BASICS OF EARNED VALUE MANAGEMENT

1. BASICS OFEARNED VALUE MANAGEMENT National Contract Management Association Colorado Springs Colorado June 19, 2008

2. Earned Value Management (EVM) Training Objectives • Understand basic concepts • What EVM is and basic terms • How to evaluate performance • What does it all mean? • How to manage using Earned Value • Now that we know what it is and what it means, what do we do with it?

3. Earned Value Management Systems measure progress Progress = Movement Forward to measure progress, there must be a standard against which the forward movement may be compared EVMS establishes a baseline to measure progress

4. EVM can provide answers to the following questions: • How much have we spent? • How much did we get for our money? • How much more will be have to spend to complete the tasks we wanted to accomplish? • How much longer will it take? • How efficiently is the work being done? • What has happened? (Why are we off schedule/cost?) • What is happening? (What are the impacts?) • What is going to happen? (What are we doing to fix it?)

5. Why use Earned Value Management Systems? “The Bottom Line” • EVM can focus program management attention on critical issues and risks during the “project” life cycle • How are you doing, and how do you know how you are doing? • Early problem identification • Completion Estimates • How far along are you? (64%, 50%, >40%) • What is your productivity/efficiency? • Work remaining

6. Earned Value ManagementIs Not: • Guarantee of profit • Restricted to projects for the production of a products – EVM can be used in service contracts • Solution for a poorly written statement of work • Magic Bullet

7. Five Basic Elements

8. 5 Basic Performance Data Questions & Answers QUESTION ANSWER ACRONYM How much work should Budgeted Cost for BCWS be done? Work Scheduled How much work is done? Budgeted Cost for BCWP Work Performed How much did the is done Actual Cost of ACWP work cost? Work Performed What was the total job Budget at Completion BAC supposed to cost? What do we now expect the Estimate at Completion EAC total job to cost?

9. What do we measure progress against? and Why? • Performance measurement baseline • Budget that is spread over . . . • Time, to accomplish the scope of • Work, against which progress can be measured • Earned Value is key concept • how much progress did I make against my original plan? • expressed in dollars or hours • Why? – early warning baseline $ earned value time

10. Why do we needEarly Warning? Small course corrections are easier when made early… … If you wait until you reach the Iceberg, its too late!!!

11. Terms and Definitions associated with EVM: • It starts with the Work Breakdown Structure (WBS) • Based on the WBS a total budget is assigned • Work packages are developed and priced • A process to measure the results of those work packages is put into place • Work packages are tracked for both the dollars and time spent • The result of this effort is developing a Budget at completion (BAC)

12. Work Breakdown Structure Systematic approach to ensuring all program work is recognized and defined into a viable work plan – should include labor and materials for complete picture 1.0 Project – New Marketing Campaign for Dog Food First Level 1.1 Printed Media 1.2 Electronic Media 1.3 Radio Second Level 1.1.1 Magazines 1.1.2 Newspaper inserts 1.3.1 Local Spots 1.3.2 Regional Spots Third Level 1.2.1 Website 1.2.2 TV

13. Organizational Breakdown Structure Identifies the functions and/or people that will do the work New Marketing Campaign for Dog Food - assign to the Western Division Admin Asst Chen Chuck’s Design Team Regional Media Support Centralized National Support Sally For message And theme Juan for Customer interface Stan In Accounting Ray Budget John for Computer Graphics Josh Audio Beverly in National Accounts Tanya Print

14. Responsibility Matrix Assigns WBS work to OBS labor 1.1 1.2 WBS OBS 1.1.1 1.1.2 1.2.1 Admin Asst - - - - - - - - - - - - - - - - - - - - - - - - - - graphics audio - - - - - - - - - - - - - - - design - - - - - - - - - - - - - - - - - - - - - - - - accounting budget - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

15. AUTHORIZED, UNPRICED CONTRACT PRICE PROFITS AND FEES CONTRACT BUDGET BASE WITHHELD FOR UNKNOWNS PERFORMANCE MEASUREMENT BASELINE MANAGEMENT RESERVE DISTRIBUTED (control accountS) WITHHELD FOR KNOWN EFFORT UNDISTRIBUTED BUDGET CONTRACT BUDGETBASE

16. CONTRACT BUDGET LEDGER MASTER SCHEDULE GENERAL WORK AUTHORIZATION Control Account WBS # ______________ ORG # ______________ TASK DESCRIPTION________________________ SCHEDULE _______________________________ TOTAL BUDGET ________________ WORK PACKAGE WP # ________ ORG # _________ DESCRIPTION ________________ ______________________________ SCHEDULE _________________ BUDGET ___________________ ORGANIZATION WBS ELEMENT ORGANIZATION WORK AUTHORIZATION SCHEDULE BUDGET COST ACCUMULATION

17. The Control AccountA Key Management Control Point • Specific functional responsibility • Specific WBS responsibility • Work planning and assignment • Performance measurement • Cost collection • Variance analysis • Corrective action • Basis of data summarization

18. AUTHORIZED, UNPRICED CONTRACT PRICE PROFITS AND FEES CONTRACT BUDGET BASE WITHHELD FOR UNKNOWNS PERFORMANCE MEASUREMENT BASELINE MANAGEMENT RESERVE DISTRIBUTED (control accountS) WITHHELD FOR KNOWN EFFORT UNDISTRIBUTED BUDGET CONTRACT BUDGETBASE

19. PERFORMANCE MEASUREMENTDATA ELEMENTS UNDISTRIBUTED BUDGET (UB) Budget applicable to contract effort which has not yet been identified to CWBS elements at or below the lowest level of reporting to the Government. KEY: Only used for the effort associated with the contractual change.

20. PERFORMANCE MEASUREMENTDATA ELEMENTS MANAGEMENT RESERVE (MR) An amount of the total allocated budget withheld for management control purposes rather than designated for the accomplishment of a specific task or set of tasks. KEY: There is no scope of work associated with management reserve budget.

21. PLANNING AND BUDGETING ESTABLISH THE BASELINE - AN ITERATIVE, 3-STEP PROCESS 1. DEFINE THE WORK CONTRACT BUDGET BASE MR 2. SCHEDULE THE WORK $ PM BASELINE 3. ALLOCATE BUDGETS 100 40 60 15 25 30 30 TIME

22. Work Budgeted and Earned • The value of the budgeted work is called: Budgeted Cost of Work Scheduled (BCWS) • The value of work earned is called: Budgeted Cost of Work Performed (BCWP) • BCWP is also called Earned Value (EV)

23. 5 Basic Performance Data Questions & Answers QUESTION ANSWER ACRONYM How much work should Budgeted Cost for BCWS be done? Work Scheduled How much work is done? Budgeted Cost for BCWP Work Performed How much did the is done Actual Cost of ACWP work cost? Work Performed What was the total job Budget at Completion BAC supposed to cost? What do we now expect the Estimate at Completion EAC total job to cost?

24. Budgeted Cost of Work Scheduled (BCWS) Total Budget = $5,000 to be spent over 5 months I plan to lay 1 section of track each month at an estimated cost of $1,000. BCWS each month = $1,000 Total BCWS = $5,000 Month 1 BCWS = $1,000 Month 2 BCWS = $1,000 Month 3 BCWS = $1,000 Month 4 BCWS = $1,000 Month 5 BCWS = $1,000 sum of all BCWS = performance baseline

25. 5 Basic Performance Data Questions & Answers QUESTION ANSWER ACRONYM How much work should Budgeted Cost for BCWS be done? Work Scheduled How much work is done? Budgeted Cost for BCWP Work Performed How much did the is done Actual Cost of ACWP work cost? Work Performed What was the total job Budget at Completion BAC supposed to cost? What do we now expect the Estimate at Completion EAC total job to cost?

26. Budgeted Cost of Work Performed(BCWP)aka. Earned Value Track 1 We’re at the end of February, Track 1 is complete and track 2 is ½ done. BCWS = $1,000 Track 2 BCWS = $1,000 Value of work performed = $1,500 50% done

27. Schedule Variance BC WS BC WP of the work I scheduled to have done, how much did I budget for it to cost? BUDGET BASED of the work I actually performed, how much did I budget for it to cost? SCHEDULE VARIANCE is the difference between work scheduled and work performed (expressed in terms of budget dollars) formula: SV $ = BCWP - BCWS example: SV = BCWP - BCWS = $1,500 - $2,000 SV= -$500 (negative = behind schedule)

28. Schedule Variance 5,000 BCWS “the baseline” sv $ BCWP “earned value” TIME

29. 5 Basic Performance Data Questions & Answers QUESTION ANSWER ACRONYM How much work should Budgeted Cost for BCWS be done? Work Scheduled How much work is done? Budgeted Cost for BCWP Work Performed How much did the is done Actual Cost of ACWP work cost? Work Performed What was the total job Budget at Completion BAC supposed to cost? What do we now expect the Estimate at Completion EAC total job to cost?

30. Actual Cost of Work Performed (ACWP) • Value is earned as the work is completed and gauged against the schedule proposed for the work • When all work is completed it will have earned its full budgeted value but the actual cost of that work may be different that the amount budgeted… this is referred to as Actual Cost of Work Performed (ACWP)

31. PERFORMANCE MEASUREMENTDATA ELEMENTS ACTUAL COST FOR WORK PERFORMED (ACWP) The costs actually incurred and recorded in accomplishing • the work performed (BCWP) within a given time period • Labor • Material (Subcontractor/vendor) • Other, computer costs, etc. • Indirect Costs

32. Actual Cost of Work Performed(ACWP) Track 1 Cost = $1,500! Track 2 Cost = $750 cost to date Total Cost to Date = $2,250

33. Cost Variance BC WP AC WP of the work I actually performed, how much did I budget for it to cost? PERFORMANCE BASED of the work I actually performed, how much did it actually cost? COST VARIANCE is the difference between budgeted cost and actual cost formula: CV $ = BCWP - ACWP example: CV = BCWP - ACWP = $1,500 - $2,250 CV= -$750 (negative = cost overrun)

34. Cost Variance 5,000 ACWP “actual cost” cv $ BCWP “earned value” TIME

35. Variance Summary • The difference between the BCWP and the ACWP is called a cost variance • The difference between the BCWP and BCWS is called schedule varianceand is provided in terms of dollars

36. 5 Basic Performance Data Questions & Answers QUESTION ANSWER ACRONYM How much work should Budgeted Cost for BCWS be done? Work Scheduled How much work is done? Budgeted Cost for BCWP Work Performed How much did the is done Actual Cost of ACWP work cost? Work Performed What was the total job Budget at Completion BAC supposed to cost? What do we now expect the Estimate at Completion EAC total job to cost?

37. Budget at Completion (BAC) BAC $ sum of all BCWS = $ $ $ $ $ $ $ time • when all work has been phased, cumulative BCWS = BAC

38. Estimate at Completion(EAC) Just a few little glitches…. We should be able to do the complete job….ack… let’s see, for about $7,000

39. Variance at Completion (VAC) B ACwhat the total job is supposed to cost E ACwhat the total job is expected to cost VARIANCE AT COMPLETIONis the difference between what the total job is supposed to cost and what the total job is now expected to cost. FORMULA: VAC = BAC - EAC Example: VAC = $5,000 - $7,000 VAC = - $2,000 (negative = overrun)

40. Earned Value Management (EVM) Training Objectives • Understand basic concepts • What EVM is and basic terms • How to evaluate performance • What does it all mean? • How to manage using Earned Value • Now that we know what it is and what it means, what do we do with it?

41. Cost variance BCWP – ACWP Schedule variance BCWP – BCWS Cost variance in percentage BCWP – ACWP x 100 BCWP Schedule variance in percent BCWP – BCWS x 100 BCWS Formulas Negative variance = cost overrun or behind schedule Positive variance = cost underrun or ahead of schedule

42. Trend Analysis Cost Performance Index (CPI) measure of cost efficiency CPI = Value of Work Completed(BCWP) Cost of Work Completed (ACWP) Schedule Performance Index (SPI) measure of schedule efficiency SPI = Value of Work Completed(BCWP) Value of Work Planned (BCWS) Closer to “1” the better Less than 1 = overrun (CPI); behind schedule (SPI) Greater than 1 = underrun (CPI); ahead of schedule (SPI)

43. Performance Efficiencies • DO I THINK THE CONTRACTOR WILL COME IN ON BUDGET? • COST PERFORMANCE INDEX: • CPI = cost efficiency for work performed to date • (The value of work accomplished for each dollar spent) • SCHEDULE PERFORMANCE INDEX: • SPI = schedule efficiency with which work has been accomplished • (The rate at which work is being accomplished) WORK = ACCOMPLISHED ACTUALS WORK BCWPACCOMPLISHED$1500 = ACWP = ACTUAL = $2250 = .67 COST WORK = ACCOMPLISHED WORK SCHEDULED WORK BCWPACCOMPLISHED$1500 = BCWS = WORK = $2000 = .75 SCHEDULED

44. EXERCISES • Attendees – Go to your Exercise Packet

45. EVM Exercise BAC = 500 BCWS = 300 BCWP = 320 ACWP = 330 • What is the cost variance? • What is the Schedule variance? • What is the Cost Performance Index? • What is the Schedule Performance Index? • How would you describe this project?

46. Solution BAC = 500 BCWS = 300 BCWP = 320 ACWP = 330 • What is the cost variance? • BCWP – ACWP = -10 • What is the Schedule variance? • BCWP – BCWS = +20

47. Solution BAC = 500 BCWS = 300 BCWP = 320 ACWP = 330 • What is the Cost Performance Index? BCWP/ACWP = .97 • What is the Schedule Performance Index? BCWP/BCWS = 1.07

48. Solution Cost Variance = -10 Schedule Variance = + 20 CPI = .97 SPI = 1.07 • How would you describe this project? Over budget, ahead of schedule

49. Example Of Performance Analysis By WBS Element. The table that follows presents key information for several elements of the contract WBS What can it tell us?