of work performed, also called earning value (EV)
• BCWS – budget cost of work scheduled
• ВАС – budget at completion
• EAC – estimation at completion
To illustrate the above factors assume that in the phase of engineering costs, time and resources (CTR) has been planned to be completed in 200 hours. The actual work will take 250 hours. The work already done has reached 200 hours. So one can see that what was done is equal to the plan. Assume the cost of one hour is $100.
The actual cost of work performed (ACWP) = $25,000.
The budgeted cost of work performed (BCWP) = $20,000.
The budgeted cost of work scheduled (BCWS) = $20,000.
Cost variance (CV) = BCWP – ACWP.
Schedule variance (SV) = BCWP – BCWS.
The cost variance (CV) is equal to -$5,000. The minus-sign indicates that, at this point in the project, the budget for this component is now "short," i. e., has been overspent, by this amount.
Percentage of cost deviation = (ACWP – BCWP)/BCWP.
Schedule performance index (SI) = BCWP/BCWS; here it equals exactly 1. An SI value higher than 1 representing an acceptable performance, and a value less than 1 representing an unacceptable one, in this example we have reached a borderline, exactly at 1, at this point in the project schedule.
Cost performance index (Cl) = BCWP/ACWP. In this example, Cl – 0.8. It is less than 1, and this is as expected because the engineering CTR has already used up $25,000 and was budgeted to have consumed only $20,000 to this particular point.
EAC = BAC/CI. Dividing the budgeted actual cost by 0.8 is the equivalent of multiplying it by 1.25. In other words, by the time the project is completed, the estimated actual cost of engineering CTR can be anticipated to run 25 per cent over what was budgeted.
Calculated at regular intervals during project implementation, these factors should be compatible with the date of the month accounted by the company. Monitoring on a monthly basis assists in evaluating the project and approximating final costs of project components while there is enough time left to make any necessary course corrections in management of the remainder of the project’s trajectory.