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

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

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

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

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

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

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 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected As Expected Perfect Less than Expected

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 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected As Expected Great! Less than Expected Terrific!!Great!

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 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected Not Good!Terrible!! As Expected Not Good! Less than Expected

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 Possibilities Matrix schedule Ahead OfRight OnBehind cost More than Expected ?? As Expected Less than Expected ??

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

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

Earned Value Analysis There are many resources available for more in depth study of Earned Value Analysis/Management See the Earned Value Management website: 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

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

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

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

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

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

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

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

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

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 $ time BCWS ACWP

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 $ time BCWS ACWP BCWP

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 $ time BCWS ACWP BCWP

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 $ time BCWS ACWP BCWP BAC EAC

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 PlanFlexible Fcst Volume Variance Units sold Variable cost500650(150) PlanBCWP Schedule Variance Units produced Cost

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 $ time $

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 BCWS Schedule Variance BCWP Cost Variance ACWP Units Produced Cost per Unit554 Cost at a Point in Time

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

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

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 BCWS Schedule Variance BCWP Cost Variance ACWP Units Produced Cost per Unit554 Cost at a Point in Time

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 Learning Check

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

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

Budget at Completion: BAC semestercoursescost perbcwscum © Dale R. Geiger BAC $ X axis = semesters

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 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester1 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000--

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 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester11 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester

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 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester

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 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester--2000

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 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester2000--

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 BCWS Schedule Variance BCWP Cost Variance ACWP Courses Taken – 1 st Semester111 Cost per Unit – 1 st Semester2000 Cost after 1 st Semester

Classroom Exercise – 2 nd Semester © Dale R. Geiger

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester Courses Taken – 2 nd Semester2 Cost per Unit – 2 nd Semester2000 Cost of 2 nd Semester4000 Cost after 2 nd Semester6000

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester Courses Taken – 2 nd Semester21 Cost per Unit – 2 nd Semester Cost of 2 nd Semester Cost after 2 nd Semester

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester Cost of 2 nd Semester Cost after 2 nd Semester

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester Cost of 2 nd Semester4000(2000)2000(200)2200 Cost after 2 nd Semester(200)4200

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester Cost of 2 nd Semester4000(2000)2000(200)2200 Cost after 2 nd Semester6000(2000)

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 1 st Semester Courses Taken – 2 nd Semester211 Cost per Unit – 2 nd Semester Cost of 2 nd Semester4000(2000)2000(200)2200 Cost after 2 nd Semester6000(2000)4000(200)4200

Classroom Exercise – 3 rd Semester © Dale R. Geiger

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 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

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 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 Semester Cost of 3 rd Semester Cost after 3 rd Semester

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 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 Semester Cost of 3 rd Semester Cost after 3 rd Semester

3 rd Semester Results We are now back on schedule but over cost: not good! © Dale R. Geiger 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 Semester Cost of 3 rd Semester (1200)7200 Cost after 3 rd Semester(1400)11400

3 rd Semester Results We are now back on schedule but over cost: not good! © Dale R. Geiger 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 Semester Cost of 3 rd Semester (1200)7200 Cost after 3 rd Semester

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 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 Semester Cost of 3 rd Semester (1200)7200 Cost after 3 rd Semester (1400)11400

Individual Exercise: 4 th Semester © Dale R. Geiger

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 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

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 BCWS Schedule Variance BCWP Cost Variance ACWP Cost after 3 nd Semester (1400)11400 Courses Taken – 4 th Semester233 Cost per Unit – 4 th Semester Cost of 4 th Semester (1800)7800 Cost after 4 th Semester (3200)19200

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

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

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

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 This is like a performance variance This is like a volume variance

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