2. 1 Estimating Costs At Completion Review this tutorial and the Project Pyramid Exercise until you are fully comfortable with how to calculate an estimate at completion. Take Special Note of “Points to Ponder” EXERCISE 15

3. 2 LEARNING OBJECTIVES ELO 8.1: Given project EVM information, determine impact to the Estimate at Completion (EAC). ELO 8.2: Given project CPR data, calculate estimate at completion (EAC) range.

4. 3 Exercise 15. EAC CALCULATIONS & ASSUMPTIONS STEP ACTION 1. Review the EAC formulas on slide 14. 2. Answer the Questions on slides 15 & 16 Criteria for Successful Completion 1. Responses consistent with slide show content 2. Responses that demonstrate logical assumptions, per slide show content.

5. 4 Estimate at Completion (EAC) Develop supportable estimates. Start with assumptions. Learn how to use EAC formulas. Use contractors’ data to determine contract status. Key to an accurate assessment is the contractors’ work package EV methods and definition of complete. CPI = Cost Performance Index The cum to date performance efficiency, or value of work completed for every $1.00 spent. A CPI of.80 means $.80 of work was completed for every $1.00 spent. TCPI = To Complete Performance Index The efficiency the contractor must achieve in order to meet their stated EAC. PMO will calculate the TCPI to assess the reasonableness of the contractor’s estimate. A TCPI of 1.13 means the contractor’s EAC depends upon completing future work at a rate of $1.13 worth of work for each $1.00 spent. Point to Ponder: If the contractor performance to date is 80%, what is the likelihood the contractor will perform at 113% for all future work?

6. 5 SPI = Schedule Performance Index = BCWP divided by BCWS = The value of work completed for every $1.00 of work planned to complete. An SPI of.75 means $.75 of work was completed for every $1.00 of work scheduled to be completed. Points to Ponder: The calculated schedule variance or schedule efficiency stated in dollars is simply an indicator that a true schedule variance may exist. This can be confirmed only by reviewing the milestone schedule and the critical path elements. The dollarized SV does not recognize schedule ‘reserve’ also known as schedule ‘slack.’ SV = Schedule Variance = BCWP - BCWS = Work completed minus work scheduled About EVM Schedule Indicators

7. 6 The CPIcum represents the average efficiency at which the contractor has performed to date. In other words, the value of work completed for every dollar spent. A CPI of.80 means $.80 of work is completed for each $1.00 spent. The TCPI represents the efficiency the contractor must perform from this point on to the end of the contract in order to meet the contractor’s stated EAC. In Project Pyramid, the contractor has performed at an average efficiency or CPI cum to date of.71. In other words, the Pharaoh was getting $.71 worth of work for every $1.00 spent. The contractor’s EAC of $22M says they must immediately begin to perform at an efficiency of 1.33, or complete $1.33 of work for every $1.00 spent, and continue this efficiency til contract completion. Therefore, one might conclude the contractor’s estimate is not likely. At the least, the PMO needs to ask some hard questions. Next step: Develop your own independent EAC, using the contractor’s data. Your gold card gives you two often used formulas. The basis for all the EAC formulas is the CPI. You know the efficiency to date. You must decide your best guess on the efficiency the contractor will perform for the balance of the contract. A starting point would be to assume the same efficiency will continue. Research tells us the efficiency to date is as good as it is going to get, and performance is even likely to degrade. Sorry, but facts are facts. Form your assumptions and calculate an EAC range. Best Case, Worst Case, Most Likely. I usually use the contractors’ estimates as the Best Case, since they tend to be wildly optimistic. Do the ‘eye-ball’ reasonable test. Does the curve appear realistic? If the BCWS curve flattens out at the end - not realistic.

8. 7 Management Reserve Total Allocated Budget (TAB) ACWP C Time Now BCWS C Completion Date Schedule Variance C Cost Variance C PMB All Realistic Plans/PMBs Form an ‘S’ Curve BCWP C Potential Schedule Slip BAC EAC MR Dotted Line = estimated schedule slip and cost overrun

9. 8 Management Reserve Total Allocated Budget (TAB) ACWP C Time Now BCWS C Completion Date PMB Evaluate the PMB ‘S’ Curve - Notice the Flattened End BCWP C Contractor will do this Work Free? BAC Dotted Line = estimated schedule slip and cost overrun EAC Is this PMB realistic? Are we really getting 3-4 years work free?

10. 9 FACT: The Total Allocated Budget (TAB) minus Management Reserve always equals the PMB or BAC. TAB - MR = PMB Stated another way, The PMB or BAC plus Management Reserve always equals the Total Allocated Budget. PMB + MR = TAB If MR equals ‘0’ the PMB = TAB. Study the following graph.

11. 10 Calculate TCPI to Kr EAC $ Years Time Now Completion Point NEGOTIATED CONTRACT COST ACWP BCWS Management Reserve=2M Budget at Completion (BAC)=20M } BCWP 0 2 4 6 8 10 12 14 16 18 20 22 02468101214161820 1 3 § 22M } T CPI § 22M KR EAC § 22M KR EAC Cum CPI

12. 11 Calculating an Estimate At Completion (EAC) The estimate at completion formula is simply: EAC = ACWP + Estimate To Complete (ETC) (EAC = actual costs incurred + estimate to complete) Make two key assumptions: 1. Will the contractor use the Management Reserve (MR)? Yes/No. 2. Will the contractor continue to perform at the same efficiency (CPI)? Yes/No. Improved efficiency? Degraded efficiency? The basic EAC formula, EAC=BAC/CPI assumes the CPI (efficiency) cum to date will continue. Historically, this formula gives you an estimate that is as good as it gets. This statistic will probably continue, until we reach the point that we award contracts at a realistic cost, and develop realistic work plans or PMB’s.

13. 12 TCPI = Work Remaining = Cost Remaining KR EAC Work Remaining Cost Remaining Work Completed § BCWP = 10M Costs Incurred Total Budget, Authorized Work § BAC or TAB = 22M § KR EAC =22 M § ACWP =13M § 12M Estimated Cost, Authorized Work § 9M = TCPI = 1.33

14. 13 Calculate TCPI to Kr EAC $ Years Time Now Completion NEGOTIATED CONTRACT COST ACWP BCWS Management Reserve=2M Budget at Completion (BAC)=20M } BCWP 0 2 4 6 8 10 12 14 16 18 20 22 02468101214161820 1 3 § 22M } T CPI § 22M KR EAC § 22M KR EAC Cum CPI =.77 TCPI = 1.33 or 133%

15. 14 Is the contractor’s EAC reasonable? If they have been performing at 77% efficiency, how likely is it they will begin performing at 133% efficiency? And maintain that efficiency through the end of the contract? Well, if we can’t believe the contractor’s estimate, what is the likely EAC? That depends on your assumptions...

16. 15 Estimates at Completion (EAC) Formulas METHODFORMULA 1.BAC/CPI C 2.ACWP C + 3.ACWP C + 4.ACWP C + BAC - BCWP C CPI C X SPI C BAC - BCWP C (BCWP) /(ACWP) 7 MO BAC - BCWP C.8 CPI C +.2SPI C The “Floor”- as good as it gets Schedule is an issue Selected months are relevant Weighted indices are more relevant The performance index in the formula, or CPI, is PM’s ‘best educated guess’ Past efficiency will continue

17. 16 CV CV% SV SV% CPI cum SPI cum TCPI (KR EAC) Worksheet - Do the calculations using these data. It might look familiar BCWS cum = 14 BCWP = 10 ACWP = 13 TAB/BAC = 22 * KR EAC = 22 * Assumes MR will be 0 at contract completion

18. 17 STUDENT INDEPENDENT ESTIMATE Best Case Worst Most Likely Rationale:

19. 18 Program Office Estimate at Completion Assumptions consider risk, past performance, etc. Calculate estimates using several formulas. See gold card for two. What EAC formula would you use for the most likely, and why? Worst Case __________________ Best Case ____________________ Most Likely _____________________ ?? EAC = TAB/CPI = $22/.77 = $28.6 ?? Key to these EAC formulas is the CPI, or performance efficiency factor. You will make an assumption as to the efficiency the contractor will achieve for the balance of the contract. Using TAB/CPI, the TAB value represents the assumption that all management reserve will be used, and it will be consumed at the same efficiency,.77. If you use BAC in the formula, BAC/CPI, you are assuming the MR will not be used, or if it used, it will be consumed at 100% efficiency. What do you assume? Just a suggestion - history tells us the EAC derived assuming the same CPI continues is as good as it gets.

20. 19 EV TERMS NCC– Negotiated Contract Cost Contract price less profit/fee AUW– Authorized Unpriced Work Work approved, but not yet negotiated CBB– Contract Budget Base NCC plus AUW OTB– Over Target Baseline CBB plus recognized overrun TAB– Total Allocated Budget Sum of budgets for authorized work-NCC,CBB or 0TB BAC– Budget At Completion Recognized contract budget -does not include MR PMB– Performance Measurement Integrated scope, schedule, budget - time-phased plan, Baseline does not include MR MR– Management Reserve Contractor PM contingency budget based on risks UB– Undistributed Budget Authorized work not yet distributed to control accounts CA– Control Accounts Contractors’ key management control points WP– Work Package Near-term, detail-planned control account tasks PP– Planning Package Far-term, broadly defined control account tasks BCWS– Budgeted Cost for Work Scheduled Value of work planned -- WORK PLAN or PMB BCWP– Budgeted Cost for Work Performed Value of work completed -- EARNED VALUE ACWP– Actual Cost of Work Performed Cost of work completed-- COSTS INCURRED EAC– Estimate At Completion (EAC) Estimated cost of authorized contract work CDRL - Contract Data Requirements List Obtain information reports via the CDRL EVM POLICY (DOD 5000.2-R): Two Alternative EV Management Applications 1. EVMS Standards : Government certifies management system meets Industry Standards. Required for non-FFP contract exceeding $73M RDT&E or $315M procurement (CY00$). PM may apply to contracts below thresholds - consider risks, criticality, complexity. Contractor’s management system must meet the 32 Industry Standards. PM obtains Cost Performance Report (CPR) via CDRL. CPR has 5 Formats (WBS, Organization, Baseline, Staffing, and Explanations). 2. C/SSR: No Government certification - still expect fundamental management system. Required for non-FFP contract exceeding $6.3M (CY00$) and 12 months in length. Contractor system with reasonably objective earned value methods is adequate. PM may obtain either the CPR or Cost/Schedule Status Report (C/SSR). C/SSR has only 2 Formats (WBS and Explanations) EVM Home Page — http://www.acq.osd.mil/pm/ DSMC EV E-Mail Address — EVM@DSMC.DSM.MIL DSMC EV Phone No. — (703) 805–2848/2968 (DSN 655) May 2000 Management Reserve Control Accounts Contract Price Work PackagesPlanning Packages OTB CBB OVERRUN NCC or Target Cost AUW TAB Profit / Fees PMB Undistributed Budget TCPI (TO COMPLETE PERFORMANCE INDEX) relative to contractor EAC WORK REMAINING = COST REMAINING BAC* – BCWP cum = EAC – ACWP cum ( KR EAC) Defense Systems Management College Earned Value Management Gold Card Management Reserve TAB Cost Variance Schedule Variance ACWP BCWP BCWS $ EAC Time NowCompletion Date Schedule Variance SV = BCWP – BCWS Cost Variance CV = BCWP – ACWP BCWP BCWS BCWP ACWP VARIANCES Favorable is positive, Unfavorable is negative CV % = CV BCWP SV % =SV BCWS Variance at Completion VAC = BAC* – EAC EAC (ESTIMATE AT COMPLETION) either PMO or contractor EAC Basic formula premise: EAC = ACWP + ETC (Estimate to Complete) 1. EAC. = CPI C um BAC* 2. EAC C um = ACWP C um + BAC* – BCWP cum (CPI cum) (SPI cum) CPI (Cost Performance Index) cum to date SPI (Schedule Performance Index) cum to date PERFORMANCE INDICES BAC* BCWP cum ACWP cum BAC* Percent Complete = Percent Spent = CPI = SPI = Favorable is > 1.0, Unfavorable is < 1.0 _ BAC* PMB Value of work completed for every $1.00 spent Value of work completed for every $1.00 of work scheduled Efficiency the contractor must perform to achieve the contractor EAC. Is the EAC realistic? The CPI is the factual performance efficiency to date. The TCPI is the efficiency the KR must perform from time now on, in order to achieve their EAC. The PMO calculates the TCPI to determine the reasonableness or likelihood of the KR estimate. If performance to date, CPI, is 80%, is it likely the future efficiency, TCPI, will be 115%? TCPI = Formulas using cum CPI assume performance to date is indicative of past performance * BAC, CBB, or TAB MR

21. 20 Cautionary Note: It is one thing to calculate a number, based on a formula. It is another thing to select the formulas based on a thoughtful, logical process. Your EAC is as valid as your supporting assumptions. We are looking for your thought processes, rather than a specific number. Take the time to think it through. Use some data from a real program you may be working on. See what EAC you come up with, and why.

22. 21 Visualize the PMB, TAB, and MR

23. 22 Developing Estimates at Completion, EAC, requires making some assumptions. Your Gold Card provides some formulas, and your EVM Intro provided additional formulas. You must decide which, or which combination, best fits your program assumptions. Do you assume all the MR will be used by the end of the contract? And, do you assume the contractor will perform at the same level of efficiency experienced to date? Then your formulas should include MR when using the “BAC.” If you choose to not include the MR amount in your formula, you are assuming the contractor will perform at 100% efficiency when the MR is used. Then you must remember to add in the MR amount to your final EAC.

24. 23 The relationships among TAB, MR, PMB…. Always a true statement: The BAC cum or PMB + Management Reserve = The Total Allocated Budget The Total Allocated Budget - Management Reserve = The PMB or BAC cum As you have surmised, sometimes the Contract Target Cost will not equal the Contract Budget Base or the Total Allocated Budget. When Authorized Unpriced Work (AUW) is not yet negotiated the CTC does not equal the CBB. When an Over-Target-Baseline (OTB) is approved, the CBB will not equal the TAB. The term TAB is used to cover all - NCC/CTC, CBB, TAB It may be true statement to say the the PMB + MR = CTC (unless AUW exists, or unless an OTB exists.) PMB + MR = TAB always holds true. See the PMB Changes exercise to help clarify this.

25. 24 Management Reserve Contract Target Cost = Contract Budget Base = Total Allocated Budget ACWP C Time Now BCWS C Completion Date Schedule Variance C Cost Variance C PROJECTEDSLIPPAGEPROJECTEDSLIPPAGE PMB Over Budget EAC The Contract at a Glance BCWP C Schedule Slip BAC MR TAB