CPM 300 Principles of Earned Value Implementation CPM 300B – Management Use of EV Data Eleanor Haupt Aeronautical Systems Center eleanor.haupt@wpafb.af.mil +1-937-656-5482 Lloyd Carter MTC AustralAsia Pty Ltd llcarter@mtc.aust.com +61(0)3 5754 1010

Training Objectives Basic concepts of measuring performance Examples EVM guidelines for project execution Basic concepts of reporting progress Basic concepts of analysis

Budgeted Cost for Work Performed (BCWP) the EARNED VALUE concept We’re at the end of the second month, but only 1 section of track is complete. Earned value of work completed = $1,000 Assess progress on recurring basis There are different methods of earning value You earn value the same way as it was budgeted in baseline

General Principles of Measuring Performance (BCWP) Establish valid metrics as you establish the time phased baseline Relate true work status Objective and quantifiable Should be a quantitative and discrete way to measure the work May tie in with success criteria or technical measure Example: successful completion of a specific test Must be consistent in following established metric as work progresses BCWP value drives both cost and schedule variances If overstated or understated, it will distort variances Can impact estimate at complete calculations

Three Basic Methods of Earning Value Discrete Physical, tangible end product Common techniques: milestone, % complete, 0/100, 50/50, units complete Apportioned Discrete, but dependent on another discrete work package Example: quality assurance (depends on assembly labor) Planned as historical estimating factor (e.g., 7%) Level of Effort No tangible end product Basis of measurement: time When clock starts ticking, you automatically accumulate earned value Results in no schedule variance (BCWP will always equal BCWS) Example: management personnel

Be Discrete! Discrete EV Techniques: Method How Value is Earned 0/100 no EV at opening, 100% EV at close of WP 50/50 50% EV at opening, 50% EV at close of WP Units Completed same budget value for identical units Equivalent Units planned unit standards, allows partial credit Weighted Milestone each milestone weighted based on planned resources ideal to have a milestone each month Percent Complete should be based on some quantitative assessment may be somewhat subjective

Earning BCWP on Material Material and Subcontracts Earned Value: taken no earlier than receipt or progress payments to subcontractors define order receipt or progress payments payment to inventory usage accurate cost accumulation and assignment to contract should perform price and usage variances should plan earned value to match expected payment period BCWP and ACWP should occur in same period to avoid artificial cost variance option: may report “estimated actuals” based on invoice

Examples of BCWP Calculations

Different EV Methodology Yields Different Results! WBS 1.1.2 (Workpackage) MONTH: Jan Feb Mar Total BCWS (Original Budget) 100 120 100 320 BCWP (Earned Value) ACWP (Actual Cost) 50 120 180 350 Assume that costs overran and work was completed behind schedule for all methods

Example: Milestone Technique Jan Feb Mar BCWS (Original Budget) 100 120 100 320 BCWP (Earned Value) 0 100 220 320 Milestone 1 Planned: 100 Milestone 2 Planned: 120 Milestone 3 Planned: 100 SCHEDULE VARIANCE -100 -20 +120 0 ACWP (Actual Cost) 50 120 180 350 COST VARIANCE -50 -20 +40 -30 100 120 100

Example: Level of Effort Technique Jan Feb Mar BCWS (Original Budget) 100 120 100 320 BCWP (Earned Value) 100 120 100 320 SCHEDULE VARIANCE 0 0 0 0 ACWP (Actual Cost) 50 120 180 350 COST VARIANCE +50 0 -80 -30

Example: 50/50 Technique Jan Feb Mar BCWS (Original Budget) 160 160 320 BCWP (Earned Value) 160 0 160 320 Task – Baseline Task - Actual SCHEDULE VARIANCE 0 -160 +160 0 ACWP (Actual Cost) 50 120 180 350 COST VARIANCE +110 -120 -20 -30 50% 50% 50% 50%

Example: Percent Complete Technique Jan Feb Mar BCWS (Original Budget) 100 120 100 320 BCWP (Earned Value) 60 100 160 320 Task 1 (100) Task 2 (120) Task 3 (100) SCHEDULE VARIANCE -40 -20 +60 0 ACWP (Actual Cost) 50 120 180 350 COST VARIANCE +10 -20 -20 -30 60% 40% 50% 50% 100%

Which Technique Accurately Reflects Work Progress? Jan Feb Mar Total Milestone SV -100 -20 +120 0 CV -50 -20 +40 -30 LOE SV 0 0 0 0 CV +50 0 -80 -30 50/50 SV 0 -160 +160 0 CV +110 -120 -20 -30 % Compl SV -40 -20 +60 0 CV +10 -20 -20 -30

EVM Guidelines for Project Execution

Work Package (not open) Work Packages Work Package (closed) Work Package (open) Work Package (open) Work Package (open) Work Package (not open) Time Now

Authorizing the Work Can only work on work package if it has been opened Charge costs to open work packages only Contractor system sets procedure Contractor maintains baseline log which tracks: Distribution of budget Additions of authorized work Total equals value of contract at cost Contract changes incorporated in disciplined manner Cannot start work without authorization and budget Baseline changes are controlled

more rules of the road... cannot move budget and work independently cannot use management reserve budget to cover overruns may replan open work packages as necessary contractor sets internal policy maintain valid performance information cannot change budgets or costs for completed work except to fix errors

Project Control So, your project has been baselined and work has started Is everything going according to plan? Next step in the process: figure out your status figure out the problems figure out what you need to do to fix them figure out what the impact might be $ time BCWP BCWS

Status Reporting Report on periodic basic weekly monthly Tailor the data to match how you’re managing Provide performance reports to: Senior management Customer Based on contract terms Use data in reports and variance analysis to manage and control project

Contractor Reports Cost Performance Report (CPR) (Example of data item from U.S. Department of Defense) Cost Performance Report (CPR) Format 1: cost and schedule progress by WBS (specified reporting level usually at level 3) Format 2: cost and schedule progress by organization Format 3: changes to performance measurement baseline Format 4: manpower forecast Format 5: variance analysis current and cum data

Formats 1 and 2 Contents header: body basic contract information (target, ceiling, name of contractor, etc.) range of final estimates body performance data variances budget at completion, estimate at completion WBS or ORGANIZATION

Variance Explanations Format 5 variance analysis should address: separate discussion of CV, SV (current and cum) and VAC clear description of reason for variance quantity variances (e.g., price vs. usage) be specific discuss needed corrective action technical, schedule, and cost impacts impact to estimate at completion should be written by CAM! A big hammer for a big variance!

Sample of Variance Analysis

Basic Concepts of Analysis or figuring out where the problems are

Looking Forward PAST PRESENT FUTURE Are we on schedule? Are we on cost? What are the significant variances? Why do we have variances? Who is responsible? What is the trend to date? What risks have been reduced or added? What is the “to go” plan? How is it resourced? When will we finish? What will it cost at the end? How can we control the trend? How do we adjust for risk? To address management with earned value more specifically, it is important to analyze our past performance in order to help us control the future. All too often, earned value data is seen as historical, a nice picture of where we’ve been. It is challenging work to analyze these past trends and use them to project into the future. However, every program manager should be able to answer when the project will finish, what it will cost, and understand the impacts of future risks. Using earned value data allows us to project these trends and then to take the appropriate action to control the project. Acquiring earned value data can take a substantial amount of time and resources, and we must make effective use of it in managing our projects. Earned value is the only management tool that relates cost and schedule progress to technical progress. Earned value should not be seen as a progress report, but the integrating principle of project management. We analyze the past performance………to help us control the future

Basic Analysis Techniques Find significant variances eliminate almost complete, just starting, etc. Graph and analyze trends Look at comparative data e.g. cumulative performance vs. projected performance Examine written analysis by contractor does it answer why? adequacy of corrective action plans Analysis of schedule trends, critical path Analysis of EAC realism what are the drivers? what can we do about them?

Types of Variances Values can be expressed as either current period or cumulative current tends to be more volatile use cum data to show trends Easy rule of thumb: negative value = BAD positive value = GOOD index < 1.0 = BAD index > 1.0 = GOOD Absolute expressed in terms of dollars or hours (e.g., -$1,000) may not be able to tell significance from this amount Percent relates absolute variance to a base (e.g., -35%) shows significance Index compares one value to another in a simple ratio if you are on plan, index = 1.00

Where are the significant problems? sorted by CV $

graphs show overall trend... Graphing Techniques Overall cost and schedule trend EAC realism graphs show overall trend... are you getting better, or worse?

Analysis of Variances CURRENT OR CUM TO DATE Schedule Variance SV ($) = BCWP - BCWS SV (%) = BCWP - BCWS x 100% BCWS Cost Variance CV ($) = BCWP - ACWP CV (%) = BCWP - ACWP x 100% BCWP

Performance Indices 1.2 “GOOD” 1.1 1.0 CPI .9 SPI “BAD” .8 COST PERF INDEX (CPI) = BCWP ACWP SCHED PERF INDEX (SPI) = BCWP BCWS 1.2 “GOOD” 1.1 TIME 1.0 CPI .9 SPI “BAD” .8

Past and Present Cost Efficiency IS THE CONTRACTOR'S EAC REASONABLE? Compare the CPI to the TCPI-LRE TCPI-EAC = Efficiency necessary to complete at the contractor’s estimate WORK $5000 - $1000 $4000 = BAC-BCWP = REMAINING = $6400 - $2400 = $4000 = 1.00 EAC-ACWP ESTIMATE REMAINING Cumulative performance to date (CPI) = .42 Contractor has been performing at 42% efficiency, but expects to complete remaining work at 100% efficiency! reasonable? The TCPI(LRE/EAC) depicts the efficiency necessary for the contractor to complete at his estimated EAC. Since we had assumed the contractor had resolved all problems it is no surprise that he only has to work at 100% to achieve his EAC. Of course, he was only working at 42%.

Schedule Status compare % scheduled = BCWS x 100% BAC % completed = BCWP x 100% compare example: I should have completed 60% of the work (% scheduled), but I only completed 42%

Budget Status budget status compare: % spent vs. % complete % spent = ACWP x 100% BAC compare: % spent vs. % complete example: 60% spent vs. 50% complete

Mutual Goal: Effective Variance Analysis Make it meaningful avoid routine explanations Make it timely Make it streamlined significant variances Make it right work with contractor to get the information we need Get the information to the managers Use the information to control the project make this a mutual goal between contractor and customer 9

What will be the final cost? Estimate at Completion (EAC) defined as actual cost to date + estimate to complete contractor develops comprehensive EAC at least annually reported by WBS in cost performance report should examine on monthly basis consider the following in EAC generation performance to date impact of approved corrective action plans known/anticipated downstream problems best estimate of the cost to complete remaining work EAC = ACWP + ETC

Need to Estimate Costs for Remaining Work Budgeted Cost for Work Remaining (BCWR) Budgeted, baseline value for remaining work Update estimate of costs for BCWR Can be detailed estimate Can calculate with performance factors (CPI or SPI) Assumes performance will continue at same level of efficiency Basic formula: BCWR / performance factor Example: CPI = .9 BCWR = 1,000 Estimate to complete = 1,000 / .9 = 1,111

Common EAC Formulas Common EAC Formulas: EAC = BAC CPI = ACWPcum + Budgeted Cost of Work Remaining CPI3 = ACWPcum + Budgeted Cost of Work Remaining .5(CPI) +.5(SPI) = ACWPcum + Budgeted Cost of Work Remaining CPI * SPI

Other methods of EAC calculation “Grass Roots” or formal EAC detailed build-up from the lowest level detail hours, rates, bill of material, etc. Average of statistical formulae Statistical regression Complete schedule risk analysis for remaining work, estimate work remaining

Past vs. Projected Efficiency Efficiency needed to achieve EAC 1.0 CPIcum = .42

Earned Value Enables Realistic Forecasts CONTRACT BUDGET BASE $24M COST VARIANCE AT COMPLETE FORECASTED ACTUALS BUDGET 20M SCHEDULE VARIANCE Cost Var FORECAST SCHEDULE SLIP 16M 12M PMB FORECASTED EARNED VALUE 8M 4M 2 4 6 8 10 12 14 16 18 20 22 TIME PERIODS TIME NOW PROGRAM IS BEHIND SCHEDULE AND OVERRUNNING COST

The “Box of Uncertainty” (courtesy Swedish Defense Material Administration) POTENTIAL COST OVERRUN 20M POTENTIAL SCHEDULE SLIP 16M 12M PMB 8M 4M 2 4 6 8 10 12 14 16 18 20 22 TIME PERIODS TIME NOW BOX OF UNCERTAINTY SHOWS POTENTIAL RANGE OF COST OVERRUN AND SCHEDULE SLIP

Managing with Earned Value Data

Program Manager Responsibilities Assign integrated responsibility to teams Demand accountability Ask tough questions project office contractor Look ahead – manage the risks Integrated analysis and reviews EVMS Integrated Master Schedule Risk Plan Manage to the baseline Control statement of work growth Lead assessment of baseline realism Integrated Baseline Review (IBR) Call for realistic estimates The Program Manager is the key person in making EVM work. Some of the major responsibilities are to assign responsibility to IPT subordinates, and then hold people accountable and ask tough questions. This would be true both on the government and contractor teams. Another key responsibility is to use EVM data to identify trends and potential problems and manage program risks. The PM is also responsible for ensuring that the EVM data ties together with the integrated master schedule, the risk plan and other management indicators. Earned value should be seen as the connecting thread between the contractor’s technical, schedule, and cost performance. The program team should fully integrate EVM analysis into program reviews. The PM should see the EVM baseline as the plan to manage the project. Successful baseline management includes controlling growth of the SOW and assessing the baseline realism. The IBR is the initial review of the baseline, and the baseline should be reviewed continually through the life of the project.

Quotes from Project Managers “Are we looking good, or are we in trouble? And, how do we know?” CAPT Joe Dyer, US Navy F/A-18E/F Program Manager “It forces you to plan, and then to manage to the plan.” Lt Col Paul Vancheri, US Air Force JSTARS Production Program Manager

Additional References http://www.cpm-pmi.org http://www.acq.osd.mil/pm

Summary Be careful to establish correct value for reported BCWP (earned value) Set up and maintain system discipline Maintain a realistic baseline Analyze earned value data Calculate a realistic estimate at completion Manage with earned value data