PM1 Unit 5

Budget Management

Earned Value Management: Definition, Formula & Examples - Video & Lesson Transcript | Study.com

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57

Budget Management

Budget Development

• Good scheduling skills and abilities

• Understanding of the project scope

• Well developed WBS and project

schedule

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Budget Management

Key reasons for overspending…

• Bad Luck

• Overly optimistic initial estimates

• Poor communication

• Poor cost/time estimating practices

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Budget Management

Three methods of estimating

3. Bottom-up Estimating

Decomposition of the work into smaller
packages or more detail. Estimates are
made at the lowest level and then
summarizes, or aggregated, into the
higher level activities.

Cost Budgeting

• The planning process that involves

summarizing, or aggregating, the
estimated costs for individual
activities to establish a total cost
baseline for the project.

Budget Management

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Cost Baseline

• Time based budget that is used as a

basis for measuring, monitoring, and
controlling the overall cost
performance of the project.

• Also represents “Planned Value”

Budget Management

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Cost Baseline

Budget Management

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Cost Control

• The process of influencing factors

that create variances, and controlling
changes to the project budget.

Budget Management

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Funding Limit Reconciliation

A cost budgeting tool that involves the comparison and adjustment of the funding limits and the estimated costs by refining the scope and schedule of the project activities. A difference or variance on the planned expenditure and the funding limit usually causes the need for rescheduling of the work to meet the rate of the expenditures.

Budget Management

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Multiple Choice

The board set a target for the project budget during the planning phase. While executing the project, they check to make sure she is within budget. They are looking to determine if they need to refine the scope of the project and change its timeline and costs for activities. Which tool is being used to manage the cost of this project?

• cost of quality

• cost performance baseline

• funding limit reconciliation

• vendor bid analysis

Project cost control includes:

• Ensuring changes are agreed upon

• Managing changes when they occur

• Assure potential cost overruns do

not exceed authorized funding

• Monitor cost performance and

understand variances

Budget Management

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Project cost control includes:

• Recording all appropriate changes

against the cost baseline

• Preventing incorrect, inappropriate,

or unapproved changes

• Inform stakeholders of approved

changes

• Acting to bring overruns within limits

Budget Management

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Cost Change Control System

• Defines the procedures by which the

cost baseline can be changed.

• WSDOT policy found in the Project

Control & Reporting Guide

• Also documented in the Project

Management Plan

Budget Management

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What is Earned Value Management

(EVM)?

• A method of integrating scope, schedule,

and resources, and for measuring project
performance.

• It compares the amount of work that was

planned with what was actually earned
with what was actually spent to determine
if cost and schedule performance are as
planned.

Earned Value Management

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What is needed for EVM?

• A baseline plan
• A project budget (BAC – Budget at

Completion)

• A project end date
• Tasks are identified & scheduled
• Each task has a budget or effort (resource

loaded / weighting)

• Actuals tracked

Earned Value Management

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Multiple Choice

Mrs. Jones is building a gardent next to her porch. She estimates the work to build this garden will be $250 per day and will take six days to complete. What is the project's budget at completion?

• $500

• $600

• $1,000

• $1,500

To perform EVM, three values need

to be determined

• Planned Value (PV or BCWS)

• Actual Costs (AC or ACWP)

• Earned Value (EV or BCWP)

Earned Value Management

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Planned Value (PV)

What are the budgeted costs of
the work scheduled?

•Time phased based on baseline
budget

•Only changes when baseline is
changed

•Also referred as “BCWS” & “BAC”

Earned Value Management

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Multiple Choice

A project manager is building a real volleyball machine based on the national competition and has been given a budget of $1,500 and is 40% complete. The team planned to spend $500 a month on the three-month project. The manager is evaluating the status of the project at the end of the first month. What is the project's planned value?

• $500

• $600

• $1,000

• $1,500

Earned Value Management

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Actual Costs (AC)

What are the actual costs of the
work performed?

•Based on the actual completion of
work packages

•Actual costs for reported work

•Also referred as “ACWP”

Earned Value Management

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Earned Value (EV)

What are the budgeted costs of
the work performed?

•Based on the actual completion of
work packages

•Baseline value of the reported work

•Also referred as “BCWP”

Earned Value Management Example

Task – Drill & install 10 piezometers

• Budget - $100,000 ($10K per piezometer)
• Time – 10 weeks (1 piezometer per week)

At week 5:

• 4 piezometers drilled and installed
• $47,500 spent to date

PV = $50,000

AC = $47,500

EV = $40,000

Calculating Earned Value and

interpreting results

• to measure the progress of the project

• help identify trends

• forecast costs

• and identify ways to correct/mitigate

project pitfalls.

Earned Value Management

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Multiple Choice

The high school hired a team to put new blinds in over the summer.

The project should take five days and cost $2,500 to complete. At the end of the second day, the project is 50% complete. What is the project's earned value at the end of the second day?

• $500

• $750

• $1,000

• $1,250

Cost Variance (CV)

CV = EV - AC

•Good News: If CV value is positive, the project is
currently under budget (spending less than
planned for the work)

•Bad News: If CV value is negative, the project is
currently over budget (spending more than
planned for the work)

Earned Value Management

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Earned Value Management

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Cost Performance Index

(CPI)

CPI = EV / AC

•Good News: If CPI value is >1 or =1, the project
cost trend is currently under or at planned budget

•Bad News: If CPI value <1, the project cost trend
is currently over budget

Earned Value Management

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Cost Variance % (CV%)

CV% = CV / EV

•Good News: If CV% value is positive, the project
is currently under budget by the CV%

•Bad News: If CV% value is negative, the project is
currently over budget by the CV%

Earned Value Management

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Schedule Variance (SV)

SV = EV - PV

•Good News*: If SV value is positive, the project is
currently ahead of schedule

•Bad News: If SV value is negative, the project is
currently behind schedule

* - not all positive SVs are good

Earned Value Management

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Schedule Performance

Index (SPI)

SPI = EV / PV

•Good News: If SPI value is >1 or =1, the project
schedule trend is currently ahead or on planned
schedule

•Bad News: If SPI value <1, the project schedule
trend is currently behind schedule

Earned Value Management

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Schedule Variance % (SV%)

SV% = SV / PV

•Good News: If SV value is positive, the project is
currently ahead of schedule

•Bad News: If SV value is negative, the project is
currently behind schedule

Dropdown

What do you use SPI for when evaluating a project? ​ ​ ​

Select answer

Dropdown

What does it mean to have a CPI of 1.5?​ ​

Select answer

Match

Facts : AC $400 EV $450 PV $525 BAC $1,000

Calculate each of the following and match it to the correct answer

• CPI

• CV

• SPI

• SV

1.125

50

.86

-75

• 1.125

• 50

• .86

• -75

Earned Value Management

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Estimate at Completion

(EAC)

#1

Actual costs to date plus a new estimate for all
remaining work (original plan no longer valid)

EAC = AC + ETC

(ETC🡺Estimate to Complete)

Earned Value Management

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Actual costs to date plus remaining budget
(current variances are viewed as atypical of future
variances)

EAC = AC + BAC - EV

Estimate at Completion

(EAC)

#2

Earned Value Management

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Estimate at Completion

(EAC)

#3 & #4

Actual costs to date plus remaining budget
modified by a performance factor (CPI) (current
variances are viewed as typical of future
variances).

EAC = AC + [(BAC - EV) / CPI]

EAC = BAC / CPI

Earned Value Management Example

Task – Drill & install 10 piezometers

• Budget - $100,000 ($10K per piezometer)
• Time – 10 weeks (1 piezometer per week)

At week 5:

• 4 piezometers drilled and installed
• $47,500 spent to date

PV = $50,000

AC = $47,500

EV = $40,000

CV = -$7,500

CPI = 0.82

CV% = -19%

SV = -$10,000

SPI = 0.80

SV% = -20%

Earned Value Scenario

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Earned Value Scenario

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Earned Value Scenario

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Earned Value Scenario

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Earned Value Scenario

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BAC = $100,000 (current project budget)

EV = $42,000 (42% of project completed,
$100,000 planned)

PV = $56,000 (56% of project planned $100,000
completed – initial aging report)

AC = $48,000 (from actual expenditures
reporting)

Is this project on schedule / budget?

Or is it in trouble?

Earned Value Scenario

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Cost Variance (CV):
CV = EV – AC
= $42,000 - $48,000
= - $6,000

Cost Performance Index (CPI):
CPI = EV / AC
= $42,000 / $48,000
= 0.875

Cost Variance % (CV%):
CV% = CV / EV
= - $6,000 / $42,000

= 14% OVER BUDGET

Earned Value Scenario

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Schedule Variance (SV):
SV = EV – PV
= $42,000 - $56,000
= - $14,000

Schedule Performance Index (SPI):
SPI = EV / PV
= $42,000 / $56,000
= 0.750

Schedule Variance % (SV%):
SV% = SV / PV
= - $14,000 / $56,000

= 25% BEHIND SCHEDULE

Earned Value Scenario

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Estimate at Completion (EAC):
Method #1:
EAC = AC + ETC (say $68,000)
= $48,000 + $68,000
= $116,000
(Change Management for $16,000 funds
request)

Method #2:
EAC = AC + BAC – EV
= $48,000 + $100,000 - $42,000
= $106,000
(Change Management for $6,000 funds
request)

Earned Value Scenario

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Estimate to Complete (ETC):
Method #3
EAC = AC + [(BAC – EV) / CPI]
= $48,000 + [($100,000 - $42,000) / 0.875]
= $48,000 + $66,285
= $114,285
(Change Management for $14,285 funds
request)

Method #4
EAC = BAC / CPI
= $100,000 / 0.875
= $114,285
(Change Management for $14,285 funds
request)

Earned Value Scenario

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Budget Management

Graphing Earned Value exercise

• Gantt chart baseline (report)

• EVM graph

• Task information

• Cost distribution

• EVM worksheets

Budget Management

Graphing Earned Value exercise

• Planned Value (PV) is always shown

in blue with circle nodes

• Actual Cost (AC) is always shown in

red with square nodes

• Earned Value (EV) is always shown in

green with triangle nodes

Budget Management

Graphing Earned Value exercise

• Work together as a team to calculate the

task cost (task budget) for each task

• Record these values on the worksheet with

the total (BAC) calculated

• Warning: Wait to plot on the EVM graph as

a class – we will use the Cost Distribution
Report

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$50K

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Budget Management

Graphing Earned Value – week 1

• Task A started on time – 30% complete

• Task B started 2 days late – 30% complete

• Task C started 1 day late – 25% complete

• Tasks D, E, F, G, H, and J have not started

• Project Management is on-going

• Actual Costs reported for week 1 = $5000

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$10K

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Schedule
Variance

Cost
Variance