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MANAGE INDIRECT COSTS USING THE EARNED VALUE MANAGEMENT METHOD

PUBLISHED BY PMWEB ON APRIL 19, 2021APRIL 19, 2021



Each capital construction project consists of direct and indirect costs. Direct
Costs are the costs that are proportional to the project, which would usually
include material for products, workers, project managers. Direct Costs are also
known as Variable Costs as they vary with project requirements. On the other
hand, Indirect Costs: are the costs expended regardless of the size of the
project. They include a project management team working on multiple jobs in the
office, contract supervision, tools and equipment, temporary buildings,
scaffolding, personal protective equipment, quality control, inspection, bonds
and insurance, repairs, and maintenance. Depreciation and amortization, project
finance, general expenses, among others. Indirect Costs are also known as Fixed
Costs, and they do not vary with project requirements.

Although we tend to monitor and control direct costs closely, less attention is
given to indirect costs. Like the risks associated with the direct cost scope of
work for which they can be managed or outsourced or transferred to other,
indirect costs scope of work can also be managed or outsourced. In summary,
similar to direct costs, indirect costs also need to be addressed, monitored,
controlled, and reported on.

Similar to direct costs, indirect costs need to be adequately estimated. The
detailed cost estimate will be associated with the relevant cost breakdown
structure (CBS) levels that they relate to. The approved indirect costs estimate
they will become the basis for establishing their budget and their budgeted
spending plan. The approved estimate will also be the basis for establishing the
commitment cost for each category or package of indirect cost, either outsourced
or managed by the entity. The commitment cost will also become the basis for
capturing the actual money spent on indirect costs. Those actions will enable
the entity to manage, monitor, control, and report on indirect costs.

Using a Project Management Information System (PMIS) like PMWeb, the cost
management processes of a capital construction project should cover the
procedures for both direct and indirect costs. The first step to achieve this
requires defining the cost breakdown structure (CBS) for the indirect cost
categories, as explained above. 

The next step is to use the PMWeb cost estimate module to estimate indirect
costs. PMWeb allows creating the cost estimate by using pre-defined cost items
like, for example, associated with the site office facilities and labor and
equipment resources. There is also the option of importing the cost estimate
from MS Excel. When estimating the indirect cost, it is essential to provide the
quantity, unit of measure, and unit price for each cost estimate line item
instead of lump-sum values. This will be needed when capturing the actual
spending of indirect cost.

When the indirect cost estimate is approved, PMWeb allows generating a budget
request or adjustment. This will be used to append the approved project baseline
budget with the budget for indirect cost. This budget adjustment will be posted
as the original budget rather than the revised budget. The budget projection
option allows defining the projected budget spending line for each budget line
item. It is highly recommended to link each budget line item with the relevant
project schedule activity. This will be used to calculate the earned value (EV)
for each budget line item for which the budget at completion (BAC) and planned
value (PV) is already available.

The approved cost estimate will create the commitments for the different
indirect cost categories to enable capturing actual spending. Also, it allows
creating procurement packages for an outsourced scope of work. For example, for
bonds and insurances needed for the project, the entity might ask for proposals
from different insurance copies. This will enable the entity to compare and
select the best proposals to generate the commitment for that indirect cost
category.

The commitments for indirect costs should itemize all items that need to be
managed, monitored, controlled, and reported. For example, the committee will
include a line item for each resource for the team working on the project, by
name, showing the entire days, weeks, or months allocated to the project and the
unit rate for each resource. The unit rate which the corporate office will
provide will be inclusive of salary, all allowances, indemnities, among others.

To ensure that the approved indirect cost commitments reflect the predicted
total indirect cost when the project is completed, all changes, whether
approved, pending, or even expected, should be captured. PMWeb potential change
order module can be used as an early warning notification of any predicted
changes to what was initially approved. If the review of the possible change
order finds that the shift has merit, then a change order will be generated.

PMWeb, a change order module, will capture, review and approve or reject all
changes. Those changes will be initially considered as pending until they are
reviewed and approved or rejected. The approved revision will be the basis for
having the revised commitments by adding them to original obligations. Projected
commitments will be revised commitment plus pending modifications and potential
changes that are still not approved or rejected.

The actual spending of resources and items included in the indirect cost
commitments will usually happen daily. The PMWeb production module allows
capturing those quantities weekly. Those production forms can be assigned to
different individuals to capture actual data for consumed resources and items
accurately. Similar to the concept of timesheets, production sheets as generated
every week from the past week production sheet.

An interim payment requisition will be released every month to estimate the
number of indirect costs spent during the period. The actual quantities will be
automatically captured from the production forms, for which the actual cost will
be calculated by multiplying the exact amounts by the unit price. The actual
cost could be incurred against internal entity commitments between the project
team and one of the entity’s business units and external entities like insurance
companies, suppliers, etc. This process will continue until the project comes to
completion. Those values will be the actual cost (AC) values used in the earned
value management method.

For any other indirect cost expenses occurred that was not part of original cost
estimate, nor the approved budget or commitments for indirect cost, PMWeb
miscellaneous invoices module will be used to capture the cost against its
related cost breakdown structure (CBS) level.

Another option for capturing indirect cost that was not part of a commitment is
timesheets.  Entities can use the PMWeb timesheet module to capture the actual
cost of resources, labor, and equipment spent on the project. PMWeb allows
defining regular pay, overtime pay, weekend pay, and another type of hourly
actual cost rate for each resource to be reported on. PMWeb timesheet module
allows each help to submit his/her timesheet each week or submit a single
timesheet for all resources, labor, and equipment that each resource is
responsible for. PMWeb same timesheet allows posting hours on different
projects.

For each PMWeb record, including those for the indirect costs, the attachment
tab will be used to attach all supportive documents required for the transaction
or each process. It is highly recommended that all supporting documents be
uploaded and stored on the PMWeb document repository. Besides, links to other
transactions for the different project management can be added as well as links
to imported MS Outlook emails.

Similarly, a workflow will be assigned to each indirect cost process to map the
sequence for each record’s review and approval tasks before its status becomes
labeled as approved. This will enable assigning the role or project team member
to each review task and its duration. Also, conditions can be added to each
workflow to incorporate the approval authority levels associated with the
workflow.

The captured indirect cost data from the different processes detailed above will
provide the needed input for managing, monitoring, controlling, and reporting
the indirect cost using earned value management method. The budget adjustments
will give the budget at completion (BAC) and planned value (PV). The updated
project schedule values for each period will be imported to PMWeb using the
schedule link. This enables the earned value (EV) for each budget line item by
multiplying the completion (BAC) budget with the linked project schedule
activity percent complete value. The actual cost (AC) values will be captured
from progress invoices, miscellaneous invoices, and timesheets.

Those values will become the basis for calculating the earned value measures.
Those include the schedule variance (SV), which is the difference between earned
value (EV) and planned value (PV), cost variance (CV), which is the difference
between earned value (EV) and actual cost (AC), schedule performance index (SPI)
which is the division of earned value (EV) by and planned value (PV), cost
performance index (CPI) which is the division of earned value (EV) by actual
cost (AC), the estimate to complete (ETC) which is difference between budget at
completion (BAC) and earned value (EV), estimated cost at completion (EAC) which
is summing estimate to complete (ETC) and actual cost (AC), and finally the
variance at completion (VAC) which the difference between budget at completion
(BAC) and estimated cost at completion (EAC).



Categories: BlogCost ManagementCostsPlansSchedulesToolsWorkflow
Tags: CostsPlansSchedulesToolsworkflows


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