Evaluating the Estimate at Completion (EAC) August 2013 NAVY CEVM Welcome to the overview of EAC Evaluation using standard metrics

Outline IEAC Formula IEAC Performance Index selection IEAC Comparison to EAC TCPI Formula Evaluating the TCPI against CPI In this training module, we’ll first discuss the general IEAC formula, the various performance indices that can be used in its calculation, and how to evaluate the EAC based upon the IEAC results. We’ll then discuss the TCPI formula and the evaluation of TCPI reasonableness against the CPI.

Can you trust the contractor EAC? The contractor has just reported a new EAC, but how do you know if the estimate is any good? Requires objective, formulaic approaches Two standard ways of evaluating EAC reasonableness Independent Estimate at Completion (IEAC) comparison TCPI to CPI comparison These methods tend to be most reliable when the contract is between 15% and 85% complete. So how do you know if an EAC is accurate? Contractor EACs and their comprehensive EACs in particular are rolled up from low level estimates based upon the assumptions and judgment of control account managers. It falls to both contractor and government program offices to make sure that the resultant contract level EAC makes sense given historical performance and expectations for the future. Two standard approaches to EAC evaluation are IEAC comparison and TCPI to CPI comparison. They represent objective, formulaic approaches to evaluating an EAC. These methods are most reliable when contracts are between 15% and 85% complete.

Independent Estimate at Completion …given this is the budgeted effort that remains to be completed… This is the likely final cost of the contract… 𝐵𝐶𝑊𝑅=𝐵𝐴𝐶 −𝐵𝐶𝑊𝑃 𝑰𝑬𝑨𝑪=𝑨𝑪𝑾𝑷+ 𝑩𝑪𝑾𝑹 𝑷𝒆𝒓𝒇𝒐𝒓𝒎𝒂𝒏𝒄𝒆 𝑰𝒏𝒅𝒆𝒙 Here we have the standard IEAC formula, which projects the likely final cost of the contract by summing incurred cost and a forecast of anticipated cost. Given ACWP represents the incurred cost to date, a projection of future cost is calculated by dividing the value of budgeted cost for work remaining by any one of a variety of user selected performance indices that are intended to represent average future cost efficiency. The product of the IEAC formula is no more than a point of comparison for more rigorously developed EAC estimates. Use of the IEAC formulas for developing a formal contractor or government EAC position is discouraged. …given this is the incurred cost to date… …if this is the index chosen to represent average cost efficiency for future effort

What Performance Index Makes Sense? What incurred cost performance data is the most relevant for projecting future cost? Performance Index Consider it when… CPIcum Cumulative cost performance has been relatively stable ITD without significant schedule delays or advancement, so it reasonably represents future cost performance CPIcum*SPIcum Cost performance has been stable ITD, but past schedule performance may have bearing on the degradation or improvement of future cost efficiency CPI3month Performance incurred over the past three months is likely to continue CPI6month Performance incurred over the past six months is likely to continue CPIcurrent Current month cost performance is expected to continue for the remainder of the contract Other * You have a strong reason and/or evidence to support an alternate anticipated future cost efficiency of your choosing As mentioned on the previous slide, an IEAC can and should be calculated with a number of different performance indices. Based on the particulars of the program and where the program is in its life cycle, different indices may be more applicable than others The cumulative CPI is one of the most frequently used performance indices for IEAC calculation, and it assumes that all future work will be performed with the same cumulative cost efficiency incurred to date. Because cost degradation often lags schedule degradation however, a cum CPI based IEAC is often considered optimistically bias. To correct for this bias, many analysts prefer a performance index derived by multiplying cumulative CPI and SPI. Performance indices based upon 3 month or 6 month rolling average CPIs are used when more recent cost trends are considered more likely to represent future cost efficiency. These shorter term averages can of course produce more erratic IEAC calculations month to month. There is no exact science to performance index selection. An analyst can project an IEAC with any index he/she chooses; however, the basis for the index should be documented and supported. * the more objective the index, the more credibility the EAC will have Decide which is most pertinent, but evaluate all of them!

IEACs are not to be used as formal EAC estimates! IEAC Results Determine if the contractor EAC falls within the range of predicted IEAC results and its relationship to what you believe is the most pertinent IEAC A Chart plotting EAC/IEAC trends may provide additional insight Once the different IEACs have been calculated, they should be compared with the contractor’s Best Case, Most Likely, and Worst Case EACs to determine the reasonableness of the contractor’s estimates. A chart plotting the different EAC trends may provide additional insight. As mentioned previously, IEACs are not intended to be used as a formal statement of the likely contract outcome, but are rather simply points of comparison for evaluating more rigorously developed estimates. IEACs are not to be used as formal EAC estimates!

To Complete Performance Index This is the level of cost efficiency required in the future… …given this is the budgeted effort that remains to be completed… 𝐵𝐶𝑊𝑅=𝐵𝐴𝐶 −𝐵𝐶𝑊𝑃 𝑻𝑪𝑷𝑰= 𝑩𝑪𝑾𝑹 𝑪𝒐𝒔𝒕 𝑻𝒂𝒓𝒈𝒆𝒕 −𝑨𝑪𝑾𝑷 …given this is the cost incurred to date… The To Complete Performance Index or TCPI indicates the level of cost efficiency required in future months in order to achieve a specific cost target. Said another way, it’s the anticipated CPI going forward, assuming everything goes as planned. TCPI is calculated by dividing the value of budgeted cost for work remaining by the anticipated cost of the work remaining. This anticipated cost (the denominator in the equation here) is calculated by subtracting the ACWP or incurred cost to date, from the total contract target. Although both the BAC and EAC are used as TCPI Cost Targets, the TCPI_EAC is generally considered more interesting as it’s focused on the latest notion of final contract cost. …if this is final target cost TCPIBAC → the cost target is the BAC, so it calculates the cost efficiency necessary to complete on budget TCPIEAC → the cost target is the EAC, so it calculates the cost efficiency necessary to achieve the current estimate

What is a good TCPI? A good TCPI is one that’s achievable Predicts a level of future cost efficiency which seems reasonable based upon incurred cost efficiency to date TCPI is evaluated by how much it differs from CPI Generally speaking, the higher CPI the better. By contrast, the lower the TCPI, the more likely it is that the EAC can be achieved Some amount of variation is expected based upon performance challenges or conservatism, but TCPI should neither be too far above nor too far below performance incurred to date An EAC is considered unlikely if TCPI and CPI that differ by 0.10 or more Lends credibility to the overall EAC position. The TCPI metric is only really useful when compared to CPI. By itself, the TCPI lacks context, though it’s worth noting that with TCPI, the higher the number, the more challenging it is to achieve. Unlike a CPI, a high TCPI isn’t necessarily good. A good TCPI is one that indicates a level of future cost efficiency that seems achievable based on incurred cost metrics and therefore lends credibility to the EAC position. If the TCPI is too far above the CPI then the EAC is likely unachievable. If it is too far below the CPI, then the EAC is either unrealistically pessimistic, or some significant unfavorable event is forecast. An EAC is considered unlikely if the TCPI differs from CPI by more than 0.1 CPICUM TCPIEAC Delta Prospect 0.95 1.07 0.12 Unlikely (optimistic) 1.11 1.00 0.11 Unlikely (pessimistic) 0.85 0.87 0.02 Likely 1.09 1.05 0.04

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