Wednesday, June 25, 2008

Project Closeout Activities

You've probably heard the saying, "Those who forget the past are doomed to repeat it." This applies nicely to project management. As a part of project closeout, you should document the successes, failures, and lessons learned for each project, so you can benefit from them on future projects.

For many organizations, project closeout involves gathering all of the cost control documentation and evaluating the cost control procedures, as detailed below.
  • Documentation. As a part of project closeout, you need to collect all data related to project cost control. This includes budget reports, performance analyses, trend analyses, Gantt charts, change requests, budget update reports, and progress updates.
  • Procedures. Project closeout procedures often include completing all the necessary company forms and evaluating any new project processes.
The lessons learned during cost control efforts should become a part of a project's historical database. The information you keep about closed-out projects should be used to save you time and money on future endeavors.

Things you should include as you document the lessons learned are details about the main causes of cost control variances, the reasons behind the corrective action chosen, and actions you'll do differently in future projects.

In addition, when you learn important lessons that will improve the performance of future projects, you should share the information with other project leaders within the company. Possible reporting techniques include:
  • discussing lessons learned during team debriefings
  • reassigning a team member to another division in order to train personnel there
  • writing a case study based on the lesson and incorporating it into corporate training material
  • distributing lessons learned to employees via e-mail or as written memos.
The purpose of cost control is to ensure the profitability of your project. By documenting the lessons learned and completing project closeout activities, you help ensure that you achieve project goals.

Wednesday, June 18, 2008

The Project Estimate of Completion

The estimate at completion (EAC) is an important output of project cost control. It is a calculated prediction of the total costs of a project at completion, based on performance to date. You might want to calculate the EAC whenever you assess the earned value for a project as a part of your periodic evaluation.

As with other outputs, your periodic assessments of the EAC will form a vital part of the project's history. You may want to track it in a trend analysis. The EAC is useful for the project management team for the following reasons.
  • It shows what the total project is expected to cost.
  • You can estimate the total costs of an activity or group of activities.
  • It is the best estimate of potential profitability of the project.
If the current EAC for any job gives a warning of cost overruns, you may want to assess cost variances to see if they will likely be recurring in the future and check the original cost estimates to see if they were inaccurate and should be revised.

There are four common methods for calculating the EAC. However, before you can calculate the EAC, you will need to know the budget at completion (BAC), which is the planned value (PV). The standard method used for calculating the EAC can be expressed in either of two ways, depending on whether you have the cost performance index (CPI).
  • The standard formula for calculating EAC is as follows: EAC = (AC ÷ EV) x BAC. This formula, which uses the earned value (EV) variable, is based on the project's cost performance to date. Use it when cost variances are typical of future variances.
  • If you have worked out the CPI already, simply divide it into the total budget at completion (or the planned value at completion). The formula is as follows: EAC = BAC ÷ CPI.
The third formula you can use is: EAC = AC + ETC. It combines actual costs to date (AC) and the estimate to complete (ETC), which is the total of all estimated costs of work that has not yet been performed. This approach is most often used when:
  • past variances would have continued to occur
  • original estimates have been revised significantly
  • the revised estimates are deemed accurate.
The fourth formula that can be used to calculate the EAC adds the actual costs to date (AC) to the expected earned value of the work not yet completed. To find this "future earned value," you simply multiply the PV by the percentage of work that has not yet been performed. It is expressed as follows: EAC = AC + (PV x percent of work remaining).

This approach is most often used when the variances to date are seen as atypical, and the project management team expects that similar variances will not occur in the future.

However you choose to arrive at a final estimate, you can use the EAC to calculate the variance at completion for your project. The final variance can be expressed as either a dollar amount or as a percentage. You will more commonly see it as a ratio of the total variance to the budget at completion.

For example, for a project with a BAC of $75,000 and an EAC of $85,000, the variance at completion would be $10,000. Expressed as a percentage, the VAC (variance at completion) would be $10,000 divided by $75,000. This project would be 13 percent over budget.

The estimate at completion is your educated guess regarding the total cost of a project. You have to decide, before calculating EAC, how future cost variances compare to current cost variances, since each of the formulas uses a different assumption about future variances.

Monday, June 16, 2008

Project Cost Control: Corrective Action

Have you ever developed the perfect project plan? One that was implemented without a hitch, and whose stated goals were completely realized? Not likely. That is why every project plan should include ways to correct any problems that pop up.

Corrective action is an important output of project cost control. It includes anything that must be done during a project to bring actual cost performance into line with planned costs.

You can use various types of corrective action to control project costs. Some typical corrective action activities are described below.
  • Subcontract work activities. For example, upon seeing that a project will overrun its budget, a project manager decides to subcontract parts of the project to a firm that has quoted a lower labor cost than it would cost the original project team to do the work.
  • Use less expensive resources. Another project manager decides to use less expensive resources, such as parts, raw materials, and supplies, because his project is running over budget. He also could re-assign work to less expensive laborers, as long as this would not diminish quality or productivity.
  • Find other ways to alter project scope. An example of this might be to extend the project finish date in order to reduce overtime costs.
  • Change the product specifications. If your project was running over budget, you might try to convince the customer to reduce the amount of work that was originally planned, or the quality of work that is expected, so that the project can be delivered within the original budget.
  • Increase or decrease the budget. Variance analysis of your project reveals that the original budget was unreasonably low. Your boss requests an increase in the budget to better reflect the true costs of the work, and to show a more accurate cost performance index.
While there is no standardized checklist to use when choosing corrective action, you can build your own checklist to follow. Ask for input from other project managers in your organization. They can tell you how they respond to different situations. Whether you implement a list of standard corrective actions as a company, or you simply develop your own plan, creating a standard to follow will greatly enhance the management of projects when things don't go according to plan.

There are some common concerns that should be addressed by every company in establishing a checklist or criteria for choosing corrective action. The company should ask such questions as:
  • Does this change the original plan?
  • Will any deadlines be missed?
  • Are any tasks adversely affected?
  • Are any cost overruns introduced?
By asking these questions, you are doing an impact assessment of the proposed action. Corrective measures should always be followed up to see whether they had the desired effect.

Remember, the root of the problem always should be identified before corrective action is chosen and implemented. By taking the appropriate corrective action when necessary, you can ensure that your project ultimately meets its goals.

Thursday, June 12, 2008

Revising Project Cost Estimates and Budgets

Projects need to have parameters. It only makes sense that there should be a set duration of time in which to produce what the customer has asked for, and a limited amount of money to spend doing it. But what if early measurements of cost efficiency reveal that you are going to have trouble remaining within the cost and budget boundaries?

Revising cost estimates and making updates to the overall budget through the course of the project as more information becomes available is a part of the project cost control process. Preliminary estimates that were set during the planning stages of the project may need to be revised for the following reasons.
  • Real costs for certain resources have changed.
  • The original estimates contained errors.
  • There has been a change in the project or product scope.
  • Vague estimates can now be refined.
Cost revisions are justified when it becomes apparent that cost variances to date are not due to isolated causes. A poor rating of cost performance to date may show that your total costs at completion are going to be outside the permitted range. The sooner you can bring variances into line, the better. Revising cost estimates can result in the following benefits.
  • Revised cost estimates ought to be much more accurate.
  • You will have more confidence in the estimated costs at completion.
  • You will know better if the project will come in on budget.
Cost revisions that lead to a change to the budget must be approved as outlined in the project's cost change control system. The person making the change should indicate in the change request the reason for the proposed revisions and await final approval before making any changes.

To revise cost estimates, you simply go back to your original estimates, isolate the specific items that are causing the variance, and then update the estimates based on the more accurate information.

Not all revisions to cost estimates will necessarily lead to updates to the budget. Offsetting revisions to cost categories may not affect the overall budget for a certain time frame or task. Budget updates involve a change to the approved cost baseline and should only be done under certain circumstances.

A change to the budget is considered to be one of the "last resorts" of project cost control. Cost variances should be assessed to see if there is any other way to correct them before re-baselining the entire project.

When you have determined that revised estimates will lead to a budget update, you must follow the approval process laid out in your cost change control system. Any changes to the product or project scope must be analyzed to see how they will affect overall costs. You will want to consult the project's scope management plan and integrated change control system as well. Additional details are provided below.
  • Cost management plan (CMP). If your CMP states that the project budget will have a 25 percent contingency on top of the original estimate, a 5 percent variance might be easy to accept. If there is no contingency, or the variance is more significant, you would update the budget.
  • Product scope. Changes to the features and functions of the product or service you are delivering, whether imposed or optional, will likely affect costs. You need to determine if the changes in cost are great enough to warrant altering the budget.
  • Project scope. Changes to the work that must be done in order to deliver the specified product or service, whether imposed or optional, may also affect costs. You need to determine if the budget should be altered to compensate for these prospective variances.
Remember, cost estimates and budgets need to be updated so that at any point in time the project plan continues to be a valid tool for predicting the future of the project. By keeping in mind the information discussed above, you'll know when and how to revise cost estimates and update budgets.

Wednesday, June 11, 2008

Computerized Tools for Project Cost Control

Many software companies have produced computerized tools to aid in project cost control. Project management software that will run on your personal computer or network is available at many different levels of sophistication, with prices ranging from $25 to over $10,000.

Computerized tools could include anything from standalone spreadsheets and accounting packages to fully integrated cost management systems. They offer planning and tracking capabilities at varying levels of detail.

Computers and the appropriate software have helped many project managers cut down on time, costs, and effort involved in getting their work done. You can use these tools to collect information, make calculations, and produce reports. In terms of project cost control, computerized tools can help you to:
  • track performance more easily and quickly
  • track multiple projects at once
  • design, simulate, analyze, and improve cost control processes
  • conduct "What if?" analyses
  • obtain organized and summarized reports
  • catch potential problems early in the project that may cause damage later on.
When it comes time to choose the appropriate computerized tools, you will have to ask, "What kind of tool can I afford?" Most inexpensive applications will enable you to produce charts and basic reports. If your budget allows, you can buy software that will do just about anything you need for project management.

Bear in mind that when implementing new software, you not only have to consider the expense of the tool, but also the time you have to invest to learn how to use it properly. New software costs time as well as money.

You also must decide how "large" a tool you need. Make sure you don't invest in project management software that is not right for you. Before you go shopping, spend some time figuring out:
  • the maximum level of complexity you can handle
  • aspects of cost control that you need automated
  • the level of analysis that stakeholders demand.
Computerized tools should be tailored to your needs. Perhaps the projects you manage are fairly simple with straightforward work breakdown structures and modest budgets. You would likely then benefit most from low-end software that is easy to use.

The larger and more complex your projects become, however, the more you will require a system that integrates schedules and the cost management plan, and one that controls change. There are mid-range and high-end products that meet increasingly complex needs.

Computerized tools are a big help to project management. However, the package your company chooses to invest in will be worthwhile only if it suits your needs and the needs of the projects' stakeholders. Provided below are details about project management software for three main categories of users.
  • Low-end users. Packages that will simply automate the basics for a low-end user are simple to use and will produce pretty charts. Cost: $25 to $200.
  • Mid-range project managers. Mid-range users include managers of large projects or multiple projects. Software for these projects would need a moderate level of sophistication. Cost: $200 to $500.
  • High-end/multi-project users. High-end users are those with complex projects running concurrently, and whose team members work on more than one project at a time. Software would allow simulations and more complex analysis. Cost: $2,000 to $10,000.
Computer software can be a very effective tool for controlling project costs. Remember to purchase software that fits your budget, that you can quickly come up to speed on, and that will meet your needs.

Monday, June 9, 2008

Project Cost Performance Measurement Techniques

One of the most important aspects of project cost control is cost performance measurement. You can use a number of performance measurement techniques to measure cost performance, including cost variance, earned value management (EVM), and the cost performance index. Details about these three cost performance measurement techniques are provided below.

1. Cost variance
Cost variance (CV) is the most basic performance measure. Simply stated, cost variance is the difference between the earned value and actual costs. A positive variance indicates that the project is running under budget, while a negative variance means that costs are overrunning. For the purpose of tracking over- or underrun percentages, you may want to use tables, Gantt charts, or bar charts.

Cost variance is typically expressed as a ratio or percent. You can calculate CV by comparing the actual cost of the work (AC) to the earned value (EV). Follow the steps below to calculate cost variance.
  • Calculate the difference between the earned value of the project and the actual costs.
  • Divide this amount by the earned value.
  • Multiply this figure by 100 to obtain a percentage.
  • Keep the negative sign for cost overruns.
The project manager's goal in calculating variances is to provide the basis for earned value management. You must understand the problems behind variances and take action that will correct any problems.

2. Earned value management
Earned value management is perhaps the most useful activity in cost control because it combines costs and the schedule into one indicator. It tells you how much the project is physically accomplishing in terms of both cost and time, giving management a more accurate and timely report on project progress.

The concept of earned value management multiplies the project budget (planned value, or PV) and percent-complete figures to arrive at a budgeted dollar value of the work that has actually been completed so far. The main difficulty in using earned value data to measure cost performance is in determining work completion. How does one accurately measure how much of a task is complete, while avoiding subjectivity in measuring performance as much as possible?

There are five methods you can use to assess work completion. They are described below, from the most conservative and least accurate to the most accurate.
  • The zero/100 rule. Many companies do not assess percent complete incrementally. This removes any subjectivity. A task is assessed as either not done (zero percent complete) or finished (100 percent complete). This method works well for activities with a short duration—less than a month, for example.
  • The 20/80 rule. This method is almost as conservative as the zero/100 rule. When it is started, a task is considered to be 20 percent complete, and 20 percent of the PV is charged against its account. When the task is complete, the remaining 80 percent of the budget is applied to the task.
  • The 50/50 rule. This is probably the most popular method. You assume that once a task has begun, 50 percent of its budget is used. When a task is complete, it has used the other half. For a project with a large number of tasks, this method provides a fairly accurate way to calculate earned value.
  • The milestone method. This is used for long work packages that are broken down into distinct milestones. A budget is assigned to each milestone instead of to the task as a whole. Value is earned when each milestone is completed.
  • The percent complete. This method is usually used for long-duration work packages (for example, ones that last three months or more). Your project may not have identifiable milestones, but you are still able to estimate the percentage of the task that has been completed.
3. The cost performance index
You can use the earned value figure to establish another important performance indicator. Calculate the ratio of earned value to the actual costs to find out how efficiently your team is accomplishing the work. This ratio is called the cost performance index (CPI). The formula for calculating CPI is as follows:

CPI = EV ÷ AC.

When the CPI is measured periodically, you can plot CPI figures in a line graph to see the trend over the life of the project. This is called a trend analysis.

You will usually see the cost performance index reported along with its "companion" indicator—the schedule performance index (SPI). The SPI is the ratio of earned value (EV) to the planned costs (PV).

Project managers use the CPI and SPI to rate the cost and schedule performance of their projects. A poor rating provides a warning signal, allowing for corrective action to be taken before it's too late. These indexes fall into three categories:
  • If equal to 1.0, performance is exactly as planned.
  • If greater than 1.0, performance is better than planned.
  • If less than 1.0, performance is poor.
Evidence shows that without corrective action, most projects will continue to perform at their cumulative CPI rate. Once the project is about one-third complete, you will have difficulty recovering from a CPI of less than 1.0 without aggressively managing the remaining tasks.

Remember, it's important to measure the cost performance of your projects. By using the three techniques described above, you can control project costs and ensure the project comes in on-budget.

Sunday, June 8, 2008

The Project Cost Change Control System

The cost change control system is one of the tools you can use to control project costs and ensure the project comes in on-budget. It outlines the procedure that is followed to make changes to the cost baseline. You can incorporate it into the integrated change control system to coordinate changes across the entire project.

The cost change control system is important to the cost control process. It helps the project management team by:
  • guiding the team as they make decisions about changes to the budget
  • making all changes auditable and traceable
  • ensuring that incorrect or unapproved changes won't be reflected in the cost baseline.
Each change control system within a project plan is initiated by a change request, whether it is for the budget, the schedule, or for contracts your organization holds with its suppliers. Stakeholders must present a fairly compelling argument in the request why the proposed change must be made.

Once a change request is submitted, the steps of the cost change control system are followed to determine whether or not the cost baseline will change as a result of the request. The cost change control system involves five steps. Companies use this procedure to ensure that all change requests are properly dealt with and that only approved changes are reflected in the cost baseline. The steps in the procedure are listed below.
  1. Receive the change request. The change request is initiated in the form of an oral, written, or electronic request. The person making the request can be either internal or external to the project. The requested change can be optional or legally mandated.
  2. Record the request. The specifics of the change request are recorded, usually in a change request log, so that the request can be managed. The level of detail is up to project management. Enough information should be recorded so that anyone related to the project can understand the request.
  3. Assess the request. Someone on the project team assesses the impact that the proposed change will have on the rest of the project. Budget changes can potentially affect time, cost, quality, and objectives. You have to do a cost/benefit analysis of the change.
  4. Make a recommendation. Based on the assessment, the assessing team member or members make a recommendation to accept, reject, or modify the change request. The recommendation is presented to the project authority.
  5. Decide whether to accept or reject the request. Based on the recommendation, the project authority decides what to do with the request. If rejected, the change request is closed and the documentation is filed. If accepted, the project budget is adjusted accordingly to incorporate the approved change.
If the change is accepted, the project continues according to the revised project plan. Performance continues to be monitored against the modified cost baseline.

Notice the pattern that is evolving. Change requests and the cost baseline were inputs to cost control. The cost change control system is a tool that uses these inputs to produce an output—a change to the cost baseline.

Saturday, June 7, 2008

The Project Cost Management Plan

The cost management plan is an important element of project cost control. It is developed during the cost estimating process and forms one of the main inputs used during the cost control process.

The cost management plan describes how cost variances will be managed, should they occur. Project managers must review the cost management plan regularly to ensure that the guidelines it contains continue to be appropriate throughout the duration of the project.

The cost management plan can be either formal or informal, depending on the nature of the organization. The level of detail required by the project stakeholders will determine whether the plan needs to be detailed or broad.

During the planning stages, companies decide the range by which cost variances will be permitted to deviate. The permitted range may be dependent on such factors as:
  • the particular phase of the project you are in
  • the length of the phase
  • the length of the entire project
  • the nature of the task or materials being estimated
  • the perceived accuracy of the estimate.
Variance management may be different from project to project. For many projects, variances are permitted to change over the project duration. For projects that involve research and development, for example, larger deviations may be allowed during the earlier phases of the project. On the other hand, for manufacturing projects, allowed variances may be fixed over the duration of the project. Since the risk for any project decreases as time goes on, so should the allowed variance.

When a variance occurs, you can deal with it in one of four ways. You can choose to ignore the variance, make functional modifications, replan the project, or redesign the product. The first issue to consider when choosing the appropriate management technique is the size of the cost variance.
  • If the variance is inside the permitted range of deviation, the two best choices are to ignore it or to make functional modifications.
  • If the variance is outside of the permitted range of deviation, you need to take a more drastic approach, such as replanning or redesigning the product.
The choices available to manage a cost variance vary in terms of how drastic they are, how much work they require, and how much they change the project. Ignoring the variance or making functional modifications are mild solutions. These choices require little or no work, and make minimal changes to the project, if any.

Replanning or making changes to the product scope are more drastic solutions. They require a great deal of work and make substantial changes to the project. More details about these four choices are provided below.
  • Disregard. The cost variance can be ignored if it falls within the permitted range of deviation and does not appear to be a sign of future cost problems.
  • Modify. If the variance is within the permitted variance range, but could potentially grow or become a problem in the future, functional modifications can be made. These are small changes to the project that can save time and money.
  • Replan. Replanning occurs if the variance is outside of the permitted range. Management attempts to replan the project without changing the product scope. This means finding less expensive ways of doing things, such as using less expensive resources or contracting out.
  • Redesign. This is the most drastic measure. It involves changing the product or service you will deliver. You have to find ways to make the product less expensive to produce and deliver. Redesign only if replanning is not sufficient.
Project replanning and product redesign involve major changes to the project. Both approaches require an assessment of the impact on the overall product quality and its ultimate usability by the customer. Taking either of these approaches too far could render the product sub-standard and unmarketable.

Remember, there is comfort in having a good plan for managing costs and knowing how to implement it. The cost management plan can help you effectively manage project cost variances when they occur.

Friday, June 6, 2008

Project Cost Control: Change Requests

The secret to successful project cost control is complying with the project plan—and knowing when to be flexible. A good plan will enable you to make changes when necessary.

Nearly every project will require change at some point, whether it's to the schedule, the budget, or the project scope. Change is sparked by the submission of a change request. There are several benefits to using change requests, besides the fact that they initiate necessary change to a project. Change requests are inputs to cost control, but they also:
  • enable team members to have some say in the budget, whether their requests are accepted or not
  • provide useful information during a postmortem follow-up
  • form a part of the paper trail you can use to audit changes to the project budget.
Change requests are used to initiate a modification in the project specifications. In project cost control, change requests apply specifically to proposed changes to the budget. Once the request has been submitted, the cost change control system is used to manage the change request.

The cost change control system is a five-step process that begins with a change request and ends in a decision to accept or reject the proposed change. The five steps involved are: initiate, record, assess, recommend, and make a decision.

Change requests can take many forms. They can be submitted in writing or verbally expressed, internally or externally initiated, direct or indirect, and legally mandated or optional. These different forms of change requests are discussed below.
  • A change request can be made in writing and handed in, or verbally expressed to the appropriate project authority.
  • A change request can originate from within the project team or outside the project team.
  • A change request can be submitted directly to project management or can be passed on to the project manager by someone other than the person who initiated it.
  • A change request can result from a law or rule imposed by the government or authorities, or it can be optionally imposed by the company.
Change requests are the first step in initiating a change to the project budget, scope, or schedule. These requests take different forms, depending on the project and the situation, and they are important inputs to project cost control.

Thursday, June 5, 2008

Performance Reports and Project Costs

Have you ever had that nagging feeling that something's not quite right with a project? Accurate and timely performance reports can help you control project costs, so you can calm that uneasiness.

The time you spend reviewing performance reports and analyzing the data they contain is never wasted. Written performance reports, which are inputs to project cost control, can actually save you the time it would otherwise take to meet face-to-face with team members and other stakeholders. Performance reports are an important input for cost control because they:
  • provide a summary of how a project is progressing
  • compare actual versus planned results
  • provide feedback to management, planners, and team members
  • contain the early warning signs of future problems.
You can use performance reports to analyze variances from the cost baseline, plot the trends that will help you to forecast your total costs, and watch for events that could increase expenses in later stages of the project.

Good project managers take corrective action early on to ensure their project costs hit the mark. However, you need sufficient and accurate information in order to forecast costs properly. There are four main types of charts that summarize and report project information.
  • Histograms. A histogram is a simple graph that quickly shows the over- or underrun of project costs. It indicates both the budgeted and actual cost of performing each project task.
  • Tables. Tables can display data clearly and concisely. Tables can also be used to show costs, activities, project milestones, actual versus planned results, and any other information about project status. Tables can provide summaries or they can contain specific details about a project.
  • Gantt charts. A Gantt chart is the combination of a table and a bar chart. Gantts summarize cost- and schedule-related information. More elaborate charts can include the duration of each activity in hours or days, the estimated start and finish dates of each activity, critical time frames, and milestones.
  • Cumulative cost curves. A cumulative cost curve is a commonly used report that shows project costs plotted against time. The line usually takes the form of an S-curve, since costs are typically low early in the project, increase during the peak production period, and then trail off in the closing phases. You can use a graph to plot the cost baseline and the actual cumulative costs together for comparison. The difference between the two curves represents a cost variance.
The performance reports discussed above are just a sample of those available to project management teams. There is not a set list of performance reports because no two projects have the same reporting requirements. Choose the performance reports that work best for you, and use them to better control costs for your project.

Tuesday, June 3, 2008

The Cost Baseline

Project management is like baseball: You need to follow a baseline or else you will have a hard time bringing the project "home." The cost baseline is a time-phased budget that is used to measure and monitor project cost performance. It is established during the budgeting phase of the project.

Cost budgeting uses cost estimates, the Work Breakdown Structure, and the project schedule to create the cost baseline. The cost baseline is the plan that outlines how project costs are expected to be incurred over time.

Think of the cost baseline as a map that outlines planned cost performance. It is used to monitor where the project is, where it should be, and where it's going in terms of expenditures. The cost baseline is important to understand because:
  • it is the basis for project cost control
  • it serves as a benchmark for measuring cost performance
  • discrepancies from the cost baseline foreshadow problems
  • it gives everyone involved in the project a goal to work toward.
You establish the cost baseline by plotting the estimated total costs per time period on a graph. The resulting line usually takes the form of an S-curve. By reading the graph, you can see how costs are expected to be incurred over the life cycle of the project.

Large projects may have several cost baselines to measure various categories of spending. For instance, a project manager may want to measure labor costs separately from the expenses for materials and equipment.

The cost baseline is set in the planning stages of the project after a lot of time and effort has been spent on developing accurate cost estimates. Therefore, the cost baseline should change only if the project has changed substantially and only if there is no other way to control cost variances.

Day-to-day over- and underruns in costs are normal. Only persistent variances will warrant changing the cost baseline. Do not change the cost baseline if:
  • cost variances are normal and based on accurate estimates
  • cost variances are caused by poor cost estimating
  • normally occurring costs have been forgotten in the planning stage.
Change the cost baseline if:
  • there is a change to a project deliverable that will affect overall costs
  • there is a change in how the work will be done that will affect overall costs
  • there are major, unforeseen changes to project costs.
Remember, adjusting the cost baseline does not change the actual cost of the project—it just eliminates a negative variance. Therefore, changing the cost baseline should not be used as a means of managing variances.

The cost baseline serves as a guide for measuring project performance in terms of cost. Review the cost baseline when variances occur to ensure that the cost estimates used are as accurate and as realistic as possible.