Slides 11 3 calculate schedule and cost variances with earne

Consider the Possibilities at any Given Consider the Possibilities at any Given Point During the Project • Being right on schedule and at the expected cost is perfect but rarely happens

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Calculate Schedule and Cost Variances with Earned Value Analysis

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How Can We Better Manage Large, Complex, Non Repetitive Projects?

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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

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• 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

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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

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• The nature of projects results in a high degree

of risk

• There are two types of risk:

• Risk that the project will not be completed in the timeframe expected: schedule varianceschedule variance

• Risk that the project will not be completed within the budget allotted: cost variancecost variance

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Consider the Possibilities at any Given

Point During the Project

• Being right on schedule and at the expected cost is perfect (but rarely happens)

Ahead Of Right On Behind

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• Being ahead of or on schedule and at or less than

expected cost is a good thing

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• Being behind or on schedule and at or more than

expected cost is not a good thing

cost

More than Expected Not Good! Terrible!!

Less than Expected

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• Can’t really tell if this is good news or bad without further analysis

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cost

More than Expected ?? Not Good! Terrible!!

As Expected Great! Perfect Not Good!Less than Expected Terrific!! Great! ??

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• 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

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• There are many resources available for more

in depth study of Earned Value

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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

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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

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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?

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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

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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

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Comparing Flexible Forecast to Project

Budget

$

time

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Comparing Flexible Forecast to Project

Budget

$

units

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Essential Vocabulary of EVM Variables

• BCWS Budgeted Cost for Work Scheduled

• How much work should be done?

• BCWP Budgeted Cost for Work Performed

• How much should it cost for the work actually done?

• ACWP Actual Cost of Work Performed

• How much did the work done actually cost?

• BAC Budget at Completion

• What was the total project supposed to cost?

• EACEstimate at Completion

• What do we now expect the project to cost?

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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”

$

time

BCWS ACWP

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• What does this mean????? (Terrific!!: we are ahead of

$

time

BCWS ACWP BCWP

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$

time

BCWS ACWP BCWP

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• What does this mean????? (Terrific!!: we are ahead of

$

time

BCWS ACWP

BCWP

BAC EAC

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Schedule Variance Logic Differs

From Cost Variance

• In calculating cost volume variance cost volume variance we looked at increased units resulting

in more cost

• More cost is (unfavorable) by definition in cost variance analysis

• In calculating schedule variance 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

Plan Flexible Fcst Variance Volume

Variable cost 500 650 (150)

Plan BCWP Schedule

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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

Schedule variance looks at the X axis

• Any point left of the BCWS is ahead

of spending schedule in the time

$

time

$

time

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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

BCWS Schedule Variance BCWP Variance Cost ACWP

Cost at a Point in

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EVM Variance Summary

• 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)

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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

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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

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• What information does the comparison of

BCWP to BCWS give?

• What can be said about the project if ACWP is greater than BCWS?

Learning Check

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The Project Management AAR

• Uses EVM metrics as part of the measurement

• There are many application opportunities for

project management AARs

• Acquisitions, research and development,

experimentations, building and construction, BRAC,

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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

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Budget at Completion: BAC

semester courses cost per bcws cum

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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

Courses Taken – 1 st Semester 1

Cost per Unit – 1 st Semester 2000

Cost after 1 st Semester 2000

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BCWP

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Cost per Unit – 1 st Semester 2000 2000 2000 Cost after 1 st Semester 2000 2000 2000

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BCWP

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BCWP

Cost per Unit – 1 st Semester 2000 2000 2000 Cost after 1 st Semester 2000 2000 2000

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Classroom Exercise – 2nd Semester

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2nd Semester Results

• We are now behind schedule and over cost: terrible!!

• ACWP is 105% of BCWP so EAC can be projected at 105% of

Cost after 1 st Semester 2000 2000 2000

Courses Taken – 2 nd Semester 2

Cost per Unit – 2 nd Semester 2000

Cost of 2 nd Semester 4000

Cost after 2 nd Semester 6000

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Cost per Unit – 2 nd Semester 2000 2000 2200

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Cost per Unit – 2 nd Semester 2000 2000 2200 Cost of 2 nd Semester 4000 (2000) 2000 (200) 2200

Cost after 2 nd Semester 6000 (2000) 4000 (200) 4200

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Classroom Exercise – 3rd Semester

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3rd Semester Results

• We are now back on schedule but over cost: not

good!

Courses Taken – 3 rd Semester 2

Cost per Unit – 3 rd Semester 2000

Cost of 3 rd Semester 4000

Cost after 3 rd Semester 10000

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good!

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good!

Cost per Unit – 3 rd Semester 2000 2000 2400

Cost after 3 rd Semester 10000 10000 11400

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good!

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• We are now back on schedule but over cost:

not good!

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good!

Cost per Unit – 3 rd Semester 2000 2000 2400 Cost of 3 rd Semester 4000 2000 6000 (1200) 7200

Cost after 3 rd Semester 10000 10000 (1400) 11400

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Individual Exercise: 4th Semester

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4th Semester Results

good!

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

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4th Semester Results

• We are now ahead of schedule but over cost: not

good!

Cost after 3 nd Semester 10000 10000 (1400) 11400

Cost per Unit – 4 th Semester 2000 2000 2600 Cost of 4 th Semester 4000 2000 6000 (1800) 7800

Cost after 4 th Semester 14000 2000 16000 (3200) 19200

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MBA Project Graph after 4th Semester Semester

BAC

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MBA Project Graph after 4th Semester Semester

BCWP

EAC

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• 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

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Teacher’s Note

petition to avoid courses

This is like a performance variance

This is like a volume variance

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Teacher’s Note: MBA Exercise

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