Carlos Consulting Group

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1 Carlos Consulting Group Earned Value Management Building A Playhouse Financial analysis that goes one step beyond Budget versus Actual Presented by Tom Carlos, PMP June 20, 2007 Carlos Consulting Group Roseville, CA

2 Introduction There are lucky project managers whose projects were completed on time and within budget. However, chances are these PMs represent a small minority. Everyone else has probably faced a situation where one of the following statements is true: The project is within budget and schedule but we do not see the expected results The project is taking longer than expected The project is costing more than anticipated

3 The novice project manager probably uses analysis tools that are considered two-dimensional. Budget and Actual are the two dimensions. But in looking at a broader picture, there is a much needed third dimension- one that reflects performance and efficiency. Performance and efficiency indicate whether or not we are actually completing the intended tasks and producing the expected project deliverables within the designated budget and schedule.

4 Earned Value Management The process of considering scope, schedule, and resources, measured against a project s actual performance. It compares the planned amount of work to the completed tasks, to the projects cost, to determine if the cost, schedule, and work completed (thus far) are all in synch and in accordance with the plan. This analysis will show past performance and will estimate future efforts to complete the project (with the desired results).

5 The Project and Assumptions To help us understand the Earned Value Management, let s apply the process and formulas to a case study. Building A Playhouse Ann would like to build an outdoor playhouse for her children. She will hire five different contractors who will each perform a specific task. There are five separate tasks, at varying hours and cost per hour.

6 Ann has agreed to pay the contractors on a time and material basis The project estimates include a total of 30 hours of construction time at a total cost of $2,395. Typically, the tasks are scheduled to be performed sequentially. Based on the work plan, it is determined that the project can be completed within five weeks (where each task will take one week).

7 The Project Budget Task # Description Budget Hrs Hrly Cost Total Est Cost T1 Floor 6.00 $ 100 $ T2 Frame 6.00 $ 75 $ T3 Roof 4.00 $ 65 $ T4 Interior 7.00 $ 80 $ T5 Exterior 7.00 $ 75 $ $ 2,395.00

8 The Basic EVM Formulas Symbol Description Formula Explanation PV Planned Value None The estimated value of the work planned to be done thus far. AC Actual Costs None The total costs incurred to date, based on timesheets, invoices, other expenses, etc. EV Earned Value -Sum of all tasks (Task Budget * % Completed) The estimated value of (intended) work completed thus far, as it relates to the expected deliverables.

9 Project Analysis At The End of Week 1 By the end of week 1, the floor should be completed. However, the contractor did not finish. He put in 5 hours and completed 60% of the floor. Symbol PV Value $600 Formula Our budget figure for Task 1 AC $500 5 $100 per hour EV $360 Budget for this task times the percent completed $600 * 60%

10 Ann is worried because the floor contractor did not complete the task on time. The contractor assures her that he will finished the floor on Monday. However, he argues that an unforeseen problem came up with the installation of the floor. So Ann agrees to pay him two extra hours of work ($200). Ann is also wondering how she can measure the performance (and efficiency) of the floor contractor. So she decides to use two additional attributes of EVM.

11 The Performance Index Calculations Symbol Description Formula Explanation CPI Cost Performance Index EV/AC CPI compares the relationship between the Earned Value and Actual Cost. I am (only) getting (blank) cents performance out of every $1 spent. SPI Schedule Performance Index EV/PV SPI compares the relationship between the Earned Value and Planned Value. I am only progressing at (blank) % of the original plan.

12 The Performance Index Calculations Symbol CPI SPI Value 72% 60% Formula $360 / $500 $360 / $600 The CPI index tells Ann that she is receiving $.72 cents performance out of every $1 spent. The SPI index tells Ann that she is only progressing at 60% of the original plan.

13 Ann is also wondering how the extra time and cost will affect the final cost to the project. So she reviews the next three formulas. Symbol Description Formula Explanation BAC Budget At Completion N/A The original budget for the total job EAC Estimate At Completion BAC / CPI The amount "currently expected" for the total project cost ETC Estimate To Complete EAC-AC From this point on, how much MORE do you expect the cost will be to finish the job

14 Budget Completion Estimates (in dollars) Symbol BAC EAC ETC Value $2, $3, $2, Formula The original Budget $2,395 /.72 $3, $500 *Calculating a value for EAC can be tricky. There are four different methods for calculating EAC. Each method can yield a different result. Since Ann employs the principle of conservatism and wants the worst case scenario she uses the formula the yields the highest figure. (Refer to the weekly worksheets for all EAC formulas).

15 At this point, Ann is not worried about the projected $200 budget overrun. But she should be; this is only the first task and who knows what can happen with the remaining contractors. Now that Ann has a handle on the formulas used thus far, she decides to forge ahead and calculate the remaining EVM attributes.

16 The Variance Calculations Symbol Description Formula Explanation VAC Variance At Completion BAC-EAC How much over or under budget will the project come in at. (This assumes that each task will have the same inefficiency as task 1) CV Cost Variance (in dollars) EV-AC Negative is over budget, Positive is under budget SV Schedule Variance (in dollars) EV-PV Negative is behind schedule, Positive is ahead of schedule

17 The Variance Calculations Symbol VAC CV SV Value - $ $ $ Explanation $ $ $ $ $ VAC assumes that each task will have the same inefficiency as seen thus far with Task 1. This is why VAC (at this point) does not equal the $200 cost overrun of Task 1. The Cost (CV) and Schedule (SV) variances indicate that the project is over budget and behind schedule.

18 Overall Efficiency Ratings Symbol Description Formula Explanation PE Planned Earned EV/BAC Project % Complete (as it relates to time and deliverables) PS Percent Spent AC/BAC Project % Spent (as it relates to cost) CSI Cost Schedule Index CPI * SPI The overall efficiency rating. The further CSI is from 1.0, the project will have difficulties in recovering.

19 Overall Efficiency Ratings Symbol PE PS CSI Value 15.0% 20.9% Explanation $ / $ $ / $ % * 60% The values for PE and PS do not surprise Ann. She knows this is week one and the figures look right. But CSI is surprising. This value is far from 1 so it indicates a problem with the project s overall efficiency.

20 EVM - Building A Playhouse Financial Summary - Week 1 Project Information Project duration (weeks) 5 Project start date 7/1/07 This report date 7/6/07 Work Period Number 1 Estimated end date 8/3/07 (Enter values were you see a blue font) (The sample case assumes that tasks can be completed concurrently) Task # Description Budget Hrs Hrly Cost Total Est Cost Actual Hrs To Date Cost To Date Percentage of Tasks Completed *1 T1 Floor 6.00 $ 100 $ $ % T2 Frame 6.00 $ 75 $ $ - 0% T3 Roof 4.00 $ 65 $ $ - 0% T4 Interior 7.00 $ 80 $ $ - 0% T5 Exterior 7.00 $ 75 $ $ - 0% $ 2, $ *1 - Information as reported by contractors Term Description Value Term Description Value PV Planned Value *2 $ BAC Budget At Completion $ 2, AC Actual Cost $ EAC *3 Estimate At Completion $ 3, EV Earned Value $ ETC Estimate To Complete $ 2, CPI Cost Performance Index 72.00% VAC Variance At Completion $ (931.39) SPI Schedule Performance Index 60.00% CV Cost Variance (in dollars) $ (140.00) *2 Remember that PV is based on what should have been completed thus far. SV Schedule Variance $ (240.00) For multi-period projects, it will not equal the same value as BAC. *3 Using Max Value of EAC #1, EAC #3, or EAC #4 (Using EAC #2 will create a circular error) Term Description Value Your project Status: PE Planned Earned 15.0% Schedule Variance PS Percent Spent 20.9% If SV = 0 CSI Cost Schedule Index If SV > 0 If SV < 0 Project Behind Schedule Alternate methods to Calculate EAC Cost Variance Term Description Value If CV = 0 EAC #1 BAC/CPI $ 3, If CV > 0 EAC #2 AC + ETC $ 3, If CV < 0 Over Budget EAC #3 AC + BAC - EV $ 2, EAC #4 AC +[(BAC-EV)/CPI] $ 3,326.39

21 Project Analysis At The End of Week 2 The floor contractor finished his task. As agreed (by Ann), it took two extra hours and cost an additional $200. The framing contractor was able to complete the work within the estimated time and budget. By the end of week two, the project was back on schedule, but over budget.

22 Financial Summary - Week 2 EVM - Building A Playhouse Project Information Project duration (weeks) 5 Project start date 7/1/07 This report date 7/6/07 Work Period Number 2 Estimated end date 8/3/07 (Enter values were you see a blue font) (The sample case assumes that tasks can be completed concurrently) Task # Description Budget Hrs Hrly Cost Total Est Cost Actual Hrs To Date Cost To Date Percentage of Tasks Completed *1 T1 Floor 6.00 $ 100 $ $ % T2 Frame 6.00 $ 75 $ $ % T3 Roof 4.00 $ 65 $ $ - 0% T4 Interior 7.00 $ 80 $ $ - 0% T5 Exterior 7.00 $ 75 $ $ - 0% (Enter values were you see a blue font) $ 2, $ 1, *1 - Information as reported by contractors Term Description Value Term Description Value PV Planned Value *2 $ 1, BAC Budget At Completion $ 2, AC Actual Cost $ 1, EAC *3 Estimate At Completion $ 2, EV Earned Value $ 1, ETC Estimate To Complete $ 1, CPI Cost Performance Index 84.00% VAC Variance At Completion $ (456.19) SPI Schedule Performance Index % CV Cost Variance (in dollars) $ (200.00) *2 Remember that PV is based on what should have been completed thus far. SV Schedule Variance $ - For multi-period projects, it will not equal the same value as BAC. *3 Using Max Value of EAC #1, EAC #3, or EAC #4 (Using EAC #2 will create a circular error) Term Description Value Your project Status: PE Planned Earned 43.8% Schedule Variance PS Percent Spent 52.2% If SV = 0 Project On Schedule CSI Cost Schedule Index If SV > 0 If SV < 0 Alternate methods to Calculate EAC Cost Variance Term Description Value If CV = 0 EAC #1 BAC/CPI $ 2, If CV > 0 EAC #2 AC + ETC $ 2, If CV < 0 Over Budget EAC #3 AC + BAC - EV $ 2, EAC #4 AC +[(BAC-EV)/CPI] $ 2,851.19

23 Financial Summary - Week 2 EVM Analysis $1, $1, $1, Value in $$ $ $ $ PV AC EV $ $0.00 Period 1 Period 2 Time EVM Item Period 1 Period 2 PV $ $1, AC $ $1, EV $ $1,050.00

24 Project Analysis At The End of Week 3 The framing contractor finished his task. The roofing contractor arrived late Friday and was only able to put in 2.5 hours. He estimated that 40% of the roof was completed.

25 EVM - Building A Playhouse Financial Summary - Week 3 Task # Description Budget Hrs Hrly Cost Total Est Cost Actual Hrs To Date Cost To Date Percentage of Tasks Completed *1 T1 Floor 6.00 $ 100 $ $ % T2 Frame 6.00 $ 75 $ $ % T3 Roof 4.00 $ 65 $ $ % T4 Interior 7.00 $ 80 $ $ - 0% T5 Exterior 7.00 $ 75 $ $ - 0% (Enter values were you see a blue font) $ 2, $ 1, *1 - Information as reported by contractors Term Description Value Term Description Value PV Planned Value *2 $ 1, BAC Budget At Completion $ 2, AC Actual Cost $ 1, EAC *3 Estimate At Completion $ 2, EV Earned Value $ 1, ETC Estimate To Complete $ 1, CPI Cost Performance Index 87.92% VAC Variance At Completion $ (328.95) SPI Schedule Performance Index 88.09% CV Cost Variance (in dollars) $ (158.50) *2 Remember that PV is based on what should have been completed thus far. SV Schedule Variance $ (156.00) For multi-period projects, it will not equal the same value as BAC. *3 Using Max Value of EAC #1, EAC #3, or EAC #4 (Using EAC #2 will create a circular error) Term Description Value Your project Status: PE Planned Earned 48.2% Schedule Variance PS Percent Spent 54.8% If SV = 0 CSI Cost Schedule Index If SV > 0 If SV < 0 Project Behind Schedule Alternate methods to Calculate EAC Cost Variance Term Description Value If CV = 0 EAC #1 BAC/CPI $ 2, If CV > 0 EAC #2 AC + ETC $ 2, If CV < 0 Over Budget EAC #3 AC + BAC - EV $ 2, EAC #4 AC +[(BAC-EV)/CPI] $ 2,723.95

26 Financial Summary - Week 3 $1, $1, EVM Analysis Value in $$ $1, $ $ $ $ PV AC EV $0.00 Period 1 Period 2 Period 3 Time EVM Item Period 1 Period 2 Period 3 PV $ $1, $1, AC $ $1, $1, EV $ $1, $1,154.00

27 Project Analysis At The End of Week 4 The roofing contractor finished his task but he needed an extra hour. The interior contractor made good progress but was not able to finish. He put in 6 hours and estimated that 80% of the interior was completed.

28 EVM - Building A Playhouse Project Information Project duration (weeks) 5 Project start date 7/1/07 This report date 7/6/07 Work Period Number 4 Estimated end date 8/3/07 (Enter values were you see a blue font) Financial Summary - Week 4 (The sample case assumes that tasks can be completed concurrently) Task # Description Budget Hrs Hrly Cost Total Est Cost Actual Hrs To Date Cost To Date Percentage of Tasks Completed *1 T1 Floor 6.00 $ 100 $ $ % T2 Frame 6.00 $ 75 $ $ % T3 Roof 4.00 $ 65 $ $ % T4 Interior 7.00 $ 80 $ $ % T5 Exterior 7.00 $ 75 $ $ - 0% (Enter values were you see a blue font) $ 2, $ 1, *1 - Information as reported by contractors Term Description Value Term Description Value PV Planned Value *2 $ 1, BAC Budget At Completion $ 2, AC Actual Cost $ 1, EAC *3 Estimate At Completion $ 2, EV Earned Value $ 1, ETC Estimate To Complete $ CPI Cost Performance Index 89.92% VAC Variance At Completion $ (268.38) SPI Schedule Performance Index 94.01% CV Cost Variance (in dollars) $ (197.00) *2 Remember that PV is based on what should have been completed thus far. SV Schedule Variance $ (112.00) For multi-period projects, it will not equal the same value as BAC. *3 Using Max Value of EAC #1, EAC #3, or EAC #4 (Using EAC #2 will create a circular error) Term Description Value Your project Status: PE Planned Earned 73.4% Schedule Variance PS Percent Spent 81.6% If SV = 0 CSI Cost Schedule Index If SV > 0 If SV < 0 Project Behind Schedule Alternate methods to Calculate EAC Cost Variance Term Description Value If CV = 0 EAC #1 BAC/CPI $ 2, If CV > 0 EAC #2 AC + ETC $ 2, If CV < 0 Over Budget EAC #3 AC + BAC - EV $ 2, EAC #4 AC +[(BAC-EV)/CPI] $ 2,663.38

29 Financial Summary - Week 4 EVM Analysis Value in $$ $2, $2, $1, $1, $ $0.00 Period 1 Period 2 Period 3 Period 4 Time PV AC EV EVM Item Period 1 Period 2 Period 3 Period 4 PV $ $1, $1, $1, AC $ $1, $1, $1, EV $ $1, $1, $1,758.00

30 Project Analysis At The End of Week 5 The interior was completed but the contractor needed an extra half hour. The exterior contractor completed the work as expected. The project was completed by the end of Week 5.

31 EVM - Building A Playhouse Project Information Project duration (weeks) 5 Project start date 7/1/07 This report date 7/6/07 Work Period Number 4 Estimated end date 8/3/07 (Enter values were you see a blue font) Financial Summary - Week 5 (The sample case assumes that tasks can be completed concurrently) Task # Description Budget Hrs Hrly Cost Total Est Cost Actual Hrs To Date Cost To Date Percentage of Tasks Completed *1 T1 Floor 6.00 $ 100 $ $ % T2 Frame 6.00 $ 75 $ $ % T3 Roof 4.00 $ 65 $ $ % T4 Interior 7.00 $ 80 $ $ % T5 Exterior 7.00 $ 75 $ $ % (Enter values were you see a blue font) $ 2, $ 2, *1 - Information as reported by contractors Term Description Value Term Description Value PV Planned Value *2 $ 2, BAC Budget At Completion $ 2, AC Actual Cost $ 2, EAC *3 Estimate At Completion $ 2, EV Earned Value $ 2, ETC Estimate To Complete $ - CPI Cost Performance Index 94.48% VAC Variance At Completion $ (140.00) SPI Schedule Performance Index % CV Cost Variance (in dollars) $ (140.00) *2 Remember that PV is based on what should have been completed thus far. SV Schedule Variance $ - For multi-period projects, it will not equal the same value as BAC. *3 Using Max Value of EAC #1, EAC #3, or EAC #4 (Using EAC #2 will create a circular error) Term Description Value Your project Status: PE Planned Earned 100.0% Schedule Variance PS Percent Spent 105.8% If SV = 0 Project On Schedule CSI Cost Schedule Index If SV > 0 If SV < 0 Alternate methods to Calculate EAC Cost Variance Term Description Value If CV = 0 EAC #1 BAC/CPI $ 2, If CV > 0 EAC #2 AC + ETC $ 2, If CV < 0 Over Budget EAC #3 AC + BAC - EV $ 2, EAC #4 AC +[(BAC-EV)/CPI] $ 2,535.00

32 Financial Summary - Week 5 EVM Analysis Value in $$ $3, $2, $2, $1, $1, $ $0.00 Period 1 Period 2 Period 3 Period 4 Period 5 Time PV AC EV EVM Item Period 1 Period 2 Period 3 Period 4 Period 5 PV $ $1, $1, $1, $2, AC $ $1, $1, $1, $2, EV $ $1, $1, $1, $2,395.00

33 Final Project Analysis The project was completed on time but over budget. The final cost totaled $2, (5.8% over budget). The final performance indicators include: Term Description Value PE Planned Earned 100.0% PS Percent Spent 105.8% CSI Cost Schedule Index 0.945

34 Closing There is much more to EVM than discussed in this presentation. But you are now aware of the third dimension of a project s financial analysis. All three dimensions are key elements that must be considered when analyzing project performance. The EVM formulas provide a mathematical analysis of past and potential future performance. Unfortunately, they cannot explain why the inefficiencies occur. For this, a project manager will need to examine the work of each resource in order to understand why they perform the way they do.

35 Carlos Consulting Group About the Author Tom Carlos has over 25 years of cumulative experience in business, technical, and training environments. He is a Certified Project Management Professional (PMP) and member of the Sacramento Valley PMI Chapter. Carlos Consulting Group Roseville, CA Ph: (916) Tom@CarlosConsulting.com