A general contractor discovers that actual job costs are running 15% over budget on a $300,000 project that is 60% complete. If the trend continues, what is the projected total cost overrun?
Correct Answer
D) $45,000
Current costs should be $180,000 (60% × $300,000) but are actually $207,000 (115% × $180,000). Projected total cost = $207,000 ÷ 0.60 = $345,000. Overrun = $345,000 - $300,000 = $45,000.
Why This Is the Correct Answer
The correct approach is to first calculate what the actual costs are at 60% completion ($180,000 × 115% = $207,000), then project this cost rate to 100% completion ($207,000 ÷ 0.60 = $345,000). The total overrun is the difference between the projected final cost and the original budget ($345,000 - $300,000 = $45,000). This method properly accounts for the cost overrun trend continuing through project completion.
Why the Other Options Are Wrong
Option A: $35,000
$35,000 incorrectly calculates only the current overrun amount ($207,000 - $180,000 = $27,000) or uses an incorrect projection method that doesn't properly extrapolate the trend to completion.
Option B: $60,000
$60,000 incorrectly assumes the 15% overrun applies to the entire $300,000 budget (20% × $300,000), rather than projecting the current cost performance trend to completion.
Option C: $52,500
$52,500 appears to calculate 15% of the total project cost plus some additional amount, but this doesn't follow the proper earned value management methodology for projecting cost overruns based on current performance.
Memory Technique
Use the acronym 'PAP': Performance (current %), Actual costs, Project to completion. Always divide actual costs by percent complete to project final costs.
Reference Hint
Look up 'Earned Value Management' or 'Cost Control and Budgeting' in project management chapters, specifically sections on cost performance index and estimate at completion calculations.
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