Friday, March 9, 2007

Cost Report for Cost Control

For managing the project costs, people periodically generate the cost report to guide their execution. A cost report may be distributed to management to show the status of a cost center. This report is sometimes called the Job Status report.

The report includes the following columns:

A. Original Budget: This is the original budget. It never changes during the course of the project.

B. Approved Contract Changes: This is the summary of changes to the original budget from the approved change orders. You should be able to know where this figure comes from by going to the detail change orders. Each change order may increase or decrease the original budget for multiple budget element. From a given budget element, you should be able to drill cross to all change order touch that element.

C. Revised Budget: This the current budget or baseline for measuring the performance. This is the total of column A and column B. Using the terminology from EVM, this is the BAC - Budget at Completion.

D. Committed to Date: This is the money has been committed and is no long available for other activities. Commitments may represent material orders or subcontracts for which firm dollar amounts have been committed. The amount covers both the amounts you already spent and the remaining amount that you have committed. This is not the "actual to date", nor the "payment to date". It is one of the source contributing to the Estimated Total Cost. Using the EVM terminology, this is close to the definition of actual cost (AC). For accurately estimate the cost at completion, the total commitment is in place of the actual costs.

E. Estimated Cost to Complete: This is also called Cost Exposure. This is the result of review made for the report. The figure indicate whether a corrective action is required. Using EVM terminology, this is colse to the definition of the ETC. However, it differs because the ETC from EVM is estimated on top of actual cost (AC). Typically the actual cost from your accounting system may be the months behind and is not useful for forecasting or even indicate the overrun.

F. Estimated Total Cost: The amount should be the same as the sum of the column D and the column E. Using the terminology from EVM, this is the EAC.

G. Overrun or Underrun: This is the result of subtracting column C from the column F. This is the column management focuses on because it would indicate whether a budget overrun happens.

Some observations:

1. Actual cost is not used. The Spent to Date is not here. You do not need to wait for all the time cards to be submitted and processed to generate this report. You do not need to wait all the vendor invoices to be verified or paid. You do not need to wait for subcontractor to report their expenses. You are running your business based on the known "commitments".

2. Earned Value is not shown. This type of Job Cost reports were developed long before the Earned Value Method was developed or become popular. The report is designed based on common sense. You want to know if you overrun your budget or not, so you list how much your current budget is and how much you are going to spent. However, although earned value is not seen here. the earned value can fit into the picture as a source to come up the ETC and EAC.

A simple calculation of earned value based forecasting is as follows:

EAC = BAC / CPI
CPI = EV / AC

Basically, you take the project progress into account for estimating your cost at completion.
Post a Comment