4 Cost Planning and Control

Plan the estimate

Cost planning turns defined project work into a defensible estimate, an approved budget, and a baseline for monitoring performance. Estimates should be traceable to the work breakdown structure (WBS), schedule, resource needs, assumptions, and risks. Cost, scope, and schedule are interdependent, so a change to one may affect the others.

Before estimating, clarify the scope, schedule, level of detail, assumptions, exclusions, and price date. Identify relevant cost elements, such as labor, materials, equipment, subcontractors, travel, and overhead, and document the basis for each estimate.

Choose an estimating method

Select an estimating approach suited to the available detail and the work being estimated. Analogous estimating uses actual costs from a similar project, adjusted for differences, and is useful early when detail is limited. Parametric estimating applies a cost rate to a measurable quantity, such as a cost per unit; the rate and quantity must fit the work. Bottom-up estimating calculates costs for detailed activities or work packages and aggregates them, which can provide more detail but requires a sufficiently defined scope.

Three-point estimating makes uncertainty visible by considering optimistic, most likely, and pessimistic estimates. A commonly used weighted estimate is:

Here, $O$ is the optimistic estimate, $M$ is the most likely estimate, and $P$ is the pessimistic estimate.

Document estimates and uncertainty

For a bottom-up example, a work package requires $120$ labor hours at $\$75$ per hour, $40$ materials at $\$50$ each, and a subcontract worth $\$3{,}000$. The estimated cost is $\$14{,}000$. If risk analysis supports a contingency of $\$1{,}400$ for identified uncertainty, the planned amount for the work package becomes $\$15{,}400$. The contingency is an explicit planning allowance, not an unexplained cushion.

A useful estimate includes all relevant cost elements, explains its assumptions and uncertainty, and is updated when scope, schedule, actual costs, or other important information changes. Define the estimate's purpose and scope, document assumptions and methods, analyze risk, and update estimates with actual costs.

Set the budget and cost baseline

An estimate forecasts what work is expected to cost; a budget is the authorized funding for the project or part of it; and a cost baseline is the approved, time-phased budget used to measure and control cost performance.

Build the baseline from the WBS and schedule. Assign budgets to work packages and periods, ensuring the plan reflects the required resources and timing. Record the approved scope, assumptions, funding limits, and change-control process. The WBS, baseline schedule, and budget are mutually dependent planning elements.

In common earned value practice, the cost baseline includes authorized work and its contingency reserve but excludes management reserve. Organizational rules may define budget and reserve terms differently, so follow the project's governing standard. Do not silently revise the baseline to make unfavorable performance appear favorable; assess and approve proposed changes through the established process.

Understand earned value

Comparing money spent with the amount planned can be misleading: spending less than planned may simply mean less work has been completed. Earned Value Management (EVM) addresses this by comparing planned work, completed work, and actual cost.

Planned Value (PV) is the budgeted value of work scheduled by the status date. Earned Value (EV) is the budgeted value of work actually completed. Actual Cost (AC) is the cost incurred for that completed work. Use these measures to distinguish cost performance from progress against the schedule.

Interpret cost performance

Cost Variance (CV) is calculated as:

A negative result means the completed work cost more than its budgeted value and is unfavorable. A positive result is favorable, but still needs investigation. The Cost Performance Index (CPI) is calculated as:

A CPI below $1.0$ indicates unfavorable cost efficiency; a CPI above $1.0$ indicates favorable cost efficiency.

Apply the measures and forecast costs

At a status date, suppose $PV=\$50{,}000$, $EV=\$40{,}000$, and $AC=\$48{,}000$. Then:

• $CV=\$40{,}000-\$48{,}000=-\$8{,}000$: the completed work cost $\$8{,}000$ more than its budgeted value.

• $CPI=\frac{\$40{,}000}{\$48{,}000}\approx0.83$: each dollar spent produced about $\$0.83$ of budgeted work.

Because EV is below PV, less work has been completed than scheduled. This is a schedule signal, distinct from the cost variance.

If the budget at completion (BAC) is $\$100{,}000$ and current cost efficiency is assumed to continue, a simple estimate at completion (EAC) is:

This is a projection, not a certainty. Use it only when continued performance is a reasonable assumption, and update forecasts using current information while explaining their assumptions.

Investigate variances and respond

A variance is a prompt to investigate, not a diagnosis by itself. Check work-package data and identify possible causes, such as higher labor hours or rates, material prices, rework, inaccurate estimating, or changed conditions. Assess the impact, decide on corrective action, assign responsibility, and set a follow-up date.

Review favorable variances as well: they may reflect genuine efficiency, delayed work, or incomplete cost recording. Explain the problem, its cause and impact, the corrective action, and the expected recovery date.

• Cost estimate