COST MANAGEMENT 642 - Paper 13 COST CONTROL - EARNED VALUE 1.0. EARNED VALUE - INTRODUCTION 2.0. EARNED VALUE - THE PROCESS 3.0. EARNED VALUE - ASPECTS

Earned Value - Historical Background Originated in early 1900s by industrial engineers in factories 1967 US C/SCSC: DoD Instruction 7000.2 - incorporated EV Cost reimbursable contracts. Imposed on contractors Reissued 1991 revision -“contributed to interest in EV” Main users today - US Defence & some Oz Government agencies “cost overrun problems in Australian Defence contracts led to direction from Parliament to implement EV management” 1993: Australia, Canada, Sweden & USA established International Performance Management Council. An objective - promoting EV “private industry, with few exceptions, has not employed EV” “EV: 1 of most underused cost management tools available

Earned Value - Definition EV “is a method for measuring project performance” (PMI). Technique for integrating time and cost perfromance in a project, EV evaluates project’s cost performance by: comparing planned value of work to be done against earned value of work accomplished; and comparing this earned value against actual costs incurred

Earned value - Inputs WBS - defines project’s scope into finite measurable activities. Project Schedule - “without a schedule, there could be no EV” Project Budget - Total & task. Schedule/Budget Baseline - usually represented by S-curve. Work Results - Actual costs incurred

EARNED VALUE - CRITERIA “There will always be some deviation from the plan". Criteria needed to identify if & where deviations are occurring EV relates time and cost deviations with each other EV uses 3 criteria of cost data - BCWS, BCWP, ACWP 3 criteria can be applied to performance of: overall project &/or separate work packages or tasks; each cost period &/or on cumulative basis.

Budgeted Cost of Work Performed (BCWP); or Earned Value EV - Example 1-month project has budget of $10,000. End of month, $8,000 of work completed.This cost $8,500. Budgeted Cost of Work Scheduled (BCWS) = what is planned to be done . BCWS = $10,000. Actual Cost of Work Performed (ACWP) = what was paid for work done. ACWP = $8,500. Budgeted Cost of Work Performed (BCWP); or Earned Value = budget of work actually done. BCWP = $8000 End of the project, BCWP = BCWS.

EV - Example 3. What does BCWP - ACWP tell you ?

COST VARIANCE CV = difference between budget & actualcost CV = BCWP - ACWP Cost Performance Index (CPI) = BCWP / ACWP Both indicate whether work costs more or less than budgeted. Positive CV, or CPI of 1.0+, means actual cost is less than budget Example: CV = $ 8,000 - 8,500 = -$500. i.e., cost overrun, CPI = $ 8,000 / 8,500 = 0.94. i.e., cost overrun Can be calculated cumulatively or for a specific period

EV - Example 4. What does BCWP - BCWS tell you ?

Schedule Variance SV = difference between budget for accomplished work & budget for planned work I.e. schedule performance SV = = BCWP - BCWS Schedule Performance Index (SPI) = BCWP / BCWS Positive SV, or SPI of 1.0+, means actual work performed is greater than work scheduled, so ahead of schedule Example: SV = $8.000 - 10,000 = -$2,000. i.e. time overrun SPI = $8,000 / 10,000 = 0.80 i.e. time overrun Can be calculated cumulatively or for a specific period

Schedule Variance SV can be misleading - “may or may not accurately reflect true schedule position: may not clearly indicate whether milestones are being met, since work may have been done out of planned sequence. Scheduling system must be used to provide the means of determining the status of specific activities or milestones" EV does not discriminate between critical and non-critical scheduled activities so liable to provide misleading projections of completed date

relationship between BCWS, BCWP, & ACWP, SV and CV.

EV - Example 5. The BCWP at any point in time = BCWP of work packages completed + BCWP evaluation of the budgeted value of partially completed work-in-progress. How might the BCWP for partially completed work-in-progress be evaluated?

BCWP - Evaluating Work in Progress major problem- evaluating BCWP for partially completed tasks Short tasks reduces problems, but = numerous tasks Methods for evaluating BCWP for partially completed tasks: START/FINISH Some tasks difficult to assign progress Eg: aligning motor - know when starts & finished, but not % done. S/F = % arbitrary assigned to start, & 100% recorded when done 50/50 = task done at a constant rate. Reasonable for short duration, lower-value tasks 20/80 - good for "tasks with longer duration or higher value. Owner will hesitate to recognise too much completion in advance". 0/100 - suited to very short tasks

BCWP - Evaluating Work in Progress MILESTONES Tasks divided into objective milestones. Each milestone has budget budgeted cost recorded once milestone completed. Suited to longer-duration tasks. e.g., three or four months duration UNITS COMPLETED Measure amount of physical units produced "applicable to tasks that involve repeated production of easily measured pieces of work, when each piece requires approximately the same level of effort" eg bricks laid

BCWP - Evaluating Work in Progress OPINION Judgement made of % of work completed. “Should be used for relatively minor tasks & only where more discrete status is not feasible" LEVEL OF EFFORT (LOE) tasks over long period of time or continuous during project. Eg PM For time-orientated activities, rather than task-related activities % complete = actual cost to date /forecast at completion Assumes BCWP always = BCWS.

EV - Example 6.How might the Estimate at Completion [EAC] be calculated?

Forecasting Final Cost - Estimate at Completion (EAC) EAC = “$ to-date + estimate to complete “infinite number of possible EAC formulas" Benefit of EAC forecasting - indicates effects if no action is taken. "often requested of PMs by anxious senior management, vital to project cash flow, viability of project & sometimes whether to cancel project after it has started" 2 kinds of cost overruns: Current overrun. i.e. cost variance Forecasted cost overrun at completion i.e. EAC

Overrun at completion Current overrun

END OF PROJECT BCWP = BCWS CV = final overrun

EAC - Forecasting Methods Original Budget + Cost Variance to date Work from particular point will progress at planned rates, whether or not rates have prevailed to this point EAC = BAC + CV [BAC: Original Budget at Completion; CV: Cost Variance to date] Example: EAC = 8,500 + (10,000 - 8,000) = 10,500 Common method because some cost overspends are unlikely to be repeated those likely to be repeated may be reduced using experience to date some cost savings will be made to balance further overspend

EAC - Forecasting Methods Cost variance to date will continue to prevail Rate of progress to date will continue to prevail EAC = BAC / CPI [CPI: Cost Performance Index to date] Example: EAC = 10,000 / 0.94 = 10,638. “reliable indicator of total required project costs” “provides what some consider to be the ‘best case’ possible for a project”

EAC - Forecasting Methods Cost and Schedule variance to date will continue to prevail Considers schedule performance as well as cost performance EAC = BAC / (SPI * CPI) [SPI: Schedule performance Index to date] Example: EAC = 10,000 / 0.80 * 0.94 = $13,298. Rationale “if project is behind schedule & overrunning costs to date, both conditions will combine to exacerbate final results”

EAC - Forecasting Methods Estimate for Remaining Work EAC based on actuals to date + new estimate for remaining work Whilst may be accurate, likely to be difficult & costly. Acceptable “when past performance shows that the original estimating assumptions were fundamentally flawed, or that they are no longer relevant due to the change in conditions”

EAC- Summary US DoD analysed 700+ contracts Key findings - at 15% completion point in a project: overrun at completion will not be less than overrun to date. So overrun will not be recovered on remaining tasks; and, % overrun at completion will be greater than % overrun to date. So overruns get progressively worse with time. cumulative CPI value at 20% completion point does not change by more than 10%. So, CPI is a stable value early in project & can be used to confidently predict range of EAC Finally, no single method used but forecast by each calculated so range of possibilities is produced for consideration.

Earned Value - Who needs to use it? Relevant for those with direct control & responsibility for performance of resources used for project activities. Client involved in ‘price control’ rather than ‘cost control’ client’s expenditure predetermined, irrespective of costs incurred by contractor - “key limitation of usefulness of EV for owner Client - BCWP & ACWP are same - “both represent only cost incurred by owner”. contractor will be concerned with EV as it can be used to monitor a project’s cost performance.

EV v Traditional Cost Management Traditional CM: only 2 data used - planned & actual costs “if less, all assumed to be OK”. “May be false because no measure made of what has been done for the expenditure” EXAMPLE Eg: 12-month project $100,000 budget, @ 6 months project spent $29,000 of its planned $32,000 budget. What might this tell you? Alternative interpretations: either project on schedule & under-running costs; or project is behind schedule. Is there any other information required to properly determine the project’s cost performance?

EV v Traditional Cost Management: Example EV approach uses a 3rd dimension: BCWP “Must compare actual expenditure not to schedule expenditure, but to measure of value of work done” .i.e. BCWP. EV provides more useful cost information than traditional approach - “project management must abandon traditional method of relating planned costs to actual costs, and to adopt the three dimensional earned value approach” If known that BCWP is say $24,000, then project is: behind schedule - planned budget at this stage was $32,000 but only $24,000 has been completed overrunning costs - $24,000 budgeted work was done, actually cost $29,000 to accomplish

CM642 - Paper 13: COST CONTROL II - EARNED VALUE 1.0. EARNED VALUE - INTRODUCTION 1.1. Earned Value - Historical Background 1.2. Earned Value - Definition 1.3. Earned Value - Inputs 2.0. EARNED VALUE - THE PROCESS 2.1. Criteria 2.2. Example 2.3. BCWS, ACWP, BCWP 2.4. BCWP - Evaluating Work in Progress 2.5. Performance Indicators - Cost & Schedule Variance 2.6. Forecasting Final Cost - Estimate at Completion (EAC) 3.0. EARNED VALUE - ASPECTS 3.1. Earned Value - Who needs to use it? 3.2. Earned Value v Traditional Cost Management