1. Calculate Schedule and Cost Variances with Earned Value Analysis © Dale R. Geiger 20111

2. How Can We Better Manage Large, Complex, Non Repetitive Projects? © Dale R. Geiger 20112

3. Terminal Learning Objective Task: Calculate Schedule and Cost Variances with Earned Value Analysis Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) 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 © Dale R. Geiger 20113

4. 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?” © Dale R. Geiger 20114

5. 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 © Dale R. Geiger 20115

6. Risk The nature of projects results in a high degree of risk There are two types of risk: schedule variance Risk that the project will not be completed in the timeframe expected: schedule variance cost variance Risk that the project will not be completed within the budget allotted: cost variance © Dale R. Geiger 20116

7. Consider the Possibilities at any Given Point During the Project Being right on schedule and at the expected cost is perfect (but rarely happens) © Dale R. Geiger 20117 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected As Expected Perfect Less than Expected

8. Consider the Possibilities at any Given Point During the Project Being ahead of or on schedule and at or less than expected cost is a good thing © Dale R. Geiger 20118 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected As Expected Great! Less than Expected Terrific!!Great!

9. Consider the Possibilities at any Given Point During the Project Being behind or on schedule and at or more than expected cost is not a good thing © Dale R. Geiger 20119 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected Not Good!Terrible!! As Expected Not Good! Less than Expected

10. Consider the Possibilities at any Given Point During the Project Can’t really tell if this is good news or bad without further analysis © Dale R. Geiger 201110 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected ?? As Expected Less than Expected ??

11. Consider the Possibilities at any Given Point During the Project © Dale R. Geiger 201111 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected ??Not Good!Terrible!! As Expected Great!PerfectNot Good! Less than Expected Terrific!!Great!??

12. 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 © Dale R. Geiger 201112

13. Earned Value Analysis 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 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 © Dale R. Geiger 201113

14. 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 © Dale R. Geiger 201114

15. 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 © Dale R. Geiger 201115

16. Learning Check What are some of the characteristics of projects that may pose management challenges? What are the two categories of risk related to projects? © Dale R. Geiger 201116

17. 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 © Dale R. Geiger 201117

18. 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 © Dale R. Geiger 201118

19. Comparing Flexible Forecast to Project Budget © Dale R. Geiger 201119 $ time

20. Comparing Flexible Forecast to Project Budget © Dale R. Geiger 201120 $ units

21. Essential Vocabulary of EVM Variables BCWS BCWSBudgeted Cost for Work Scheduled How much work should be done? BCWP BCWP Budgeted Cost for Work Performed How much should it cost for the work actually done? ACWP ACWPActual Cost of Work Performed How much did the work done actually cost? BAC BACBudget at Completion What was the total project supposed to cost? EAC EACEstimate at Completion What do we now expect the project to cost? © Dale R. Geiger 201121

22. 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) © Dale R. Geiger 201122 $ time BCWS ACWP

23. 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) © Dale R. Geiger 201123 $ time BCWS ACWP BCWP

24. 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) © Dale R. Geiger 201124 $ time BCWS ACWP BCWP

25. 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) © Dale R. Geiger 201125 $ time BCWS ACWP BCWP BAC EAC

26. Schedule Variance Logic Differs From Cost Variance cost volume 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 schedule variance 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 © Dale R. Geiger 201126 PlanFlexible Fcst Volume Variance Units sold10013030 Variable cost500650(150) PlanBCWP Schedule Variance Units produced10013030 Cost500650150

27. Here’s Why: We’re Looking at Two Different Dimensions Cost Variance looks at the Y axis Any point above the BCWS is over cost: unfavorable Any point below is favorable 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 © Dale R. Geiger 201127 $ time $

28. 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 © Dale R. Geiger 201128 BCWS Schedule Variance BCWP Cost Variance ACWP Units Produced100130 Cost per Unit554 Cost at a Point in Time500150650130520

29. 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 © Dale R. Geiger 201129

30. 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 © Dale R. Geiger 201130

31. 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 © Dale R. Geiger 201131 BCWS Schedule Variance BCWP Cost Variance ACWP Units Produced100130 Cost per Unit554 Cost at a Point in Time500150650130520

32. What information does the comparison of BCWP to BCWS give? What can be said about the project if ACWP is greater than BCWS? © Dale R. Geiger 201132 Learning Check

33. 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. © Dale R. Geiger 201133

34. 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 © Dale R. Geiger 201134

35. Budget at Completion: BAC semestercoursescost perbcwscum 112000 22 40006000 322000400010000 422000400014000 522000400018000 622000400022000 722000400026000 822000400030000 922000400034000 1012000 36000 © Dale R. Geiger 201135 BAC $ X axis = semesters

36. 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 © Dale R. Geiger 201136 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester1 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000--

37. 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 © Dale R. Geiger 201137 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester11 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000-- 2000

38. 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 © Dale R. Geiger 201138 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000--2000--2000

39. 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 © Dale R. Geiger 201139 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester--2000

40. 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 © Dale R. Geiger 201140 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000--

41. 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 © Dale R. Geiger 201141 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000--2000--2000

42. Classroom Exercise – 2 nd Semester © Dale R. Geiger 201142

43. 2 nd 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 © Dale R. Geiger 201143 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester2000--2000--2000 Courses Taken – 2 nd Semester2 Cost per Unit – 2 nd Semester2000 Cost of 2 nd Semester4000 Cost after 2 nd Semester6000

44. 2 nd 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 © Dale R. Geiger 201144 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester2000--2000--2000 Courses Taken – 2 nd Semester21 Cost per Unit – 2 nd Semester20002200 Cost of 2 nd Semester40002200 Cost after 2 nd Semester60004200

45. 2 nd 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 © Dale R. Geiger 201145 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester2000--2000--2000 Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester2000 2200 Cost of 2 nd Semester400020002200 Cost after 2 nd Semester600040004200

46. 2 nd 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 © Dale R. Geiger 201146 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester2000--2000--2000 Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester2000 2200 Cost of 2 nd Semester4000(2000)2000(200)2200 Cost after 2 nd Semester(200)4200

47. 2 nd 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 © Dale R. Geiger 201147 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester2000--2000--2000 Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester2000 2200 Cost of 2 nd Semester4000(2000)2000(200)2200 Cost after 2 nd Semester6000(2000)

48. 2 nd 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 © Dale R. Geiger 201148 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester2000--2000--2000 Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester2000 2200 Cost of 2 nd Semester4000(2000)2000(200)2200 Cost after 2 nd Semester6000(2000)4000(200)4200

49. Classroom Exercise – 3 rd Semester © Dale R. Geiger 201149

50. 3 rd 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 © Dale R. Geiger 201150 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2 nd Semester6000(2000)4000(200)4200 Courses Taken – 3 rd Semester2 Cost per Unit – 3 rd Semester2000 Cost of 3 rd Semester4000 Cost after 3 rd Semester10000

51. 3 rd 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 © Dale R. Geiger 201151 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2 nd Semester6000(2000)4000(200)4200 Courses Taken – 3 rd Semester23 Cost per Unit – 3 rd Semester20002400 Cost of 3 rd Semester40007200 Cost after 3 rd Semester1000011400

52. 3 rd 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 © Dale R. Geiger 201152 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2 nd Semester6000(2000)4000(200)4200 Courses Taken – 3 rd Semester233 Cost per Unit – 3 rd Semester2000 2400 Cost of 3 rd Semester400060007200 Cost after 3 rd Semester10000 11400

53. 3 rd Semester Results We are now back on schedule but over cost: not good! © Dale R. Geiger 201153 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2 nd Semester6000(2000)4000(200)4200 Courses Taken – 3 rd Semester233 Cost per Unit – 3 rd Semester2000 2400 Cost of 3 rd Semester400020006000(1200)7200 Cost after 3 rd Semester(1400)11400

54. 3 rd Semester Results We are now back on schedule but over cost: not good! © Dale R. Geiger 201154 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2 nd Semester6000(2000)4000(200)4200 Courses Taken – 3 rd Semester233 Cost per Unit – 3 rd Semester2000 2400 Cost of 3 rd Semester400020006000(1200)7200 Cost after 3 rd Semester10000--

55. 3 rd 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 © Dale R. Geiger 201155 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 2 nd Semester6000(2000)4000(200)4200 Courses Taken – 3 rd Semester233 Cost per Unit – 3 rd Semester2000 2400 Cost of 3 rd Semester400020006000(1200)7200 Cost after 3 rd Semester10000--10000(1400)11400

56. Individual Exercise: 4 th Semester © Dale R. Geiger 201156

57. 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 © Dale R. Geiger 201157 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 3 nd Semester Courses Taken – 4 th Semester Cost per Unit – 4 th Semester Cost of 4 th Semester Cost after 4 th Semester

58. 4th Semester Results 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 © Dale R. Geiger 201158 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 3 nd Semester10000--10000(1400)11400 Courses Taken – 4 th Semester233 Cost per Unit – 4 th Semester2000 2600 Cost of 4 th Semester400020006000(1800)7800 Cost after 4 th Semester14000200016000(3200)19200

59. MBA Project Graph after 4 th Semester © Dale R. Geiger 201159 $ BCWS BAC Semesters

60. MBA Project Graph after 4 th Semester © Dale R. Geiger 201160 $ BCWS BCWP ACWP BAC EAC Semesters

61. 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 © Dale R. Geiger 201161

62. Teacher’s Note cost reconciliationcontinuous improvement BCWS14000transfer ACWP19200apply 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/bcwp120% bac36000 eac43200 © Dale R. Geiger 201162 This is like a performance variance This is like a volume variance

63. Teacher’s Note: MBA Exercise schedulecost bcwsvariancebcwpvarianceacwp units completed111 1st semestercost per unit2000 cost at point in time20000 0 units completed211 2nd semestercost per unit2000 2200 cost at point in time4000(2000)2000(200)2200 units completed233 3rd semestercost per unit2000 2400 cost at point in time400020006000(1200)7200 units completed233 4th semestercost per unit2000 2600 cost at point in time400020006000(1800)7800 14000200016000(3200)19200 © Dale R. Geiger 201163