Project Cost Estimate vs. Cash Flow Analysis

A follow up based on my previous post: analyzing graph of planned project cost against cash flow. 

A simple comparison can be done using the WBS (Work Breakdown Structure) elements that contain all the tasks (the work to be done) of the project not yet realized. Each task has a cost assumption. Since WBS have a child / parent relationship, it's possible to roll up and summarize the cost information from the lower levels and upwards. The summarized total cost is the project cost estimate (or budget).

As the project advances, it's possible to validate the project cost estimate against the cash flow (actual cost). A good estimate makes a better forecast of project cost at completion (close to the final actual cost).

Project Cost Estimate and Cash Flow Analysis
**The above graph illustrates three curves and is based on a hypothetical project with a number of tasks with an equal amount of work distributed equally over time,

  1. The green curve is the ideal case. In an ideal situation the beginning is usually slow because the project team normally acquires confidence with the project. Once the schedule has achieved 20-30% of the work, the slope of the graph will change and will accelerate due to the confidence and knowledge acquired. At 70-80% the schedule has reached a very good level of control and will continue with confidence to full completion of the project.
  2. The red curve is a representation of an early schedule spending too much money at an early stage. In this case, there is a risk to go over the budget, make mistakes, hence, not completing the project has planned.
  3. The blue curve is a representation of a late schedule. In this case, there is a  risk to work in a hurry toward the end, without the possibility of correcting possible mistakes.
**Graph to be re-defined.

In order to compare the project cost estimate with the cash flow at any given point in the timeline of the project, there is a need to know the actual cost of the work done. This data can be obtained from the organization 's accounting system or from the team that keeps track of the financial aspect of the project. 

To analyze, and not only compare, in order to get more meaningful information of the project cost estimate against the cash flow at any given point, it's necessary to verify how much work has actually been completed to that point. This can be achieved with the Earned Value method. Please see my previous two posts for this topic:

Popular posts from this blog

The differences between Project, Operation and Program

Using PERT for estimating tasks

Forecasting Project Costs using Variance Analysis