1. © 2011 All Rights Reserved APM Heathrow Branch Meeting 11 th September 2012 Practical Use of Earned Value for Real- time Forecast and Control Nick Brown ARES Corporation

2. © 2011 All Rights Reserved 2 What is Earned Value Management? A Collection of management practices that are used to establish and maintain a performance measurement baseline from which to measure and analyze performance, identify variances to the baseline, and forecast the project outcome Effectively integrates the work scope of a project or program with the schedule and cost elements for optimum program planning and control to support project management decisions-making Uses 3 data points to determine productivity and efficiency factors Planned Value (How much as planned to get done?) Earned Value (How much was accomplished?) Actual Costs (How much did it cost?)

3. © 2011 All Rights Reserved BCWP: The value of the work that has been performed Often referred to as: EV, BCWP, Earned Budget EV = BAC * Percent Complete Note: no reference to Actual Costs spent % Complete and the Budget of work are the inputs to determine Earned Value % Complete is synonymous with Progress –Typical question is How much progress have we made? Lets Talk about Earned Value 3

4. © 2011 All Rights Reserved Earned Value – the hard part The difficult task is OBJECTIVELY assessing the realistic % Complete - How much work has been completed compared to how much work is remaining to complete? Important:Assessing Accurate Consistency is important (well talk about that shortly) Consistent EV practice reduces subjectivity on progress 4

5. © 2011 All Rights Reserved Objectively Assessing % Complete Understand the work scope Engineering Tasks/Deliverables (drawings, specs, plans, etc.) Construction tasks Indirect Cost tasks Procurement deliverables Firm Fixed Price contract pay items Research and Development tasks Information Technology Tasks Requires some experience factor to establish Subject Matter Expert Company documented Standards (Engineering Standard)

6. © 2011 All Rights Reserved 6 Several methods for objectively assessing progress Discrete Effort 0% - 100% -Either 0% or 100%, no in between values 50/50 rule -50% when start, 100% when completed Quantity based -Quantity installed / Quantity EAC Milestones-Weighted Progress Milestones Mgmt Assessment-SMEs educated guess (a little subjectivity) Apportioned Effort -% based on progress of other tasks Level of Effort (LOE) -Planned = earned Being consistent and having documented rules of earning is important Some Standard Rules of Earning

7. © 2011 All Rights Reserved Choosing the Right Rules Short duration activities (<1d to 5d) 0-100 ; 50-50 Rule Activity is typically done before the next progress update Mid duration activities (5d – 30d) Based on Quantity Weighted Milestones Long Duration Activities (>30d) Based on Quantity Weighted Milestones Apportioned Effort LOE (try to focus <20% of budget)

8. © 2011 All Rights Reserved Rules of Earning Paired to Task Engineering Tasks Can be both short and long duration activities 0-100 ; 50-50 Rule Weighted Milestones

9. © 2011 All Rights Reserved Rules of Earning Paired to Task Construction Tasks Typically short duration activities 0-100 ; 50-50 Rule Weighted Milestones Quantity Installed Indirect Costs Apportioned Effort Progress is based on the progress of other tasks (e.g. Construction Management activities, Utilities, Project Management LOE Good for fixed duration activities that have little chance of schedule delays

10. © 2011 All Rights Reserved Rules of Earning Paired to Task Procurements Weighted Milestones Long Lead Procurements (typically identified in PO) 0-100 (payment when delivered) Indirect Costs Apportioned Effort Progress is based on the progress of other tasks (e.g. Construction Management activities, Utilities, Project Management LOE Good for fixed duration activities that have little chance of schedule delays

11. © 2011 All Rights Reserved Rules of Earning Paired to Task Research and Development Projects Nature of work has typically not been performed before SME develops accomplishment and WBS Weighted Milestones (SME must develop as part of the work plan) Managements Assessment of % complete Information Technology Projects Weighted Milestones SME develops accomplishment and WBS Weighted Milestones based on deliverable (documents, testing, signoffs, etc)

12. © 2011 All Rights Reserved Cost Processors Rules of Earning

13. © 2011 All Rights Reserved The 4 Key Elements of EVM Four data points Budget at Complete (BAC) Total Budget of the Work task Planned Value (PV, BCWS, Scheduled Budget) When budget (£, Hrs, Qty) is linked to schedule, value of the work to be performed, over time, can be measured. Usually measured by reporting period or To-Date Earned Value (EV, BCWP, Earned Budget) After % complete is determined, multiply by BAC to derive EV which generates the work accomplished Actual Costs (AC, ACWP) Actual costs incurred (including Accruals)

14. © 2011 All Rights Reserved Efficiency and Productivity Using BCWS, BCWP, ACWP, the following performance values can be derived (£, Hrs, Qty) SV - Schedule Variance is the value of work accomplishment versus the value of work planned (BCWP – BCWS). CV - Cost Variance is the value of work accomplishment versus the actual cost to perform the same work (BCWP – ACWP). SPI - Schedule Performance Index is the schedule efficiency. It represents the ratio of work value performed vs. the work value planned. (BCWP/BCWS). CPI - Cost Performance Index is the cost efficiency. It represents the ratio of the value of work performed, to the actual cost to perform the work (BCWP/ACWP).

15. © 2011 All Rights Reserved EV Basics Some Basics about SV and CV Negative values indicate behind schedule / behind costs Positive values indicate the opposite Usually set to thresholds for variance analysis reporting Does not replace a critical path analysis of key schedule dates By itself does not indicate project is going to miss their dates Based on the Early Dates of a schedule, doesnt evaluate float Some Basics about SPI and CPI –Stated as a ration where 1.0 is even (on schedule/on cost) –Less than 1.0 indicates trending behind schedule –Above 1.0 indicates trending ahead of schedule

16. © 2011 All Rights Reserved 16 Estimate at Completion (EAC) Total anticipated cost of the project Estimate to Complete (ETC) Total anticipated cost of the remaining work of the project Simple equations are: EAC = Actuals + ETC EAC – Actuals = ETC Many more equations are available Variance at Completion (VAC) EAC-BAC=VAC Forecasting

17. © 2011 All Rights Reserved 17 EAC calculations aid in determining the EAC Some methods work better at different phases of the job Different methods provide for worst case, best case, and most likely EACs There is no one correct answer until all true costs of the job have been incurred. Use the best information available to predict the EAC Determining the EAC

18. © 2011 All Rights Reserved 18 Calculations can give an indication but many factors contribute to making a final decision on the EAC Procurements costs not hitting at the time expected Temporary shifting of resources Performance trends Changes to the scope Changes in key resources EAC determination must consider all these factors Determining the EAC

19. © 2011 All Rights Reserved EAC Calculation Methods Independent EAC (i-EAC) BAC / CPI cum Which also equals Actuals / % Complete £1,000 / 0.63 = £1587 Basic Actuals cum + (BAC - EV cum ) £900 + (£1000 - £600) = £1300 Composite Actuals cum + ((BAC - EV cum ) / (CPI cum + SPI cum )) £900 + ((£1000 - £500) / (0.63 + 0.71)) = £1273 3 Month Ave Actuals cum + ((BAC - EV cum ) / CPI 3 )) £900 + ((£1000 - £500) / 0.63)) = £1693 Determining the EAC (cont)

20. © 2011 All Rights Reserved 20 We need to be able to answer the follow question….. How well do we have to perform to get back on track? T-CPI (BAC - EV cum ) / (EAC – Actuals cum ) (£1000 - £500) / (£1200 - £800) = 1.25 £1.25 of work has to be completed for every dollar spent Different derivatives of this calculation can be used to include focus on schedule performance, cost performance and the specific phase of the project One Last Bit of Data

21. © 2011 All Rights Reserved Benefits of using Earned Value Proven to reduce the risk of unforeseen cost increases Focuses on true work completed Early Warning System Course corrections are easier to make when you have time to make small adjustments If react too late, there may be costly risks and schedule delays incurred Management by Exception Focus on the areas that have performance issues and need management attention

22. © 2011 All Rights Reserved Benefits Continued Provides reliable data and predictive data Only caution is the 1 st 15% and last 15% of a project The cumulative cost performance index (CPI) provides an early warning signal. The schedule performance index provides an early warning signal. The CPI is a predictor of the final cost of the project. EVM uses an index-based method to forecast the final cost of the project, less guessing The "to-complete" performance index allows evaluation of the forecasted final cost. The periodic (e.g., weekly or monthly) CPI is a benchmark.

23. © 2011 All Rights Reserved With Earned Value Performance 23 Planned Actual In £1,000s Budget at Completion (BAC) 12345678910 Months Target Completion Date 200 400 600 800 1000 1200 11 1300 BCWS = £500K : Data Date BCWP = £300K ACWP = £400K 200 400 600 800 1000 1200 1300 Current Completion Date Probable Schedule Delay = 4 weeks Probable Cost Overrun = £300K Estimate at Completion (EAC) Cost Variance -£100K Schedule Variance (Time) - 4 wks Schedule Variance (£) -£200K Earned Typical EV Performance Graph

24. © 2011 All Rights Reserved 24 Typical EV Performance Report

25. Thank you nbrown@arescorporation.com

26. © 2011 All Rights Reserved PRISM G2 Modules Materials