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 Integration, Synchronization and Merging Earned Value Performance Measurement with Traditional Job Cost accounting Practices YOUR PRESENTER Roland Horat Managing Director and Director Business, Global (Australia)

3 Why EVPM Discipline Results In Superior Reporting, Forecasting And Project Control To Accounting Practices. Topics: EVPM Performance Metrics and Definitions. Accounting Performance Metrics and Definitions. Variances and Indices Formulae and Interpretation

4 Metrics Available In Both Systems For Measuring And Reporting Performance. Basic Definitions: 1.Budget At Completion [BAC] the sum of all budgets established for the work to be performed on a project or a work breakdown structure component or a schedule activity. The total planned value for the project. (PMBOK Guide)* (Used By Both EVPM & Job Cost Accounting Systems) 2. Estimate At Completion [EAC] the expected total cost of a schedule activity, a work breakdown structure (WBS) component or the project when the defined scope of work will be completed. The EAC may be calculated based on performance to date or estimated by the project team based on other factors, in which case it is often referred to as the latest revised estimate. (PMBOK Guide)* (Used By Both EVPM & Job Cost Accounting Systems) Note : At the project EAC = BAC Note : As the project progresses the EAC the BAC

5 EVPM Based Performance Metrics Planned Value [PV] Data Requirements 3. Planned Value (PV) the authorized budget assigned to the scheduled work to be accomplished for a scheduled activity or work breakdown structure (WBS) component. Also referred to as the budgeted cost of work scheduled (BCWS). (PMBOK Guide)* (Used By both EVPM And Advanced Accounting Systems)

6 EVPM Based Performance Metrics Earned Value [EV] 4. Earned Value (EV) the value of work performed expressed in terms of the approved budget assigned to that work for a schedule activity or work breakdown structure (WBS) component. Also referred to as the budgeted cost of work performed (BCWP). (PMBOK Guide)* (Used By EVPM Systems Only)

7 EVPM Based Performance Metrics Actual Cost [AC] & Estimate To Complete [ETC] Data Requirements 5. Actual Cost (AC) total costs actually incurred and recorded in accomplishing work performed during a given time period for a schedule activity or work breakdown structure component. Actual cost can sometimes be direct labor hours alone, direct costs alone or all costs including indirect costs. Also referred to as actual cost of work performed (ACWP). (PMBOK Guide)* (Used By Both EVPM & Job Cost Accounting Systems)

8 EVPM Based Performance Metrics Key Definitions [Combined] * All of these PMBOK Guide references together will the others in this Guide are taken from the Project Management Institutes Project Management Body of Knowledge (PMBOK Guide) Fourth Addition. For more information

9 Accounting Techniques and Performance Metrics BAC, EAC, AC & ETC Data Requirements * Accounting Systems use the Estimate At Completion [EAC] where the Actual Cost [AC] representing the Cumulative accrued value to the report Period is summed to the Estimate to Completion [ETC] for the remaining work. The Combined Value is then Compared Against the Budget At Completion [BAC] and the variance [VAC] noted.

10 Accounting Techniques and Performance Metrics BAC, EAC, PV, AC & ETC Data Requirements * Advanced Accounting Systems use the Planned Value [PV] with the Actual Cost [AC] to determine the SPV the Spending Variance. This represents whether the spending rate is under or over that planned. The technique does not take earned value into account. As represented in the example an overspend trend is not recognized until the later third of the project.

11 EVPM And Accounting Variances and Indices $EV (Achieved Dollars) All Part Of EVPM Schedule Variance (SV) SV = EV PV Cost Variance (CV) CV = EV AC Schedule Performance Index (SPI) SPI = EV/PV Cost Performance Index (CPI) CPI = EV/AC $PV (Scheduled Dollars) Spending Variance SPV = PV AC Spending Rate Index (SRR) SRI = PV / AC Advanced Accounting $AC (Spent Dollars)

12 EVPM Definitions Cost Variance (CV) is defined as the variance between the EV Earned Value and the AC Actual Cost. The CV determines by cost amount how much each task and project overspends or under spends its allocated budget. If CV =>$0.00 If CV <$0.00 CV = EV AC (EVPM) This is interpreted as either breaking even or making a cost saving. This is interpreted as overspending. Schedule Variance (SV) is defined as the variance between the EV Earned Value and the PV Planed Value. The SV determines by cost amount how much each task and project is behind or ahead of the baseline (Contract) plan. If SV =>$0.00 If SV <$0.00 This is interpreted as either on schedule or ahead of schedule. This is interpreted as behind schedule. SV = EV PV (EVPM Only) Spending Variance (SPV) is defined as the variance between the PV Planned Value and the AC Actual Cost and is used to determine the shortfall or surplus of funds available to the project where funding is provided strictly in accordance with the PV Planned Value. If SPV >$0.00 If SPV <$0.00 SPV = PV AC (Accounting) This is interpreted as a surplus of funds is available to meet actual/accrued costs. This is interpreted as there being a shortage of funds to sustain the project. On completion of the project, the SPV = BAC EAC as the PV = BAC and the AC = EAC.

13 Cost Performance Index (CPI) measures cost performance at the project task outline level. If CPI is < 1 If CPI is > 1 CPI = EV/AC (EVPM Only) Spending for the work completed is greater than the allocated budget indicating overspending. Spending is less than the allocated budget indicating a cost saving. Schedule Performance Index (SPI) is used to assess schedule performance at the project task outline level. If SPI is < 1 If SPI is > 1 SPI = EV/PV (EVPM Only) Project is behind the scheduled baseline completion and will be delivered late. Project is ahead of the scheduled baseline and will be delivered early. At completion of the project the SPI is always = 1.0 as the EV =PV = BAC Spending Rate Index (SRI) is used to assess the availability of funding to a project where funds are released in accordance with the PV Planned Value. The SRI Spending Rate Index should not be used as an alternative to the CPI to assess cost performance. If SRI is < 1 If SRI is > 1 SRI = PV/AC (Accounting Only) Spending is outpacing the Planned Value, indicates a shortage of funds to sustain the project. Spending is less than the Planned Value, sufficient funds are available to sustain the current work. At completion of the project the SPI is always = 1.0 as the EV =PV = BAC

14 Case Study Using Variances To Identify Early Trends In Poor Performance Spending Variance Is Sometimes Misinterpreted as Cost Variance SPV Accounting Establishes a Negative Cost Trend In the Later Part of The project CV Recovery Reaction Time Possible Recovery Too Late EVPM CV Establishes A Cost Trend from the Start of the Project

15 Case Study Using Performance Indices To Early Trends In Poor Performance Spending Index Is Misinterpreted as Cost Performance Index SPI Accounting Establishes a Negative Cost Trend In the Later Part of The project Recovery Reaction Time Possible Recovery Too Late EVPM CPI Establishes A Cost Trend from the Start of the Project

16 EV, PV, and AC Predictive Formula Based Forecasting (Not Part Accounting Practice) The Independent Estimate At Completion, (IEAC) is an estimate based on attributes of past performance and how that might effect future performance. Examples include: IEAC1 = AC + (BAC EV)/CPI where it is assumed the future cost performance is entirely based as that of the past. IEAC2 = AC + (BAC EV)/(0.8xCPI + 0.2xSPI) where it is assumed the future cost performance will be influenced by 80% of the past cost and 20% past schedule performance. IEAC3 = AC + 3x(BAC EV)/(CPI1 + CPI2 + CPI3) where the future cost performance will be influenced by that of the past three report periods. IEAC4 = AC + (BAC EV)/(CPIxSPI) where the future cost performance will be influenced by past cost and schedule performance. The Mathematical Estimate At Completion, (MEAC) is an estimate where the future cost performance is entirely dependant on the remaining budgeted cost. Formula: MEAC = AC + (BAC EV)

17 Predictive Formula To Adequacy of BAC and EAC (Not Part Accounting Practice) To Complete Performance Index, TCPI (BAC) determines the Efficiency Factor and indicates how well the project or project elements need to perform in comparison with the baseline plan from the report period to completion in order to achieve the current (BAC) Budget At Completion. TCPI (BAC) = (BAC EV)/(BAC AC) If TCPI is < 1 If TCPI is > 1 It is likely that the BAC Budget At Completion will be achieved during the remaining work periods to completion. It is unlikely that the BAC Budget At Completion will be achieved during the remaining work periods to completion. Indicator of an unfavorable cost performance in the future. Performance needs to be better than planned. To Complete Performance Index, TCPI (EAC) indicates how well the project or project elements need to perform in comparison with the baseline plan from the report period to completion in order to achieve the current (EAC) Estimate At Completion. TCPI (EAC) = (BAC EV)/(EAC AC) If TCPI is < 1 If TCPI is > 1 It is likely that the EAC will be achieved during the remaining work periods. It is unlikely that the EAC will be achieved during the remaining work periods to completion. Indicator of an unfavorable cost performance in the future. Performance needs to be better than planned.

18 Profit Versus Planned Profit, Taking Account of Revenue (Not Part of EVPM Practice) Useful Extension to EVPM that facilitates Time Phased Profit Analysis SP Sell Price/Revenue is generally a Multiplier of the BAC PSP Planned Revenue is treated as PV ESP Earned Revenue is treated as EV At Completion both the ESP and PSP SP At Completion: PP Planned Profit = SP BAC P Profit = SP EAC ESP Earned Revenue is treated as EV During Project Implementation: PP Planned Profit = ESP EV P Profit = ESP AC

19 Why EVPM Discipline Results In Superior Reporting, Forecasting And Project Control. EVPM System Standard: Supports Schedule & Cost Variances Supports Schedule & Cost Performance Indices All Data analysis is Time Phase. Has extensive predictive algorithms based on historical performance. EVPM Advanced/Extended: Extended to Profit and Loss Can be extended to Work and Commodity Usage Analysis Used for Combined Cost, Work and Commodity usage KPI s Other: Requires schedule and Cost resource integration. Reporting is Both WBS, CA and OBS based. Accounting System Standard Limits performance analysis to Planned Value [PV], Actual Cost [AC] and the Estimate to Complete [ETC]. Excludes from the analysis Earned Value [EV] therefore limited forecasting based on AC and ETC, Excludes CPI and SPI. Uses Spending Variance [SPV] and Spending Rate Index [SRI] as substitutes for CV and CPI Performance measurement and reporting limited to a Control/Cost Account. Using EVPM this can be done by WBS, CA, WP or any Code Grouping. Limited Productivity based analysis. AC/AW versus Published Averages. Cash flow analysis does not include the rigors of EVPM. Simplified Baseline Control PV

20 Disadvantages of Posting Actual Cost Data to Tasks Versus Project Account and Work Package level. Topics: Commercial EVPM Environment, Data Repositories And Sources System Options Posting Actuals At Task Level to Scheduling Software Versus Actutals By Cost Account [CA] and By Work Package [WP].

21 Commercial EVPM Environment, Data Repositories And Sources System Options Option 2 Post Actuals to Job Cost Accounting & Time Sheeting Systems, then Import or Post In Scheduling System Some Financial Systems products have their own EVM engines. Option 1: Post Actuals To Planning Software Option 3: Import Schedule Data To Accounting Systems Produce EVM Reports from Within the Job Cost Accounting System Option 5: Import Actuals Posted to Job Cost Accounting System To EVPM Middle Ware Mainstream scheduling software have limited EVPM features. Have their own or interface with other dedicated EVPM products. EVPM Middleware has wide ranging capabilities. EVENGINE for example has EVPM for cost, work and commodity usage, contract administration and financial modelling. Produce Planning Software EVPM Reports Option 4: Import Schedule & Cost Data From Planning Software To EVPM Middle Ware Dedicated EVPM Middle Ware Undertake EVPM Analysis & Reporting

22 Disadvantages of Posting Actual Cost Data to Tasks Versus Project Account and Work Package level. Method 1: Posting Actual Data Each report Period against each task and each assigned resource. Time consuming, with large time sheets, to be completed. Should weigh the value of this method. Method 2: Collecting Actual Data At Cost Account or Work Package Level by Report Period. AC CA/WP Level ETC at Task and Resource level ACTUALS Advantages: Limited Number Of Cost Accounts For Tracking And Reporting, Lower Overhead. Maintaining The Accuracy of PV, EV, ETC Is Established At Task Level.

23 Data Synchronization Between EVPM and Job Cost Accounting System Topics: Problems with Schedule and Cost Data Synchronization. Understanding the Accrual Methodology.

24 Problems With Data Synchronization EVPM reporting requires and relies on all schedule, work and cost data to be maintained and be current at the report status date. This includes actual/spent data, commitments and forecasts for future remaining work. EVPM assumes cost and units of work incurred [Actuals] and committed [ETC] correspond to the scheduled dates. The problems: A time lag between the collection and confirmation of actual cost and work as recorded in a Job Cost Accounting system and the status of the project. Data can be out of sync by as much as one month or may be incomplete. Question: Does the Job Cost Accounting System allow Entry Reversals of Estimated Actuals, and the Reposting of Actuals to the previous report period. AC To Date ETC To Date

25 Understanding the Accrual Method Step 1: At the report period, the actual data for cost and work is reviewed and as required Estimated Actuals injected to the job cost accounting system to cover the cost and work not invoiced or posted. This balancing of the books is referred to as the Accrual Method. Historical AJ AJ = Adjusted, AC = Actuals With Accrual Adjustment AC Step 2: During the next report period the accrued values are reversed out of the ledger and substituted with real time sheet and approved invoice values and the cycle is repeated. Check as some Accounting System do not allow reversals to be made to the previous report period. Concerns: If real and Accrued Actuals are not taken account off, Trends and forecasts on the Estimate to Complete can be under stated. ( CV, CPI, IEAC) Adjustments are best made through Middle Ware EVPM products such as EVENGINE which take account of past period accrual adjustments.

26 EVPM For Determining The Real Project Cash Position, Profit And Loss Statement. Topics: Understanding the Difference Between EVPM and Commercial Based Cash Flow. Uses for Commercial Cash Flow Analysis.

27 EVPM Does Not Take Account Of Negotiated Commercial Payment Conditions Real Cash Flow Takes Account of the Negotiated Payment Terms Example Terms 45 DAY CLIENT PAYMENT TERMS 7 DAY LABOUR 30 DAY SUPPLIER TERMS How to Model Real Cash Flow: Use the Profit [P] and Planned Profit [PP] Extended EVPM Definitions. Time shift EVPM based Time Phased Data. EVPM Methodology Needs To Be Extended/Tailored For Commercial Performance Analysis Benefits of Real Cash Flow Modelling: Understand the Negative cash position and establish the Amount of Project Financing required. In the event of project delays what is the impact of the cash position of project financing. How to ensure the project stays at least cash neutral? Negotiate and Up Front Cash Payment Front Load early tasks to ensure finance costs are minimized.

28 Comparison Between EVPM and Commercial Based Cash Flows EVPM Commercial Commercial EVPM EVPM Based Cash Position Commercial Cash Position

29 EVPM To Undertake The Traditional Job Cost Accounting Payment Role. Topics: Setting Up The Schedule and EVPM Code Structure To Facilitate Payments Certificates of Payments

30 EVPM Can Be Extended to Undertake Certificate of Payments and Claims Step 1. Distributed the BAC, EAC and SP to each activity. Then if the activity is completed payment is due. Step 2. Systematically Update the Schedule each report period and recalculate payment due. The difference between report periods is the certificate of Payment. EAC = Subcontract Price Then Certificates of Subcontractor Payments = Sum of EAC for Completed Work this period less value for last period. SP = Main Contractor Revenue Then Certificates of Claim = Sum of SP for this period less value for last period. EVPM Can Automates Certificates of Claim & Payments

31 EVPM Techniques To Determine The Viability Of A Project And Its Financial Performance As It Moves Through Its Life Cycle From Concept, To Delivery. Topics: EVPM and The Project Life Cycle Determining The Viability Of Projects Using EVPM Modelling With Discounted Cash Flow.

32 Using EVPM and the Project Life Cycle Build a Project time phased financial model, then update and maintain through the project development phases: Concept Phase Selection Phase Definition Phase Execution Phase Concept Phase: Initial business study to confirm the economic viability of the project. Selection Phase: A number of Technology Studies are undertaken to determine the best technical solution for the project. At the end of the phase only one technology, contract management strategy should go forward. Estimate is at +/ 30% Definition Phase: The engineering level is at 80% with placement of long lead items for equipment with suppliers. All contract work packages are identified, early works designs completed in readiness for the Execution phase. Estimate +/ 20% Execution Phase: Engineering is rapidly progressed to 100% based on Supplier information and committments, Construction works commences and is completed in this phase with full EVPM control systems in place and functional by Area/Facility/Commodity using Control Accounts [CA] and Work Packages [WP]. Estimate +/ 10%

33 Model Each Phase Using Scheduling Software Using Cost Assignments Concept Level Engineering 5 10% Concept Level Management Schedule Selection Phase Level Schedule Financial Model Definition Phase Level Schedule Concept Level Execution Schedule Concept Level Revenue Model The schedule and EVPM model is continuously revised from one phase to the next to reduce risk.

34 Use EVPM Based Cash Flow And Apply Discounted Cash Flow Principles Phase 1 to 3 Period Construction Period Financial Model Plant In production Investment Return Period Cash Position = $0 Internal Rate of return = 34% with 8% Finance Interest 1. Determine the viability of the project and rank with respect to the IRR. Make a project selection. 2. Repeat the process through each phase of the project to confirm the project viability

35 What Cultural Change Will EVPM Have On The Way The Company Does Business. Topics: EVPM By Stealth Integration of Professional Disciplines and Skills

36 Most organizations already undertake EVPM reporting by stealth. Most of the data is available but locked up in some vertical silos, Vertical Silos Can include: Scheduling, Estimating, Project Controls, Finance and Accounting Departments. Access may be restricted by technology, political, management structure. Implementation of effective EVPM requires Project Management skills to be raised to an advanced level where the project management team understands: 1. Estimating 2. Planning 3. Accounting And Finance Practices 4. Integration of The Three Successful EVPM implementation requires company commitment beyond the purchase of the software, May require significant cultural change in doing business and accountability. Successful EVPM depends on investment in people with the appropriate project management skills.

37 These skills should be found in personnel with Tertiary qualifications in Project Management or are Accredited as Management Professionals through the PMI. Alternatively, select and stream suitable technical or commercial candidates from within the organization to undertake subject specific training courses, then place on rotation within and organization to gain the practical experience. Offers a Range of Courses. Hire specialist consultants to establish the EVM Environment, then mentor and support the organization until sufficient staff have gained the experience and confidence to manage projects in their own right.

38 Integration, Synchronization and Merging Earned Value Performance Measurement with Traditional Job Cost accounting Practices QUESTIONS AND ANSWERS? ALL GRAPHS AND REPORTS PRODUCED USING SUPERTECH S EVENGINE MICROSOFT EXCEL ADD IN EVPM PROJECT CONTROL SOFTWARE For more information visit