1.

2 THE PURPOSE OF COST CONTROL

The purpose of cost control can be generally identified as follows:
To limit the clients expenditure to within the amount agreed. In simple terms
this means that the tender sum and final account should approximately equate
with the budget estimate.
Introduction 5
To achieve a balanced design expenditure between the various elements of the
buildings.
To provide the client with a value-for-money project. This will probably
necessitate the consideration of a total-cost approach.
The client may stipulate the maximum initial cost expenditure, or provide a detailed
brief to the design team who will then determine the cost. Most schemes are a
combination of these two extremes.
1.3 THE IMPORTANCE OF COST CONTROL
There has in recent years been a great need for an understanding of construction
economics and cost control, particularly during the design stage of projects.
The importance of this is due largely to the following:
The increased pace in society in general has resulted in clients being less likely
to tolerate delays caused by redesigning buildings when tenders are too high.
The clients requirements today are more complex than those of their Victorian
counterparts. A more effective system of control is therefore desirable from
inception up to the completion of the final account, and thereafter during
costs-in-use.
The clients of the industry often represent large organisations and financial
institutions. This is a result of takeovers, mergers and some public ownership.
Denationalisation has often meant that these large organisations remain intact
as a single entity. There has thus been an increased emphasis on accountability
in both the public and the private sectors of industry. The efficiency of these
organisations at construction work is only as good as their advisers.
There has been a trend towards modern designs and new techniques, materials
and methods of construction. The designer is able to choose from a far wider
range of products and this has produced variety in construction. The traditional
methods of estimating are unable to cope in these circumstances to achieve value
for money and more balanced designs.
Several major schemes in the UK and abroad in construction and other industries
have received adverse publicity on estimated costs. Even after allowing for
inflationary factors, the existing estimating procedures have been very inadequate
(see Chapter 14). It is not a valid diversion to suggest that projects in other
industries such as the Nimrod Early Warning System, Concorde or space
exploration have produced considerably more inaccurate estimates than those
in the construction industry.
Contractors profit margins have in real terms been reduced considerably during
the past decade. This has resulted in their greater cost-consciousness in an
attempt to redress possible losses.
There has, in general, been a move towards the elimination of waste, and a
greater emphasis on the use of the worlds scarce resources. This has necessitated
a desire for improved methods of forecasting and control of costs.
6 Cost Studies of Buildings
There is a general trend towards greater cost-effectiveness, and thus a need to
examine construction costs not solely in the context of initial costs but in terms
of whole-life costs, or total-cost appraisal.
World recession has generally produced a shortage of funds for capital purposes
and construction in general. This has been coupled with high inflation and
interest charges, resulting in the costs of construction soaring to high levels.
Although the relative costs compared with other commodities may be similar,
the apparent high costs have resulted in greater caution, particularly on the part
of clients.
1.4 COST, PRICE AND VALUE
The terms cost, price and value will represent different interpretations to different
people. Their particular meaning generally lies in the context in which they are
being used. It must also be remembered that much of the terminology used in the
construction industry has a special interpretation appropriate only to this industry.
Cost, to the building contractor, represents all those items included under the
heading of his expenditure. His price is the amount charged for the work he carries
out, and when this is received it becomes his income. The difference between the
two is his profit. Cost is therefore reasonably clearly defined within this context.
It relates largely to manufacture, whereas price relates to selling. The term cost
price really means selling at cost. The price, however, that the building contractor
charges the building owner for doing the work is to the latter his building costs.
The Building Cost Information Service (BCIS) was designed and developed on
the basis of the building owners costs. These are in reality the tender price from
building contractors. A tender price index therefore attempts to measure the
building contractors prices (the building owners costs) whereas a building cost
index measures the building contractors costs. Although there is some relationship
between the two, they are not identically correlated.
It is not surprising, therefore, to realise how easy it can be to confuse these two
terms if used incorrectly. To adapt the famous quotation, one persons (builders)
price increase is another persons (building owners) cost increase.
Value is a much more subjective term than either price or cost. In the economic
theory of value, an object must be scarce relative to demand to have a value. Where
there is an abundance of a particular object and only a limited demand for it, then,
using the economic criteria, it has little or no value attributed to it. Value constitutes
a measure, therefore, of the relationship between supply and demand. An increase
in the value of an object can therefore be obtained through either an increase in
demand or a decrease in supply.
Aristotle identified seven classes of value that are still relevant to our modern
society. These classifications of value can be summarised as: economic, moral,
aesthetic, social, political, religious and judicial. These bear some resemblance to
the way in which we identify building life as shown in Table 17.2. Economic value
may be seen as the more objective consideration, since it is measurable in terms of
Introduction 7
money. The remainder are seen as being more subjective. Maximum value is
assumed to be found when a required service or function is attained and when the
cost of providing that service or function is at a minimum. Value in this context
can be measured objectively, but any solution found through such a procedure risks
sub-optimisation. Any increase above the required level of either service or function,
for a small extra cost, would often be perceived by clients as better value. A more
meaningful approach when applied to the built environment considers the following
four components that when aggregated combine to provide a clearer picture of value:
Use value. This is the benefit attached to the function for which the item is
designed
Esteem value. This attribute measures the attractiveness or aesthetics of the
item
Cost value. This represents the costs to produce or manufacture the item and
to maintain it over its period of possession or life. This relates very much to the
issues surrounding whole-life costing (see Chapters 17 and 18)
Exchange value. This is the worth of an item as perceived by others who are
primarily interested in its acquisition.






Cost Management - Cost Control
The primary purpose of the Cost Control process is to
influence the factors that create cost variances and to
control changes to the project budget.
One of the most common problems in project
management is overrunning the project budget. There
are a number of plausible explanations for this. People
may be more focused on the technology and making
sure that the project requirements are met, literally at the
expense of the budget. In other situations, the need to
define and observe a budget constraint is not
recognized; therefore cost performance is running "open
loop," until the sponsor or customer calls attention to the
problem.
Project Cost Control includes:
Influencing the factors that create changes to the
cost baseline;
Ensuring that requested changes are agreed upon;
Managing the actual changes when they occur;
Assuring that potential cost overruns do not exceed
the authorized funding for a particular phase and
the total funding for the project;
Monitoring cost performance to detect and
understand variances from the cost baseline
Recording all appropriate changes accurately
against the cost baseline;
Preventing incorrect, inappropriate, or unapproved
changes from being included in the reported cost or
resource usage;
Informing appropriate stakeholders of approved
changes; and
Acting to bring expected cost overruns within
acceptable limits.
What information you need to implement cost
control?
Cost Baseline
The cost baseline, also described as the time-phased
budget or S-curve, was created in the Cost Budgeting
process. Once established, the baseline serves as a
constant reference for measuring and monitoring cost
performance on the project.
Project Funding Requirements
Funding requirements are derived from the cost
baseline. Fund flow should be positive; it should exceed
the cost baseline in every period by an amount that will
cover expenditures associated with both early progress
and cost overruns. Funding occurs in incremental
amounts. Each increment must be sufficient to cover all
expenditures in every period between the posting of the
first increment and the posting of the next increment.
Funding sources include payments from the customer,
revenue from sales, loans from a bank, or appropriations
from the organization's financial authority.


Performance Reports
Performance reports organize and summarize
information gathered; present the results of any analysis
performed; and provide information and the level of
detail required by stakeholders.
Common performance report formats include:
Bar charts;
S-curves;
Histograms; and
Tables.
Performance reports generally should be short
documents (one to two pages for a monthly report) that
relate the relevant facts of the project performance.
Although formats can vary significantly to address
different stakeholder needs, many common elements
are included in most performance reports; for example:
Reporting period;
Work accomplished in reporting period;
Schedule and cost status and performance;
Problems experienced or approaching;
Corrective actions, or plans;
Summary of accomplishments planned for the next
reporting period; and
Detailed quantitative reports, included as
attachments (such as earned value analysis data).
Work Performance Information
Work performance information provides data on the
status of project activities, for example, if project
deliverables are not being completed on a timely basis
and at or below the planned cost. Information includes,
but is not limited to:
Costs authorized and incurred;
Estimates to complete the schedule activities;
Activities completed or incomplete, or percent
complete of the schedule activities; and
Deliverables that have been completed and those
not yet completed.
Approved Change Requests
Approved change requests from the Integrated Change
Control process are documented, authorized changes
that can modify terms of the contract, project scope, cost
baseline, or cost management plan. Changes are
usually implemented by the project team once they have
been approved.


Project Management Plan
The project management plan is a document that
specifies how the project is executed, monitored and
controlled, and closed. The project management plan
can be a summary level or detailed document and can
contain one or more subsidiary plans or other
components. The cost management plan component
and other subsidiary plans are considered when
performing the Cost Control process.
Cost Control Process
Cost Change Control System
A change control system is a formal documented
process that describes when and how project
documents may change. It describes the people who are
authorized to make the changes and the paperwork
needed to make the changes.
Assuming that a variance from the plan has been
identified and a course of action has been determined,
the change control system is employed to coordinate an
integrated change to the project baseline.
Normally the change control system is a single,
integrated mechanism for controlling changes. The cost
element of that change control system should be just
one additional aspect of the overall system. Details on
controlling cost changes should be described in the
project's cost management plan.
Performance Measurement Analysis
Performance measurement analysis is a mechanism for
quantifying the current level of accomplishment of the
project management plan. Any deviations from the plan
(i.e., over or under budget) are to be reported as
variances. Variances exceeding a prescribed threshold
must be clearly identified and managed to reduce the
impact to an acceptable level. The Earned Value
Technique (EVT) is an example of a performance
measurement technique, discussed further in its own
section.
Forecasting
In assessing current project performance as well as the
impact of known variances, forecasting is a technique
for extrapolating current performance data to an
estimate of future performance. In other words, will the
project continue to operate at, under, or over budget and
by how wide a variance? Forecasting is one of the
functions performed by the EVMS.


Trend analysis is a forecasting technique that involves
examining project results over time to determine if
performance is improving or deteriorating.
Key functions of trend analysis include:
Evaluating a project's results over a period of time;
Identifying a pattern of performance; and
Showing improvement, stabilization, or decline.
Proper trend analysis requires:
A controlled baseline;
Correct and timely data; and
Comparison of recent and long-term performance.
Trend analysis looks at performance to date and
identifies a pattern of results that indicates a trend. The
trend is used to forecast future results.
Successful trend analysis depends on:
Controlled Cost Baseline: The project manager
must assess the actual spending and schedule
performance against the planned spending during
the same schedule period. Without a time-phased
cost plan, the project manager cannot compare the
burn rate to any comparable baseline;
Data and timing: If cost and schedule data are
based on vague estimates, the trend analysis will
be equally vague. If performance reports are
scheduled quarterly, they may not be frequent
enough to measure trends unless the project is very
long-term (several years); and
Identified trend: The trend is the important element
in trend analysis; it may indicate a a pattern toward
satisfactory or unsatisfactory performance. The
focus is on the long term. Often, project managers
focus too much on the current data and immediate
needs.
Project Performance Reviews
Project performance reviews are typically formal
meetings held to assess the current status of the project
in terms of scope, schedule, and budget. The
completion of work should be reported with an
assessment of the health of both the schedule and
budget.
Performance reviews are usually used in conjunction
with other performance reporting techniques. For
example, the need for corrective and preventive action
may be identified in the performance review through the
review of the quantitative results from the EVMS.
Discrete issues should be identified as part of an issue
management process and new risks should also be
identified.
Project Management Software
Project management software tools of various types are
helpful in creating estimates, assembling budgets, and
controlling cost performance. They range from
spreadsheets and project scheduling tools to project
management tool suites.
Project managers enter cost or labor rate data in the
project management software, or into a spreadsheet, to
manipulate variables in order to see the results of
different options. Other, more advanced statistical
analysis tools are also used in some cases.
Variance Management
The cost management plan as discussed previously
should contain specific thresholds and descriptions of
appropriate corrective actions to be used in response to
budget variances.
For example, a relatively minor variance, such as less
than 5%, should be reported and noted. The project
manager should be aware of the reasons for the
variance and should form a strategy for how best to deal
with it.
As variances grow to a larger percentage of budget
(perhaps 10%), formal reporting using the variance
management system should be required. This will call
for an analysis and a written corrective action plan.
If the control account variance continues to expand and
does not respond to corrective action, it should be
escalated to higher levels of attention in the
organization. A formal system such as this minimizes
surprises to the customer or to senior management.
Also, it ensures that more senior management has the
opportunity to assess the problem as early as possible.

Conducting a Performance Measurement Analysis
The first step in performance measurement analysis is
to ensure the completion of a project management plan
and the establishment of a cost baseline. This baseline
becomes known as the planned value (PV) of the project
(and is the same as the previously mentioned S-curve).
It is represented as a spending curve for each period of
the project.
Periodically during execution of the project, usually
monthly, but perhaps more frequently, the following
steps are performed.
1. Collect performance reports from each control
account manager. These should state which
planned tasks for the reporting period have been
completed.
2. Compute the value of these planned tasks. The
total value of completed tasks is known as earned
value (EV). These amounts are summed and
compared to the planned value (PV).
3. Compute a schedule variance (SV) by subtracting
PV from EV.
4. Collect actual cost performance from the finance
team. They will calculate the actual cost by
summing all paid invoices and labor sheets during
the reporting period. This sum is called actual
cost (AC).
5. Compute the cost variance (CV) by subtracting AC
from EV.
The implementation of performance measurement
analysis can generate some confusion, but given a well-
defined process and a commitment to the goal of
simplicity, it is possible to achieve a practical and
quantitative method for measuring project performance.


Earned Value Management System (EVMS)
An EVMS is the most commonly used performance
measurement technique for managing projects. An
EVMS compares the schedule and cost information at a
point in time and avoids using the project manager's
subjective interpretation of data.
Earned Value Analysis
The EVMS is based on the technique referred to
as earned value analysis, which integrates scope, cost
(or resource), and schedule measurements to assess
project performance. Earned value provides a
determination of whether or not work is being completed
as planned.
Earned value analysis is not new. The government has
used it for decades in the formal Cost/Schedule Control
System (C/SCS). In its current form, the government
method describes thirty-five criteria to guide effective
performance measurement, and requires formal
certification.
Earned value analysis is now broadly accepted as an
efficient, quantitative method for assessing project
status. Current project management software tools
include features that incorporate earned value
management techniques into project planning.
Benefits of Using an EVMS
Using an EVMS allows the project manager to integrate
both schedule and cost information to gain a more
comprehensive understanding of project performance.
This gives the project manager a more complete view of
project performance; schedule-only or cost-only
comparisons do not provide the same data. This missing
data could lead to misinterpretations of project
performance.
An EVMS compares the scope, schedule, and cost
information at a point in time. In a sense, it provides a
snapshot of the Triple Constraint triangle, showing the
current status of the project. This minimizes the errors
and misrepresentations possible with a schedule-only or
cost-only comparison. Integrating schedule and cost
status lets project managers forecast project status from
trend information. An EVMS requires the project
management team to correctly establish baselines and
to learn earned value management terms.
For an EVMS to be effective, it is important for the
project manager to ensure that the project baseline is
valid, otherwise the data resulting from the calculations
cannot be compared to a standard. An EVMS also
allows the project manager to forecast future project
performance by identifying trends and calculating results
if the trend continues.


Earned Value Management System (EVMS) Terms
An EVMS uses a concept of "dollarizing" the schedule
and performance data. A solid understanding of earned
value concepts and terms is a prerequisite for the
effective use of the associated methods.
Three fundamental EVMS terms include:
Planned Value (PV): Agreed value of work to be
accomplished in a given period;
Earned Value (EV): Agreed value of work that was
actually accomplished; and
Actual Cost (AC): Real cost of the work performed.
Collecting and Analyzing Planned Value (PV)
Planned Value (PV), previously called budgeted cost
of work scheduled (BCWS) in the government system,
is the value of work that was scheduled to be completed
as of a certain date. The PV is really a curve, or time-
phased cost budget.
At the end of the project, the final PV equals the budget
at completion (BAC). PV is established by time-
phasing the project's budgeted costs.
When the project plan is approved, the PV becomes a
fixed standard of reference. When it comes time each
status reporting period to update the earned value
analysis, the PV value is obtained by consulting the
project baseline information for the associated time
period.

Collecting and Analyzing Actual Cost (AC)
Actual Cost (AC) is another parameter that must be
measured during each status reporting period. This is
typically information collected by the organization's cost
accounting group, using the company cost accounting
system.
The cost accounting group collects all costs against the
project work packages and control accounts, including
labor accounting sheets, materials invoices, and other
direct costs such as travel and contract labor. AC
identifies what it really cost the project to operate during
the reporting period, independently of what work was
actually accomplished.
The AC is reported as both the new costs for the current
period and the cumulative cost for the project since
inception. The reporting of cost is independent of the
project team and represents the expenditure of real
money, unlike the earned value discussed further in the
course. The only control the project manager has over
AC is to ensure that work is performed efficiently, as
planned, using the appropriate resources. Inaccurate
accounting of labor is a common cause for cost
variances.
AC is also referred to in older earned value
management systems as the actual cost of work
performed (ACWP).



Collecting and Analyzing Earned Value (EV)
EV, the central concept in this technique, is slightly
difficult to grasp at first. In very basic terms, every
activity or item of work is associated with a dollar value.
When you complete a particular activity, you "earn," or
receive credit for, that declared value.
A frequent point of confusion is that the actual cost of
the job may be different from the earned value. Earned
value is the agreed value of the task, not what
youactually spend on it. If a contractor submits an
invoice for an unforeseen additional amount, the actual
cost of the job will be the amount of the invoice, but the
earned value remains the original negotiated amount.
The difference between the earned value and actual
cost will be an indication of cost variance.

Methods for Computing Earned Value
EV, the method for assigning value earned, is calculated
based on one of several predetermined methods. In the
simplest concept, the value earned is exactly the
planned value of the task. However,
determining when or how the value is applied may use
different methods.
Keep in mind that the calculation of earned value for a
task is different than an individual reporting status
against the task. Status reporting and earned value
analysis serve different purposes. Earned value analysis
allows the project manager to measure and report the
overall project health, evaluating project schedule, cost,
and work performed. It provides measures to detect
variances, and therefore determine the overall ability to
meet project objectives.
The information presented below outlines the various
methods for computing earned value along with
descriptions of how earned value is assigned and their
recommended uses.
In practice, a project manager may elect to use only a
few of these earned value techniques. They are
discussed in more detail on the pages that follow.

0-100 %

How earned value is assigned for this method
No credit for the start of a task, but 100% upon
completion

Recommended use of this method
When tasks are scheduled to complete within one
accounting period

50-50 %

How earned value is assigned for this method
50% value when the task starts, and 50% upon
completion

Recommended use of this method
When tasks are scheduled to complete within two
accounting periods

Percent Complete

How earned value is assigned for this method
Value estimated by the person responsible for the task's
completion

Recommended use of this method
Not generally recommended, although it may be used
for longer work packages in which distinct milestones
are not recognized

Weighted Milestones (WM)

How earned value is assigned for this method
Value given upon milestone completion, where interim
milestones mark the completion of a longer task or work
package

Recommended use of this method
For longer work packages for which discrete methods do
not seem appropriate

Level of Effort (LOE)

How earned value is assigned for this method
Value earned is proportionate to the total budget of the
work package and based on elapsed duration

Recommended use of this method
Minimize the use of LOE to less than 10% of the total
project budget

Apportioned Effort (AE)

How earned value is assigned for this method
Value is planned and measured in relation to another
(non-LOE) task

Recommended use of this method
Not recommended for frequent use but may help in
instances where it is difficult to determine the exact
value of the work

Percentage Methods for Computing Earned Value

0-100%
The 0/100% method is the simplest and usually the best
method for tasks of relatively short duration compared to
the standard reporting period length. For example, if the
project status data is collected once per month, this
method should be used on tasks of less than 30 days
duration.
As an example of computing earned value using the
0/100% method, assume that there is a work package to
paint a room in your company's headquarters. You
approved the painter's estimate totaling $1,000 in labor
and materials to perform the job, with a completion date
of Friday. When the job is complete, you will credit the
EV column with $1,000, the agreed value of the job. This
tracks the completion of the SCOPE leg of the triangle. If
the painter submits an invoice for an unforeseen
additional $50 in materials, the actual cost of the job will
be $1,050, but the earned value remains the original
negotiated amount of $1000.
Suppose that on Friday the job has not yet been
completed, so when the status report is filed, the value
earned remains at $0. The difference between the
earned value and planned value is an indication
of schedule variance. This variance will continue until
the work is completed. So, if the job is delayed until
Wednesday of the next week, the schedule variance will
be negative $1,000 until the completion is recorded, at
which time the schedule variance returns to $0.
Alternatively, if the painter finished the job early, a
positive schedule variance would be posted.
The 0/100% method is the-all-or-nothing approach, in
which no credit or value is earned until the task in
question is completed. In the above example, the painter
earned no value until the room was completely painted
(and presumably cleaned up and inspected). This
method eliminates the common project management
problem of subjective reporting such as "we're almost
done" or "97% complete", etc. Instead, the task owner
must ensure complete execution, which generally also
assures higher quality results.
50-50%
The 50/50% method is a minor adjustment to the
0/100% for tasks of longer duration compared to the
reporting period. If project data is collected monthly, but
a task is planned to take six weeks, the task owner
would be showing a negative variance for the first status
report, even though the work may be on track. In
fairness, the 50/50% method allows the task owner 50%
credit for the work, as long as the work has been
started. This reduces the negative variance to a smaller
amount, and assuming the job finishes on time, the
variance will disappear by the end of the next reporting
period.
Other variations on 50/50% may be defined, such as
25/75%, 40/60%, depending on the rules in the
organization. These should be established as standards
in the project's cost management plan.
Percent Complete
The Percent Complete method is one of the recognized
methods, but should not be used as a general practice.
The discrete 0/100%, 50/50% or milestone methods are
much more effective in controlling the reporting of task
completion. The percent complete method is subject to
abuse, as task owners may have no objective definition
of what "60% complete" actually means. Often this is
reported incorrectly as the percent of the time that has
elapsed rather then the percent of the work that has
been completed.
While not generally recommended, this method can be
useful for longer work packages in which distinct
milestones are not recognized. If percent complete is
allowed as a method, the work package template should
provide an objective basis for awarding percent
complete.

For example, if the work package involves
testing to ensure 30 test cases pass
successfully, one could earn 10% each
time 3 more test cases pass. The cost
management plan or the specific work
package planning template must provide
explicit definitions of each milestone.
Milestone and Effort Methods for Computing Earned
Value
Weighted Milestone

The Weighted Milestone method is used for longer work
packages for which discrete methods do not seem
appropriate. Assuming that the process in the work
package has clearly understood interim milestones,
appropriate credit should be assigned to the
accomplishment of each milestone.

Level of Effort (LOE)

The Level of Effort (LOE) method should be used very
sparingly, usually only for the supervisory tasks on the
project. The labor costs of the supervisors, such as the
project manager and any clerical support staff, must be
accounted for in the PV and EV baselines. The problem,
however, is identifying exactly what work has been
done, or what deliverables have been produced. After
all, supervisors have highly unpredictable days,
integrating all the other team members' activities,
attending meetings, filing reports, and communicating
with the stakeholders.

Therefore, one assumes that the supervisors are always
on schedule and allows them to earn value
proportionate to the total budget of the supervisor's work
package. For example, if there are 30 days of
supervisory labor planned, the supervisors "earn" 1 day
each day of the project.

A general rule of thumb is to minimize the use of LOE to
less than 10% of the total project budget. Otherwise,
large sums of LOE value will mask or disguise smaller
variances in other work packages.

Apportioned Effort Method

The Apportioned Effort Method falls into a category
similar to LOE, in that it should not be used often but
may help in instances where it is difficult to determine
the exact value of the work.

For example, if a quality inspector is needed to monitor
the activities of the test group, the quality work package
would earn value at a predetermined rate proportional to
the test work package. As the testing progresses, the
quality work earns a corresponding percentage of work
complete.

Analyzing Cost and Schedule Variances
Earned Value Variances and Indices
Once the status has been determined for the project,
i.e., the PV, EV, and AC values have been determined
for the current period for each work package, what does
the data mean and how is it presented in a useful way?
Several earned value calculations allow the project
manager to evaluate both schedule performance and
cost performance.
A variance is a difference between actual project results
and planned or expected results. A positive variance
means that a project is ahead of schedule or under
budget, while a negative variance indicates that a
project is behind schedule or over budget.
An index is a measure used to assess the magnitude of
any project variances that do occur. For indices, a value
greater than 1.00 is better than planned efficiency, while
a value less than 1.00 indicates that efficiency
is less than planned.
EVMS Schedule Formulas
Schedule variance (SV) = EV - PV
Schedule performance index (SPI) = EV/PV
Preferred state: SV is positive, and SPI is greater
than 1.00
o This means that the earned value is greater
than the planned value. More work has been
earned than planned, so the project is on or
ahead of schedule.


EVMS Cost Formulas
Cost variance (CV) = EV - AC
Cost performance index (CPI) = EV/AC
Preferred state: CV is positive, and CPI is greater
than 1.00
o This means that the earned value is more than
the actual cost. More value has been earned
than the actual cost expended, so the project is
on or under budget.
Example of EV Components
The example below illustrates these values at a time of
status measurement.

EV Component Example
In this example, the project is to build five prefab
sections of a house for a total project budget of
$500 (BAC). Recall that at the end of the project, the
final PV equals the budget at completion (BAC). The
task now is to compute the PV at this point in time.
It was expected that $300 worth of tasks were to be
completed (PV). In reality, only $200 worth has been
completed (EV); but the accounting system collected
expenses of $400 (AC) on the project.
EVMS Example
The following EVMS example uses the earned value
formulas to calculate the variances and indices.
PV = 300
EV = 200
AC = 400
SV = EV-PV = 200 - 300 = (100)
SPI = EV/PV = 200/300 = 0.67
CV = EV-AC = 200 - 400 = (200)
CPI = EV/AC = 200/400 = 0.50
The calculations in this example indicate that the project
is behind schedule and over budget, with poor schedule
and cost efficiency ratios.
The SPI of 0.67 indicates that the project has
accomplished only 67% of the work it was
scheduled to accomplish by the status date.
The CPI of 0.50 indicates that for every $1.00 spent
on the project, only $.50 worth of work has been
completed.
EVMS Diagram
The results of the EVM analysis are usually graphed to
provide a powerful status report for the project. Such a
diagram can be tracked at the total project level, and
also for each control account. Project management
software tools can help present this information.
The EVMS data in the diagram below depicts the values
over time for the three key parameters, PV, EV, and AC.
The status reporting period during which these
parameters were calculated is shown via the Update
Now vertical line. At that point in time, the schedule and
cost variances are depicted on the graph as the
difference between EV and PV (schedule variance) and
between EV and AC (cost variance).
Another powerful feature of the diagram is its ability to
show the trends in performance from one reporting
period to the next. An experienced eye can read these
charts quickly and draw conclusions about the project's
performance, past, current, and future.

The EVMS diagram also illustrates how EV calculations
provide more insight into the overall project health than
straight comparisons between the original baselines and
actual costs.
If the actual costs are less than the original cost
baseline, it may appear that the project is under-
spending. However, by comparing EV to AC, a project
manager realizes that, in reality, the project is paying too
much for the work actually performed.

By comparing EV to PV, it is apparent that less work
was accomplished than planned at the point of
determining the project's status; therefore, the project is
behind schedule.
The key to understanding EV is that the cost or schedule
is always compared to the value of the work performed-
EV or the earned value.
Forecasting Costs
When the project manager knows the current project
cost, he can also predict where the project is going
using EV. This requires calculating at-
completion andto-completion costs. There are several
terms to define in learning and applying these
calculations.
Estimating the At-Completion Project Cost (Terms)
Budget at Completion (BAC)
Total cumulative PV at completion of a schedule
activity, work package, control account, or other
project component
o When applied to the entire project, BAC
represents the total budget of the project, not
including management reserve
o At project completion, BAC will equal PV
Estimate at Completion (EAC) - also called Latest
Revised Estimate (LRE)
Estimate, or forecast, of the most likely total value
based on project performance and risk
quantification
o EAC can be greater than or less than BAC
Estimating the To-Completion Project Cost (Terms)
Estimate to Complete (ETC)
Estimate for completing the remaining work for a
schedule activity, work package, control account, or
other project component
o ETC is the difference between EAC and actual
costs to date
Various techniques to calculate EAC and ETC are
discussed on the following pages.

Estimating the At-Completion Costs
Examples of Estimating At-Completion Costs
At-completion values of interest to the project manager
and stakeholders are calculated using the methods
below. These calculations use the same data as the
EVMS example of the prefab construction project:
Total budget, or budget at completion (BAC) = 500
Planned value (PV) for this stage of project = 300
Earned value (EV) of project completed at review =
200
Actual cost (AC) = 400
Schedule variance (SV) = EV-PV = 200 - 300 =
(100)
Schedule performance index (SPI) = EV/PV =
200/300 = 0.67
Cost variance (CV) = EV-AC = 200 - 400 = (200)
Cost performance index (CPI) = EV/AC = 200/400 =
0.50
There are many forecasting techniques to calculate
EAC. Each of these approaches can be the correct
approach for any given project and will provide the
project management team with a signal if the EAC
forecasts are not within acceptable tolerances.
Calculating EAC using earned value data
Using remaining budget: The cumulative actual
costs to date plus the budget required to complete
the remaining work, which is the budget at
completion minus the earned value
o EAC = AC + (BAC - EV) = 400 + (500 - 200) =
700

Using CPI: The cumulative actual costs to date
plus the budget required to complete the remaining
work, which is the BAC minus the EV, modified by a
performance factor (often the CPI).
o EAC = AC + [(BAC - EV)/(CPI)] = 400 + [(500 -
200) / .50] = 1,000
Calculating EAC using ETC (ETC is discussed further
on the following page)
A bottom-up Estimate to Complete (ETC) for the
remaining work is provided by the performing
organization. Often used when past performance
shows that the original estimating assumptions
were fundamentally flawed or are no longer relevant
due to a change in conditions.
o EAC = AC + ETC
ETC based on new estimate
The ETC is a manual revised estimate for the remaining
work in the control account, as determined by the
performing organization. This more accurate and
comprehensive completion estimate is an independent,
non-calculated estimate to complete all of the work
remaining, and considers the performance or production
of the resource(s) to date.
The ETC for the project is calculated by summing the
manually revised individual control account estimates.
The decision to manually create a new ETC should be
balanced with the time it will take to perform it. If not
calculated manually, the ETC can be calculated based
on earned value data.
Importance of Early Analysis
Hundreds of studies across many industries have
revealed that a pattern of variance from the baseline is
usually set early, and the variances only get worse as
the project continues. If a project manager's ability to
predict the first 20% of the project is poor, his ability to
predict the remainder of the project is usually worse.
Early analysis results provide forecasting input. Based
on history, after 15% to 20% of a project has been
completed, the CPI will not change by more than 10%,
and will probably get worse. For example, a CPI of .80
at the 20% point will probably not recover to reach a CPI
of over .88.
It is the project manager's responsibility to keep the
project on schedule and within the project budget,
keeping the at-completion costs as close to the original
estimate as possible. It is also the project manager's job
to get the project back on track when a variance has
been discovered. Historical data indicate that early
project analysis has the most potential for impacting the
project, if corrective actions are necessary.
The To Complete Performance Index' (TCPI)
The TCPI is a calculation that indicates the cost
performance (CPI) needed for the remainder of the
project to complete either on budget (BAC) or at an
estimated at completion (EAC) value. The denominator
of the TCPI formula is adjusted depending upon which
parameter is used, BAC or EAC:
CPI needed to complete on budget: (BAC -
EV)/(BAC - AC)
CPI needed to complete at the EAC value: (BAC -
EV)/(EAC - AC)


Other Performance Measurements
Many types of performance measures are available,
such as:
Status of quality measurements;
Status of risk management plan;
Status of technical performance measurements;
and
Status against other planned baselines
o Lines of code
o Labor hours.
Many different items can be tracked and used as
performance measurements. Run charts, statistical
process control charts, and other measurements from
the quality plan are all performance measurements.
Tracking identified risks and mitigating the risks are
areas that affect performance as well as cost and
schedule.
Technical Performance Measurements (TPMs) are used
by some industries to track how well the product is
achieving critical performance parameters. Depending
on the product, the metric being tracked could be
weight, power consumption, fuel consumption, power
output, throughput, production price, utilization
percentage, capacity, or operational use data
Variance Analysis
Variance analysis involves comparing actual progress
results to planned or expected results. The differences
between actual project results and planned or expected
results (baseline values and current or projected
results), becomes the variance. Variance analysis can
be used to quickly detect deviations from desired
baselines. The comparison can be within the current
period or cumulative over several periods.
Variance analysis allows the project manager to identify
differences between the work results and the project
plan. Identifying these variances from the desired
baselines is only the first step in status reporting. Simply
knowing the variances will be of little value in ensuring a
project's success.
Once a variance is identified, the project manager
should determine what caused the variances (root
cause) and plan a corrective action. Action must be
initiated if the variances are negative or potentially
harmful to the project's intended outcome.
In many cases, the corrective actions will require some
changes to the project. These must be documented and
managed; in many cases, the changes will need to
come under configuration control.


Variance Analysis Reports
Once a variance is detected, whether it is in cost,
schedule, or scope and quality, it should be corrected. A
return to baseline is the desired result of a recovery
plan. A completed variance analysis report is a good
starting place for the recovery plan.
When completing variance analysis reports, ask these
questions:
What is the variance?
What caused the variance?
What is or could be the impact on the project?
What is the planned corrective action?
o Specific plan, with milestones
o Responsible person
o Milestone completion dates
A solid plan of recovery must be established, as
recovery at a later date is nearly impossible. The project
manager must ensure that a person is assigned to the
task of leading the corrective action, and must make the
recovery plan part of the weekly status review.
Problem Resolution Strategies
Problem resolution strategies can be simple to complex,
depending upon the problem. Project variables of cost,
schedule, and scope and quality can be negotiated with
the customer. There is usually one element about which
stakeholders may be flexible in accepting changes. This
can be exploited to the benefit of the project.
The key to altering the variables is to keep the customer
involved in the problem-resolution process. Remember
that customer satisfaction is usually one of the quality
metrics.


Examples of problem resolution strategies include:
No action required; accept non-critical variance.
Schedule variances
o Alter schedule dependencies to get back on
schedule.
o With cooperation of customer, extend the
project to cover slip in schedule.
o Use the management reserve and assign
additional resources.
Cost variances
o With cooperation of customer, alter scope and
quality or schedule.
Revising the Project Baseline
Once the project status has been analyzed and clear
trends have been established over several reporting
periods, it may become advisable to revise the baseline.
Such a decision is not reached easily or very often. The
point of the baseline is to illuminate areas of
performance variance. Changing the baseline to correct
variances would be counterproductive.
If, however, attempts to correct the performance
problems do not have a significant effect, and if the
variances continue to worsen, the project manager
should seek concurrence of the sponsor and key
stakeholders to revisit the project management plan.
This decision should be supported by a clear
understanding of the variances and the dynamics of the
project that are limiting the effectiveness of the
corrective actions.
Usually the decision to rework the project's baseline is
accompanied by discussions about renegotiating scope,
budget, and schedule expectations.

REFERENCES
PMI, "THE STANDARD FOR PROGRAM
MANAGEMENT", PMI, 2008
PMI, "A GUIDE TO THE PROJECT MANAGEMENT
BODY OF KNOWLEDGE", 4th Edition, PMI 2008
R. Mulcahy, "PMP EXAM PREPARATION", RMC
Publications Inc. 2009
PMI, "PRACTICE STANDARD FOR EARNED VALUE
MANAGEMENT", PMI 2005
S.J. Amos, "SKILLS & KNOWLEDGE OF COST
ENGINEERING", AACEI, 2004