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Thursday, 25 January 2007 20:56

Cost Performance Measurements

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Earned Value - Earned value management is a project management technique for estimating how a project is doing in terms of its budget and schedule. It compares the work finished so far with the estimates made in the beginning of the project. This gives a measure of how far the project is from completion. Through EV the project manager can get an estimate on how much resources the project will have used at completion. “Earned Value Analysis” is an industry standard way to measure a project’s progress, forecast its completion date and final cost and provide schedule and budget variances along the way. By integrating three measurements, it provides consistent, numerical indicators with which you can evaluate and compare projects.

It compares the PLANNED amount of work with what has actually been COMPLETED, to determine if cost, schedule, and work accomplished are progressing as planned.

 cost-earned_value.jpg

Note: This technique is related to the critical path concept. An alternative project performance measurement and management technique is critical chain, which utilizes buffer management instead. The reason is that the earned value management method does not distinguish between the progresses on the project constraint (i.e. its critical chain) from progress on the non-constraints (i.e. other paths in the project network). This can sometimes lead the project manager to expedite non-critical work at the expense of critical work in pursuit of better earned value measures, resulting in delayed project completion. This is a case of local optimization, resulting from a lack of subordination of local measures to global measures.


Cost Performance Index - CPI is a value that demonstrates how the project costs are performing. CPI is a value that reveals how much money the project is losing. CPI is a value that shows how the project costs are performing to plan. It relates the work you have accomplished to the amount you have spent to accomplish it. A project with a CPI of .93 means you are spending 1.00 for every .93 worth of work accomplished. Therefore, a CPI under 1.00 means the project is performing poorly against the plan. However, a CPI over 1.00 does not necessarily mean that the project is performing well. It could mean that estimates were inflated or that an expenditure for equipment is late or sitting in accounts payable and has not yet been entered into the project accounting cycle.

 

Cost Performance Index formula - CPI = EV / AC
 
< 1 means that the cost of completing the work is higher than planned (this is bad)
= 1 means that the cost of completing the work is right on plan (this is good)
> 1 means that the cost of completing the work is less than planned (good).

 

Having a CPI that is very high (in some cases, very high is only 1.2) may mean that the plan was too conservative, and thus a very high number may in fact not be good, since the CPI is being measured against a poor baseline. Management or the customer may be upset with the planners since an overly conservative baseline does not free up available funds for other purposes, and the baseline is also used for manpower planning.

 cost-cpi.gif

 

 

Schedule Performance Index – SPI is the ratio of work accomplished versus work planned, for a specified time period. The SPI is an efficiency rating for work accomplishment, comparing work accomplished to what should have been accomplished.

 cost-spi.gif

Note: The closer the CPI and SPI are to a value of 1.00, the more successful the project can be considered, at least in terms of cost and schedule. This establishes our performance baseline against which the project can compare actual performance data.


Earned Value EV = BAC * %Comp
Cost Variance CV = EV - AC
Schedule Variance SV = EV - PV
Cost Performance Index CPI = EV / AC
Schedule Performance Index SPI = EV / PV
Estimate at completion EAC = AC / %Comp
Estimate to completion ETC = EAC – AC
Variance at completion VAC = BAC – EAC
Cumulative CPI CPIc = EVc / ACc

BAC = Budget at completion         PV = Planned Value         AC = Actual Cost

 


Forecasting - Estimating or predicting potential project costs. These figures are based on information and knowledge available at the time the forecast is made.

 

Cost Performance Reports - These reports focus on project cost performance, project scope, and planned performance versus actual performance. The reports may vary according to stakeholder needs.

 

Estimate at Completion - The Estimate at Completion is created using the actual costs of labor and materials to date plus the latest revised estimate for all remaining work. A varied amount of information is used to prepare the EAC, including completed and remaining work scope, schedule variances.

 

Estimate to Completion - The expected cost needed to complete all the remaining work for a schedule activity, work breakdown structure component, or the project

 

Variance - Variances that cross a given threshold may require the project manager to create a variance report to explain the variance, why it has happened, and what corrective action has been applied to prevent the variance from recurring.

  • Cost variance (CV) - The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Formula: CV= EV – AC
  • Schedule variance (SV) - Schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV = EV – PV

These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project. Project cost control searches out the causes of Positive and Negative variances and is part of Integrated Change Control. For example, inappropriate responses to cost variances can cause quality or schedule problems or produce an unacceptable level of risk later in the project.

 

Read 9492 times Last modified on Thursday, 10 December 2009 21:33

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