Tuesday 15 March 2022

Control of the project budget according to the "earned value" schedules

Why do we need a mastered volume"

In order to control the progress of the project, that is, to answer at some control point the question "where we are compared to the plan", it is necessary to assess the degree of achievement of the result and the costs incurred.

Unfortunately, it can be extremely difficult to measure how much of the result has already been obtained. How ready, for example, is a program that was written but not tested" How to assess the degree of readiness of an automated system, for the implementation of which it is necessary to purchase, deliver and configure equipment and modify existing software"

Therefore, it is often assessed not the degree of readiness of the result, but the amount of resources that remain to be spent to achieve it. That is, the degree of readiness of the result is considered the share of already spent resources necessary to achieve it.

When comparing the actual (ACWP - Actual Cost of Work Performed - the actual cost of work performed) and the planned (BCWS - Budgeted Cost of Work Scheduled - the estimated cost of work planned for the period of time under consideration) the amount of resources spent at a given point in time, that is, when controlling the budget of the project, ambiguity arises in the interpretation of the causes of deviations.

Namely, suppose the ACWP indicator > BCWS, that is, we actually spent more money than was budgeted. Hence, unfortunately, it is impossible to draw a conclusion about the reason for the increase in costs - more work was done or the work cost more. And in the opposite case – ACWP < BCWS (less money spent than was budgeted) – either the work was cheaper, or less work was done than planned.

In order to correctly interpret the causes of deviations, the concept of earned value (BCWP - Budgeted Cost of Work Performed - the planned (estimated) cost of the work performed) is introduced.

How to Calculate Earned Value"

There are two main approaches to calculating earned value (BCWP) at some point in time:

sum up the budget value of the work performed at this point in time ("from the bottom up");
determine the proportion of work performed from the current forecast of their total volume and multiply by bcWS of the project ("top down").

The bottom-up approach is obvious for those works that have been planned and have already been completed – for them, BCWP is equal to their budget cost. However, when only unplanned work remains to be completed, this approach shows that BCWP=BCWS, since the budget value of unplanned work is considered to be equal to 0, and it is no longer possible to track the progress of the project on the mastered volume.

To account for work that has been planned but not yet completed, a second approach is used, namely that

BCWP works = (ACWP works/ (1)
ESC works) * BCWS works

where EAC work is the current forecast of the costs of this work,
ACWP work / EAC work is the share of already incurred costs in the total cost of performing the work (i.e. assessment of the degree of readiness of the result).

Let us note two more characteristic features of the method of mastered volume. First, the mastered volume can be calculated both in value and in physical terms. If several heterogeneous resources (materials, labor resources) are used, then the use of cost indicators is preferable. If the resources are homogeneous and have approximately the same cost (for example, labor costs in a company with high overhead costs per man-hour), then it is possible to use natural indicators. And secondly, the earned value method is a simplified, project-oriented version of the standard-costing method for analyzing deviations.

How to analyze charts"

Earned value analysis includes answers to the following questions:

1. How our actual indicators relate to the planned ones"

1.1. At cost.
1.2. Terms.

2. How far ahead of schedule we are (behind schedule)"

2.1. At cost.
2.2. Terms.

3. What are the trends"

3.1. At cost.
3.2. By Deadlines.

4. How good are our predictions"

Let's look at how this can be done with the help of visual analysis of graphs. For simplicity, we will analyze the charts in pairs (in the coordinates time - money, P1, P2, ... - the analyzed periods), considering one or two points of each chart. Next to each figure depicting the relative location of the chart points is a description of the situation on the graph.

How good are our predictions"
Based on the methods of calculation, in the current period (let's denote it P2) there is always BCWP2 = BCWP, that is, their graphs converge at one point. However, in past periods, they may not coincide - this is determined by work cost forecasts (EAC), data in past periods:

  • If bcWP2>BCWP in the previous period (P1), this means that the estimates were too optimistic. Therefore, the last report (for the P1 period) indicated that more of the work has been done than is obtained on the basis of current, more accurate forecasts.
  • If bcWP2<BCWP in the previous period (P1), it means that the estimates were unnecessarily pessimistic. Therefore, in the past period (P1), it was believed that less work was done than is obtained on the basis of current, more accurate forecasts.
  • Particular attention should be paid to situations where BCWP2 for the current period (P2) is smaller than BCWP2 for the previous period (P1). This means that as a result of recent activities, the proportion of work done (estimated on the basis of projections) has decreased. This situation can be caused by serious changes in the project, and if this is not the case, then it is necessary to radically revise the forecasting system, since there is an error not only in the value of the indicators, but also in the direction of their change.

Where to start?

It doesn't take much effort to get started with the earned value method in practice. To implement it, it is enough to be able to use the means of MS Excel. Here's how to proceed:

1. Create the following tables, placing them for convenience in one workbook:

"budget" – the distribution of project costs by period (BCWS indicator);
"actual costs" – the actual distribution of costs by periods (ACWP indicator);
"estimate" – an estimate of the costs of the project as a whole, given in each period (for the calculation of BCWP1, the last value is used, for the calculation of BCWP2 – the value of the period for which the calculation is carried out);
"indices" – calculation of BCWP1, BCWP2, CV, SV indices from the first three tables.

2. Enter data on any of the projects into the tables and use Excel tools to build graphs.

3. Analyze the graphs according to the above algorithm.

4. If necessary, change the data, forecasts and repeat the analysis.

An example of graph analysis using the method described in the article.
Control of the project budget according to the schedules of the earned value

Rice. 7. Dynamics of indicators of the earned amount method

Consider Fig.7, reflecting the situation in some project for mid-March.

If you have some experience in graphical analysis by the method of mastered volume, the following conclusions can be drawn.

As of mid-March, work was completed in the amount of about 20 USD less than planned, but about 140 USD more was spent on their implementation (there is a delay in the schedule and overspending).

At the moment, the work is about one week behind schedule. Just justified by the amount of work performed funds spent about 1.5 weeks ago.

The pace of work is greater than planned, the backlog is decreasing. If the current trends continue, for about one week, the work will already go on schedule and even ahead of schedule.

The rate of expenditure is higher than the pace of work, overspending increases. If the current trends continue, the project will be completed with a greater cost overrun than it is now.

1 comment:

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