PURPOSE
The purpose of this procedure is to discuss how Project Managers, Project Engineers, and Construction Managers can perform cost forecasting, cost monitoring, and variance analysis.
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RESPONSIBILITIES
Program Manager: The Program Manager must obtain approval from the approving authority, usually an Oversight Committee, for all requested changes in scope, budget, and/or schedule.
Project Manager (PM): The PM is responsible for setting and monitoring the project budget, scope, and schedule. The PM must also assure that the project costs and budget are updated at appropriate points during the design process. The PM must also review these updates to ensure that scope creep is not occurring. As the client agency contact, the PM is also responsible for managing the design process so that additional client requests/requirements outside the project scope are minimized once the project budget and scope have been established. There are times when a scope revision is essential. For example, a change in scope may be necessary to comply with a code requirement or a regulatory permit requirement. In the case of an essential scope revision, the PM is responsible to (1) notify the Program Manager if the project’s budget, scope, or schedule are being compromised; (2) work with the Project Engineer to identify work that can be deleted from the original scope to maintain the approved budget and schedule; (3) work with the Program Manager to obtain either additional funding or approval for scope reduction to achieve the budget; and (4) adjust the project scope, schedule, and budget based on the revisions approved by the Oversight Committee.
Project Engineer (PE): The PE is responsible for designing the project in accordance with the approved scope but within the limits imposed by the project budget. If scope creep occurs that is not within the PE’s ability to control, or if the schedule and budget are at risk for any other reason, the PE is responsible to notify the PM at the earliest possible moment.
Construction Manager (CM): The CM is responsible to monitor project costs during construction, minimize change orders to the extent possible, and avoid any unnecessary change orders. In particular, the CM must monitor changes related to scope or owner initiated changes. The CM must update the change order information in UPRS on a regular basis. The CM is also responsible to notify the PM whenever a change is requested that appears to be unnecessary or not within the original project scope.
Oversight Committee: Most capital programs have an Oversight Committee that has the authority and responsibility to approve a project’s scope, budget, schedule, and any changes thereto. In such cases, the Oversight Committee is the approving authority.
PROCEDURE
Background
The need for cost forecasting and variance analysis is applicable to all phases of a project: Pre-Design, Design, and Construction. This control over project expenditures is not only a vital tool, but is necessary to see that total funding is both available to complete the project and in place for milestone payment dates. There are many tools that can be used for this monitoring, but the basic policy is to use only the tools needed to deliver the project for the lowest total cost. The object of a successful project is being able to deliver it for the lowest total project cost. Nothing will substitute for design quality to keep down the total project cost.
Cost Control Cycle
The PM must monitor the cost control cycle to make sure the project will be funded to completion. The first step in the process is estimating and budgeting. This begins with the authorization to start planning the project then performing a work breakdown structure to determine what subgroups and/or specialties will be required to complete the design. This is followed by creating subdivided work descriptions where the various tasks can be identified and quantified. Schedules are then made and each task is budgeted based upon standard templates or in some cases by negotiating with the group that will perform the work.
The second step is to release the work to the working design groups and start spending the funds needed to perform the work. This is where the monitoring truly begins and the results are measured by cost, performance, and time to complete. This requires the regular review of expenditures to control costs and make adjustments as necessary.
The PM must be proactive and step in whenever necessary to expedite the work flow and resolve problems quickly. All “within budget” projects have the same common features including thorough planning and concept of the work to be done. Also needed is a good work definition of the tasks involved and an accurate work breakdown structure. It is very important to have clear communication of the work scope with all parties involved and good estimating of time, labor, and costs. “Within budget” projects have quality designs, disciplined budgets, and control over the authorization to make expenditures.
Other factors involved with successful “within budget” projects are the periodic re-estimation of time, performance, and cost to complete and frequent comparisons of actual progress and expenditures versus schedule and budget. It is also important to take immediate remedial actions based on problems uncovered in these comparisons. The PM must budget for contingencies, because all unknowns increase the cost and add time to the project. Management involvement is also vitally important to the success of a project. They need to be regularly informed of project status and be willing to assist should a problem arise.
Cost Accounting System
There is a critical need for accurate information on who is charging and how much to a project. The Bureau of Engineering’s (BOE’s) cost accounting system is based on work order numbers and task and subtask codes for each project. Every project has one work order number and some may have more than one. They are broken down into three layers of definition; phase identifier, task codes and subtask codes. The BOE breaks down tasks into Management and Administration, Concept, Pre-Design, Bid and Award, Construction, Post-Construction Commissioning, and Services. Each of these is further broken down into tasks and subtasks. The basic requirements for cost reporting are as follows: (1) a reasonable level of detail, (2) personal responsibility for data input, (3) input should be automated to the extent reasonable, (4) different levels of detail are needed for task leaders, PMs and management, and (5) the system should provide information often and regularly.
Data from individual timesheets is entered into the Financial Management Information System (FMIS). FMIS is the official cost accounting system for the City. It is housed on the City’s mainframe computer and costs are entered by the Bureau of Accounting. The report formats are “accounting-like” and many types are available – “canned” and ad-hoc. The system can provide information on every individual by name that charges to a project’s work order number.
Actual project charges are downloaded from FMIS monthly into UPRS. The PM should check the UPRS actual charge data monthly, investigate incorrect charges and secure corrections. The UPRS “actuals” are necessarily summarized into total project charges. If the PM or PE question the charges, they can request more detailed information from the Merlin system to be distributed on a quarterly basis from the administrative staff of the Division or from the FMIS system by contacting the Administration Division.
Common Causes for an Over Budget Project
The causes for an over budget project can be found in any phase of the project. In the Planning Phase it starts with no or limited alternatives assessments. Then poor estimates will result in poor budgets and an inadequate work breakdown structure will leave out costs. The environmental assessment is a great example of this problem. Never assume that it will be a simple exemption or negative declaration, because a surprise full Environmental Impact Report (EIR) could cost years times and expense. Other over budget causes in the planning phase are having no plan for “expected, but yet unidentified” problems, over optimism with time, budget or effort and an unrealistic appraisal of the capability of existing staff to perform the work needed.
In the Design Phase a common cause for over budget projects is scope creep (see Procedure 4.3) where additional features or extras are requested by the client during the design process. Other causes are poor tracking of planned versus actual costs, not understanding the customer’s requirements and unauthorized charging to the project. Problems in the design phase can also be caused by an inadequate Quality Assurance/Quality Control (QA/QC) plan, failure to design to budget, and not understanding what constitutes the “100% design” package.
The most common causes for an over budget project in the Construction Phase are poor design, unclear specifications, or lack of control over owner initiated changes. Other causes are the failure to resolve disputes and negotiate change orders in a timely manner and having an adversarial versus a partnering attitude with the contractor. Partnering is the best approach to resolving issues during construction and thus constructing the project at the least possible cost. Performing constructability reviews at 50% and 90% is essential. The 90% package should include complete package, schedule of work and prices, GC & GRs, technical specifications, and permits. Each Program should develop a plan and checklist for the minimum effort to ensure this review is performed.
The Post Construction Phase contains potential factors that can cause an over budget project. The first is simply a slow closeout. This could be caused by as-builts not being completed, change order issues not resolved and final change orders not issued, Office of Contract Compliance (OCC) problems with contractor wages and the subcontractors used, or not completing the lessons learned report in a timely manner. Finally, simply failing to close the work order can allow unexpected stray charges to be made to the project.
Total Project Cost Estimating
The PM is responsible for the total project cost estimate. This total project cost estimate must include everything. This means construction, delivery costs, right-of-way, build out, permits, contingencies, escalation, and allowances. The PM must always use estimating contingencies, escalation to mid-point of construction, and construction or budget contingencies when estimating the project budget. In addition, there are the delivery costs which include planning, pre-design, design, and specialty services (such as environmental, Geotech, structures, real estate, architecture, process, electrical, mechanical and instrumentation and control). Also, the costs of bid and award, construction management, inspection, close out, and other Department costs and consultants must be estimated and included into the total project cost. The total project cost means the TOTAL. The only unknown is possible litigation and hopefully that will not occur.
The Total Project Cost should be the budget amount. This total project cost is the amount that should be quoted when discussing the project. When requested the construction cost or the City Engineer’s estimate of a project, always qualify that amount for what it is. In some cases, it may be prudent to state the total project cost as well. This will help to eliminate confusion, unrealistic expectations and questions at the completion of the project.
In special Programs, such as the Bridge Program, budget for utility relocations should be added based on an MOU with utility company and proposal from utility company. Utility companies can be various such as LADWP, railroad company, and gas company. Also, plans produced by agencies external to BOE, such as LADOT, BSL, BSS must be fully signed prior to project advertising for construction.
Tools for Project Monitoring
The PM needs to balance the tools to be used based on the actual needs of the project. It is BOE Policy to use monitoring control tools when it is likely they will assist in delivering at the lowest possible total cost. It is not cost effective to use every monitoring tool where their application will have minimal useful value and increase the total project cost. The basic cost monitoring tools include UPRS and other cost forecasting tools that may be developed for a specific project.
UPRS is the BOE’s Uniform Project Reporting System. UPRS drives the Program Master Schedules, provides geocoding information to the GIS Database, provides the basis for the Work Program Resource Requirements (WPPR), and provides the fundamental data on project scope, budget and schedule. The information available can help the PM track project charges and their sources, the object being to locate problems and make corrections and revisions.
Cost forecasting is important at any phase of a project. The PM must be able to recognize the progress being made on the project and the amount of the budget that has been expended. There must also be funds in place and available to make progress payments, especially in the case of authorized bonds to be sold to raise capital. The following tools or methods can be used in cost forecasting:
Earned Value – Earned value is an estimate of the “value” of the work performed to data. The earned value can then be compared to that actually expended. If earned value is greater than expended value, then the project is ahead of its actual expenditures. On the other hand, if earned value is significantly less than expended value, the project may be in trouble and might not finish within its allocated budget. The point is that it is important to review the work progress to assure that it is moving at the same pace as the expenditures.
Cost to Complete – Cost to complete is a new estimate of the work to be done and the cost to do it in a particular phase of a project at a specific point in time. This analysis will help to determine if the remaining funding will be sufficient to complete the project or if a surplus might be possible.
Variance Analysis – Variance analysis is the difference between the cost to complete and the remaining budget or the difference between earned value and expended value. Variance analysis can be a useful tool to determine if the project is on budget; if corrections to method or scope are needed; or if additional funding must be appropriated. In cases where additional funding will be required the PM must discuss the situation with the Program Manager and be ready to meet with the Oversight Committee to explain what will be required. It is imperative to obtain actual cost reports from third party utility companies to ensure that their actual charges will be within their cost proposal.
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