Cost and Financial Management
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Why Costs Overrun
Flyvbjerg (2014) found that large projects frequently run over budget and schedule, partly because of optimism bias and strategic misrepresentation. Flyvbjerg and Gardner (2023) argue that careful planning, drawing on data from similar past projects ("reference class forecasting"), and delivering in small, repeatable modules improve results. The same lessons apply, on a smaller scale, to student and research projects.
Estimating Costs
Cost estimates can be analogous, parametric, bottom-up, or three-point, as for durations. Include direct costs (equipment, materials, travel, participant payments, software, publication fees), labor (including your own time, even if unpaid), and indirect costs such as overheads. Add a contingency reserve for identified risks, and a management reserve for unknown unknowns, and state them openly.
Building the Budget
The budget assigns costs to work packages and time periods, producing the cost baseline against which performance is measured. Research grants usually require a budget justification explaining each item.
Earned Value Management
Earned value management (EVM) integrates scope, schedule, and cost to measure performance objectively (Fleming & Koppelman, 2016). The basic quantities are:
| Term | Meaning |
| Budget at completion (BAC) | Total planned budget |
| Planned value (PV) | The budgeted cost of the work scheduled to date |
| Earned value (EV) | The budgeted cost of the work actually completed |
| Actual cost (AC) | What has actually been spent |
The key indicators are:
Cost variance (CV) = EV − AC (negative means over budget)
Schedule variance (SV) = EV − PV (negative means behind schedule)
Cost performance index (CPI) = EV / AC (below 1 is over budget)
Schedule performance index (SPI) = EV / PV (below 1 is behind schedule)
Estimate at completion (EAC) = BAC / CPI (if current cost performance continues)
Estimate to complete (ETC) = EAC − AC
Variance at completion (VAC) = BAC − EAC
To-complete performance index (TCPI) = (BAC − EV) / (BAC − AC)
Worked example. A project has a budget of 100,000. At the review date, the plan called for 50% of the work to be done, but only 40% is done, and 45,000 has been spent. Then PV = 50,000, EV = 40,000, and AC = 45,000. CV = −5,000, SV = −10,000, CPI = 0.89, and SPI = 0.80. The EAC is 100,000 / 0.89 = about 112,500, so the ETC is 67,500 and the VAC is −12,500. The TCPI of 1.09 shows that the team must perform about 9% better than the budget rate for the rest of the project to finish within budget, which is a warning that this is unlikely without a change.
Funding Academic Projects
Student projects may be funded by the university, a scholarship, a supervisor's grant, an industry partner, or personal funds. Identify what is allowed, what must be reported, and the rules on equipment, travel, and participant payments. Keep receipts, and record spending against the budget monthly.
Cost and Value
Keep cost in the context of value: a cheaper project that fails to deliver its purpose is not a saving. Review benefits and costs together, as the business case does (Chapter 4).
CHAPTER 9