During the contract management process, the CO reviews the cost management plan regularly to ensure that its guidelines continue to be appropriate throughout the duration of the contract. The pricing analyst closely monitors the CV to ensure that significant variance is addressed appropriately and in a timely manner. The item manager informs the pricing analyst of any anticipated resources and inventory changes, and the pricing analyst updates the cost management plan accordingly.
Several techniques are available for measuring cost performance:
CV is the most basic performance measure, defined as the difference between planned costs and ACs. CV is calculated by comparing the AC of the work with the EV, typically expressed as a ratio or percentage:
CV = [(EV — AC) ⁄ EV] x 100
The goal of calculating CVs is to provide the basis for EVM. The pricing analyst must understand the problems behind variances and the action that will correct any problems.
Some costs are incurred by tasks that are incomplete and have not yet earned any value. These costs are considered during cost analysis, but are not used when assessing the current EV to the project. EVM is perhaps the most useful activity in cost control because it combines costs and the schedule into one indicator. EVM shows how much the project is physically accomplishing in terms of both cost and time, giving management a more accurate and timely report on project progress. EV is the cost originally budgeted to accomplish the work that has been completed as of the analysis date. It answers the question, “How much work has actually been completed?”
EV is calculated from the measured work completed and the budgeted costs for that work:
EV = (percentage of project completed) x (project budget)
Figure 5.3 illustrates EV (represented by “$”) as being associated with the percentage of work completed at various points throughout the project.
Figure 5.3
Earned Value (EV)
AC is what it actually costs to accomplish all the work completed as of the analysis date. It answers the question, “How much have we actually spent?” This is usually determined from the organization’s accounting system or can often be approximated by multiplying the number of people by the number of hours, days, or weeks worked.
AC = [(actual hours incurred at the task level) x (individual
resource cost)] + sum (actual expense amounts for the task)
Planned value (PV) is the total budgeted cost up to the analysis date. It answers the question, “How much did we plan to spend as of this date?” A variant of this question is, “How much work should have been completed by this date?” PV can be computed from the project plan, or it can be approximated by multiplying the total budget by the fraction of total project duration at the analysis date. For example, if the project budget is $100 and 20 percent of the project’s time has elapsed, the approximate PV is $20.
PV = [(task % complete) x (baselined estimated hours) x
(individual resource cost)] + sum (baselined estimated
expense amounts for the task for all baselined expenses with
actual expense dates)
The CPI illustrates how efficiently a project team is accomplishing the completed work. CPI is determined by calculating the ratio of EV to the AC.
CPI = EV ⁄ AC
When the CPI is measured periodically, the CPI figures can be plotted in a line graph that illustrates trends over the life of the project (known as a “trend analysis”).
The CPI is often reported along with the schedule performance index (SPI). Both CPI and SPI are measures of efficiency, but the SPI is the ratio of EV to PV, or budgeted costs.
SPI = EV ⁄ PV
For example, an SPI of 0.75 means that the project has earned only 75 percent of the value that was anticipated to have been earned.
CPI and SPI are used to rate the cost and schedule performance of a project. A poor rating provides a warning signal, allowing for corrective measures to be taken at the early stages of issue development. If the index is:
The estimate at completion (EAC) is a calculated prediction of the total costs of a project at completion, based on performance to date. The pricing analyst calculates the EAC when assessing the EV for a project, as part of a periodic evaluation. The EAC is the pricing analyst’s educated guess regarding the total cost of a project. Before calculating EAC, the pricing analyst should determine how future CVs may compare with current CVs, because the formula differs based on the assumption about future variances.
As with other outputs, the periodic assessment of the EAC will contribute a vital part of the project’s history. The EAC is a useful tool for project management and is primarily used to:
If the current EAC for any project indicates potential for cost overruns, the pricing analyst must assess CVs to anticipate whether the overruns will recur in the future. The pricing analyst is also responsible for checking the original cost estimates to determine whether the estimates were inaccurate and require revision.
In addition to future CVs, the pricing analyst also needs to know the budget at completion (BAC), which is the sum of all budgets established for the contract:
BAC = (baselined estimated hours assigned at the task level x
individual resource cost) + sum (baselined estimated expense
amounts for the task)
Generally, the EAC can be calculated in four different ways, depending on whether the CPI is readily available and on assumptions about future CVs.
The standard formula for calculating EAC, when CPI is not available, is based on the project’s cost performance to date, or the ratio between AC and EV, as part of the BAC. This formula is used when current CVs reflect future variances:
EAC = (AC ⁄ EV) x BAC
If the CPI is available, simply divide it into the total BAC. This is presented in the second formula for calculating EAC:
EAC = BAC ⁄ CPI
The third formula combines ACs to date and the estimate to complete (ETC). The ETC is the total of all estimated costs of work that has not yet been performed, or the difference between BAC and EV (i.e., ETC = BAC — EV):
EAC = AC + ETC
This approach is most often used when:
The final formula that can be used to calculate the EAC adds the actual-costs-to-date to the expected EV of the work not yet completed. To find this “future EV,” simply multiply the PV by the percentage of work that has not yet been performed:
EAC = AC + (PV x % of work remaining)
This approach is most often used when the variances to date are seen as atypical and the project team expects that similar variances will not occur in the future.
Whichever method the pricing analyst uses to arrive at a final estimate, EAC can be used to calculate the variance at completion (VAC) for the project. The final variance can be expressed as a dollar amount or as a percentage. It is commonly seen as a ratio of the total variance, or the difference between the budgeted and estimated cost at completion of a project, to the BAC:
VAC = (BAC — EAC) ⁄ BAC
For a project with a BAC of $75,000 and an EAC of $85,000, the variance at completion would be $10,000. Expressed as a percentage, the VAC would be $10,000 divided by $75,000. This project would be 13 percent over budget.
If early measurement of cost efficiency reveals that the project is going to have trouble remaining within budget, the pricing analyst will need to revise the cost estimates and update the overall budget as required.
Preliminary estimates that were set during the planning stages of the project may need to be revised. The pricing analyst should consult the latest TCO estimates produced in Section 2-3, Update⁄Refine Total Cost of Ownership Analysis. In some cases, changes in cost estimates would require updating the budget. Budget updates involve a change to the approved cost baseline and may not be performed without approval by the client.
