Budgeting and Cost Control
Building the budget
Costs are structured through a cost breakdown aligned to the WBS, distinguishing direct from indirect, fixed from variable, and capital from operating cost. The approved time-phased budget forms the cost baseline against which performance is measured, usually displayed as an S-curve. Hold contingency for identified risks and their responses; hold a separately controlled management reserve for unknown unknowns, normally owned by the sponsor.
Earned value
Know the four core measures: PV (planned value), EV (earned value - budgeted cost of work performed), AC (actual cost) and BAC (budget at completion). From them: CV = EV − AC; SV = EV − PV; CPI = EV / AC; SPI = EV / PV. Variances are expressed in currency, indices are unitless. Forecasts: EAC = BAC / CPI (typical variance continues), or AC + ETC; VAC = BAC − EAC; TCPI = (BAC − EV) / (BAC − AC).
Worked example
BAC = £100,000; EV = £40,000; AC = £50,000; PV = £45,000. CV = −£10,000 (over budget), SV = −£5,000 (behind schedule), CPI = 0.80, SPI = 0.89, EAC = 100,000 / 0.80 = £125,000, VAC = −£25,000.
Traps
Confusing EV with AC or with percentage spend; using SPI late in a project when remaining work is small; assuming 90% of the money spent means 90% complete; forgetting that a favourable CPI can still hide a poor forecast if the early variance was atypical.