europe GENEVA 2009 Haute école de gestion de Genève Geneva School of Business Administration EVA Europe 2009 was jointly organised by Gold Sponsors

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1 eva europe GENEVA , CERN, HEG, Authors - This material is provided courtesy of EVA Europe 2009, the European organisation for nuclear research(cern), the Geneva School of Business administration (HEG) and the authors. All rights reserved. The contents may not be reproduced without permission of the authors and EVA Europe. EVA Europe 2009 was jointly organised by Gold Sponsors Partners Haute école de gestion de Genève Geneva School of Business Administration

2 THE TREMENDOUS MISTAKES YOU CAN MAKE WHEN RELYING ONLY ON TRADITIONAL ACCOUNTING SYSTEMS INSTEAD OF ADOPTING THE EV TECHNIQUES Prepared by: : Paolo Sanvito Geneva, November 25 th - 26 th, 2009 The 1 1 Annual International Earned Value Conference for Continental Europe 1

3 DEFINITIONS The meaning of earned value It is based on the comparison among three values: BCWS BUDGET COST of WORK SCHEDULED ACWP ACTUAL COST of WORK PERFORMED BCWP BUDGET COST of WORK PERFORMED (Earned Value) 2

4 DEFINITIONS Variance and performance indexes Variance Indexes Cost Variance CV CV = BCWP - ACWP Schedule Variance SV SV = BCWP - BCWS Performance Indexes Cost Performance Index CPI = BCWP/ACWP Schedule Performance Index SPI = BCWP/BCWS 3

5 DEFINITIONS Reading of results CV>0 SV>0 CV<0 SV<0 CPI>1 SVI>1 CPI<1 SVI<1 4

6 ADVANTAGES OF THE TECHNIQUE Example: : EV is not calculated ACT. JAN. FEB. MARCH APRIL MAY JUNE TOTAL BUDGET A TIMENOW (progress date) 150 B C D BUDGET=150 ACTUAL=120 BUDGET=150 ACTUAL=100 BUDGET=100 ACTUAL=150 BUDGET=0 ACTUAL= TOTAL AT TIMENOW BCWS = 400 ACWP = 370 VARIANCE = ACTUAL COST LOWER THAN BUDGET COST: SHOULD WE BE HAPPY? 5

7 ADVANTAGES OF THE TECHNIQUE Example: : EV is calculated ACT. JAN. FEB. MARCH APRIL MAY JUNE TOTAL BUDGET A 100% TIMENOW (progress date) 150 B C BUDGET=150 EARNED=150 ACTUAL=120 33% BUDGET=150 EARNED=50 ACTUAL=100 75% D BUDGET=100 EARNED=150 ACTUAL=150 BUDGET=0 EARNED=0 ACTUAL=0 100 TOTAL AT TIMENOW BCWS = 400 BCWP = 350 ACWP = 370 TIME VARIANCE SV = -50 COST VARIANCE CV = POSITIVE OR NEGATIVE SITUATION? 6

8 ADVANTAGES OF THE TECHNIQUE The answer: Actual cost at Timenow is greater than the Earned Value: -Meaning: we are spending more than what we should have spent for what has been achieved -Outcome: we are spending more Budget cost at Timenow is greater than the Earned Value: -Meaning:: the value of what has been actually achieved in terms of budget is less than the planned. -Outcome: we are doing less. 7

9 THE POWER OF THE METHOD: THE CONCEPT OF JOINT It is a methodology that: Allows a correct analysis of the variances of time and cost as a function of the actual physical progress of the project at a certain date May provide useful indications regarding the estimate at completion of the project May help to plan a more effective operating plan of corrective actions, if necessary 8

10 ESTIMATE AT COMPLETION Possible projections and evaluations Cost ESTIMATE AT COMPLETION 1 HYPOTHESIS - RECOVERY OF TIME AND COST Total Budget Delay Time 9

11 ESTIMATE AT COMPLETION Cost ESTIMATE AT COMPLETION 2 HYPOTHESIS - DELAY CONFIRMATION AND COST RECOVERY Total Budget Delay Delay Time 10

12 ESTIMATE AT COMPLETION Cost ESTIMATE AT COMPLETION 3 HYPOTHESIS - DELAY CONFIRMATION AND COST ESTIMATE (a) Total Budget Delay Delay Time 11

13 ESTIMATE AT COMPLETION Cost ESTIMATE AT COMPLETION 4 HYPOTHESIS - TREND OF TIME AND COST COST ESTIMATE (b) Total Budget I Delay Delay Time 12

14 ESTIMATE AT COMPLETION Cost WHAT IS THE BEST ESTIMATE? Total Budget Delay Delay Delay Time 13

15 ESTIMATE AT COMPLETION Cost PROJECT MANAGER ESTIMATE PM Estimate Total Budget Delay Delay Delay Time 14

16 POSSIBLE CASES: VISUALIZATION AND DEDUCTIONS ON THE TREND SPI < 1 CPI < 1 SPI > 1 CPI > 1 SPI > 1 CPI > 1 SPI > 1 CPI < 1 SPI < 1 CPI < 1 SPI < 1 CPI > 1 15

17 Very fine! But what do you implement such methodology? need to Or, better: : Are there any particular organizational requirements that my Company has to meet in order to reach positive results? 16

18 REQUIREMENTS The three basic requirements are: - Availability of an S-curve (baseline) to be used as reference for the execution of the project (this( implies the existence of a project network and of the initial budget) - A system capable of collecting all costs (or manhours) really borne (or spent) by the project at the end of each control period (timenow) - A system for measuring the physical progress at site (the evaluation of the progress for engineering and procurement activities is generally easier and implies little or no discussion on figures) 17

19 18 OUTPUT In such a situation,, the following info are therefore available: - T = timenow - BCWS = Budget Cost at Timenow - BCWP = Earned Value at Timenow - ACWP = Actual Cost at Timenow - BAC = Budget at Completion - BC = Budget Completion Time - CPI = Cost Performance Index - SPI = Schedule Performance Index From which EAC (estimate at completion) ) and Actual Completion Time can be obtained using the relevant formulas valid for linear projection

20 19 NEXT Further considerations for the implementation of the EV methodology are: - A well-done WBS (and CBS as a consequence) allows to carry out analyses for every discipline/level level in the project (e.g( e.g.:.: engineering, procurement, construction, units, sub-units units, etc); - Engineering activities are generally measured based on issued/approved documents and manhours consumed; - Procurement activities are the sum of two contributions: : management services (manhours) for issuing the PO, inspection, expediting, etc and the PO value.. The progress is usually linked to pre- definite intermediate milestones;

21 NEXT - Construction activities are evaluated considering the physical progress achieved at the date (timenow)) and the relevant construction manhours spent; - The type of applicable contract, lump sum/unit rates/reimbursable reimbursable of course must be considered because of the different payment criteria adopted. 20

22 RECOMMENDATIONS Ground rules for the successful implementation of the EV methodology Good planning Take care of any changes in scope and need of updating the reference baseline Maximum attention to changes of certain cost elements like quantities, selling prices, etc. Relationship with client, partners and subcontractors based on mutual trust Timely more than accurate collection of data (costs( costs, manhours,, progress figures) for reporting. It is useless to have +/- 1% precision on all progress figures if they are provided late: : no time for developing corrective actions 21

23 Additional advantages in claim management activities: A Lump-sum contract with a Client and Unit Rate contracts with the various subcontractors is the most common situation that can occur to major EPC contractors It is also the case that can originate most claims, both active and passive with respect to the parties involved The use of the EV methodology can be extremely useful when managing relationships with claim- oriented subcontractors for instance 22

24 23 To follow: Typical situation is where a subcontractor complains because he states he had planned to spend X manhours for the execution of the works done till date while, based on the timesheets, it results he has spent (X+Y) manhours, where Y can be even bigger than X, due to reasons like disruption, late delivery of drawings and materials,, out of sequence, etc This can happen at any time during construction works and it can be difficult to reject or in any case to carry out counter-analyses if you do not have the possibility of linking closely the planned manhours spent with the works actually performed

25 To follow: Here comes the EV that does exactly the above. Comparing the EV indicators at the various WBS (or CBS) level or for the different units/subunits subunits, you can easily identify costs variations and delays and proceed to apportion responsibilities Special attention must be paid when situations like increase in quantities, increase in selling prices of raw materials, out of sequence execution of the works, take place 24

26 The possibility of using cost elements to measure the delays (if any) accrued at the timenow with reference to the valid baseline makes it easier to evaluate the total delay and therefore foresee a new completion date. Detailed schedule analyses can be much more complicate due to the presence of concurrent activies, float, etc 25

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