Friday, February 24, 2006

Project Management Formula Review

  • Budgeted Cost of Work Scheduled = BCWS = Planned Value = PV
  • Budgeted Cost of Work Performed = BCWP = Earned Value = EV
  • Actual Cost of Work Performed = ACWP = Actual Cost = AC
  • Budget at Completion = BAC
  • Estimate at Completion = EAC
  • Estimate to Complete = ETC
  • Variance at Completion = VAC
  • Variance = Plan - Actual
  • Cost Variance CV = BCWP - ACWP = EV - AC
  • Schedule Variance SV = BCWP - BCWS = EV - PV
  • Cost Performance Index CPI = BCWP / ACWP = EV / AC
  • Schedule Performance Index SPI = BCWP / BCWS = EV / PV
  • Estimate at Completion EAC = BAC / CPI
  • Estimate to Completion ETC = EAC - ACWP
  • Variance at Completion VAC = BAC - EAC

16 Comments:

Anonymous Anonymous said...

Good work. Your blog came up when I googled for Project Management Formulae review. Simple and easy to understand.

11:00 AM  
Blogger Alexandru` said...

Mpfff... i have a problem solving a project. I make a huge cunfusion between ACWP and BCWP... Some help?

7:27 AM  
Blogger michael said...

Sure, these terms can be hard to understand at first.

1. BCWS = Planned Value (also called PV). It means: What is this thing worth to us? It is often used as a synonym for "planned cost".

2. BCWP = Earned Value ( also called EV). It means: What have we received for our money?

3. ACWP = Actual Cost (also called AC). It means: How much did we spend to get what we received? So ACWP means amount spent, not value received, which is BCWP. GThe difference between BCWP and ACWP gives you your cost variance.

I'll write a post with an example to help clarify.

Hope this helps,

Mike

8:18 PM  
Anonymous Anonymous said...

Well done and to the point. Keep up the good work.

Chuck

12:06 PM  
Blogger Alexandru` said...

I've passed the test ( finally :) ), but it would be good for me to remember ( to keep awake ) my PM knowledge. Can you give me a tip, a link, or somethingg. I know I dont't have the time, but I understand the value of PM. So, if you can help a little, it would be great.

10x

2:30 PM  
Blogger michael said...

Hello Alexandru`,

Congratulations for passing the test!

There are very many sites with information about Project Management. I cannot give you a tip or link without knowing more about your specific interest. Project Management is a very big topic!

8:14 PM  
Anonymous Anonymous said...

The one problem I have with the EV calculation is that it is applied to the Budget, and not the Fee for a piece of work.

Say I have to do a piece of work for a fee of $100,000, and I budget it at $80,000 (to leave a contingency). When I have completed 50% progress, my EV should be $50k and not $40k, as I would want to invoice half the FEE and not half my budget, as the latter would just penalise me for my efficient performance...

Could you please comment?

Thanks
Sunil

8:29 PM  
Blogger michael said...

Sunil,

The value of the work performed is not the invoice value.

It is a measure of technical performance in units of money.

EV identifies what has been delivered ("earned") for the money you planned to spend.

Not how much revenue you can collect.

9:42 PM  
Anonymous Anonymous said...

ok...point noted - thanks. So one other question in relation to this: When your assessment of the work required to do a task changes (as it inevitably does through the lifecycle of a project), if you continue to measure EV against the original BCWS, then the EV could end up being quite distorted. Would it be appropriate then, to constantly update the BCWS as the project goes along?
Thanks again
Sunil

10:36 PM  
Blogger michael said...

Sunil, you are essentially asking whether you should re-baseline your plan. The answer in general, is no, unless your performance is so far off the plan as to make it impossible to manage.

"[I]f you continue to measure EV against the original BCWS, then the EV could end up being quite distorted"

This is precisely the point of EV. If you are consistently unable to perform to your plan, then something is wrong with your planning or execution. Don't change how you measure performance simply to make the numbers look good.

7:35 AM  
Anonymous Anonymous said...

Thanks Michael - I appreciate your feedback.

Regarding my previous point re the fee, what is your experience on how the fee should be collected? I want to be able to say to my Clients that our invoices are based on the Value we have earned. Currently we multiply the overall project progress (which is calculated using Actual manhours / Total Estimated manhours) and the fee to establish the "Earned Value", which is clearly not the correct textbook way of calculating EV.

If we calculate the EV using the proper definition, and then invoice the EV, we will be under invoicing, as our BCWS is always less than the fee (to build in a contingency)...

Any thoughts?

Thanks again
Sunil

3:57 AM  
Blogger michael said...

Sunil, a number of things here.

Starting with measuring project progress: By dividing actual hours by planned hours, you are measuring effort, not results. Just because someone worked 100% of the planned hours doesn't mean the project got done. You know where you are on the project by looking at the results, not the effort. Eventually, you are going to run into a client who understands this and will want to see physical evidence of progress.

Here's what to do: Agree with the client that when you deliver certain functionality, the project will be some percentage done. For a simple example, if your project is to deliver 4 new features, you can agree that when 2 are complete, you are 50% done. Then you can invoice for 50% of the fee. You can break it down however you want: 0/100%, 0/50/100% or 0/25/50/75/100%. Just agree up front with the client what the evidence of progress is and what percent complete it represents. Then multiply that perentage by the total fee to get your invoice amount.

Now back to the question of "value": Again, the value we are talking about is not the invoice value. It is the measure of your project's performance in units of money. The purpose is to let you know how your project is doing compared to the time and money you planned to spend. Not to calculate your invoice amount.

Finally, your statement: "our BCWS is always less than the fee (to build in a contingency)...". This is not a contingency. The difference between BCWS (plus any other costs) an the fee is your profit on the account. Ideally, you should be working to maximize this number, not thinking of it as something you can give up if the project runs late or goes over budget.

8:01 AM  
Anonymous Anonymous said...

Michael

Thanks for your detailed response - I hope I am not monopolizing this forum!

We DO actually enter progress based on a milestone type basis for each task. It is just when aggregating this progress over the whole project that we need some way of weighting the tasks, and that’s where the manhour allocations are used.

The point regarding contingency: The figure we use for BCWS is actually worked out based on charge rates of resources ie. Our base profit is in there already. Hence if we budget at 80% of the fee, the 20% is a super-profit – or contingency. Is it actually standard procedure to use the actual BASE costs (ie. No profit included) when calculating BCWS, EV, etc?

Thanks again

Sunil

8:13 PM  
Blogger michael said...

Hello Sunil,

Task weighting as you describe is not a standard practice and there is little reason to do it. Just agree on the percents complete measurement as already discussed.

You might be able to get away with including a profit margin in your resource rate, as long as your ACWS also reflects the same profit margin. But this adds complexity to the process, and you will be unable to determine your actual project costs. Typically, only direct and indirect labor costs are reflected in your resource rate. Not a markup for profit.

Hope this helps,

Mike

7:23 AM  
Anonymous Anonymous said...

Yes it helps.
Thanks very much for your input.

8:05 PM  
Anonymous Nathaniel @ project management test said...

Great post! This Project Management Formulae is simple and understandable.

These are really helpful and useful. Thanks a lot for this post!

7:03 AM  

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