By Allen C. Hamilton, PMP, CCE
The first article in this series introduced the subject of cost management on capital projects, identified its key steps, and discussed cost estimating. This article discusses cost control.
Cost control is the application of procedures to monitor expenditures and performance against the progress of projects or manufacturing operations; to measure variance from authorized budgets and allow effective action to be taken to achieve minimum costs (Ref. AACE Intl. Recommended Practices and Standards 10S-90).
Cost control is the second of the three major areas of cost management and the one that represents the translation of the project from theory to reality. The basic design is completed and contracts are signed for the balance of the work in the form specified in the project execution plan. Cost control is also the cost management area that receives a great deal of attention from owners, contractors, vendors, and consultants. It is the link between the project, final operations, and financial requirements. Some believe that cost control is the most important activity in cost management.
Budgets and baselines are essential tools of cost management to establish reference points for reporting, comparing, analyzing, and action. Budgets are a common tool in the business community to assist in establishing cost control, and budgets are one of the primary tools of cost control. Budgets are derived from the approved control estimate. The control estimate is translated to the budget by the use of a Code of Accounts (COA), which were discussed in the first article of this series. The COA would be utilized to a level appropriate for the project cost control. As previously mentioned, the COA should be standardized to facilitate the collection and use of the cost data.
In cost management, one area that receives a lot of staff and management attention is reporting. Reporting is one of the highly visible products of cost management; therefore, much expense and great care are exercised in the production, distribution, and support of project reporting documents. Depending on the company and project, a large number of information systems may feed into the project cost report.
Cost reporting summarizes and compares current costs with reference costs. The deviations are sources for review, analysis, and corrective action. The reporting should be defined in a project plan and modified to suit developments. The report should be regularly published to the appropriate stakeholders on a timely basis. Some report sections may be broken out and published on a more frequent basis depending on project needs. The frequency and timing of reporting should also facilitate support of corporate reporting.
Tracking curves are useful tools in cost control that graphically show progress and performance. Tracking curves, at a minimum, show what happened. However larger and complex projects usually benefit from the central cost control principles of:
The tracking curve below shows the classic “S Curve” and the key tracking parameters of plan, actual, and forecast. The example shows that the actual progress is less than planned, and therefore the forecast is longer than the plan.
Forecasting is the result of a disciplined, logical analysis using project data and forecasting methodologies to establish the expected cost at project completion and the expected completion date. Forecasts use current project status and trends to establish the future cost and establish what will happen to the cost and schedule if present trends continue.
Forecast – An estimate and prediction of future conditions and events based on information and knowledge available at the time of the forecast (Ref. AACE Intl.).
Forecasts should predict future outcomes and be used as the basis to control risk. The timing of forecasts is important to communicate trends before the events occur. The use of knowledge, experience, and judgment play important roles in the analysis.
Highlighting trends and potential budget deviations that require management action is an important outcome of forecasting. Forecasts should prompt action that can be taken in sufficient time to minimize or avoid cost overruns and schedule delays. To be effective, forecasting should be predictive and forward looking and not reactive to current events.
Forecasts should include all parts of the project elements including scope of work, change management, resources, quality, cost, and schedule. Forecasts may also assume that present trends continue and no corrective action is taken. They should be ongoing and current to be most effective and avoid emergencies. Most project teams engage in forecasting on a regular basis.
Change – any deviation from the planning scope, cost and schedule basis, and the execution basis (AACE Intl.).
Changes are a part of projects because few if any projects can be designed and built as planned. Projects are progressed on the best available information for the results required. Some projects are progressed with unclear information because of the need to complete the project as soon as possible. Changes are also difficult to estimate because of the complexity and their impact during design, engineering, and construction. They cannot be estimated in isolation and have impacts based on the stage of project development. These associated impacts on facilities and timing are sometimes called ripple or cascade effects.
Change control relies on the collection and classification of expected changes to the project as they are progressed by a change management procedure through the change management system. Change control relies on promptly identifying the impact of the change. Successful change control establishes appropriate justification criteria to review, approve, or reject changes. It establishes a system to separate necessary from unnecessary changes. The figure below illustrates the main steps in the change management cycle.
The next and last article in this series will discuss data collection and analysis.