Presentation on theme: "EV Basics Tutorial Lesson 1 – Earned Value Management Basics"— Presentation transcript:
1 EV Basics Tutorial Lesson 1 – Earned Value Management Basics This file best viewed 1280 x 1024 pixelsNarration: Title page. Lesson 1 – Earned value basics tutorial. This lesson produced by the Defense Acquisition University’s Curricula Development and support center. This lesson best viewed on a monitor set at 1280 by 1024 pixels.Lesson 1 – Earned Value Management BasicsCurricula Development and Support Center
2 Define the basic elements of performance measurement 2. Learning ObjectivesDefine the basic elements of performance measurementIdentify the governing EVM statutes, regulatory policy, and DoD implementation guidance.Describe how earned value management combines work scope, schedule, and resources.Explain in plain language the meaning of the five earned value variables: BCWS; BCWP; ACWP; BAC; and EAC.Explain in plain language the meaning of the SV, CV and VAC earned value metricsRecognize earned value variables, SV, and CV on EV graphs and Format 1 of the Cost Performance Report.Script – Slide 2 – Learning Objectives, The primary learning objective for lesson 1 is to introduce the fundamental elements associated with the concept of earned value management, or E-V-M, as they relate to acquisition program management. Specifically after finishing this lesson you should be familiar with E V M related laws passed by congress, how the office of management and budget has implemented these laws, and the current Department of Defense policy guidance regarding EVM requirements. Additionally you should recognize how work scope, schedule, resources are combined to establishment the E V M performance measurement baseline. This lesson also introduces the five independent Earned Value variables and the three most common E V M metrics. The five EVM variables are budgeted cost working scheduled, budget cost of work performed, actual cost of worked performed, budget at completion and estimate at completion. The three common metrics are the schedule variance, cost variance, and variance at completion. The final learning objective for this lesson is for you to be able to recognize how, the earned value variables and metrics appear on the most common earned value graph and how they typically are reported in format one of the cost performance report.
3 3. Integrated Program Management Script – Slide 3 – Integrated Program Management, This slides introduces the concept of earned value management as an integrated program management tool. The center triangle graphically represents the acquisition program baseline or A P B. The APB is a contract between the milestone decision authority and the program manager and it is established at program initiation. The triangle’s three sides present the key sections of each APB: Performance; Schedule; and Cost. All programs have risk and risk management is the primary job of program managers and program management offices. The program manager has many tools to manage this risk. In the performance area there is the system engineering process, simulation and test, design reviews such as the PDR and CDR, and T P M s or technical performance metrics. To manage schedule risk we develop critical path schedules which allow Monte Carlo type “what if” simulations and we also have recurring PMRs or program management reviews. To manage cost risk, we use standardized work breakdown structures to collect recurring and nonrecurring contractor costs reported in the contract funds status report or C F S R, and the contract cost data reports C C D R. Another element of today’s DoD acquisition programs is a concept called CAIV or cost as an independent variable. CAIV requires that total ownership costs be treated as a military requirement. Thus making the A P B cost elements more black or white requiring performance and scheduled to be traded to achieve required total ownership costs.Up until now we haven’t discussed earned value. So why EV? In this APB triad, EV is a unique tool because it provides a common dominator usually dollars, but it can be hours, to relate the three elements. The E V budgeted cost of work scheduled variable is a time phased budget representing program planning. The EV budget cost of worked performed variable, or earned value, measures actual performance. BCWP is not realized until performance is demonstrated. The final three E V independent variables budget at completion, actual cost of work performed, and the contractor’s reported independent estimate at completion or EAC provide actual program costs to date and the ability to forecast a total program cost range. The earned value program management tool is unique because it alone addresses all APB elements and provides a common denominator to support CAIV decisions. Addition notes from the DoD INTERIM DEFENSE ACQUISITION GUIDEBOOK regarding CAIV and the APB are provided in the power point note page format of this slide.C1.3. COST AS AN INDEPENDENT VARIABLE (CAIV) C In establishing realistic objectives, the user shall treat cost as a military requirement. The acquisition community, including technology and logistics, and the requirements community shall use the CAIV process to develop total ownership cost (TOC), schedule, and performance thresholds and objectives. They shall address cost in the Operational Requirements Document (ORD), and balance mission needs with projected out-year resources, taking into account anticipated process improvements in both the Department of Defense and defense industries (5 U.S.C. 306 (reference (d)) and Pub. L (1996), Section 5123 (reference (e))). CAIV trades shall consider the cost of delay and the potential for early operational capability.C1.4. ACQUISITION PROGRAM BASELINE (APB) C Every acquisition program shall establish an APB beginning at program initiation. The PM shall base the APB on users' performance requirements, schedule requirements, and estimate of total program cost. Performance shall include interoperability, supportability and, as applicable, environmental requirements. The department shall not obligate funds for ACAT I or ACAT IA programs beyond Milestone B until the MDA approves the APB, unless the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)) (for ACAT I) or the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (ASD(C3I)) (for ACAT IA) specifically approves the obligation (10 U.S.C. 2435(b) (reference (g))). The APB satisfies requirements derived from both reference (g) and 10 U.S.C. 2220(a)(1) (reference (h)).Acquisition program baselines (APB) have three elements: Performance; Schedule; and Cost. A primary job of program management is to manage risk and there are many tools available to accomplish this. Earned value (EV) management addresses each of the APB elements. The E V budgeted cost of work scheduled (BCWS) addresses scheduling, the E V budget cost of work performed (BCWP) measures performance, and the E V actual cost of work performed (ACWP) and estimate at completion (EAC) measure cost.Another element of today’s DoD acquisition programs is cost as an independent variable (CAIV). CAIV requires that total ownership costs be treated as a military requirement. The earned value management uniquely addresses all APB elements by providing a common denominator of dollars to support CAIV trade decisions.
4 4. Statutes Related to EVM LawPurposeGovernment Performance and Results Act of 1993 GPRAEstablish performance Standards for Federal budgetFederal Acquisition Streamlining Act of Title V (FASA V)Report cost, schedule and performance goals and evaluate progressInformation Technology Management Reform Act of 1996 (ITMRA / Clinger-CohenReport performance information systems acquisitionScript – Slide 4 – Statutes related to EVM. This slides directly supports the first learning objective for this lesson which includes the identification of EVM statutes. The origins of earned value management dates back to the 1960s when the Air Force and the Navy began the acquisitions of complex systems such as the minute man missile and the Polaris submarine. In the 1980s service unique cost and schedule reporting requirements were combined into the thirty-five cost / schedule control system criteria referred to as C/ SCSC. In the 1990’s C/SCSC evolved into today’s Industry Owned thirty-two Earned Value Management System Criteria. The requirement for EVM as it is practiced today can be traced to three public laws: The first is the Government Performance and Results Act of 1993 also known as G P R A. This law establishes the requirement for strategic planning and performance measurement in the Federal Government. The second law is the Federal Acquisition Streamlining Act of 1994 title five also known as F A S A or FASA. FASA requires that programs must achieve on average, 90 percent of their cost, schedule, and performance goals or they will be considered for termination. The final law is the Information Technology management reform act of 1996 also know as the Clinger Cohen Act. This act requires executive agencies, as part of the budget process, to analyze, track, and evaluate risks for all major capital investments in information systems.The requirement for EVM as it is practiced today can be traced to three public laws
5 5. Office of Management & Budget EVM Policy Policy GuidancePurposeOMB Circular A-11 Part 7 – Capital Programming GuideUnified guidance supporting reporting to Congress (incl, Info Technology)Circular A-11 PolicyCapital Programming GuideAgencies must establish cost, schedule and performance goals for major acquisitions and then achieve, on average, 90% of those goalsRequires use of earned value “or similar” performance based management systemScript – Slide 5 – office of management and budget EVM policy. This slides directly supports the first learning objective for this lesson which includes the identification of regulatory policy. OMB Circular A-11 Part 7 includes a supplement titled the Capital Programming Guide. This 1997 Guide provides executive branch agencies of the Federal Government with a basic reference on principles and techniques for planning, budgeting, procurement, and the management of capital assets. The guidance integrates various Administrative and statutory asset management initiatives including G P R A, Clinger/Cohen Act, and FASA into a single best practice policy intended to ensure that capital assets contribute to the achievement of agency strategic goals and objectives. The guide specifically requires use of an earned value or similar performance-based management system for risk and program management of capital asset acquisition. Appendix four of the document includes a short tutorial on Earned Value Management. Remember as an OMB circular this policy applies not only to the Department of Defense but to all executive branch agencies such as NASA, FBI, FEMA, IRS, the Treasury and FAA to mention a few.OBM Circular A-11 Implemented the three public laws for the executive branch of government
6 6. DoD EVM Implementation Instructions Policy InstructionDoDI Operation of the Defense Acquisition System – May 12, 2003PurposeImplements OMB Circular A-11Table E3.T2. Regulatory Information RequirementsOMB Circular A-11, Part 7Implement EVMS guidelines in American National Standards Institute (ANSI)/Electronic Industries Alliance (EIA) 748-A-1998 (R2002), and conduct Integrated Baseline ReviewsApplies to contracts/agreements for RDT&E over $73 million and procurement or O&M over $315 million, both in FY 2000 constant dollarsScript – Slide 6 – DoD EVM Implementation Instructions – Department of Defense Instruction titled, Operation of the Defense Acquisition System, documents the statutory and regulatory information requirements for all military acquisitions. Table E3.T2, titled Regulatory Information Requirements, specifically references EVMS and lists OMB circular A-11 Part 7 as the source of the requirement for earned value management. It requires EVMS for Research and Development Test and Evaluation contracts costing over 73 million dollars and for Procurement and Operations and maintenance contracts over 315 million dollars, measure in FY 2000 constant dollars. DoDI also establishes the thirty-two American National Standards Institute ( A N S I) / Electronic Industries Alliance (E I A) 748-A-1998 (R2002) EVMS guidelines as the Department of defense standard for Earned Value Management Systems criteria. Finally specifically requires program managers to accomplish integrated baseline reviews.DoDI Implemented OMB Policy Guidance
7 7. Traditional Measurement PLANNEDACTUAL COST22= $15105= $253Script - Slide 7 – Traditional Measurement – This slide supports the second learning objective for this lesson which is to describe how earned value management combines work scope, schedule, and resources. In traditional financial management we often compare budget estimates with actual costs to make program management decisions. The left side of this slide shows a typical monthly budget plan for fifty dollars. This budget is allocated to ten work packages, represented by two rectangles budgeted at two dollars each, by two squares budgeted at ten dollars each, by four circles each budgeted for five dollars, and finally by two triangles planned at three dollars each. The right side of the slide shows the actual cost for the month were forty dollars. At the end of the month the labor costs of fifteen dollars and the computer costs of twenty-five dollars were collected to compare with the budget. Comparing the Budget of fifty dollars with the actual costs of forty dollars at first glance suggest a ten dollar favorable variance. But there is something missing in this simple model—we must ask did all the work got done?BUDGET = $50COST = $40STATUS: Variance = Budget - Actual = + $10 FavorableIn traditional financial management we often compare budget estimates with actual costs to make program management decisions. The geometric shapes on the PLANNED side of this slide represent a monthly budget plan of fifty dollars. The people and computer on the ACTUAL COST side represent the monthly costs of forty dollars. Because this model does not account for work accomplishment, just comparing the budget of fifty dollars with actual costs of forty incorrectly suggests a ten dollar favorable variance.
8 8. Earned Value Measurement PLANNEDPERFORMEDACTUAL COST2222= $1510101055555555= $253333BUDGET = $50EARNED VALUE = $35COST = $40Script - Slide 8 – Earned Value Measurement – This slide supports the second learning objective for this lesson which is to describe how earned value management combines work scope, schedule, and resources. In earned value measurement we must be able to answer slide 7’s question of -- What work got done. To do this we’ll add a third section which we’ll call performed to our planned and actual cost sections from slide 7. Now that we’ve determine that the work represented by one rectangle, both squares, two of the four circles and, one triangle was actually completed, we can compute our earned value which is equal to the planned, or budgeted values, originally assigned to each of the completed geometric work packages. This results in a total performed value of thirty-five dollars. With this additional performed, or earned value data, the actual program status becomes much clearer. Rather than a ten dollar favorable variance, we can see that fifteen dollars worth of planned work, represented by a rectangle, two circles and a triangle, did not get completed. This unfavorable situation is called schedule variance in earned value management and is computed by subtracting the panned value from the performed value. Additionally, when we compare the performed value with the actual cost, we see that the work that was completed cost five dollars more than was originally budgeted, this unfavorable situation is called cost variance in earned value management.STATUS: Schedule Variance = Earned - Budget = - 15 UnfavorableCost Variance = Earned - Actual = - 5 UnfavorableIn earned value management, we add the additional variable of work performed. The shaded geometric shapes in the PERFORMED section represent the monthly EARNED VALUE of thirty-five dollars. Comparing this with the monthly fifty dollar BUDGET, we now correctly see that fifteen dollars worth of work was not completed. Comparing the EARNED VALUE with the ACTUAL COST we can see the completed work cost five dollars more to complete then was budgeted.
9 9. – If the pharaoh had only used an earned value system in building the pyramids By Lt Col William J Neimann, USAF (Ret)Script - Slide 9 – If the pharaoh had only used an earned value system in building the pyramids, by Lt Col William J Neimann, United Sates Air Force retired – This slide supports the second learning objective for this lesson which is to describe how earned value management combines work scope, schedule, and resources. In 1982, Col Neimann published the titled paper in the Program Manager magazine. Although some of Col Neimann’s references to DoD policy, to C/SCSC and to the EVMCS are now obsolete, his paper is still one of the best references for learning the basics of earned value management. This slide includes a link to his paper. If you are viewing this presentation in the Slide Show format, you will need to select the Esc key now and return to the three window html format before selecting the hyperlink button. Selecting this button in the Slide Show format will open a window that can only be closed by the window task manager. If you’ve already selected the button after reading or printing the paper, press Alt-Ctrl-Delete and select the Task Manager to close the window. At this time, please read his article. After completing his article, return to this presentation and continue with the next slide were we’ll review Col Neimann’s graphs together.Lt Col Neimann published the above titled paper in the Program Manager magazine in Col Neimann’s references to DoD policy, to C/SCSC, and to the EVMCS are now obsolete, but his paper is still an excellent reference for learning the basics of earned value management. The next six slides reprint Col Neimann’s tables and graphs and the corresponding text associated with each is reprinted in the Power Point Note Page format. The entire paper is reprinted in the Note Page formants. At this time please read and review the paper by selecting the Note Page format of this presentation or by printing the Note Page formats of slides 10 – 15.
10 10. Figure 1 - The Program Plan BUDGETED COSTOF WORKSCHEDULED ($M)DEFINE WORKSCHEDULE4DesignIF THE PHARAOH HAD ONLY USED AN EARNED VALUE SYSTEM IN BUILDING THE PYRAMIDSLieutenant Colonel William J. Neimann, USAF (Ret.)The developer of the great pyramid of Egypt might be looked upon as the father of program management. He had one of the first programs in recorded history that required a great deal of integration and coordination (i.e. program management). He did not, however, have the relatively new concept of "earned value" to assist in the management of this ambitious program. An "earned value" concept is the heart of all defense contractor management information systems, which comply with DoD Instruction concerning the earned value management control system (EVMCS). But let's go back nearly 5,000 years to the construction of the pyramids to see if "earned value" would have been of any utility in managing that program.Let's assume we are all members of the pharaoh's air force and work in a program management office. We are competing for resources with the Icarus, Pegasus, and Sphinx programs, so we must manage our technical, schedule, and cost performance with the highest of skills. Let's further assume that our office has been given a PMD (Pharaoh's Management Directive) for implementation of the pharaoh's dream. He wants to build a tomb to keep out the barbarians, last forever, etc. We have been given 20 years and a budget of $22 million ($ is the symbol for shekel) to accomplish the task. The pharaoh also wants us to report the status of the program to him on a quarterly basis using the PAR (Pharaoh's Acquisition Report) format.Now that we have our marching orders, what's the first thing we should do? As a military organization, experience would tell us that we need to lay out a plan. Let's approach the plan using the requirements and available resources. To convert the pharaoh's requirements into brick and mortar, we need to break down the work into its component tasks and distribute the responsibilities within the office. We could break down the work into either product-oriented or functionally oriented categories. For our own porposes, let's break the work down into the functional categories shown in Figure 1. We could, of course, discuss whether this is the correct functional breakdown, but for our purposes, let's assume this breakdown of the work is adequate.What next? We must look at the resources available for the completion of the program. One of those resources is time. In conjunction with the individuals responsible for each functional area, we determine the amount of time required for each task and the interrelationships of the tasks. Figure 1 shows the agreed-to times for accomplishing the individual tasks and the overall program. We have not shown the interrelationship of the tasks on our chart.Lastly, for our plan to be complete, we must determine the expected cost of each work task. Since we are still in the planning stage, the cost we are referring to is budgeted cost. But cost of what? The answer is; of course, cost of the work we have just scheduled, or budgeted cost of work scheduled (BCWS). Cost in our definition will include both direct and indirect costs, but not profit or fee. For the design task we have to budget for wages of the astrologers, alchemists, and engineers, as well as any material required in this task. We also have to budget for other direct charges (ODC) that may occur (i.e. abacus time, or travel to headquarters at Cairo). Finally, we must include an estimate of the overhead (indirect) charges, which will be incurred. When all of these anticipated costs are added up, we see that Budgeted Cost for the Work Scheduled (BCWS) in the design task is $4 million. The manufacturing task is beyond our in-house capability and we plan to subcontract this to the Phoenicians, who are known to be shrewd negotiators, so we budget this task at $6 million. For the component test, we will need to get the astrologers, alchemists, and abacus operators’ back together, and this is estimated to cost us $4 million. For the assembly task, we intend to use slave labor, so the cost is relatively low at $2 million. For the last task of integrated test, we expect the cost to be $4 million. Note that when all the costs of all the tasks are added, the total is $20 million, leaving $2 million in management reserve which the prudent program manager is setting aside for future problems (i.e. those infamous unk-unks).6Manufacture4Component Test2Assemble4Integrated TestYears2468101214161820$20See or Print Notes Page format to read section one of:If the Pharaoh Only Used Earned Value System in Building the Pyramids
11 11. Figure 2 - The Time-Phased Spend Plan NEGOTIATED CONTRACT COSTManagementReserve}Budget atCompletion(BAC)PerformanceMeasurementBaseline (PMB)$CumulativeBudgetedCost of WorkScheduled(BCWS)Section 2In summary, we know the pharaoh likes to see a chart depicting shekels ($) on the ordinate and time on the abscissa. This will result in a spend plan showing planned use of shekels over time. Taking the total amount of shekels expected to be expended over time, and then adding them cumulatively, results in a line in Figure 2 called the performance measurement baseline (PMB). This baseline is the result of adding together the BCWS for all tasks to be accomplished over certain time periods in the program. Management reserve (MR) is the difference between the total allocated budget and the budget at completion (BAC) of the performance measurement baseline (PMB). Clearly, management reserve lies outside of the PMB.We now have laid out our basic program plan, and after developing several of the areas in a little more depth, we are ready to take our plan to the pharaoh for his approval. Let's assume the pharaoh is satisfied with our plan and gives us the program go-ahead, while reminding us to report program progress on a quarterly basis.YearsSee or Print Notes Page format to read section two of:If the Pharaoh Only Used Earned Value System in Building the Pyramids
12 12. Figure 3. Current Status Time Now 4 4 6 6 4 3 $13 2 4 6 8 10 12 14 SCHEDULEBCWS$(M)ACWP$(M)DEFINE WORK44Design66Manufacture43Component Test$13AssembleSection 3Twelve years have now passed since program initiation. Like most programs we have had some success and some failures. It is now time to prepare another of our quarterly PAR reports to the pharaoh. What can we include in our reports? Let’s look at our current status (Figure 3) and determine what we can tell the boss.In our discussion with the manager of the design task, we found that he started his task on time and completed it on time by year 4. We know he had planned to spend $4 million to do the task. We can also now collect some actual cost data. Using the bill of material, labor hours, and overhead rates, we can calculate the total amount of money actually spent to accomplish the design task. We find that $4 million is the actual cost of work performed (ACWP). So far, so good. We spent exactly what we had projected to accomplish the design task.Our discussion with the manager of the manufacturing task reveals that we are having a problem with our subcontractor, the Phoenicians. They are getting behind on their deliveries, and we only have 667 of the 1,000 granite cubes needed for the program. We had planned to spend (BCWS) $6 million for this task and we have already spent (ACWP) $6 million. The task is only two-thirds complete.The component test area consists of two tests: a wind tunnel test and an environmental chamber test. Both tests are of equal cost. We have completed the environmental test, but have been out-prioritized by the Sphinx program for the use of the wind tunnel and unable to do the second test. We planned to spend $4 million for the component test task and have spent $3 million so far. The test effort is only one-half complete.Integrated TestYears2468101214161820$14See or Print Notes Page format to read section three of:If the Pharaoh Only Used Earned Value System in Building the Pyramids
13 13. Figure 4. Cost Status Imposed on the Plan NEGOTIATED CONTRACT COST22}ManagementReserve201816$14Budget atCompletion(BAC)BCWS1210ACWP864Section 4Let's again turn our attention to the spend plan (Figure 4), but let's include an indication of current status. We are at "time now" in year 12 and we had planned to spend (BCWS) a total of $14 million by this time. We may also plot the actual cost of the work that was performed (ACWP), which totals $13 million. We could have determined ACWP in previous reporting periods and plotted these points. These points also define a line, which is an analog representation of the ACWP over time.What could we tell the pharaoh from this information? By examining the current status chart we can determine that:- we have spent less than we planned to spend at this point in time (planned to spend $14 million, actually spent $13 million);- we still have $2 million in management reserve;- we have spent 65 percent of the money ();and,- we have done less work than we planned. We can tell this from looking at the schedule.The last time we briefed the pharaoh, he asked some difficult questions. For example:- For the work that has been performed, are we overrunning cost or underrunning? How much?- What percent of the work has been accomplished?- Do we have enough money? What is our estimate at completion?22468101214161820CompletionPointYearsTime NowSee or Print Notes Page format to read section four of:If the Pharaoh Only Used Earned Value System in Building the Pyramids
14 14. Figure 5. Current Status 4 4 4 Time Now 6 6 4 4 3 2 $10 2 4 6 8 10 SCHEDULEBCWS$(M)ACWP$(M)BCWP$(M)DEFINE WORK444DesignTimeNow664Manufacture432Component TestSection 5What do we get when we compare planned cost with actual cost? We find only that we have spent $1 million less than intended. This information is useful, but only from a funding viewpoint. It would be incorrect to state that from a performance viewpoint we have a cost variance of -$1 million. What we need is a measure of performance that takes into account what really has been accomplished. We could measure this accomplishment or work performed in terms of budgeted cost. This measurement of work performed is designated as "earned value" in C/SCSC terminology. The budgeted cost of work (BCWP) is a measurement of work accomplished in terms of the cost budget for that work and is the heart of a good cost performance reporting system. Figure 5 shows the earned value for calculation for the example. If we now subtract the actual cost of the work performed from the budgeted cost of work performed, we get a measurement, in $, of the difference between planned cost and actual cost, for the same amount of work performed. Likewise, if we subtract the BCWS from the BCWP, we see in $ the difference between the work scheduled and the work performed. Note that this $ difference represents accomplishment of more or less work than originally planned. No consideration is given to the interrelationship of the tasks, so the ability to meet a particular milestone cannot be determined from this calculation. Said another way; there is no critical path consideration in the determination of schedule variance. Therefore, schedule variance is only a measure of how much more or less work has been accomplished than originally planned not a complete measure of progress toward a completion date.If "earned value" or BCWP is the key to good performance measurement, how is it calculated? Basically, BCWP is a measurement of the work performed compared to the original plan. For example, in the design task the budgeted cost for the task was $4 million. All work has been performed, so a value of $4 million work of work has been "earned". BCWP for this task is $4 million. Note that the calculation of BCWP is completely independent of the actual cost of the work. In the manufacturing task, we have performed two-thirds of the total budgeted work of $6 million. Therefore, BCWP for this task is $4 million. Likewise, we have performed half of the component test task that was budgeted at $4 million. Therefore, BCWP for this task is $2 million. If we add the BCWP for the tasks, we can see that the BCWP for the program at time now is $10 million. This means we can take "credit" for, or we have actually completed $10 million of the originally budgeted work.AssembleIntegrated Test$10Years2468101214161820$14$13See or Print Notes Page format to read page section five of:If the Pharaoh Only Used Earned Value System in Building the Pyramids
15 15. Figure 6. Current Status Imposed on the Spend Plan NEGOTIATED CONTRACT COST}ManagementReserveBCWS$ScheduleVarianceBudget atCompletion(BAC)CostVarianceSection 6The BCWP term is then plotted on the spend plan as shown in Figure 6. We are now in a better position to answer some of the pharaoh's questions. As far as determining current over/underrun is concerned, we simply subtract the ACWP ($13 million) from the BCWP ($10 million) and find we have an unfavorable variance of -$3 million or an overrun to date of $3 million. We have scheduled to perform $14 million worth of work (BCWS) but has performed (BCWP) only $10 million worth. We have therefore performed $4 million less work than planned, and are $4 million behind schedule. Remember this work may or may not be on the critical path, so we must look at the schedule to determine progress toward the completion date.The percent complete may be calculated by dividing the work performed by the budget at completion (BAC). Therefore, 10/20 or 50 percent of the work has been accomplished. Remember, from an earlier calculation that 65 percent of the money has been spent (ACWP).We are now ready to answer the pharaoh's last question. There are many different methods used to reach an estimate at completion (EAC). We could take the actual cost incurred to date (ACWP) and do a complete bottoms-up estimate for the remaining work. This is a time-consuming and costly process. We could use a "management estimate" of the remaining work. This tends to be very subjective and open to management optimism. We could make the assumption that in our work to date, we have established a certain cost efficiency, which will continue to program completion. We can develop such a "cost-efficiency index" by dividing the budgeted cost of work performed (BCWP/ACWP). In our example, this is 10/13 or The cost efficiency index for the first half of the work accomplished is If we assume that this efficiency will continue to completion, we divide the BAC by the efficiency index (20/.77), and determine the EAC to be $26 million. Said another way; we have accomplished 50 percent of the work at a cost of $13 million. Therefore, when the program is 100 percent complete, the cost is projected to be $26 million.This estimate at completion is $4 million greater than currently authorized. What do we do? First, we must recognize the limitations of our estimate, but it indicates that it's time to reevaluate the direction of the program. Perhaps we should consider descoping our effort, perhaps building the pyramid out of 800 blocks rather than 1,000, or canceling one of the tests. If this descoping were not feasible, another alternative would be to look around for additional funds. Whatever we do, we must remember that the pharaoh doesn't like surprises and we must inform him as early as possible when we think we may have a funding problem. Earned value (BCWP) helps in finding those problems much earlier in the program life when a wide variety of alternatives are viable.The purpose of this example is to point out the utility of the "earned value" method and to introduce some terms used in cost performance measurement. Many of the concepts, such as determination of BCWP, were only touched upon and will be further developed in further articles.BCWPACWPCompletionPointYearsTime NowSee or Print Notes Page format to read page section six of:If the Pharaoh Only Used Earned Value System in Building the Pyramids
16 16. Earned Value Independent Variables DescriptionMeaningBudgeted Cost of Work Scheduled is the dollarized value of all work scheduled to be accomplished in a given period of time. BCWS is the planning function required by earned value and establishes the baseline against which performance is measured.PlanningBaseline -- PMBBCWSBudget Cost of Work Performed is the dollarized value of all work actually accomplished in a given period of time. The variable is also called earned value and symbolizes the completion of work. BCWP is not realized until the work is completed.Work AccomplishmentEarned ValueBCWPActual Cost of Work Performed is the costs incurred and recorded for performance measurement purposes within a given period of time. ACWP is independently reported by the contractor’s accounting system. Simply stated: “actuals” are “actuals”.Expenditures“Actuals are Actuals”ACWPBudget at completions are established early in the contract for every given level of the work break down structure. They capture the budgets for all authorized work and they are the benchmarks for forecasting overruns and underruns.BACScript - Slide 16 – Earned value independent variables - This slide supports the third learning objective for this lesson which is to explain the meaning of BCWS, BCWP, ACWP, BAC and EAC in plain language. As an earned value analyst you will need to communicate EV status, trends and projections in terms understandable by audiences who are not be familiar with earned value vocabulary. The defense acquisition university’s curriculum, defines five independent EVM variables: BCWS, BCWP, ACWP, BAC and EAC. All earned value metrics are derived from these five variables.The budgeted cost of work scheduled or B C W S is the dollarized value of all work scheduled to be accomplished in a given period of time. This most important variable symbolizes the planning function required by earned value management. BCWS is determined early in the contract and establishes the baseline against which performance is measured.The budget cost of work performed or B C W P is the dollarized value of all work actually accomplished in a given period of time. The variable is also called earned value and symbolizes the completion of work. BCWP is not realized until the work is completed.The actual cost of work performed or A C W P is the costs incurred and recorded for performance measurement purposes within a given time period. The ACWP is reported by the contractor’s accounting system in accordance with generally accepted accounting procedures. Simply stated actuals are actuals.Budget at completions or B A Cs are established early in the contract for every given level of the work break down structure. They represent the total budget from which individual period B C W S values are derived and they are the benchmarks for computing overruns and underruns at the end of the contract. The budgets for all authorized work must be captured within the budget at completion.Estimate at completion or E A C is an independent forecast for what it will cost to complete any given level of the work break down structure. The key word is independent. The Defense Acquisition University’s E A C independent variable refers to the estimate at completion reported by the contractor. The contractor's E A C has also been called the L R E or latest revised estimate.Authorized WorkEstimate at completions are an independent forecast of the final costs required to complete any given level of the work break down structure. These are normally reported by the contractor. The contractor's EAC is also called the LRE or latest revised estimate.EACForecast CostEarned Value Has Five Independent Variables
17 17. Earned Value Metrics Three Common Earned Value Metrics Metric DescriptionMeaningSV = BCWP – BCWSSchedule Variance (SV) indicates some amount of work was not completed as originally planned. A positive SV indicates work was complete ahead of the original plan. A negative SV indicates work was not completed on time as original scheduled. Since BCWS and BCWP will always be equal at the end of the contract, the SV is always zero at the end of the contract. For this reason, many believe a better name for this metric would be accomplishment variance– how much work did we plan to accomplish (BCWS), verses how much work did we accomplish (BCWP).AccomplishmentVarianceCV = BCWP - ACWPCost Variance (CV) indicates the actual cost to complete some amount of work was different than originally budgeted. A positive CV indicates the work was done for less than budgeted. A negative CV indicates the work cost more to complete than originally budgeted. Like “actuals are actuals”; “cost variance” is “cost variance”.CostVarianceScript - Slide 17 – Earned value metrics - This slide supports the fourth learning objective for this lesson which is to explain the meaning of SV, CV and VAC in plain language. The Defense Acquisition University’s curriculum defines thirteen EVM metrics. This slides introduces the schedule variance, cost variance and variance at completion metrics. These three metrics were selected because they are reported by the contractor in the earned value cost performance report.The schedule variance or S V is computed by subtracting the budgeted cost of work scheduled, or B C W S, from the corresponding budgeted cost of work performed, or B C W P. Negative schedule variances are unfavorable, indicating that some amount of planned work was not completed as scheduled. Positive schedule variances are favorable, indicating that more work was completed then originally planned. Unfavorable schedule variances indicated the potential for a contract schedule slip, but this cannot be absolutely determined without a reviewing the critical path schedule. Since BCWS and BCWP will always be equal at the end of the contract, the schedule variance is always zero, at the end of the contract; even if when contract actually finishes late. For this reason, many believe that this metric is misnamed. A better name for this metric would be accomplishment variance– how much work did we plan to accomplish, BCWS, verses how much work did we accomplish, BCWP.The cost variance or C V is computed by subtracting the actual cost of work performed, or ACWP from the corresponding budgeted cost of work performed, or BCWP. Negative cost variances are unfavorable indicating that more money was spent to complete a task than was budgeted for the task. Positive cost variances are favorable indicating that work was completed under budget. Early unfavorable cost variances are a strong indicator of potential contract overruns. Like “actuals are actuals” “cost variance is cost variance”.The variance at completion or VAC is computed by subtracting the estimate at completion, or EAC, from the corresponding budget at completion, or BAC. A negative variance at completion is unfavorable and is a forecast of a contract overrun. A positive variance at completion is favorable and a forecast of a contract underrun.VAC = BAC - EACVariance At Completion (VAC) indicates the estimated cost at completion will be different than originally budgeted. A positive VAC forecasts a contract underrun. A negative VAC forecasts of a contract overrun.Forecast Overrun or UnderrunThree Common Earned Value Metrics
18 18. Sample Cost Performance Report Terminology Pop I SmithScript Slide 18; Sample Cost Performance Report; Terminology. This slide supports the fifth learning objective for this lesson which includes recognizing EV variables, schedule variance, and cost variance on the CPR format one.This slide shows a sample page one of a two page completed cost performance report Format 1. This landscape form includes eight sections or boxes. The top half of the form, boxes one through seven, include programmatic data about the contract, the contractor, reporting period, production quantities, contract budget information, and the contractor's estimate at completion. Box 8 is a spreadsheet table with the work breakdown structure defining the rows and the earned value variables, adjustments, schedule variance, cost variance, and variance at competition defining the columns. The CPR will be reviewed in detail in the earned value and financial management reports lesson, but for this lesson, lets review box eight, in respect to the DAU EV definitions. First observe that all five EV variables are reported in the CPR: B C W S , B C W P, A C W P, B A C and E A C. Additionally the S V, C V, and V A C earned value metrics are also reported in the CPR format one.BCWSBCWPACWPSVCVBACEACVACThis Cost Performance Report (CPR) is representative of an earned value report that you might receive from a contractor. The CPR will be reviewed in detail in a later lesson, but for this lesson, recognize the terminology of a typical earned value report is consistent with the DAU definitions. The five EV variables (BCWS, BCWP, ACWP, BAC, EAC) are directly reported in the CPR. Additionally the CV, SV and VAC metrics are also reported in CPR.
19 19. Sample CPR “Time Period” & “Through Any Given Level” Pop I SmithDAU definitions include the phrase “period of time ”. This phrase doesn’t appear in some industry definitions. The period of time concept is best highlighted in this CPR. Notice there is EV data reported for two time periods:CURRENT PERIOD and CUMULATIVE TO DATE.Script Slide The DAU definitions include the phrases “time period” and “through any given level”. These phrases don’t appear in some industry and commercial definitions. The time period concept is best highlighted in the CPR format one because EV data is reported for two time periods. The first is the current period which is from 29 Nov 2003 through 31 December The second time period is cumulative to date which is for the time period from contract award through 31 December 2003.The “through any given level” deals with the CPR format one WBS rollup. This CPR reports the level 3 Power Package WBS item and its’ subordinate engine, cooling, exhaust and quote other unquote level 4 WBS items. EV data is reported for all five items. The concept of roll-up is demonstrated by examining the 518 thousand dollar power package current period BCWS and recognizing it includes the engine’s 168 thousand dollar current BCWS, plus the cooling’s 108 thousand dollar current BCWS, plus the exhaust’s 81 thousand dollar current BCWS, and plus the “other” 161 thousand dollar current BCWS.=++++DAU definitions include the phrase “through any given level” which deals with WBS rollup. This phrase doesn’t appear in some industry definitions. This CPR highlights rollup. Notice EV data is reported for the “Level 3” Power Package item and its subordinate “Level 4” Engine, Cooling, Exhaust, and Other items.
20 20. Interpreting the Cost Performance Report The cumulative performance for the engine indicates the following: 1) there are 4 Million 82 thousand dollars budgeted for authorized work associated with the engine; 2) As of December 31, 2003, 575 thousand dollars worth of that work has been scheduled for completion; 3) 625 thousand dollars worth of that work was actually completed; 4) at a cost of 723 thousand dollars; 5) 50 thousand dollars more work was accomplished then was planned; 6) but it cost 97 thousand dollar more than was budgeted to accomplish this work; 7) Increada corporation forecasts it will cost 4 million 49 thousand dollars to complete all the work associated with the engine; 8) resulting in a 38 thousand dollar forecast underrun.1. BAC2.BCWS3.BCWP4.ACWP5.SV6.CV7.EAC8.VACScript Slide 20; Interpreting the Cost Performance Report - This slide supports the third and forth learning objectives for this lesson which are to explain the meaning of BCWS, BCWP, ACWP, BAC, EAC, SV, CV and VAC in plain languageUsing the same CPR Format one report we used in the last slide, lets now explain the engine’s cumulative performance for the December 2003 time period. The 4 Million 82 thousand dollars B A C represents authorized work associated with the engine. The 575 thousand dollar cum B C W S represents the work planned for completion; the 625 thousand dollar cum BCWP presents the earned value or the work actually completed; the 723 thousand dollar cum ACWP represents the actual cost of work performed. The 50 thousand dollar favorable schedule variance means 50 K more work was accomplished then planned. The 97 thousand dollar unfavorable cost variance means 97 thousand more dollars were spent to complete the work then was budgeted for the work. The 4 million 49 thousand dollar EAC is the contractor’s forecast for what it will cost to complete all the work associated with the engine. The 38 thousand dollar favorable VAC is the contractor’s forecast that all the Engine’s work will be completed for less than was budgeted resulting in an underrun for the engine.Said a different way, there is 4 Million 82 thousand dollars budgeted for authorized work associated with the engine. As of December 31, 2003, 575 thousand dollars worth of work had been planned for completion; but 625 thousand dollars worth of work was actually completed, at a cost of 723 thousand dollars. 50 thousand dollars more work was accomplished then was planned, but the work that was accomplished cost 97 thousand dollar more than was budgeted for that work. The contractor forecasts it will cost 4 million 49 thousand dollars to complete all the work associated with the engine resulting in a 38 thousand dollar forecast underrun.
21 21. Earned Value Basics Summary Earned Value Management is required by law, OMB Circular A-11 policy guidance, and DoDIEarned Value provides a common denominator for Work Scope, Schedule and ResourcesThe Independent Variables of Earned ValueBCWS – Budget Cost of Works Scheduled – Baseline PlanBCWP – Budget Cost of Work Performed – Earned ValueACWP – Actual Cost of Work Performed – Actual CostBAC – Budget at Completion – Authorized WorkEAC – Estimate at Completion – Forecast CostThree Common Earned Value MetricsSV – Schedule Variance – Accomplishment VarianceCV – Cost Variance – Cost VarianceVAC – Variance at Completion – Forecast Overrun / UnderrunScript Slide 21; Earned Value Basics Summary– This lesson and Lt Col Neimann’s paper were an introduction to the fundamentals of Earned Value Management. The concepts introduced will be reviewed and greatly expanded upon in the remainder of this course. Earned value management as is it practiced today can be traced to three public laws: the Government Performance and results act of 1993; the federal acquisition streamlining act of 1994, and the information technology management reform act of Department of defense EVM policy is derived from the OMB circular A-11 and the DoD Policy Instruction. These documents recognize the power of earned value to integrate work scope, schedule and budget resources.The most important objective for this lesson is for you to understand the meaning of the five EVM variables and the three most common EVM metrics. Remember that the budget cost of work schedule represents planning; the budget cost of work performed represents earned value and work accomplishment; the actual cost of work performed is just that the actual costs; the budget at completion represents all the authorized work for any given item, and the estimate at completions is an independent forecast cost. The schedule variance metric is determined by subtracting the Budgeted Cost of Work Scheduled from the Budgeted cost of work performed. This metric measures work accomplishment against a the current schedule plan. The cost variance is determined by subtracting the Actual cost of work performed from the budgeted cost of work performed and its name describes it meaning. The Variance at completion forecasts overruns or underruns by subtracting the estimate at completion from the budget at completion.