PMP Terminologies - Cost Knowledge Area
Control Account vs Work Package
Once the project scope is divided in the form of WBS, work packages, and activity level, it is time to track whether a project is reaching its milestones. However, it is very difficult to track a project at a very high level or at the lowest level (the lowest level is the activity level).
So, in order to to manage the project better, we take a point between the WBS and work package call it the Control Account.
Control Account is a management control point where scope, cost, and schedule are integrated and compared to the earned value for performance measurement. Control Accounts are placed at selected management points in the WBS. Each Control Account is defined with a unique code or an accounting number which can be used to link to the performing account system.
The ‘Work Package’ is a deliverable which is obtained after decomposing the WBS. Work packages are further divided into activity levels. A Control Account usually has one or more work packages. The following figure explains the relations or the hierarchy in which each of the components is placed.
Cost Baseline vs Cost Budget (Budget)
During cost estimation, the Project Manager will come up with a figure and will add a contingency reserve which will become the Cost Baseline. On top of the cost baseline, a risk assessment management reserve will be added. This combined figure becomes the budget of the project. So the difference between the cost baseline and the budget is called the risk management reserve, or the unknown risk.
Earned Value Management (EVM)
Let’s catch up with some of the terms as well as the formula used to calculate the project progress in terms of earnings. The following table provides both the definition and the formula:
For example, let’s take a project worth $4M that needs to be completed over a span of 4 months. It is assumed that the estimated work roadmap is linearly distributed, in the sense that at the end of the 1st month, 25% of work should be completed at a cost of $1M, at the end of 2nd month 50% will be completed and the spending should be $2M and so on. Let’s take the progress data of this project at the end of 3rd month. Assume the project is 60% completed at a cost $3.5M. What is the condition of project?
From the above case, we can define following values:
Actual Cost(AC)=$3.5M, Earned Value(EV) is 60% of $4M= $2.4M and Planned value (PV) is 75% of 4$M=$3M.
Now the rest of the calculations are simple:
CV=EV-AC=2.4-3.5=-1.1, SV=EV-PV=2.4-3=-0.6, CPI=EV/AC=2.4/3.5=0.69 and SPI=EV/PV=2.4/3=0.8.
What is the meaning of this?
The bottom line is that the project is in bad condition – because of negative values in case of variance and because the performance indices are below 1. The project is over budget, and behind the schedule by values of $1.1M and $0.6M respectively.
And for every $1 spent we are getting only 69 cents and the project is progressing at the rate of 80% originally planned.
This sample problem illustrates how to make EVM calculations.
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