PROJECT CONTROLS TRAINING CLASS Cost Control Cost Control

PROJECT CONTROLS TRAINING CLASS Cost Control

Cost Control vs. Financial Control Financial control is concerned with receipts and expenditures using good bookkeeping and accepted accounting practices; records history Cost control deals with what specific operations should cost vs. what they do cost; takes past and applies to future final costs Note: Financial control is a component of Cost Control, but several key components of Cost control are not found in the definition of Financial control.

DEFINITIONS Term 1 Definition Cost The amount a contract item is known or estimated to cost the contractor Price The amount of money asked or given for a product. (incorporates direct costs, indirect costs, G&A costs, profit, and contingency) Change Order A document requesting a change or correction. A written change made by the engineer to contract drawings and/or specs AFTER the contract award 1. Price 2. Change Order 3. Cost How could the terms costs and price be used differently with the following contract types? 1. Cost Reimbursable 2. Unit Price 3. Fixed Price

DEFINITIONS Term 2 Definition Work Breakdown Structure (WBS) A top-down logical structuring of project work that defines and displays all the work to be performed in accomplishing the project objectives (a framework of the project) Direct Costs that can be directly attributed to a particular item of work or activity Indirect Cost All costs not directly assigned to the end product (field admin, direct supervision, fees, insurance, taxes) 1. Direct Cost 2. WBS (Work Breakdown Structure) 3. Indirect Costs

DEFINITIONS Term Labor Burden Labor Cost 3 Definition Taxes and insurance costs based on labor payroll that the employer is legally required to pay The base salary, plus all fringe benefit costs and labor burdens associated with labor Mark-up Percentage allocation of general overhead, profit, and other indirect costs Overhead A cost or expense inherent in performing an operation that cannot be charged to a part of the work. Usually allocated and spread over project accounts. 1. 2. 3. 4. Labor Cost Mark-up Labor Burden Overhead

DEFINITIONS Term 4 Definition Contingency An amount added to the estimate to allow for changes that experience shows will likely be required (“unknowns”) Allowances Additional resources included in estimates to cover the cost of known but undefined requirements for an activity, Account (“knownunknown”) Escalation Provision for an increase in the cost of equipment, material, labor, etc. over the costs specified in the contract, due to continuing price level changes over time 1. Escalation 2. Allowances 3. Contingency

COST ELEMENTS Name examples of cost elements? 1. 2. 3. 4. 5. 6. Direct Cost – Labor/Equipment Indirect Cost Burdens Overhead – G&A Mark-up Escalation

Concepts 1 1. Cash Flow Evaluation and Control (2 month look head forecasts) 2. Contingency Control and Rundown (slush fund or management reserve) 3. Earned Value System Relationship between % complete and budget 4. WBS and CBS Each task has its own man-hour and dollar budget 5. Cost and Schedule Performance vs. Planned Performance a) what was planned b) what was done c) what was done vs. what it “cost”

Concepts 2 1. Procurement Cost Control a) Currency fluctuations b) Escalation c) Delivery conditions that impact cost 2. Direct Construction Cost Control a) Site conditions b) Local market conditions (labor / materials) c) Weather conditions (wrench time) d) Interruptions 3. Monthly Cost and Progress Report, a snapshot of where the project is TODAY a) Contains total status of project b) Identifies current problems c) Gives “heads-up” to future forecasts

Concepts 3 Construction Subcontract Agree or Disagree The first step in cost control is evaluating the contractual documents and the contract agreement Monthly Executive Progress Report Agree or Disagree Aids in getting or keeping Senior Management support needs to be Concise, Complete, Brief Backcharge Register Agree or Disagree charges against vendors or contractors for extra work can be significant What needs to be the register • Documents, dates, • Early Notification • Cost Forecast, impacts

COST REPORTING & FORECASTING 1. Cost / Hours To Date a) Commitments to Date i. iii. Purchase Orders Sub-contracts Labor Expenditures b) Actual Expenditure to Date 2. Progress to Date a) Physical % complete of Defined Deliverables i. iii. iv. v. vi. Weighted or Equivalent Units Experience/Opinion Cost Ratio Start/Finish (50/50, 20/80, 0/100) Incremental Milestones Units Completed 3. Change Management a) Pending Cost Issues and Changes b) Approved Cost Issues and Changes

What is necessary to be a Proactive Cost Engineer? 1 TEAM Player in these KEY areas Ownership Communication (everyone on the same page of the play book) Clear Sense of Direction OWNERSHIP: Know Your Budget Know Your Schedule Know Your Deliverables Quickly identify issues outside your defined Budget Scope COMMUNICATION: Make your issue visible Don’t assume it’s not important to other TEAM Members Be Proactive to identify change

What is necessary to be a Proactive Cost Engineer? 2 CLEAR SENSE OF DIRECTION Know the Project Scope and Client Expectations Know the Project Budget and Scope Know the Project required deliverables Know the Project Schedule Know and Use the Standards and Procedures a) b) c) Estimating Standards and Forms Cost Management System Change Management Procedure What would you add to this list?

Schedule and Cost Integration Cost Engineering requires the support of a good schedule made up of project scope and execution strategies. The schedule needs to be resource loaded and based on the approved estimate.

Progress Actual progress can be recorded through the schedule and changes to durations should support forecast updates in the cost system Resource plan / need has changed as the schedule has progressed.

How the schedule is key to cost The Plan A View of the estimate spread against the activities. With the intergration of cost and schedule the Budget is created. Note: the EV is now present (Planned / Earned / Actual)

How the schedule is key to cost Performance Measurement 1. Planned 2. Earned 3. Actual As the schedule is progressed, the time phased portion of the forecast is adjusted. Schedule % complete is the basis of progress. Performance to plan (EV) Variance Integration requires discipline on the part of the scheduler. Imagine the impact of deleting or changing the scope of activities to an integrated baseline plan. Change control and effective communication is critical ! Corrective Action

Brain Exercise

Earned Value Equations Planned Earned Incurred BAC EAC 50, 000 45, 000 55, 000 100, 000 60, 000 Earned – Incurred = CV Earned – Planned = SV Earned / Incurred = CPI Earned / Planned = SPI Earned / BAC = PCT COMP BAC / CPI (Min Range for EAC) BAC / (CPI*SPI) (Max Range for EAC) BCWS = What term BCWP = What term ACWP = What term In thinking about CPI and SPI which face would you associate with this projects performance? -10, 000 -5, 000 0. 82 0. 90 0. 45 122, 222 135, 802 Planned Value Earned Value Actual Cost 19

Statistics Consider the following Numbers: ( 5, 13, 14, 2, 15, 10, 14, 5, 14, 8 ) How do you determine the: Mean “Throughputs / samples collected" 100/10=10 Mode "Occurred Most often" 14 occurred 3 times Range "Hi and Low" 2 and 15 Median “Middle point of Distribution" ? 5 Below 5 Above ( 1, 2, 5, 5, 8, 10, 13, 14, 14, 15 ) 20

Quantities A concrete slab will measure 24' by 45' by 6" thick How many cubic yards will be needed? 24 ft * 45 ft *. 5 = 540 CF / 27 = 20 CY How many cubic meters will be needed? 20 CY *. 7646 = 15. 3 CM Hint: 1 CY =. 7646 CM and 1 CM = 1. 3079 CY 21

What Will it Cost In your Town? Location Index for Selected U. S. Cities 3 Years ago Juneau, AK Phoenix, AZ Los Angeles, CA San Diego, CA San Francisco, CA 128. 6 96. 2 135. 2 137. 8 184. 1 Esc. Factor 1. 1564 1. 1863 1. 1098 1. 1422 1. 1642 What would your Slab of Concrete cost in Juneau, AK if the total cost was $ 100. 00 per CY in San Diego three years ago? (20 cy * $ 100. 00 per yard) * (128. 6/137. 8) = $ 1, 886 (3 years ago) What would it cost in Juneau, AK today? $ 1, 886 * 1. 1564 Esc = $ 2, 158 (Today) 22

Production Rates / Frequencies Consider the following rates and (frequencies): 4. 8(1), 4. 95(5), 5. 0(9), 5. 15(7), 5. 20(2), 5. 30(3), 5. 45(3) 1 ) What % of the production rates will fail to make 5. 0 hours/unit or less? Made = 15 Failed = 15 Total = 30 (30 / 15) = 50% 2 ) What % will make exactly 5. 0? 9 Made exactly. 5 production (9 / 30 ) = 30% 23

Economics – Future Value $500, 000 deposited today is worth what, four years from now assuming a 5% interest rate? Find Compound Interest Factor: 1. 05 * 1. 05 = 1. 2155 Present Value * Compound Factor: $ 500, 000 * 1. 2155 = $ 607, 753 24

Economics – Rate $100, 000 is needed in five years, and you currently have $78, 350, what minimum rate of return must you have to meet this goal? Rate 10. 0% 8. 0% 5. 0% Compounding 1. 10 * 1. 10 1. 08 * 1. 08 1. 05 * 1. 05 4/ 03 D-1 V-1 Factor 1. 611 1. 469 1. 276 © OTB Solutions LLC - 2005 $ $ $ PV 78, 350 $ $ $ FV 126, 183 115, 122 99, 997 25

OVERALL GOAL OF SUCCESSFUL COST CONTROL NO SURPRISES

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