Calculate Schedule and Cost Variances with Earned Value Analysis Intermediate Cost Analysis and Management 11.3

How Can We Better Manage Large, Complex, Non Repetitive Projects?

Terminal Learning Objective Action: Calculate Schedule and Cost Variances with Earned Value Analysis Condition: You are training to become an ACE with access to ICAM course handouts, readings, spreadsheet tools, and awareness of Operational Environment (OE) variables and actors Standard: With at least 80% accuracy: Describe theory of Earned Value Analysis Explain the concept of schedule and cost variances in context of Earned Value Analysis Prepare AAR reconciliation using Earned Value Analysis

Introduction In subsequent lessons we will be dealing with Organization based control Role based control Output based control Here we would like to start with a simpler concept Project management and control The question is “how can we perform better in completing tasks or projects?”

Definition of Project Projects are Discrete tasks rather than continuous operations Often one-time or infrequent rather than repeated Frequently complex, ambiguous, or pioneering Tasks that require a significant length of time

Risk The nature of projects results in a high degree of risk There are two types of risk: Risk that the project will not be completed in the timeframe expected: schedule variance Risk that the project will not be completed within the budget allotted: cost variance

Consider the Possibilities at any Given Point During the Project Being right on schedule and at the expected cost is perfect (but rarely happens) Possibilities Matrix schedule Ahead Of Right On Behind cost More than Expected As Expected Perfect Less than Expected

Consider the Possibilities at any Given Point During the Project (Cont Being ahead of or on schedule and at or less than expected cost is a good thing Possibilities Matrix schedule Ahead Of Right On Behind cost More than Expected As Expected Great! Less than Expected Terrific!!

Consider the Possibilities at any Given Point During the Project (Cont Being behind or on schedule and at or more than expected cost is not a good thing Possibilities Matrix schedule Ahead Of Right On Behind cost More than Expected Not Good! Terrible!! As Expected Less than Expected

Consider the Possibilities at any Given Point During the Project (Cont Can’t really tell if this is good news or bad without further analysis Possibilities Matrix schedule Ahead Of Right On Behind cost More than Expected ?? As Expected Less than Expected

Consider the Possibilities at any Given Point During the Project (Cont Possibilities Matrix schedule Ahead Of Right On Behind cost More than Expected ?? Not Good! Terrible!! As Expected Great! Perfect Less than Expected Terrific!!

Earned Value Analysis Earned value management (EVM) provides an common set of metrics for measuring both Schedule variance and Cost Variance EVM combined with AAR offers a template for cost management and control of projects

Earned Value Analysis (Cont.) There are many resources available for more in depth study of Earned Value Analysis/Management See the Earned Value Management website: www.acq.osd.mil/pm Follow links to Defense Acquisition University training programs Familiarize yourself with the wealth of additional material and number of courses available within the DoD community

Requirements for Success The four requirements for successful cost management and control remain the same Leadership: actively engaged in understanding and improving performance Cost staff: supporting leadership with analysis, insight, and advice Process: the AAR where accountable subordinates explain costs and schedules and ways to improve both Measurement: schedule and cost variances as provided by the EVA

What Does Earned Value Mean? Since there are risks to both cost and schedule some method is needed to link the two Earned value measures what has been accomplished in terms of planned (budgeted) cost In this sense it is similar to the flexible forecast we used previously in analyzing volume variance Just like in the flexible forecast we will use the original planning factors to evaluate (in dollar terms) how much more or less work has been done

LSA #1 Check on Learning Q1. What are some of the characteristics of projects that may pose management challenges? A1. Q2. What are the two categories of risk related to projects? A2. Q1. What are some of the characteristics of projects that may pose management challenges? A1. They are frequently one-time or pioneering, with no institutionalized processes. They are also often ambiguous, where expected outcomes may evolve as the project progresses. Q2. What are the two categories of risk related to projects? A2. Risk that the project will not be completed on budget (Cost variance) and risk that the project will not be completed on time (Schedule variance.)

LSA #1 Summary We discussed the need to identify risk by measuring the time and cost of a project. The Earned Value Management (EVM) module creates a format to assist senior leaders in decision making.

Starting Point: The Plan (Budget) Just as in analyzing volume and performance variance we must start with an expectation This is the plan or budget The plan or budget must define two of the following three variables in the equation: cost = output x cost per output Some measure of output (like units) A measure of cost per output The total cost Furthermore, the plan defines these variables for all time periods or milestones within the project

One Difference: Non-Linearity Possible Volume variance recognizes that cost fits the equation Cost = variable cost per unit x units + fixed cost Resulting in a linear relationship in plotting $ versus units Earned value analysis planning is likely to be non-linear This is to say that cost and effort will not increase at a constant rate when plotting $ versus time

Comparing Flexible Forecast to Project Budget $ $ units time

Comparing Flexible Forecast to Project Budget (Cont.) $ $ units time

Essential Vocabulary of EVM Variables BCWS Budgeted Cost for Work Scheduled How much work should be done? BCWP Budgeted Cost for Work Performed How much should it cost for the work actually done? ACWP Actual Cost of Work Performed How much did the work done actually cost? BAC Budget at Completion What was the total project supposed to cost? EAC Estimate at Completion What do we now expect the project to cost?

Tying Terminology to Graph Suppose that halfway through the project ACWP is lower than expected “at that time” BCWP is higher than expected “at that time” What does this mean????? (Terrific!!: we are ahead of schedule and under cost) $ BCWS ACWP time

Tying Terminology to Graph BCWP Suppose that halfway through the project ACWP is lower than expected “at that time” BCWP is higher than expected “at that time” What does this mean????? (Terrific!!: we are ahead of schedule and under cost) $ BCWS ACWP time

Tying Terminology to Graph BCWP Suppose that halfway through the project ACWP is lower than expected “at that time” BCWP is higher than expected “at that time” What does this mean????? (Terrific!!: we are ahead of schedule and under cost) $ BCWS ACWP time

Tying Terminology to Graph BCWP BAC Suppose that halfway through the project ACWP is lower than expected “at that time” BCWP is higher than expected “at that time” What does this mean????? (Terrific!!: we are ahead of schedule and under cost) EAC $ BCWS ACWP time

Schedule Variance Logic Differs From Cost Variance In calculating cost volume variance we looked at increased units resulting in more cost More cost is (unfavorable) by definition in cost variance analysis In calculating schedule variance we look at this situation quite differently Even though cost is higher the logic here is that we are ahead of the spending schedule and therefore this is a favorable schedule variance Plan Flexible Fcst Volume Variance Units sold 100 130 30 Variable cost 500 650 (150) Plan BCWP Schedule Variance Units produced 100 130 30 Cost 500 650 150 © Dale R. Geiger 2011

Here’s Why: We’re Looking at Two Different Dimensions Cost Variance looks at the Y axis Schedule variance looks at the X axis Any point left of the BCWS is ahead of spending schedule in the time dimension: favorable Any point right is unfavorable Any point above the BCWS is over cost: unfavorable Any point below is favorable $ $ time time

EVM Variance Template Here you can see some of the similarities to other variance analyses BCWP is calculated using the budgeted cost per and the actual units Cost variance is favorable since ACWP is less than BCWP And differences: Note that the sum of variance is no longer meaningful Note that schedule variance is favorable when BCWP exceeds BCWS BCWS Schedule Variance BCWP Cost Variance ACWP Units Produced 100 130 Cost per Unit 5 4 Cost at a Point in Time 500 150 650 520

EVM Variance Summary Schedule Variance = BCWP – BCWS Logic: Increased cost of work performed means that more schedule has been completed: a favorable schedule variance Decreased cost of work performed means that less schedule has been completed: an (unfavorable) schedule variance Cost Variance = BCWP – ACWP Logic: Like a typical cost variance less actual cost than budgeted is a favorable variance More actual cost than budgeted is an (unfavorable) variance

Calculating EAC: Estimate at Completion One other very useful metric to calculate is the estimated cost at completion There are numerous ways to estimate this Detailed re-forecast of remaining costs – may be costly Management guess – may be optimistic Projection from results to date – assumes that we will finish remaining work with the same level of efficiency or inefficiency

Calculating EAC: Estimate at Completion Consider the previous example The ratio of ACWP to BCWP is 80% If we complete the project at this efficiency then EAC will be 80% of BAC If BAC was 1000 then we would estimate completion at 800 BCWS Schedule Variance BCWP Cost Variance ACWP Units Produced 100 130 Cost per Unit 5 4 Cost at a Point in Time 500 150 650 520

LSA #2 Check on Learning Q1. What information does the comparison of BCWP to BCWS give? A1. Q2. What can be said about the project if ACWP is greater than BCWS? A2. Q1. What information does the comparison of BCWP to BCWS give? A1. This gives the schedule variance. It compares the actual work completed to the plan in terms of budgeted or planned cost. Q2. What can be said about the project if ACWP is greater than BCWS? A2. This comparison gives the cost variance. If the Actual cost of work performed is greater than the budgeted cost of work scheduled, that represents an UNFAVORABLE cost variance.

LSA #2 Summary We identified EVM terminology and applied those terms to graphs. We were also able to use this data to identify variances of both time and cost. By using the EVM variance summary, running estimates are then updated with the latest information for management.

The Project Management AAR Uses EVM metrics as part of the measurement input Expects accountable subordinates to understand and explain the variance Seeks continuous improvement in both cost and schedule There are many application opportunities for project management AARs Acquisitions, research and development, experimentations, building and construction, BRAC, ARFORGEN, etc., etc.

Classroom Exercise You’ve decided to apply project management techniques to the project of getting an MBA You plan on taking one course this semester, two courses a semester for eight semesters and one course the last semester with each costing $2000 You successfully completed the first semester’s course which cost $2000 Task: Determine your budget at completion (BAC), schedule variance, cost variance, and estimate at completion (EAC)after the first semester

Budget at Completion: BAC semester courses cost per bcws cum 1 2000 2 4000 6000 3 10000 4 14000 5 18000 6 22000 7 26000 8 30000 9 34000 10 36000 $ X axis = semesters BAC

Schedule and Cost Variances Estimate at Completion (EAC) We are on schedule and at cost expected: perfect Cost Estimated At Completion (EAC) will be unchanged from the BAC since ACWP is same as BCWP BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1st Semester 1 Cost per Unit – 1st Semester 2000 Cost after 1st Semester --

Schedule and Cost Variances Estimate at Completion (EAC) We are on schedule and at cost expected: perfect Cost Estimated At Completion (EAC) will be unchanged from the BAC since ACWP is same as BCWP BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1st Semester 1 Cost per Unit – 1st Semester 2000 Cost after 1st Semester --

Schedule and Cost Variances Estimate at Completion (EAC) We are on schedule and at cost expected: perfect Cost Estimated At Completion (EAC) will be unchanged from the BAC since ACWP is same as BCWP BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1st Semester 1 Cost per Unit – 1st Semester 2000 Cost after 1st Semester --

Schedule and Cost Variances Estimate at Completion (EAC) We are on schedule and at cost expected: perfect Cost Estimated At Completion (EAC) will be unchanged from the BAC since ACWP is same as BCWP BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1st Semester 1 Cost per Unit – 1st Semester 2000 Cost after 1st Semester --

Schedule and Cost Variances Estimate at Completion (EAC) We are on schedule and at cost expected: perfect Cost Estimated At Completion (EAC) will be unchanged from the BAC since ACWP is same as BCWP BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1st Semester 1 Cost per Unit – 1st Semester 2000 Cost after 1st Semester --

Schedule and Cost Variances Estimate at Completion (EAC) We are on schedule and at cost expected: perfect Cost Estimated At Completion (EAC) will be unchanged from the BAC since ACWP is same as BCWP BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1st Semester 1 Cost per Unit – 1st Semester 2000 Cost after 1st Semester --

Classroom Exercise – 2nd Semester You’ve decided to apply project management techniques to the project of getting an MBA You plan on taking one course this semester, two courses a semester for eight semesters and one course the last semester with each costing $2000 You only completed one course in the 2nd semester Tuition went up $200 per course Determine your schedule variance, cost variance, and estimate at completion after the 2nd semester

2nd Semester Results We are now behind schedule and over cost: terrible!! ACWP is 105% of BCWP so EAC can be projected at 105% of BAC: (1.05)36K = 37.8K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1st Semester 2000 -- Courses Taken – 2nd Semester 2 Cost per Unit – 2nd Semester Cost of 2nd Semester 4000 Cost after 2nd Semester 6000

2nd Semester Results (Cont.) We are now behind schedule and over cost: terrible!! ACWP is 105% of BCWP so EAC can be projected at 105% of BAC: (1.05)36K = 37.8K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1st Semester 2000 -- Courses Taken – 2nd Semester 2 1 Cost per Unit – 2nd Semester 2200 Cost of 2nd Semester 4000 Cost after 2nd Semester 6000 4200

2nd Semester Results (Cont.) We are now behind schedule and over cost: terrible!! ACWP is 105% of BCWP so EAC can be projected at 105% of BAC: (1.05)36K = 37.8K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1st Semester 2000 -- Courses Taken – 2nd Semester 2 1 Cost per Unit – 2nd Semester 2200 Cost of 2nd Semester 4000 Cost after 2nd Semester 6000 4200

2nd Semester Results (Cont.) We are now behind schedule and over cost: terrible!! ACWP is 105% of BCWP so EAC can be projected at 105% of BAC: (1.05)36K = 37.8K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1st Semester 2000 -- Courses Taken – 2nd Semester 2 1 Cost per Unit – 2nd Semester 2200 Cost of 2nd Semester 4000 (2000) (200) Cost after 2nd Semester 6000 4200

2nd Semester Results (Cont.) We are now behind schedule and over cost: terrible!! ACWP is 105% of BCWP so EAC can be projected at 105% of BAC: (1.05)36K = 37.8K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1st Semester 2000 -- Courses Taken – 2nd Semester 2 1 Cost per Unit – 2nd Semester 2200 Cost of 2nd Semester 4000 (2000) (200) Cost after 2nd Semester 6000 4200

2nd Semester Results (Cont.) We are now behind schedule and over cost: terrible!! ACWP is 105% of BCWP so EAC can be projected at 105% of BAC: (1.05)36K = 37.8K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1st Semester 2000 -- Courses Taken – 2nd Semester 2 1 Cost per Unit – 2nd Semester 2200 Cost of 2nd Semester 4000 (2000) (200) Cost after 2nd Semester 6000 4200

Classroom Exercise – 3rd Semester You’ve decided to apply project management techniques to the project of getting an MBA You plan on taking one course this semester, two courses a semester for eight semesters and one course the last semester with each costing $2000 You successfully completed three courses in the 3rd semester Tuition again went up $200 per course Determine your schedule variance, cost variance, and estimate at completion after the 3rd semester

3rd Semester Results We are now back on schedule but over cost: not good! ACWP is 114% of BCWP so EAC can be projected at 105% of BAC: (1.14)36K = 41.0K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2nd Semester 6000 (2000) 4000 (200) 4200 Courses Taken – 3rd Semester 2 Cost per Unit – 3rd Semester 2000 Cost of 3rd Semester Cost after 3rd Semester 10000

3rd Semester Results (Cont.) We are now back on schedule but over cost: not good! ACWP is 114% of BCWP so EAC can be projected at 105% of BAC: (1.14)36K = 41.0K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2nd Semester 6000 (2000) 4000 (200) 4200 Courses Taken – 3rd Semester 2 3 Cost per Unit – 3rd Semester 2000 2400 Cost of 3rd Semester 7200 Cost after 3rd Semester 10000 11400

3rd Semester Results (Cont.) We are now back on schedule but over cost: not good! ACWP is 114% of BCWP so EAC can be projected at 105% of BAC: (1.14)36K = 41.0K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2nd Semester 6000 (2000) 4000 (200) 4200 Courses Taken – 3rd Semester 2 3 Cost per Unit – 3rd Semester 2000 2400 Cost of 3rd Semester 7200 Cost after 3rd Semester 10000 11400

3rd Semester Results (Cont.) We are now back on schedule but over cost: not good! BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2nd Semester 6000 (2000) 4000 (200) 4200 Courses Taken – 3rd Semester 2 3 Cost per Unit – 3rd Semester 2000 2400 Cost of 3rd Semester (1200) 7200 Cost after 3rd Semester 10000 -- (1400) 11400

3rd Semester Results (Cont.) We are now back on schedule but over cost: not good! BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2nd Semester 6000 (2000) 4000 (200) 4200 Courses Taken – 3rd Semester 2 3 Cost per Unit – 3rd Semester 2000 2400 Cost of 3rd Semester (1200) 7200 Cost after 3rd Semester 10000 -- (1400) 11400

3rd Semester Results (Cont.) We are now back on schedule but over cost: not good! ACWP is 114% of BCWP so EAC can be projected at 114% of BAC: (1.14)36K = 41.0K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2nd Semester 6000 (2000) 4000 (200) 4200 Courses Taken – 3rd Semester 2 3 Cost per Unit – 3rd Semester 2000 2400 Cost of 3rd Semester (1200) 7200 Cost after 3rd Semester 10000 -- (1400) 11400

Individual Exercise: 4th Semester You’ve decided to apply project management techniques to the project of getting an MBA You plan on taking one course this semester, two courses a semester for eight semesters and one course the last semester with each costing $2000 You successfully completed three courses in the 4th semester Tuition again went up $200 per course Determine your schedule variance, cost variance, and estimate at completion Prepare an AAR reconciliation for your Spousal AAR with suggestions for improvement

4th Semester Results We are now back on schedule but over cost: not good! ACWP is 114% of BCWP so EAC can be projected at 114% of BAC: (1.14)36K = 41.0K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 3nd Semester Courses Taken – 4th Semester Cost per Unit – 4th Semester Cost of 4th Semester Cost after 4th Semester

4th Semester Results (Cont.) We are now ahead of schedule but over cost: not good! ACWP is 120% of BCWP so EAC can be projected at 120% of BAC: (1.20)36K = 43.2K BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 3nd Semester 10000 -- (1400) 11400 Courses Taken – 4th Semester 2 3 Cost per Unit – 4th Semester 2000 2600 Cost of 4th Semester 4000 6000 (1800) 7800 Cost after 4th Semester 14000 16000 (3200) 19200

MBA Project Graph after 4th Semester BAC BCWS $ Semesters

MBA Project Graph after 4th Semester EAC BAC ACWP BCWS $ BCWP Semesters

Conclusions Projects offer many important opportunities for cost management and control The requirements for success are identical to other cost management and control effort The major difference is that project management requires attention to both Schedule variance Cost variance Another difference is that AARs might be scheduled at logical project milestones rather than fixed time intervals

This is like a performance variance This is like a volume variance Teacher’s Note cost reconciliation continuous improvement BCWS 14000 transfer ACWP 19200 apply for scholarship variance (5200) grade papers as part time job petition to avoid courses cost variance (3200) accelerate to avoid tuition hikes extra course taken (2000) don’t drop any courses acwp/bcwp 120% bac 36000 eac 43200 This is like a performance variance This is like a volume variance

Teacher’s Note: MBA Exercise schedule cost bcws variance bcwp acwp units completed 1 1st semester cost per unit 2000 cost at point in time 2 2nd semester 2200 4000 (2000) (200) 3 3rd semester 2400 6000 (1200) 7200 4th semester 2600 (1800) 7800 14000 16000 (3200) 19200

TLO Summary Action: Calculate Schedule and Cost Variances with Earned Value Analysis Condition: You are training to become an ACE with access to ICAM course handouts, readings, spreadsheet tools, and awareness of Operational Environment (OE) variables and actors Standard: With at least 80% accuracy: Describe theory of Earned Value Analysis Explain the concept of schedule and cost variances in context of Earned Value Analysis Prepare AAR reconciliation using Earned Value Analysis