The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period. Suppose a project included a summary activity of purchasing and installing a new Web server. Suppose further that according to the plan, it would take one week and cost a total of $10,000 for the labour hours, hardware, and software involved. The planned value (PV) for that activity that week is, therefore, $10,000. The actual cost (AC), formerly called the actual cost of work performed (ACWP), is the total direct and indirect costs incurred in accomplishing work on an activity during a given period. For example, suppose it actually took two weeks and cost $20,000 to purchase and install the new Web server. Assume that $15,000 of these actual costs was incurred during week 1 and $5,000 was incurred during week 2. These amounts are the actual cost (AC) for the activity each week. TERM FORMULA Earned Value EV = PV to date * percent complete Cost Variance CV = EV - AC Schedule Variance SV = EV - PV Cost Performance index CPI = EV/AC Schedule Performance index SPI = EV/PV Cost variance (CV) is the earned value minus the actual cost. In other words, cost variance shows the difference between the estimated cost of an activity and the actual cost of that activity. If cost variance is a negative number, it means that performing the work cost more than planned. If cost variance is a positive number, it means that performing the work cost less than planned. Schedule variance (SV) is the earned value minus the planned value. Schedule variance shows the difference between the scheduled completion of an activity and the actual completion of that activity. A negative schedule variance means that it took longer than planned to perform the work, and a positive schedule variance means that it took less time than planned to perform the work (Gordon & He, 2009). The cost performance index (CPI) is the ratio of earned value to actual cost and can be used to estimate the projected cost of completing the project. If the cost performance index is equal to one or 100 percent, then the planned and actual costs are equal, or the costs are exactly as budgeted. If the cost performance index is less than one or less than 100 percent, the project is over budget. If the cost performance index is greater than one or more than 100 percent, the project is under budget. The schedule performance index (SPI) is the ratio of earned value to planned value and can be used to estimate the projected time to complete the project. Similar to the cost performance index, a schedule performance index of one or 100 percent means the project is on schedule. If the schedule performance index is greater than one or 100 percent, then the project is ahead of schedule. If less than 1 or 100%, the project is behind schedule. There are some general rules of thumb for deciding if cost variance, schedule variance, cost performance index, and schedule performance index numbers are good or bad. Negative variance numbers are bad (e.g. a cost variance of -$1000 means it cost more than planned.) A performance index below 100 percent is bad. (e.g. a schedule performance index of 80 percent means the project or activity is behind schedule. Viewing earned value information in chart form helps you to visualize how the project is performing. Senior managers overseeing multiple projects often like to see performance information in a graphical form. Earned value charts allow you to quickly see how projects are performing. If there are serious cost and schedule performance problems, senior management may decide to terminate projects or take other corrective action. The estimates at completion are important inputs to budget decisions, especially if total funds are limited. Earned value management is an important technique because, when used effectively, it helps senior management and project managers evaluate progress and make sound management decisions. However, earned value management is not used on many projects outside of government agencies and their contractors. Two reasons earned value management is not used more widely are its focus on tracking actual performance versus planned performance and the importance of percentage completion data in making calculations. Many projects, particularly information technology projects, do not have good planning information, so tracking performance against a plan might produce misleading information. Several estimates are usually made on information technology projects, and keeping track of the most recent estimate and the actual costs associated with it could be cumbersome. In addition, estimating percentage completion of tasks might produce misleading information (Rothwell, 2005). What does it really mean to say that a task is 75 percent complete after three months? Such a statement is often not synonymous with saying the task will be finished in one more month or after spending an additional 25 percent of the planned budget. To make earned value management simpler to use, organizations can modify the level of detail and still reap the benefits of the technique. For example, you can use percentage completion data such as 0 percent for items not yet started, 50 percent for items in progress, and 100 percent for completed tasks. As long as the project is defined in enough detail, this simplified percentage completion data should provide enough summary information to allow managers to see how well a project is doing overall. You can get very accurate total project performance information using these simple percentage complete amounts (Weckman, et. al. 2010). Earned value management/analysis is the primary method available for integrating performance, cost and schedule data. It can be a powerful tool for project managers to use in evaluating project performance. Example Given the following information for a one-year project, PV = $23,000 EV = $20,000 AC = $25,000 BAC = $120,000 the cost variance, schedule variance, cost performance index (CPI), and schedule performance index (SPI) for the project follows Cost variance = EV-AC=$20,000 - $25,000 = -$5,000 Schedule variance = EV-PV=$20,000-$23,000=-$3,000 CPI=EV/AC=$20,000/$25,000 =80% or .8 SPI=EV/PV=$20,000/$23,000=87% or .87 How is the project doing? Is it ahead of schedule or behind schedule? Is it under budget or over budget? ANSWER: The project is over budget and behind schedule. Use the CPI to calculate the estimate at completion (EAC) for this project. Is the project performing better or worse than planned? ANSWER: EAC=BAC/CPI=$120,000/.8=$150,000 The project is performing worse than planned since the new estimate to complete it is $30,000 more than planned. Use the schedule performance index (SPI) to estimate how long it will take to finish this project? ANSWER: Estimated time to complete=12montsh/.87=13.8 months. The project is projected to take 1.8 months longer than planned. Using Software to Assist in Cost Management e.g. Project 2000 and Excel can help in preparing cost estimates, budgets, and earned value charts. Q Suppose you were asked to prepare a cost estimate for a project to purchase laptops for all Informatics staff at your college or university. How would you start? How long would it take you to prepare a good estimate? A You should first ask what type of estimate is required - rough order of magnitude, budgetary, or definitive. How you start and how long it would take depends on the answer. A rough order of magnitude estimate for providing new laptops for 100 people might be $250,000. A budgetary estimate would break down the estimate to include hardware, software, detailed assumptions (for example, if the estimate is just for the purchase cost or is for a 2 to 4 year project life), and so on. A definitive estimate would be much more detailed and accurate than a rough estimate or budgetary estimate and would include vendor quotes. the following techniques for creating a cost estimate: analogous, parametric, bottom-up, and computerized tools. Using the example of providing new laptops for 100 people, one possible response is as follows: Analogous estimate: You could research similar organizations that recently purchased about the same number and type of laptops. Parametric estimate: You could decide on key factors, such as the basic category of laptop required and other requirements, and estimate costs using those parameters. For example, you might estimate that the laptops would cost about $2,000 each and that another $500 per unit would be required for support costs. Bottom-up estimate: You could determine detailed hardware and software requirements, training, and support costs to create an estimate. Computerized tools: You could use a spreadsheet to help prepare a cost estimate. References Gordon, S., & He, W. (2009). Using a web-based system to estimate the cost of online course production. Online Journal of Distance Learning Administration,12(3). Rothwell, G. (2005). Cost contingency as the standard deviation of the cost estimate. Cost engineering, 47(7), 22-25. Weckman, G. R., Paschold, H. W., DOWLER, J. D., WHITING, H. S., & YOUNG, W. A. (2010). Using neural networks with limited data to estimate manufacturing cost