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Intermediate Cost Analysis and Management

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1 Intermediate Cost Analysis and Management
Apply Earned Value Management Principles to Case Study Scenario: Completing the Great Pyramid Intermediate Cost Analysis and Management © Dale R. Geiger 2011

2 If Only the Pharaoh Had the Corps of Engineers
Introduction If Only the Pharaoh Had the Corps of Engineers How do you think the Corps of Engineers might have impacted the process of building the pyramids? The design? © Dale R. Geiger 2011

3 Terminal Learning Objective
Task: Apply Earned Value Management Principles to Case Study Scenario 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 Identify key variables from case study data Calculate BAC, schedule and cost variances, and EAC Introduction Task: Apply Earned Value Management Principles to Case Study Scenario Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: with at least 80% accuracy Identify key variables from case study data Calculate BAC, schedule and cost variances, and EAC © Dale R. Geiger 2011

4 Building the Great Pyramid Case A: The Air Force Approach
Read the paper “If the Pharaoh Had Only Used an Earned Value System in Building the Pyramids” By LTC Neimann (USAF Ret) found at https://acc.dau.mil/CommunityBrowser.aspx?id=19572 Using the tools learned: Build and verify the BAC presented in the paper Determine schedule variance at Year 12 Determine the cost variance at Year 12 Calculate EAC at Year 12 Activity Step 1: Identify key variables from case study data [Direct students to Read the paper “If the Pharaoh Had Only Used an Earned Value System in Building the Pyramids” By LTC Neimann (USAF Ret) found at https://acc.dau.mil/CommunityBrowser.aspx?id= Their tasks are to: Build and verify the BAC presented in the paper Determine schedule variance at Year 12 Determine the cost variance at Year 12 Calculate EAC at Year 12 Students will have blank templates for the following slides. After minutes have the students return and go over the slides with the solutions.] © Dale R. Geiger 2011

5 Budget at Completion: BAC
Year Design Mfg Comp Test Assemble Intg Total Cum 2 1 4 1.5 2.5 3.5 6 7 8 10.5 10 13 12 .5 14.5 14 16 17.5 18 19 20 Activity Step 1: Identify key variables from case study data This chart represents the plan for completion of the entire pyramid project. The various tasks are represented in the table as columns and the time frame for completing each is represented in the rows for the years. The time periods are represented in 2-year increments. The costs for the tasks are assumed to be incurred evenly throughout the time allotted to each task. (Example: Design is supposed to take 8 years and the $4 million is spread evenly over those 8 years.) Since the start and end dates given in the “program plan” chart in the paper are a little ambiguous, students’ charts may vary slightly. BAC (Note: your chart may look a little different as there is some ambiguity about start/end dates) © Dale R. Geiger 2011

6 Schedule and Cost Variances: Design at Year 12
BCWS Schedule Variance BCWP Cost Variance ACWP Design 1 Cost per Unit Design 4 Cost for Design -- Activity Step 1: Identify key variables from case study data 1 unit of design is complete at a budgeted and actual cost of 4. This gives a schedule and cost variance of zero. As of year 12, design is complete, on time and on budget. © Dale R. Geiger 2011

7 Schedule and Cost Variances: Manufacture at Year 12
BCWS Schedule Variance BCWP Cost Variance ACWP Blocks 1000 667 Cost per Block .006 .009 Cost for Manufacture 6 (2) 4 Activity Step 1: Identify key variables from case study data Budgeted cost per block is 6/1000 = Actual blocks completed are 667, and actual cost per block is 6/667 = .009 BCWP = 667 * .006 = 4 Schedule variance is (2). The project is behind schedule. Cost variance is (2). The project is over cost. (This is “Terrible!!”) © Dale R. Geiger 2011

8 Schedule and Cost Variances: Component Test at Year 12
BCWS Schedule Variance BCWP Cost Variance ACWP Component Test 100% 50% Cost per Component Test 4 6 Cost for Component Test (2) 2 (1) 3 Activity Step 1: Identify key variables from case study data Component testing is only 50% complete, although this is due to a circumstance beyond our control (Sphinx project out-prioritized the Pyramid project.) We have already spent $3 on component testing. At this rate our overall cost to complete component testing will be $6. BCWP = 50% * 4 = 2 ACWP = 50% * 6 = 3 BCWS = 100% * 4 = 4 Schedule variance is (2). The project is behind schedule. Cost variance is (1). The project is over cost. © Dale R. Geiger 2011

9 Year 12 Results We are now behind schedule and over cost: terrible!!
ACWP is 130% of BCWP so EAC can be projected at 130% of BAC: (1.30)20M = 26M BCWS Schedule Variance BCWP Cost Variance ACWP Cost for Design 4 -- Cost for Manufacture 6 (2) Cost for Component Test 2 (1) 3 Cost at end of Year 12 14 (4) 10 (3) 13 Activity Step 1: Identify key variables from case study data This table summarizes the total results. The overall schedule variance is (4) and the overall cost variance is (3). How should the Air Force explain this in the AAR to Pharaoh? [There is no need to explain Design since that portion of the project is on budget and on schedule. Manufacture has a cost overrun of (2) but this is offset by being behind schedule 2. The schedule variance is reported as favorable in the AAR reconciliation, since cost is lower due to having accomplished less work. Component test has a (1) cost variance but this is more than offset by being behind schedule 2. Again, the schedule variance is reported as favorable because costs are less than planned due to having accomplished less work.] The new EAC is: ACWP 13/ BCWP 10 = 130% EAC = 130% * BAC 20M = 26M © Dale R. Geiger 2011

10 Building the Great Pyramid Case B: Corps of Engineers
The Pharaoh was quite displeased with the Air Force Pyramid Building Project’s AAR results LTC Neimann was re-assigned to flying carpets and moved to a lovely tent in the Sinai where he soon retired The Pharaoh turned to the Corps of Engineers He asked for project proposals to complete the Great Pyramid within four years The Corps of Engineers tasked six teams to make proposals to complete an enhanced, Army-ized pyramid Activity Step 2 Calculate BAC, schedule and cost variances, and EAC The Pharaoh was quite displeased with the Air Force Pyramid Building Project’s AAR results LTC Neimann was re-assigned to flying carpets and moved to a lovely tent in the Sinai where he soon retired The Pharaoh turned to the Corps of Engineers. He asked for project proposals to complete the Great Pyramid within four years The Corps of Engineers tasked six teams to make proposals to complete an enhanced, Army-ized pyramid. [Divide the class into six teams to represent the Corps of Engineers in this project.] © Dale R. Geiger 2011

11 The U.S. Army Corps of Engineers www.usace.army.mil/services
Is the Nation’s number one federal provider of outdoor recreation Owns and operates more than 600 dams Operates and maintains 12,000 miles of commercial inland navigation channels Dredges more than 200 million cubic yards of construction and maintenance dredge material annually Maintains 926 coastal, Great Lakes and inland harbors Restores, creates, enhances or preserves tens of thousands of acres of wetlands annually under the Corps’ Regulatory Program Provides a total water supply storage capacity of million acre-feet in major Corps lakes Owns and operates 24 percent of the U.S. hydropower capacity or 3 percent of the total U.S. electric capacity Manages an Army military construction program between 2006 and 2013 totaling approximately $44.6 billion between—the largest construction effort since World War II Activity Step 2 Calculate BAC, schedule and cost variances, and EAC This slide highlights the capabilities of the Corps of Engineers. Teams should keep these unique capabilities in mind when planning their pyramid completion proposals. The Corps of Engineers: Is the Nation’s number one federal provider of outdoor recreation Owns and operates more than 600 dams Operates and maintains 12,000 miles of commercial inland navigation channels Dredges more than 200 million cubic yards of construction and maintenance dredge material annually Maintains 926 coastal, Great Lakes and inland harbors Restores, creates, enhances or preserves tens of thousands of acres of wetlands annually under the Corps’ Regulatory Program Provides a total water supply storage capacity of million acre-feet in major Corps lakes Owns and operates 24 percent of the U.S. hydropower capacity or 3 percent of the total U.S. electric capacity Manages an Army military construction program between 2006 and 2013 totaling approximately $44.6 billion between—the largest construction effort since World War II © Dale R. Geiger 2011

12 Team Design Options: Pick Two from Left and Three from Right
Take advantage of Corps’ Core Competencies Army-ize the project in the interests of National Defense Add a dam and lake to provide recreational venue for tourists and pilgrims Divert the Nile River to ease transportation to site Build levees around pyramid to eliminate any flooding threat Build barracks facilities for workers and guests Up to one more of your choice Camouflage the pyramid Add armor Build system of mutually supporting archer nests Build roads for rapid reaction chariot forces Up to two others of your choice Activity Step 2 Calculate BAC, schedule and cost variances, and EAC Your pyramid completion proposal must include two of the design options from the column on the left that take advantage of the Corps’ core competencies: Add a dam and lake to provide recreational venue for tourists and pilgrims Divert the Nile River to ease transportation to site Build levees around pyramid to eliminate any flooding threat Build barracks facilities for workers and guests Up to one more of your choice. You may use your imagination. At least one of the options you choose must come from the above list, but you may be creative and come up with one option not included here. Your proposal must include three of the design options from the column on the right to Army-ize the project in the interests of National Defense Camouflage the pyramid Add armor Build system of mutually supporting archer nests Build roads for rapid reaction chariot forces Up to two others of your choice. Again, you must choose at least one option from the list above, but you may use your imagination for two other design options not listed here. © Dale R. Geiger 2011

13 Task 1: Build Your BAC Build your work breakdown structure given your choices from the previous page Assume each task takes two years Don’t ignore need for more blocks and the assembly task You should have seven tasks (blocks, assembly, two corps’ core competency, and three Army-ize) Estimate cost for each task for years 1, 2, 3, 4 (in year 3000 BC shekels) Present your design, work schedule and graph of BCWS to the class Make sure you don’t exceed the $13M the Air Force had estimated for added cost to completion Activity Step 2 Calculate BAC, schedule and cost variances, and EAC Build your work breakdown structure given your choices from the previous page. There is a template on the next slide for you to use. Assume each task takes two years Don’t ignore need for more blocks and the assembly task. Those tasks still need to be completed. You should have seven tasks (blocks, assembly, two corps’ core competency, and three Army-ize) Estimate cost for each task for years 1, 2, 3, 4 (in year 3000 BC shekels) Present your design, work schedule and graph of BCWS to the class Make sure you don’t exceed the $13M the Air Force had estimated for added cost to completion © Dale R. Geiger 2011

14 Budgeted Cost of Work Scheduled: Fill in the Blanks
Block Assembly Corps 1 Corps 2 Army 1 Army 2 Army 3 Total Cum Year 1 Year 2 Year 3 Year 4 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC [Blank template for students to use in preparing their BAC and BCWS] © Dale R. Geiger 2011

15 Graph of Pyramid Completion Project
$000 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC [This blank graph can be used as a template for the students to plot their BCWS.] © Dale R. Geiger 2011

16 Team Proposal Presentations
© Dale R. Geiger 2011

17 Task 2: AAR for the Pharaoh
Generate actual cost and schedule per following page’s instructions Present to class Cost and schedule variances for each year until completion (4+ slides) BAC and EAC for the first year (1 slide) Graph of BCWS, BCWP, ACWP (1 slide) A reconciliation of your variance results at completion (1 slide) Suggestions for continuous improvement (1 slide) A view of what your finished pyramid looks like (1 slide) Activity Step 2 Calculate BAC, schedule and cost variances, and EAC Generate actual cost and schedule per following page’s instructions Present to class Cost and schedule variances for each year until completion (4+ slides) BAC and EAC for the first year (1 slide) Graph of BCWS, BCWP, ACWP (1 slide) A reconciliation of your variance results at completion (1 slide) Suggestions for continuous improvement (1 slide) A view of what your finished pyramid looks like (1 slide) © Dale R. Geiger 2011

18 Task 2: Developing Actual Cost and Schedule
Use the randbetween formula in Excel to generate a random number between 1 and 10 for each task: =RANDBETWEEN(1,10) Follow the instructions on the next page to find what happened to the actual cost and schedule for that task Determine the actual results of the project year by year Activity Step 2 Calculate BAC, schedule and cost variances, and EAC Use the randbetween formula in Excel to generate a random number between 1 and 10 for each task: =RANDBETWEEN(1,10) Follow the instructions on the next page to find what happened to the actual cost and schedule for that task Determine the actual results of the project year by year © Dale R. Geiger 2011

19 Task 2: Reality Hits 1 Freak rain storms wash out a year’s progress: add year at same cost 2 Assyrians attack but are easily defeated: however, add 20% to task cost 3 Engineering error: task takes a third year at same average cost per year 4 Outsourcing accelerates progress, raises 1st year cost 50% but completes task 5 Slaves rebel: add 50% to task cost 6 Conquests add slaves to workforce: cut task cost 30% & finish one year early 7 Dust storms disrupt work: add 20% to task cost 8 Hidden Air Force funds discovered: reduce task cost 50% 9 LSS improves process: eliminate 2nd year and its cost 10 Finance Corps ACES assigned to project: reduce cost of all tasks 10% Activity Step 2 Calculate BAC, schedule and cost variances, and EAC The random numbers generated in Excel correspond to these events, which you will apply to your proposed project. For example One of your design options is diverting the Nile, and you budgeted two years and 3 million shekels for that task. You generated the random number 4 to this design option. The cost for year 1 will be 150% * 1.5 million shekels = 2.25 million shekels, and the job will be complete after the first year. [Notes regarding the “realities”: 1 - Freak rain storms wash out a year’s progress: add year at same cost. A two-year task that was budgeted for a total of 3 million shekels becomes a three year task for a total of 4.5 million. 2 - Assyrians attack but are easily defeated: however, add 20% to task cost. Does not effect schedule, but adds 20% to total task cost. 3 - Engineering error: task takes a third year at same average cost per year. Add one year to task and add cost equal to the average of the planned two years’ cost 4 - Outsourcing accelerates progress, raises 1st year cost 50% but completes task. Increase cost of first year but no second year needed. 5 - Slaves rebel: add 50% to task cost. Add 50% to entire cost of task. 6 - Conquests add slaves to workforce: cut task cost 30% & finish one year early. Decrease cost of first year AND no second year needed. 7 - Dust storms disrupt work: add 20% to task cost 8 - Hidden Air Force funds discovered: reduce task cost 50% 9 - LSS improves process: eliminate 2nd year and its cost. No change to cost of first year, no second year needed. 10 - Finance Corps ACES assigned to project: reduce cost of all tasks 10%. This is the one random number that applies to all tasks in your project. If you generate a 10 for any one task you apply a 10% reduction to ALL tasks on top of the effects of the number generated for those tasks. © Dale R. Geiger 2011

20 Team AAR Presentations
© Dale R. Geiger 2011

21 Teacher’s Notes: Example
Selected tasks 1 2 3 4 total cum block 500 1000 assemble 2000 divert nile 4000 dam and lake 3000 7000 camo 10000 armor 12000 roads 13000 total bcws 4500 5500 Budget for tasks BAC Activity Step 2 Calculate BAC, schedule and cost variances, and EAC This is an example of an proposal using the following core competency options: divert the Nile, build a dam and lake. The “army-ize” options are camouflage, armor, and roads. The budgeted costs are discretionary, but the total (BAC) must not exceed 13 million shekels. BCWS © Dale R. Geiger 2011

22 Teacher’s Notes: Actual Costs
random # impact 1 2 3 4 Total cum 1st +50% no 2nd block 675 20% more cost assemble 540 1080 1755 10 10% less all tasks divert nile 900 1800 3555 add yr at same cost dam and lake 1350 4050 7605 camo 2160 3240 10845 8 50% less cost armor 450 11745 roads 225 12195 total 1215 3465 4635 2880 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC This chart shows the impact of the random numbers on the completion of the work and the cost. Note that the “10% less all tasks” on the divert Nile task applies to all tasks. The 10% reduction was applied after the effect of the random number for each task. © Dale R. Geiger 2011

23 Teacher’s Notes: Example 1st Year Results
bcws schedulevariance bcwp cost variance acwp units completed 166.5 333 block cost per unit 3 2 cost at point in time 500 1000 325 675 0.5 assbly 1080 (40) 540 year 1 total 1500 285 1215 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC This shows the 1st year results. The Block task was outsourced for 50% more in the first year and no need for second year. Instead of completing blocks we completed all 333 blocks. The cost was 750 thousand shekels, but then we applied the 10% off all tasks (random #10) bringing the total to This is a 500 favorable schedule variance and 325 favorable cost variance. Assembly is charged a 20% increase in cost from random #2 (1000*120% = 1200), but then the 10% decrease is applied to all tasks ( =1080). There is no schedule variance (the project is on time) but there is an unfavorable cost variance of 40. The ratio of ACWP to BCWP is 81% and the new EAC is 13000*81% = 10530 acwp/bcwp 81% bac 13000 eac 10530 © Dale R. Geiger 2011

24 Teacher’s Notes: 2nd Year Results
schedule cost bcws variance bcwp acwp units completed 166.5 block cost per unit 3 cost at point in time 500 (500) 0.5 assbly 1000 1080 (40) 540 nile 2000 1800 100 900 0.67 0.44 lake 3000 3941 (667) 1333 (467) road 450 275 225 year 2 total 4500 (1167) 3333 (132) 3465 after 2 years 5500 4833 153 4680 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC Block: no additional work was performed (since it was completed last period) and no additional cost incurred. The schedule variance is (500) unfavorable, but that just cancels out the 500 favorable from the previous year. The schedule has caught up to us. We were ahead of schedule, but now we are on schedule. The favorable cost variance from the previous period will carry over in the total. Assembly: We have completed the remaining ½ of the assembly work. We are on schedule but over budget by 20%, offset by the 10% ACE cost reduction. Nile: This is a new task this period. We have completed half of the work (on schedule) but we show a 10% savings due to the ACE cost reduction. Lake: We add a year to this task. We expected to be 67% complete but are only 44% complete. The cost incurred so far is 1800, the amount we expected to spend to complete 67% of the project, less the 10% ACE cost reduction. We are (667) unfavorable for the schedule variance and (467) unfavorable for the cost variance. Road: We are on schedule for this (50% complete) and under budget because of the 50% cost reduction (random #8) and the 10% ACE cost reduction. © Dale R. Geiger 2011

25 Teacher’s Notes: 3rd Year Results
schedule cost bcws variance bcwp acwp units completed 0.5 nile cost per unit 2000 1800 cost at point in time 1000 100 900 0.33 0.22 lake 3000 4050 (333) 667 (233) 0.67 camo 3240 (160) 2160 0.50 armor 550 450 road 500 275 225 year 3 total 5500 5167 532 4635 after 3 years 11000 (1000) 10000 685 9315 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC The Nile task is completed on time and under budget due to the 10% ACE cost reduction. The Lake task is still behind schedule and over cost, although the cost overrun is mitigated by the 10% ACE cost reduction. We only completed 22% this year instead of 33%. Add to the 44% completed in the first year, that leaves 34% to be completed in the third year. The camo task is 67% completed (on schedule) and is over budget by 20% due to random #2. But, the 10% ACE cost reduction offsets that. Schedule variance is zero, cost variance is (160). The armor task is on time with a 50% cost reduction due to random #8. The cost is reduced further by the 10% ACE cost reduction, giving a cost variance of 550. The road task is on time and under budget due to random #8 and the 10# ACE cost reduction. © Dale R. Geiger 2011

26 Teacher’s Notes: 4th Year Results
schedule cost bcws variance bcwp acwp units completed 0.00 0.33 lake cost per unit 000 0/ 3000 4050 cost at point in time 0/ 1000 (1350)/ (350) 1350 camo 3000 3240 1000 (80) 1080 0.50 armor 2000 900 550 450 year 4 total 2000/ 3000 (880)/ 120 2880 after 4 years 13000 805 12195 Activity Step 2 Calculate BAC, schedule and cost variances, and EAC By the end of the project, all schedule variances have offset each other. The BCWS is equal to the BCWP. All work is complete and we are now back “on schedule”. (Better late than never, it seems.) The unfavorable schedule variance in the dam is now reversed. There is still an unfavorable cost variance of (350) due to the extra year needed to complete the project. This is mitigated by the 10% ACE cost reduction. The camo project is now completed, on time but over budget. The armor project is now completed. It came in under budget due to random #8 and the 10% ACE cost reduction. Overall we are 805 favorable. © Dale R. Geiger 2011

27 Graphing the Pyramid Project
ACWP BCWP Activity Step 2 Calculate BAC, schedule and cost variances, and EAC Using Dale’s numbers BCWS © Dale R. Geiger 2011

28 Graphing the Pyramid Project
ACWP BCWP Using Melanie’s numbers BCWS © Dale R. Geiger 2011

29 Teacher’s Notes: Reconciliation
Budgeted at Completion 13000 Actual Cost at Completion 12195 Cost Variance 805 Reconciliation: Army audit agency discovered hidden Air Force funds 1500 Added ACES to project 1300 Block outsourcing continuous improvement 250 Engineering error on dam task (1500) Disruption from Assyrian attacks (800) Miscellaneous rounding effects 55 Total Explained Activity Step 2 Calculate BAC, schedule and cost variances, and EAC [Shows the reconciliation for the example.] © Dale R. Geiger 2011

30 Teacher’s Notes: Continuous Improvement Suggestions
Get more ACES and involve them more Check Engineering designs before they create major cost overruns Double check Engineering designs Look for more outsourcing opportunities Activity Step 2 Calculate BAC, schedule and cost variances, and EAC [Suggestions for improvement based on example.] © Dale R. Geiger 2011

31 Camouflaged Pyramid on Lake: Excellent Camouflage, Isn’t It?!
Activity Step 2 Calculate BAC, schedule and cost variances, and EAC © Dale R. Geiger 2011


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