EVM in Cost Control - Presentation

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7.4 COST CONTROLProject Cost Management


7.4 Control Costs

• Control Costs is the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline. *

• The key benefit of this process is that it provides the means to recognize variance from the plan in order to take corrective action and minimize risk. *

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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7.4 Control Costs

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Figure 7-10, Page 215


Control Costs: Inputs

1. Project Management Plan

2. Project Funding Requirements

3. Work Performance Data

4. Organizational Process Assets

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Control Costs : T&T

1. Earned Value Management

2. Forecasting

3. To-complete Performance Index (TCPI)

4. Performance Reviews

5. Project Management Software

6. Reserve Analysis


Control Costs : T&T

1. Earned Value Management

– EVM develops and monitors three key dimensions for each work package and control account:

• Planned value

• Actual cost

• Earned Value

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Planned Value

• Planned value (PV) is the authorized budget assigned to scheduled work.

• It is the authorized budget planned for the work to be accomplished for an activity or work breakdown structure component, not including management reserve.

• This budget is allocated by phase over the life of the project, but at a given moment, planned value defines the physical work that should have been accomplished.

• The total of the PV is sometimes referred to as the performance measurement baseline (PMB). The total planned value for the project is also known as budget at completion (BAC).



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Actual Cost

• Actual cost (AC) is the realized cost incurred for the work performed on an activity during a specific time period.

• It is the total cost incurred in accomplishing the work that the EV measured.

• The AC needs to correspond in definition to what was budgeted in the PV and measured in the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs).

• The AC will have no upper limit; whatever is spent to achieve the EV will be measured.



Earned Value

• Earned value (EV) is a measure of work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed.

• The EV being measured needs to be related to the PMB, and the EV measured cannot be greater than the authorized PV budget for a component.

• The EV is often used to calculate the percent complete of a project.• Progress measurement criteria should be established for each WBS

component to measure work in progress. • Project managers monitor EV, both incrementally to determine

current status and cumulatively to determine the long-term performance trends.


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Earned Value

Earned Value = % completed x Budget

Progress measurement technique measures the percent complete which will assist in calculating the earned value. The budget is the budgeted cost of the measured component which could be a work package, control account, or the project.



Progress Measurement

Units completion, Start/Finish, Incremental Milestone, Supervisor Opinion, Cost Ratio and

Equivalent Units/Weighted Average

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Units Completion

• Formula

𝑰𝒏𝒔𝒕𝒂𝒍𝒍𝒆𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚

𝑻𝒐𝒕𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚x 100


Start/Finish (Fixed Formula)

30% 70%

Start Finish

This method is applicable to tasks that lack readily definable intermediate milestones or those for which the effort/time

required is very difficult to estimate.

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Incremental Milestone

This method is applicableto any control account that includes subtasks

that must be handled in sequence.


Supervisor Opinion

In this method, the supervisorsimply makes a judgment of percent complete.

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Cost Ratio

• This method is applicable to tasks that involve a long period of time or that are continuous during the life of a project, and which are estimated and budgeted on bulk allocations of dollars and work hours rather than on the basis of production.


Weighted or Equivalent Units

• This method is applicable when the task being controlled involves a long period of time and is composed of two or more overlapping subtasks, each with a different unit of work measurement.

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Equivalent Units - Example


Performance Measurement

Cost Variance, Cost Performance Index, Schedule Variance, Schedule Performance

Index

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Earned Value Calculation

Wall 1

Wal

l 2

Wall 3

Wal

l 4

Schedule PlanSchedule: To complete the work in 4 weeks –work is equally distributed

Budgeted CostUSD 10000 / wall

Status at the end of week 3Wall 1 – 100% - $ 12000Wall 2 – 100% - $ 13000Wall 3 – 50% - $ 7000Wall 4 – 0% - $ 0

Calculate BAC, PV, AC and EV


Work Package Planned Value Actual Cost Progress Earned Value

Wall 1 10000 12000 100 % 10000

Wall 2 10000 13000 100 % 10000

Wall 3 10000 7000 50 % 5000

Wall 4 10000 0 0 % 0

Total 40000 32000 25000

Solution

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Definitions

• Cost Variance (CV). The amount of budget deficit or surplus at a given point in time, expressed as the difference between the earned value and the actual cost.*

• Schedule Variance (SV). A measure of schedule performance expressed as the difference between the earned value and the planned value.*



Definitions

• Cost Performance Index (CPI). A measure of the cost efficiency of budgeted resources expressed as the ratio of earned value to actual cost.*

• Schedule Performance Index (SPI). A measure of schedule efficiency expressed as the ratio of earned value to planned value.*


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Cost Performance

Cost Variance Cost Performance Index

Earned Value – Actual Cost𝑬𝒂𝒓𝒏𝒆𝒅 𝑽𝒂𝒍𝒖𝒆

𝑨𝒄𝒕𝒖𝒂𝒍 𝑪𝒐𝒔𝒕Positive = Under planned costNeutral = On planned costNegative = Over planned cost

Greater than 1.0 = Under planned costExactly 1.0 = On planned costLess than 1.0 = Over planned cost

Schedule Performance

Schedule Variance Schedule Performance Index

Earned Value – Planned Value 𝑬𝒂𝒓𝒏𝒆𝒅 𝑽𝒂𝒍𝒖𝒆

𝑷𝒍𝒂𝒏𝒏𝒆𝒅 𝑽𝒂𝒍𝒖𝒆Positive = Ahead of ScheduleNeutral = On scheduleNegative = Behind Schedule

Greater than 1.0 = Ahead of scheduleExactly 1.0 = On scheduleLess than 1.0 = Behind schedule

Pe

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rman

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eas

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Cost Performance

Cost Variance Cost Performance Index

25000 – 32000 = (7000) 25000 / 32000 = 0.781

Schedule Performance

Schedule Variance Schedule Performance Index

25000 – 30000 = (5000) 25000 / 30000 = 0.833


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Control Costs : T&T

2. Forecasting

– An estimate or prediction of conditions and events in the project’s future based on information and knowledge available at the time of the forecast.

– The information is based on the project’s past performance and expected future performance, and includes information that could impact the project in the future, such as estimate at completion and estimate to complete.



Definitions

• Estimate at Completion (EAC). The expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete.*

• Estimate to Complete (ETC). The expected cost to finish all the remaining project work.*


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Estimate At Completion

EAC EAC

𝑩𝑨𝑪

𝑪𝑷𝑰AC + (BAC – EV)

CPI is expected to be the same for the remainder of the project

Future work will be accomplished at the planned rate

EAC EAC

AC + (𝑩𝑨𝑪 −𝑬𝑽)

(𝑪𝑷𝑰 𝒙 𝑺𝑷𝑰) AC + Bottom up ETC

CPI and SPI influence the remaining work Initial plan is no longer valid


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Estimate At Completion

EAC EAC

𝟒𝟎𝟎𝟎𝟎

𝟎.𝟕𝟖𝟏= 51216 32000 + (40000 – 25000) = 47000

CPI is expected to be the same for the remainder of the project

Future work will be accomplished at the planned rate

EAC EAC

32000 + (𝟒𝟎𝟎𝟎𝟎 −𝟐𝟓𝟎𝟎𝟎)

(𝟎.𝟕𝟖𝟏 𝒙 𝟎.𝟖𝟑𝟑)= 55055 32000 + Bottom up ETC

CPI and SPI influence the remaining work Initial plan is no longer valid


Estimate To Complete

ETC ETC

EAC – AC Re-Estimate

Assumes work is proceeding on plan. Re-estimate the remaining work from the bottom up.

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Estimate To Complete

ETC ETC

51216 – 32000 = 19216CPI is expected to be the same for the remainder of the project.

Re-Estimate

Assumes work is proceeding on plan. Re-estimate the remaining work from the bottom up.


Control Costs : T&T

3. To-complete Performance Index (TCPI)

– A measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget.*

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To Complete Performance Index

TCPI TCPI

(BAC – EV)/(BAC – AC) (BAC – EV)/(EAC – AC)

The efficiency that must be maintained in order to complete on plan.

The efficiency that must be maintained in order to complete the current EAC.




TCPI TCPI

(BAC – EV)/(BAC – AC)

(40000-25000) / (40000-32000)

1.875

(BAC – EV)/(EAC – AC)

(40000-25000) / (51216-32000)

0.781

The efficiency that must be maintained in order to complete on plan.

The efficiency that must be maintained in order to complete the current EAC.

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Control Costs : T&T

4. Performance Reviews

– Performance reviews compare cost performance over time, schedule activities or work packages overrunning and underrunning the budget, and estimated funds needed to complete work in progress.*



Variance At Completion

VAC

BAC – EAC

40000 – 51216 = (11216)

The estimated difference in cost at the completion of the project.

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Definition

• Variance at Completion (VAC). A projection of the amount of budget deficit or surplus, expressed as the difference between the budget at completion and the estimate at completion.*



Control Costs : Outputs

1. Work Performance Information– The calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in particular

the work packages and control accounts, are documented and communicated to stakeholders.*

2. Cost Forecasts– Either a calculated EAC value or a bottom-up EAC value is documented and

communicated to stakeholders.*

3. Change Requests

4. Project Management Plan Updates

5. Project Documents Updates

6. Organizational Process Assets Updates


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PROJECT COST MANAGEMENTEND OF CHAPTER 7