Planned value and actual costs are very important when in the monitoring and controlling phase. When starting the project, you have to figure out how much money will be involved in the project and how much to estimate. When monitoring and controlling the project, you have to estimate what each item will cost and then go from there but sometimes the actual cost can be different. This can lead to how much money you might be saving or losing in the project compared to what you planned. This will affect the budget of the project and where some costs might need to be cut or if it is worth the revenue. A project that is over the budget can be shut down because it might not make as much revenue to balance the amount spent to develop the project. This can also be a loss that a company does not want.
The actual cost is what the planned value is trying to predict. It is important to catch these early in the project development phase as it tells the company how much they can afford to spend on a project. Further, it tells project managers how much money they have so that they don't use up all of their budget! Also during the controlling phase you can see how much money you are spending and how much your budget allows for, therefore allowing the team to react and slowdown the spending.
Monitoring the difference between planned value and actual value/costs is critical in ensuring that the project will maintain its viability. In a more perfect world, these projects would happen because there are things people need to be healthy, but in the real world, projects are run by companies, who need to make a profit. Being able to monitor the cost of a project allows the company to track the viability of that project. They may be working on the next big thing, but if the project is costing them millions and is not likely to produce millions for the company, then they need to pull the plug. This is going to happen in every industry regardless of what the company does. If something does not make money for the company then they will not do it. And tracking the cost of a project is an important indicator for project viability.
Planned Value (PV) defines how far along project work is supposed to be at any given time in the Project schedule and cost estimate. It answers how much value you have planned to earn in a given time question.The planned value of the work is a time distributed data that can be obtained from the work schedule. Therefore a well-prepared work schedule with the help of Work Breakdown Structure provides categorized data for the planned value.
The critical path of the project determines the project’s duration and the completion date. If the critical path is realistic, the planned value and earned value calculations will be accurate. The planned value may be the allocation of the total budgeted cost of the project or the quantities such as manhour. It is an important metric of Earned Value Management.
Actual Cost is the actual total cost spent for the completion of work. It is the total amount that has been spent.
To figure out if they need to skimp in certain areas and spend less, or if they can spend extra they would calculate cost variance (CV = EV - AC). This would tell them where they currently stand in regards to the budget. Both the CV and SV should be used as guides to determine where the company stands in regards to the project, and are thus critical to the monitor and control of the project. However, if in the control phase it is noticed that resources need to be readjusted, the actual cost can change. In other words, it is the amount of money you have spent to date. Actual Cost (AC) is the total cost incurred in accomplishing work performed for an activity or WBS component.
The critical path of the project determines the project’s duration and the completion date. If the critical path is realistic, the planned value and earned value calculations will be accurate. The planned value may be the allocation of the total budgeted cost of the project or the quantities such as manhour. It is an important metric of Earned Value Management. Having a nearly accurate planned value in a project would make it easier for the project manager to trace the budget and to ensure that the work is on the right track. This can be achieved by preparing an accurate timeline of the project to show the complete budgeted project value/cost.
This is very important in the monitoring and controlling phase because that is where the project is controlled and kept on schedule and on budget. Otherwise, many projects can become vastly over-budget and may even end up losing the company money if these costs are not supervised. As a project manager, you want to try to maintain a positive SV and CV during the Monitoring and Controlling Phase.
There are many aspects of the project that can affect the cost variable and with that in mind, projects can be designed with the risk of these dynamics considered. Money is one of the main driving factors for any project. Many people including investing stakeholders, upper management, and customers are all concerned with how much money the project is consuming. Planned Value and Earned Value can be compared to see whether or not projects are over or under budget and that comparison has the power to derail the entire project if it gets out of hand.
Planned value is usually estimated on the best available resources while many things can happen that may affect the budget of our project so it need to be monitored carefully. Many projects can fall in this mistake makes in it on of big challenges for project managers to keep an eye on. Actual cost is determined after completing of a project and estimated on many aspects and can be calculated by how much we have spent on this project. For project mangers it’s important to plan their budget carefully or the project may fall apart.
