•Cost baseline- This is the planned budget for the project over a time period, used as a basis against which to measure, monitor, and control the cost performance of the project. The cost performance is measured by comparing the actual cost to the planned cost over a time period.

•Schedule baseline- This is a specific version of the project schedule developed from the schedule network analysis and the schedule model data. This is the approved version of the schedule with a start date and an end date, and it is used as a basis against which the project schedule performance is measured.

•Scope baseline- This is the approved project scope that includes the approved project scope statement, the WBS based on the approved project scope statement, and the corresponding WBS dictionary.

The elaborate nature of the performance measurement analysis can be seen in the cost control process.

**Performance Measurement Analysis for Cost Control**

As mentioned earlier, cost control includes influencing the factors that can create changes to the cost baseline. But to detect arising changes, you need to detect and understand variances from the cost baseline by monitoring cost performance.

In general, variance is a measurable deviation in the value of a project variable (or parameter), such as cost or schedule, from a known baseline or expected value. Variance analysis is a technique used to assess the magnitude of variation in the value of a variable, such as cost from the baseline or expected value, determine the cause of the variance, and decide whether a corrective action is required. A common technique to assess cost variance is called the earned value technique (EVT), also called earned value management (EVM). It is a commonly used method of performance measurement that has various forms. Most often, it integrates scope, schedule, and cost performance by comparing the baselines to the actual progress made. For example, you calculate the cumulative value of the budgeted cost of work performed in terms of the originally allocated budgeted amount and compare it to the following:

1. Budgeted cost of work scheduled; i.e., planned

2. Actual cost of work performed

Don’t worry if these terms sound confusing right now; we will go through an example very soon. However, as you will see; the greatest difficulty in understanding EVT (or EVM) stems from the coupling of cost and schedule. You must realize that the project cost and the project schedule are inherently related to each other. Schedule relates to performing certain work over a certain time period, whereas cost refers to the money spent to perform the work on a project over that period of time. The relationship between cost and schedule can be realized by understanding that it costs money to perform a schedule activity. The “time is money” principle can be considered here to understand the situation better. For example, a project activity can be looked upon in terms of an amount of work that will be needed to complete it or in terms of its monetary value, which will include the cost of the work that needs to be performed to complete the activity.

The EVT involves calculating some variables where you will see the interplay of schedule and cost.

Let’s look at an example to understand the concepts better:

Assume you are a project manager for the construction of a 16-mile road. Further assume that the work is uniformly distributed over 12 weeks. The total approved budget for this project is Rs. 600,000. At the end of first four weeks of work, Rs. 125,000 has been spent, and four miles of road have been completed.

We will use this example to perform the cost performance analysis and the schedule performance analysis in terms of cost.

**Cost Performance**

Cost performance refers to how efficiently you are spending money on the project work, measured against the expectations set in the project management plan, i.e., the cost baselines. The total cost approved in the baseline is called the budget at completion (BAC).

**Budget at completion (BAC)**- This is the total budget authorized for performing the project work, also called the planned budget. In other words, it is the cost originally estimated in the project management plan. You use this variable in defining almost all the following variables. In our example, the value of BAC is Rs. 600,000.

**Earned value (EV) or budgeted cost of work performed (BCWP)**- This is the value of the actual performed work expressed in terms of the approved budget for a project or a project activity for a given time period. In this variable, you see the relationship of schedule (work) and cost in action. BAC represents the total value of the project. But when you perform some work on the project, you have earned some of that value, and the earned value is proportional to the fraction of the total work performed, as shown by the formula here:

**EV=BAC * (work completed/total work required)**

So, in our example, EV can be calculated as:

**EV=Rs. 600,000 * (4 miles/16 miles) = Rs. 150,000**

This is the earned value of the work, which may or may not be equal to the actual money that you spent to perform this work.

**Actual cost (AC) or actual cost of work performed (ACWP)**- This is the total cost actually incurred until a specific point on the timeline in performing the work for a project. In our running example, Rs. 125,000 has already been used up to this point. So the actual cost at this point in time is Rs. 125,000. This cost is to be compared to the earned value to calculate the cost variance and cost performance.

**Cost variance (CV)**- This is a measure of cost performance in terms of deviation of reality from the plan, and it is obtained by subtracting the actual cost (AC) from the earned value (EV), as shown in the formula here:

CV = EV - AC

So, in our example, CV can be calculated as shown here:

CV = Rs. 150,000 – Rs. 125,000 = Rs. 25,000

The expected value of CV is zero because we expect the earned value to be equal to the actual cost. The positive result indicates better cost performance than expected, whereas a negative result indicates worse cost performance than expected. Deviation is one way of comparison, and ratio is another.

**Cost performance index (CPI)**- Earned value represents the portion of work completed, and actual cost represents the money spent. So, the CPI indicates whether you are getting a fair value for your money. This is a measure of cost efficiency of a project calculated by dividing earned value (EV) by actual cost (AC), as shown in the formula here:

CPI = EV / AC

So, the CPI for our example can be calculated as:

CPI = Rs. 150,000 / Rs. 125,000 = 1.2

This means you are getting Rs. 1.20 worth of performance for every dollar spent. A value of CPI greater than one indicates good performance, whereas a value less than one usually indicates bad performance. The expected value of CPI is one.

So both the CV and the CPI indicate that you are getting more value for each dollar spent.

But, before you start celebrating, read the example again. Four out of 12 weeks have already passed, and only four out of 16 miles of road have been built. That means that only one-fourth of the work has been accomplished in one-third of the total scheduled time. This means we are lagging behind in our schedule. Although cost performance is good, schedule performance might end up hurting us towards the end.

**Schedule Performance in Terms of Cost**

Schedule performance refers to how efficiently you are executing your project schedule as measured against the expectations set in the project management plan. It can be measured by comparing the earned value to the planned value, just like cost performance is measured by comparing the earned value to the actual cost. Planned value refers to the value that we planned to create in the time spent so far.

**Planned value (PV) or budgeted cost for the work scheduled (BCWS)**- This is the authorized cost for the scheduled work on the project or a project activity up to a given point on the timescale. The planned value is also called the budgeted cost for the work scheduled (BCWS). PV is basically how much you were authorized to spend in the fraction of schedule time spent so far, as shown in the formula here:

PV = BAC * (time passed/total schedule time)

Therefore, the planned value for the project in our example at the end of the first four weeks is calculated as shown here:

PV = Rs. 600,000 * (4 weeks/12 weeks) = Rs. 200,000

So, PV represents the planned schedule in terms of cost. You can calculate the schedule performance by comparing the planned schedule to the performed schedule in terms of cost.

Trivia:

The total planned value (PV) of the project is the same as the budget at completion (BAC).

**Schedule variance (SV)**- This is the deviation of the performed schedule from the planned schedule in terms of cost. No confusion is allowed here because you already know that the schedule can be translated to cost. SV is calculated as the difference between EV and PV, as shown in the formula here:

SV = EV - PV

So, the SV in our example can be calculated as:

SV = Rs. 150,000 – Rs. 200,000 = –Rs. 50,000

The negative value means we are behind schedule. Deviation represented by schedule variance is one way of comparison, and ratio represented by schedule performance index is another.

Schedule performance index (SPI) - Earned value represents the portion of work completed in terms of cost, and planned value represents how much work was planned by this point in time in terms of cost. So, the SPI indicates how the performed work compared to the planned work. This is a measure of the schedule efficiency of a project calculated by dividing earned value (EV) by planned value (PV), as shown in the formula here:

SPI = EV / PV

So, the SPI for our example can be calculated as shown here:

SPI = Rs. 150,000 / Rs. 200,000 = 0.75

This indicates that the project is progressing at 75% of the planned pace. Not at all good.

You should note that all these performance variables except the BAC are calculated at a given point in time.

You can maintain a graph that presents the values of these variables against points in time as the project progresses. Note that the value of the BAC does not change with time because it is the cost at completion time. Further note that given the BAC, the PV can be calculated at any point in time, even before the project execution starts. EV and AC are accumulated as the project execution progresses. The picture below can give you a fair idea of how such a graph would look like:

By using the variables discussed so far, you can monitor the project performance as time progresses. Not only that, you can also make predictions about future performance based on past performance.

**Forecasting Techniques**

Forecasting refers to predicting some information about the project in the future based on the performance in the past. The forecasting is regularly updated as the project progresses and more data from the past performance becomes available.

**Estimate to complete (ETC) at budgeted rate**- This is the prediction about the expected cost to complete the remaining work for the project or for a project activity. The future work is assumed to be completed at the budgeted rate. Therefore, the value of the ETC is obtained by subtracting the earned value (EV) from the budget at completion (BAC), as shown in the formula here:

ETC = BAC - EV

So, in our example, the value of ETC can be calculated as:

ETC = Rs. 600,000 - Rs. 150,000 = Rs. 450,000

This is true if the current variances are seen as atypical and the future performance is expected to be as planned. If the current trend, however, continues, then we need to take CPI into account.

**Estimate to complete (ETC) at the present CPI**- This is the prediction about the expected cost to complete the remaining work at the present CPI. Therefore, in that case, the ETC is given by:

ETC = (BAC – EV) / CPI

The next question that can be asked about the future is how much it will cost to complete the whole project.

**Estimate at completion (EAC) at the budgeted rate**- This is the estimate made at the current point in time for how much it will cost to complete the whole project or a project activity from beginning to end. It is assumed that the future work will be performed at the budgeted rate. Therefore, the value of the EAC is obtained by adding the value of ETC at the budgeted rate to AC, as shown in the formula here:

EAC = AC + ETC (budgeted rate)

Accordingly, the value of EAC for our example can be calculated as:

EAC = Rs. 125,000 + Rs. 450,000 = Rs. 575,000

Another useful prediction to be made is how much performance you need in the future to complete the remaining work within budget.

EAC calculated thus far is correct under the assumption that in the future the cost will be incurred as it was budgeted or performance will be made as planned. If, however, the current variance trend is assumed to continue, then EAC is calculated as discussed next.

**Estimate at completion (EAC) at the present CPI**- This is the estimate made at the current point in time for how much it will cost to complete the whole project or a project activity from beginning to end. It is assumed that the future work will be performed at the current CPI. Therefore, EAC is calculated as follows:

EAC = AC + ETC (at current CPI)

EAC = AC + ((BAC – EV) / CPI)

As stated earlier, performance is an integrated measure of progress in the areas of scope, schedule, and cost. Just measuring one of these parameters may be misleading. For example, in our running example, we are performing nicely in cost but badly in schedule. This is why some-times EAC is measured by taking into account both CPI and SPI, as shown here:

EAC = AC + (BAC – EV) / (CPI * SPI)

**To complete performance index (TCPI)**- This is the variable to predict the future performance needed to finish the work according to a specified goal. For Ex: either within the planned budget (BAC) or at the completion cost currently predicted (EAC). If the goal is to complete it within the BAC, it is calculated as the ratio of the remaining work to the remaining budget:

TCPI = Remaining Work / Remaining Funds

= (BAC – BCWP) / BAC – ACWP

= BAC – EV / BAC – AC

Therefore, the value of TCPI in our example can be calculated as:

TCPI = (Rs. 600,000 - Rs. 150,000) / (Rs. 600,000 - Rs. 125,000)

= 450,000 / 475,000

= 0.95

= 95%.

If it is realized that BAC is not attainable, then it is replaced with EAC. Accordingly, TCPI will be:

TCPI = Remaining Work / Required Funds

= (BAC – EV) / (EAC – AC)

So, during the executing stage, the obvious items that need to be executed are the schedule activities, and while these activities are being executed, the attached cost, schedule, and scope need to be monitored and controlled.

All the Formulae in this chapter can be summarized in the Picture below:

Prev: Controlling Cost

Next: Section Summary

The estimate at completion needs be weighted at 80% SPI and 20% CPI. This formula is better in case of front loaded BOQ and in case of bulk invoicing at the beginning of the contract.

ReplyDeleteIf I approve my tomorrow's exam about cost, will be because of you LOL! only at this moment with your explanation I've just understood the formulas. Great work.

ReplyDeleteThank you Anonymous!!!

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