Presentation on theme: "COST CONTROL - EARNED VALUE 1.0. EARNED VALUE - INTRODUCTION"— Presentation transcript:
1 COST MANAGEMENT 642 - Paper 13 COST CONTROL - EARNED VALUE1.0. EARNED VALUE - INTRODUCTION2.0. EARNED VALUE - THE PROCESS3.0. EARNED VALUE - ASPECTS
2 Earned Value - Historical Background Originated in early 1900s by industrial engineers in factories1967 US C/SCSC: DoD Instruction incorporated EVCost reimbursable contracts. Imposed on contractorsReissued 1991 revision -“contributed to interest in EV”Main users today - US Defence & some Oz Government agencies“cost overrun problems in Australian Defence contracts led to direction from Parliament to implement EV management”1993: Australia, Canada, Sweden & USA established International Performance Management Council. An objective - promoting EV“private industry, with few exceptions, has not employed EV”“EV: 1 of most underused cost management tools available
3 Earned Value - Definition EV “is a method for measuring project performance” (PMI).Technique for integrating time and cost perfromance in a project,EV evaluates project’s cost performance by:comparing planned value of work to be done against earned value of work accomplished; andcomparing this earned value against actual costs incurred
4 Earned value - InputsWBS - defines project’s scope into finite measurable activities.Project Schedule - “without a schedule, there could be no EV”Project Budget - Total & task.Schedule/Budget Baseline - usually represented by S-curve.Work Results - Actual costs incurred
5 EARNED VALUE - CRITERIA “There will always be some deviation from the plan".Criteria needed to identify if & where deviations are occurringEV relates time and cost deviations with each otherEV uses 3 criteria of cost data - BCWS, BCWP, ACWP3 criteria can be applied to performance of:overall project &/or separate work packages or tasks;each cost period &/or on cumulative basis.
6 Budgeted Cost of Work Performed (BCWP); or Earned Value EV - Example1-month project has budget of $10,000.End of month, $8,000 of work completed.This cost $8,500.Budgeted Cost of Work Scheduled (BCWS)= what is planned to be done . BCWS = $10,000.Actual Cost of Work Performed (ACWP)= what was paid for work done. ACWP = $8,500.Budgeted Cost of Work Performed (BCWP); or Earned Value= budget of work actually done. BCWP = $8000End of the project, BCWP = BCWS.
8 COST VARIANCE CV = difference between budget & actualcost CV = BCWP - ACWPCost Performance Index (CPI) = BCWP / ACWPBoth indicate whether work costs more or less than budgeted.Positive CV, or CPI of 1.0+, means actual cost is less than budgetExample:CV = $ 8, ,500 = -$500. i.e., cost overrun,CPI = $ 8,000 / 8,500 = i.e., cost overrunCan be calculated cumulatively or for a specific period
10 Schedule VarianceSV = difference between budget for accomplished work & budget for planned work I.e. schedule performanceSV = = BCWP - BCWSSchedule Performance Index (SPI) = BCWP / BCWSPositive SV, or SPI of 1.0+, means actual work performed is greater than work scheduled, so ahead of scheduleExample:SV = $ ,000 = -$2,000. i.e. time overrunSPI = $8,000 / 10,000 = i.e. time overrunCan be calculated cumulatively or for a specific period
11 Schedule VarianceSV can be misleading - “may or may not accurately reflect true schedule position:may not clearly indicate whether milestones are being met, since work may have been done out of planned sequence. Scheduling system must be used to provide the means of determining the status of specific activities or milestones"EV does not discriminate between critical and non-critical scheduled activities so liable to provide misleading projections of completed date
12 relationship between BCWS, BCWP, & ACWP, SV and CV.
15 EV - Example5. The BCWP at any point in time = BCWP of work packages completed + BCWP evaluation of the budgeted value of partially completed work-in-progress.How might the BCWP for partially completed work-in-progress be evaluated?
16 BCWP - Evaluating Work in Progress major problem- evaluating BCWP for partially completed tasksShort tasks reduces problems, but = numerous tasksMethods for evaluating BCWP for partially completed tasks:START/FINISHSome tasks difficult to assign progressEg: aligning motor - know when starts & finished, but not % done.S/F = % arbitrary assigned to start, & 100% recorded when done50/50 = task done at a constant rate. Reasonable for short duration, lower-value tasks20/80 - good for "tasks with longer duration or higher value. Owner will hesitate to recognise too much completion in advance".0/ suited to very short tasks
17 BCWP - Evaluating Work in Progress MILESTONESTasks divided into objective milestones.Each milestone has budgetbudgeted cost recorded once milestone completed.Suited to longer-duration tasks. e.g., three or four months durationUNITS COMPLETEDMeasure amount of physical units produced"applicable to tasks that involve repeated production of easily measured pieces of work, when each piece requires approximately the same level of effort"eg bricks laid
18 BCWP - Evaluating Work in Progress OPINIONJudgement made of % of work completed.“Should be used for relatively minor tasks & only where more discrete status is not feasible"LEVEL OF EFFORT (LOE)tasks over long period of time or continuous during project. Eg PMFor time-orientated activities, rather than task-related activities% complete = actual cost to date /forecast at completionAssumes BCWP always = BCWS.
19 EV - Example6.How might the Estimate at Completion [EAC] be calculated?
20 Forecasting Final Cost - Estimate at Completion (EAC) EAC = “$ to-date + estimate to complete“infinite number of possible EAC formulas"Benefit of EAC forecasting - indicates effects if no action is taken."often requested of PMs by anxious senior management, vital to project cash flow, viability of project & sometimes whether to cancel project after it has started"2 kinds of cost overruns:Current overrun. i.e. cost varianceForecasted cost overrun at completion i.e. EAC
23 EAC - Forecasting Methods Original Budget + Cost Variance to dateWork from particular point will progress at planned rates, whether or not rates have prevailed to this pointEAC = BAC + CV[BAC: Original Budget at Completion; CV: Cost Variance to date]Example:EAC = 8,500 + (10, ,000) = 10,500Common method becausesome cost overspends are unlikely to be repeatedthose likely to be repeated may be reduced using experience to datesome cost savings will be made to balance further overspend
24 EAC - Forecasting Methods Cost variance to date will continue to prevailRate of progress to date will continue to prevailEAC = BAC / CPI [CPI: Cost Performance Index to date]Example:EAC = 10,000 / 0.94 = 10,638.“reliable indicator of total required project costs”“provides what some consider to be the ‘best case’ possible for a project”
25 EAC - Forecasting Methods Cost and Schedule variance to date will continue to prevailConsiders schedule performance as well as cost performanceEAC = BAC / (SPI * CPI)[SPI: Schedule performance Index to date]Example:EAC = 10,000 / 0.80 * = $13,298.Rationale “if project is behind schedule & overrunning costs to date, both conditions will combine to exacerbate final results”
26 EAC - Forecasting Methods Estimate for Remaining WorkEAC based on actuals to date + new estimate for remaining workWhilst may be accurate, likely to be difficult & costly.Acceptable “when past performance shows that the original estimating assumptions were fundamentally flawed, or that they are no longer relevant due to the change in conditions”
27 EAC- Summary US DoD analysed 700+ contracts Key findings - at 15% completion point in a project:overrun at completion will not be less than overrun to date. So overrun will not be recovered on remaining tasks; and,% overrun at completion will be greater than % overrun to date. So overruns get progressively worse with time.cumulative CPI value at 20% completion point does not change by more than 10%. So, CPI is a stable value early in project & can be used to confidently predict range of EACFinally, no single method used but forecast by each calculated so range of possibilities is produced for consideration.
28 Earned Value - Who needs to use it? Relevant for those with direct control & responsibility for performance of resources used for project activities.Client involved in ‘price control’ rather than ‘cost control’client’s expenditure predetermined, irrespective of costs incurred by contractor - “key limitation of usefulness of EV for ownerClient - BCWP & ACWP are same - “both represent only cost incurred by owner”.contractor will be concerned with EV as it can be used to monitor a project’s cost performance.
29 EV v Traditional Cost Management Traditional CM: only 2 data used - planned & actual costs“if less, all assumed to be OK”.“May be false because no measure made of what has been done for the expenditure”EXAMPLEEg: 12-month project $100,000 6 months project spent $29,000 of its planned $32,000 budget. What might this tell you?Alternative interpretations:either project on schedule & under-running costs;or project is behind schedule.Is there any other information required to properly determine the project’s cost performance?
30 EV v Traditional Cost Management: Example EV approach uses a 3rd dimension: BCWP“Must compare actual expenditure not to schedule expenditure, but to measure of value of work done” .i.e. BCWP.EV provides more useful cost information than traditional approach - “project management must abandon traditional method of relating planned costs to actual costs, and to adopt the three dimensional earned value approach”If known that BCWP is say $24,000, then project is:behind schedule - planned budget at this stage was $32,000 but only $24,000 has been completedoverrunning costs - $24,000 budgeted work was done, actually cost $29,000 to accomplish
31 CM642 - Paper 13: COST CONTROL II - EARNED VALUE 1.0. EARNED VALUE - INTRODUCTION1.1. Earned Value - Historical Background1.2. Earned Value - Definition1.3. Earned Value - Inputs2.0. EARNED VALUE - THE PROCESS2.1. Criteria2.2. Example2.3. BCWS, ACWP, BCWP2.4. BCWP - Evaluating Work in Progress2.5. Performance Indicators - Cost & Schedule Variance2.6. Forecasting Final Cost - Estimate at Completion (EAC)3.0. EARNED VALUE - ASPECTS3.1. Earned Value - Who needs to use it?3.2. Earned Value v Traditional Cost Management