Page 101 - The Six Sigma Project Planner

Cost Control Plan
*

The project manager must know where he or she stands in terms of expenditures. Once
the manager is informed that a given amount of future expense is allocated to him or
her for a particular project, it is his or her job to run the project so that this allowance is
not exceeded. The process of allocating resources to be expended in the future is called
budgeting. Budgets should be viewed as forecasts of future events; in this case, the
events are expenditures. A listing of these expenditures, broken out into specific
categories, is called the budget. Project budgets are commonly prepared for the
following categories of expenses:

• Direct labor budgets are usually prepared for each work element in the project
TEAMFLY
plan, then aggregated for the project as a whole. Control is usually maintained at
the work element level to ensure that the aggregate budget allowance is not
exceeded. Budgets may be in terms of dollars or some other measure of value,
such as direct labor hours expended.

• Support services budgets need to be prepared, because without budgets support
services tend to charge based on actuals, without allowances for errors, rework,
etc. The discipline imposed by making budget estimates and being held to them
often leads to improved efficiency and higher quality.
• Purchased items budgets covers purchased materials, equipment, and services. The
budgets can be based on negotiated or market prices. The issues mentioned for
support services also apply here.

Budget Reports
Budgets allocate resources to be used in the future. No one can predict the future with
certainty. Thus, an important element in the budgeting process is tracking actual
expenditures after the budgets have been prepared. The following techniques are useful
in monitoring actual expenditures vs. budgeted expenditures.
• Expenditure reports that compare actual expenditures with budgeted expenditures
are periodically submitted to the budget authority, e.g., finance, sponsor.
• Expenditure audits are conducted to verify that charges to the project are
legitimate and that the work charged for was actually performed. In most large
organizations with multiple projects in work at any given time, it is possible to
find projects being charged for work done on other projects, for work not yet
done, etc. While these charges are often inadvertent, in fairness to the various
sponsors they must still be identified and controlled.
• Variance reporting compares actual expenditures with budgeted expenditures
directly. The term variance is used here in the accounting sense, not the statistical
sense. In accounting, a variance is simply a comparison of a planned amount

* Part of the official project plan.

®
Team-Fly
84