Earned Value Reporting – Other Ways of Calculating EAC

In this article on Earned Value Reporting we’ll at other ways of calculating Estimate at Completion. Again, the Estimate at Completion tells us the forecast value of the project when the project has been completed.

The book “The Project Management Question and Answer Book” by Michael Newell and Marina Grashina is the source for much of this discussion.

Other ways of calculating EAC

Taking the actual cost of work performed and adding it to the remaining work to be done can describe a somewhat more optimistic view of the EAC. This says that the project’s estimate at completion will be the sum of the remaining work to be done at the originally estimated budgets for that work plus the actual accumulated cost of the work already completed. The actual cost of the work already completed is nothing more than the ACWP, and the cost of the remaining work to be done, based on original estimates, is just the difference between the budget at completion and the work that is already completed.

EAC = ACWP + (BAC – BCWP)

Of course, the most optimistic calculation of the EAC is the one that is usually imposed on project managers. It says that in spite of the problems that have occurred on this project to date, the project is not only going to complete all the remaining tasks according to the original plans and estimates but is going to recover the budget overruns already spent. The calculation of EAC is quite simple.

EAC = BAC

While it may seem pessimistic to calculate the EAC by dividing the BAC by the CPI, it turns out that there have been a number of studies that have been done in this area.

Quentin Fleming states: “The cumulative CPI is a particularly reliable index to watch because it has been proven to be an accurate and reliable forecasting device. The cumulative CPI has been shown to be stable from as early as 15 to 20 percent in the project’s percentage complete point”.

From David Christensen: “Researchers found that the cumulative CPI does not change by more than ten percent once a contract is twenty percent complete; in most cases, the cumulative CPI only worsens as a contract proceeds to completion”.

What this is telling us is that the project managers who report that although bad things have happened early in the project, they expect to recover and finish the project within the originally planned budget are not very realistic. Unless they have good reason to defend this position, it should be accepted very reluctantly. The more probable outcome of the project is that the CPI will remain the same or get worse as the project progresses.

It is even rational to think this way. If a project cannot follow the project plan early in the project when the tasks planned were relatively close to the time the planning was done, then how likely is it that the tasks that were planned further in the future will have been estimated more accurately?

Earned Value Reporting – Estimate at Completion

In this article on Earned Value Reporting we’ll closely look at the concept of Estimate at Completion. What the Estimate at Completion tries to tell us is the forecast value of the project when the project has been completed.

Much of the following was derived from the book “The Project Management Question and Answer Book” by Michael Newell and Marina Grashina.

What is the estimate at completion?

The estimate at completion, frequently shown as the EAC, is the forecast value of the project when the project is complete. It should be noted that the EAC can be calculated in a number of different ways and is only an indicator of what the project’s cost will be at the end of the project.

The estimate at completion is a value that can get project managers in trouble. In its most commonly used form it is the budget at completion divided by the cost performance index.

EAC = BAC / CPI or EAC = (BAC x ACWP) / BCWP

This is a rather pessimistic estimate of the amount of money that will be spent at project completion. It says that the things that have gone wrong in the project until now will continue to go wrong, and we will not learn how to improve them between now and the end of the project. There are many reasons why this is true. There could be bias in our estimates. If the early items in the project were underestimated, it is likely that the later items in the project will be underestimated as well. If there is a chronic problem that has been evident in the early part of the project and the same people and equipment will be used on the later project activities, then the EAC will probably be accurate by this method. On the other hand, if different estimators and team members or different pieces of equipment are being used later in the project, the EAC may not indicate the project’s true estimated cost at the end.

Unfortunately, as we will see, much of the research that has been done in this area indicates that projects that are over budget when they are 25 percent complete are very likely to finish over budget. Not only that, but these projects are likely to finish with a worse cost performance index than they had when they were 25 percent complete.

Earned Value Reporting – Schedule Variance

We’ll continue our discussion of Earned Value Reporting by reviewing Schedule Variance in this segment. Schedule Variance refers to the amount of dollars planned to be spent on a project (or portion thereof) as compared to the corresponding work that was accomplished.

Much of the following information came from Newell and Grashina’s book entitled “The Project Management Question and Answer Book.”

What is schedule variance?

Schedule variance is the comparison of the amount of money that was planned to be spent on a project or part of a project to the amount of work that was actually accomplished.

In the earned value reporting system for projects, we are concerned with knowing how our project is doing with respect to the actual work that was done, the BCWP, and the amount of work that was expected to be completed, the BCWS. The measure for this comparison is the schedule variance.

It may seem a bit odd that we would be measuring schedule variance in terms of dollars since most of us are used to hearing that the project is ahead or behind schedule by so many days or weeks or months. Measuring schedule variance in dollars is actually a more indicative way of showing this. If, as is often the case, we say that we are ahead of or behind schedule by three weeks, it might not be serious if there is only one person working part-time on one task over the three weeks. On the other hand, it might be quite serious if there are one hundred people working on twenty tasks and they are all behind three weeks.

If a person’s time is worth $1,000 per week, the earned value report’s schedule variance for the first condition might say that the schedule variance is $1,500. The second condition would have a schedule variance of $300,000. This is quite a noticeable difference in two situations where the project is three weeks behind schedule. So, it really makes a lot of sense to consider project schedules as being ahead or behind in terms of dollars rather than weeks or months.

To compute the schedule variance, we compare the work that was actually completed to the work that was planned to be accomplished. This means that we will be comparing the budgeted cost of work performed, the BCWP or the EV to the budgeted cost of work scheduled, the BCWS or the PV.

SV = BCWP – BCWS

SV = EV – PV

As with the cost variance, people often have trouble remembering this calculation. They get them mixed up and end up having a positive variance when they are really having a negative variance. It is good to remember that bad variances are always negative and good variances are always positive. If we consider that completed project tasks are greater than what was planned, we could say that this is a good variance and it should have a positive value. If on the other hand we have accomplished fewer tasks than the plan allowed for, we could say that this is a bad condition and our variance will be a negative number.

The schedule variance is an important figure for the project manager and the other managers of the company because it is an indicator of how well the project is doing in terms of following the project schedule. It can be used to predict or forecast how much time it will take to finish the project.

Example:

Suppose a project is in progress and that as of today the ACWP is $190,000, the BCWP is $210,000, and the BCWS is $200,000.

Schedule variance is the difference between the work that was really accomplished, the BCWP, and the planned work that was supposed to be accomplished, the BCWS.

SV = BCWP – BCWS

SV = $210,000 – $200,000 = $10,000

Earned Value Reporting – Cost Variance

We’ll continue our discussion of Earned Value Reporting in this article by spotlighting Cost Variance – which identifies the actual amount of dollars spent on a project (or portion thereof) as compared to the corresponding work that was accomplished expending those dollars.

Much of the following information came from Newell and Grashina’s book entitled “The Project Management Question and Answer Book.”

What is cost variance?

Cost variance (CV) is the amount of money that was actually spent on a project or a part of a project compared to the amount of work that was actually accomplished. Cost variance is the budgeted cost of work performed minus the actual cost of work performed.

CV = BCWP – ACWP and CV = EV – AC

In the earned value reporting system for projects, we are concerned with knowing how our project is doing with respect to the amount of money being spent and the accomplishments being achieved. The measure for this comparison is the cost variance.

To compute the cost variance, we compare the work that was actually completed to the actual amount spent to accomplish it. This means that we will be comparing the budgeted cost of work performed, the BCWP, with the actual cost of work performed, the ACWP (see Figure 3 below).

FIGURE 3

People always have trouble remembering these things. They get them mixed up and end up having a positive variance when they are really having a negative variance. It is good to remember that bad variances are always negative and good variances are always positive. If we consider that completed project tasks have an actual cost that is less than what was planned for, we could say that this is a good variance and it should have a positive value. If, on the other hand, we have spent more to accomplish our tasks than the plan allowed for, we could say that this is a bad condition and our variance will be a negative number. Of course “good” and “bad” must be qualified. Just because we have a positive cost variance does not always mean something good. If our cost variance is positive and we have left out some of the required work it would not be such a good thing. A good rule of thumb is that any variances, whether positive or negative, should be investigated.

The cost variance is an important figure to the project manager and the other managers of the company because it is an indicator of how well the project is doing in terms of spending its budget. It can be used to predict or forecast how much money it will cost to finish the project.

Example:

Suppose a project is in progress and that as of today the ACWP is $190,000, the BCWP is $210,000 and the BCWS is $200,000. What is the cost variance?

Cost variance is the difference between the work that was really accomplished, the BCWP, and the cost of doing the work, the ACWP.

CV = BCWP – ACWP

CV = $210,000 – $190,000 = $20,000

Construction Software State of the Industry from Software Advice

My friends at Software Advice have sent over another interesting original article that they have put together pertaining to software in the construction industry. This one comes from Houston Neal and it kicks off a series of reports the group is doing on trends within the construction software industry. Please visit their site at www.softwareadvice.com for the original report.

Construction Software State of the Industry Report

This is the first in a series of “state of the industry” reports in which we will share our observations on construction software industry trends. While reporting the recessive state of the industry is not breaking news, there are some interesting trends that we can share. Not everything is gloomy, and significant technological shifts are underway.

Our observations are based on roughly 6,000 conversations with construction software buyers over the past year. In these calls, our team listened to buyers’ “pain points” – the business problems they were looking to solve with new software. From there, we recommended what we felt were the best solutions. We later surveyed each buyer to find out if they ended up buying software, what they bought and how it all went.

Estimating and takeoff solutions are in demand

We’ve seen a very healthy level of interest in construction estimating software across all divisions. Over and over we hear contractors saying something to the effect of, “Bidding has gotten very competitive, which means I’ve got to be as accurate as possible.” As a result, we’ve seen a lot of estimators replacing their spreadsheets and manual processes with database-driven estimating systems.

We’ve also seen plenty of interest in on-screen takeoff software. We’ve seen three primary reasons for this:

• Increasing the speed and accuracy of takeoff measurements (see previous paragraph);
• Avoiding the printing costs of paper plans; and,
• Responding to increasing electronic plan delivery and use of online plan rooms.

While demand for onscreen takeoff appears fairly strong and growing, we have seen a considerable amount of downward pricing pressure in that market.

Software as a Service is in the right place at the right time

Software as a Service (SaaS) is gaining momentum in many software markets. In fact, we would agree with other IT prognosticators that SaaS is a major structural shift in software deployment and is here to stay. We’ve seen this model succeed in the project management segment where there is a clear need for the collaborative benefits of web-based software. Moreover, the current recession is making the SaaS model more attractive to contractors because:

• Subscription pricing can easily be added to a project’s general conditions;
• Low up-front costs allow project managers to avoid an onerous approval process; and,
• Faster and less expensive implementation makes the new systems more digestible.

We have not seen much demand for SaaS accounting, estimating or service management, although we do get asked about it now and then. We also have not seen many vendors emerge to deliver that sort of solution. We would not be surprised to see SaaS accounting and/or estimating solutions emerge over the next few years.

LEED credit tracking creates new demand

Another trend driving the adoption of SaaS project management systems is the increasing demand for LEED credit tracking. LEED certification has grown in popularity; so too has the need to track the detailed documentation requirements related to earning LEED credits. At their core, projects seeking LEED certification need document control and efficient communication. This is the core of what project management systems deliver. Going one step further, we are seeing a number of project management vendors building in specific LEED credit tracking modules within their system. Houston Neal wrote a great post on how to Track LEED v3 Credits in Project Management Software back in July.

Stimulus funds are trickling down, slowly

Government and other civil construction has remained healthier than commercial and residential construction. However, we have not seen the American Recovery and Reinvestment Act of 2009 (ARRA) have a big impact on software spending. We believe that the temporary nature of stimulus spending is not enduring enough to drive capital investment in software systems. Our hope is that ARRA will help accelerate the economy to a point where traditional IT investment levels resume. However, Chris Thorman recently wrote a quick analysis of the ARRA that showed that stimulus spending has had a nominal effect on putting roughly 1.6 million unemployed construction workers back on the job.

There has been speculation that Stimulus-funded construction projects would drive sales of project management software. The thinking behind the forecast was that ARRA projects would require a higher level of accountability. Project management software – known for strong document tracking capabilities – would provide the audit trail needed for this transparency. However, we have not seen this translate into a meaningful increase in sales.

Fewer accounting & job costing replacements

We’ve seen fewer firms replacing their core accounting and job costing systems over the last year. In prior years, we had seen replacement activity when company growth pushed existing systems to their limits. In the absence of growth, more firms seem to be staying put with their existing systems. Firms that are buying new accounting systems tend to identify one or more of the following three pain points:

• Inability to achieve detailed job cost reporting from “generic” accounting systems;
• Lack of integration to project management or service management systems; and,
• The need to accomplish same amount of work with fewer employees.

Outlook for 2010

As the construction industry begins to rub its sleepy eyes, we agree with most experts who say that 2010 will be a transitional yet slow year for the industry as a whole. Company budgets likely won’t fully recover in 2010, limiting the purchase of construction software. However, so far we’ve noticed more activity this quarter than any other this year. Hopefully this level of interest will carry over to 2010.

This article originally published at: Construction Software State of the Industry Report.