Project Management &

Economics
Dr Wesam Salah Alaloul
Civil & Environmental Engineering Department
Cost Management
MANPOWER

MATERIALS METHODS

PROJECT

MONEY MACHINES

FIVE RESOURCES FOR PROJECT (5M)

Cost Management
Type of Costs
Cost Management
Budgeting Techniques
Cost Management
Cost Management
Cost Management Processes
Cost Management
Cost, Budgets and Monitoring…
Project cost Performance
▪ Project
✓ planned duration: 12 months
✓ total budget: $100K
.
▪ Status
✓ time elapsed: 6 months
✓ spend so far: $64K
.
▪ How far along are you?
✓ 50%? (time)
✓ 64%? (cost)
Project cost Performance
▪ Project
✓ planned duration: 12 months
✓ total budget: $100K
✓ produce 20 units
A bit more
▪ Status
✓ time elapsed: 6 months
light…
✓ spend so far: $64K
✓ units produced: 8 complete, 2 partial

▪ How far along are you?

✓ 50%? 64%? >40%?
Project Performance
Earned Value Tracking

Earned Value (EV) based performance measurement

systems “Link Expenditures to accomplishments”
Project Performance
This review of Earned Value Concept will:

▪ Describe the project and its progress.

▪ Define Earned Value and related terms.
▪ Show how Earned Value defines project
performance.
Project Performance
Earned Value System

• Can:
– Provide early (Difficult to ignore) performance problem identification
– Improve financial Reporting

• Does not:
– Recognize Critical Paths

• Will not:
– Take management action
Project Performance
Measurement Terminology
• Planned Value (PV)
– The scheduled cost based on the allocation cost items such resources and material during the
timeline of an activity
– Also called Budgeted Cost for Work Scheduled (BCWS)

• Earned Value (EV)

– The value of the work performed to-date using any reasonably accurate, mutually acceptable
methodology for determining value
– Also called Budgeted Cost for Work Performed (BCWP)

• Actual Valve (AV)

– Total incurred costs charged to a work package by the company’s accounting system, which can
include labor costs, direct costs (material, travel, and etc.), and indirect costs (overhead)
– Also called Actual Cost for Work Performed (ACWP)

• Budget at Completion (BAC)

– The sum of the total budget for a work package at the project completion, major task, or project.
Project Performance
• Cost Variance (CV)
CV = EV – AV = BCWP – ACWP
• Cost Performance Index (CPI)
– The cost efficiency ratio of earned value to actual costs (CPI = EV/AV)
– In PM Plan, the CPI is used to calculate Estimate at Completion (EAC)
(EAC = BAC/CPI)

• Schedule Variance (SV)

SV = EV – PV =BCWP – BCWS

• Schedule Performance Index (SPI)

– The schedule efficiency ratio of earned value accomplished against planned value
(SPI = EV/PV). The SPI describes what portion of the planned schedule was
actually accomplished.
• Variance at Completion (VAC)
– The predicted magnitude of possible underrun or overrun at completion of work
package, major task, or project (VAC = BAC – EAC)
 Overspend
EAT

100% BAC

AC Schedule
PV Variance

EV Cost
Variance

Time Time-now Slippage

Project Performance
Schedule

• This shows a sample project schedule

Project Performance
Planned Budget

• The sample project is loaded with resources

which results in an allocated spend plan.

2,000 11,000 12,000 10,000 5,000

Project Performance
Time-Phased Spend Plan

• This shows
the time-
phased
spend plan
if the
project
proceeds
as planned.
Project Performance
Typical Approach of Tracking of Actual versus Planned

• The chart tells us we have spent less than planned to date, but
• We cannot tell if we are behind schedule, nor if the cost for work
completed matches the actual costs.
Project Performance
Using Earned Value Method

• For Earned Value Method to work well you need to breakdown the
project into measurable activities.
• (Note: in PM Plan, Cost Budgeting is done at the activity level not
work package).
• It is recommended that your work packages (where you
accumulate actual costs) be one or two levels above the activities.
Project Performance
▪ The Cost Performance Index (CPI) is the ratio of budgeted costs to actual costs.

CPI = EV/AC

▪ CPI value above 1 indicates efficiency in utilizing the resources allocate

d to the project is good.

▪ CPI value below 1 indicates efficiency in utilizing the resources allocated

to the project is not good.

▪ So if your CPI is 0.7, this means that for every $1 spent on the project yo
u are getting only $ 0.70 of the value.
Project Performance

▪ A CPI of one means that your project is exactly on

track of value. You spent $1 on the project and got $1
of value in return.

▪ So if your CPI is 1.4, this means that for every $1

spent on the project you are getting $1.40 of value.
Estimate at Completion (EAC)
▪ There are many circumstances out of control that may
deviate the project from its planned path, which might lead
to a change in the project.
▪ We evaluate the impact of these changes using project
forecasting tools, such as the Estimate at Completion.
▪ The Estimate at Completion (EAC) gives the forecasted
value of the project when it is complete. how much you may have
to spend at the project completion.

▪ EAC can be determined by four methods depending on the

way the project is performing:
EAC: Case-I
▪ In this scenario the project will continue to perform to the
end as it was performing up until now.
▪ Simply, future performance will be same as the past
performance; i.e. the CPI will remain the same for the rest
of the project.
Estimate at Completion = (Budget at Completion) / (Cost Performance Index)

EAC = BAC/CPI

➢ If the CPI = 1, then EAC = BAC. This means you can complete your project with
your approved budget (BAC), and there is no need to use forecasting analysis.
EAC: Case-I (Example)
A project to be completed in 12 months, and the total cost of the project is $100,000
USD. Six months have passed and $60,000 USD has been spent, but on closer
review, only 40% of the work is completed so far.
Find the Estimate at Completion (EAC) for this project, assume the same
performance will continue until the project end.

Budget at Completion (BAC) = $100,000

Actual Cost (AC) = $60,000
Planned Value (PV) = 50% of $100,000 = $50,000
Earned Value (EV) = 40% of $100,000 = $40,000
Cost Performance Index (CPI) = EV / AC = $40,000 / $60,000 = 0.67
Estimate at Completion (EAC) = BAC/CPI = $100,000/0.67 = $149,253.73 $
It means if the project continues to progress with CPI = 0.67 until the end, you will spend $149,253.73 USD to complete the
project.
EAC: Case-II
▪ Usually this happens due to some unforeseen conditions, any
incident happens and the cost increased;
▪ However this will not happen again and the project can continue with
the planned cost estimate in the future activates.
▪ The previous performance will not continue in the future.

EAC = AC + (BAC – EV)

EAC: Case-II (Example)
Project with a budget of $500,000 USD. During execution phase, an incident
happens which costs a lot of money. To date $200,000 USD have been spent, and
the value of the completed work is $175,000 USD. Calculate the Estimate at
Completion (EAC).

Actual Cost (AC) = $200,000

Budget at Completion (BAC) = $500,000
Earned Value (EV) = $175,000
EAC = 200,000 + (500,000 – 175,000)= 200,000 + 325,000 = 525,000 USD
EAC: Case-III
▪ The project now is; over budget, behind schedule, and client is
insisting to complete the project on time. In this case, not only the
cost but the schedule also has to be taken into consideration.
▪ In other words, if the cost performance is poor, the project is also
behind schedule and the project must be completed on time.

EAC = AC + (BAC – EV)/(CPI*SPI)

EAC: Case-III (Example)
A fixed deadline project with a budgeted cost of $500,000 USD. So far $200,000 USD
have been spent and the value of the completed work is $175,000 USD. However, as
per the schedule the project should have earned $225,000 USD to date. Calculate the
Estimate at Completion (EAC).

Budget at Completion (BAC) = $500,000

Actual Cost (AC) = $200,000
Earned Value (EV) = $175,000
Planned Value (PV) = $225,000
SPI = EV/PV= 175,000/225,000= 0.78
CPI = EV/AC= 175,000/200,000= 0.88
EAC = AC + (BAC – EV)/(CPI*SPI) = 200,000 + (500,000 – 175,000)/(0.88*0.78)
= 200,000 + 325,000/0.69 = 671,000 USD
EAC: Case-IV
▪ This is the case when you find out that your cost estimate was
inaccurate, and you need to calculate the new cost estimate for the
remaining work for the project.
▪ Here you will go to the activity level, find the cost of each activity and
sum them up to get the total cost of the remaining work.

EAC = AC + Bottom up Estimate to Complete

EAC: Case-III (Example)
A project to build governmental building with a worth of $500,000. To date the
project spent $200,000 and the value of the completed work is $175,000. However,
during the project execution it is noticed that the cost estimation was flawed and the
budget need to be calculated again for the remaining parts.
The new estimate says that it will take $400,000 USD to complete the remaining
part of the project. Calculate the Estimate at Completion (EAC).

Budget at Completion (BAC) = $500,000

Actual Cost (AC) = $200,000 Earned Value (EV) = $175,000
Bottom Up Estimate to Complete = $400,000
EAC = AC + Bottom up Estimate to Complete = 200,000 + 400,000 = $600,000
Estimate to Complete (ETC)
▪ One of the forecasting technique is Estimate to Complete (ETC), which gives an
approximate idea of how much money will be required to complete the remaining
tasks.

▪ ETC can either be determined by building a bottom-up estimate, usually by asking

the work packages owners, team, or vendors for revised estimates or by deducting
the actual costs (AC) from the estimate at completion (EAC).

Estimate To Complete = Estimate At Completion – Actual Cost

Estimate To Complete = EAC – ACWP
Estimate to Complete (ETC)
A project manager for a construction company managing a project to
create a new sports hall. So far, the project has spent $430,000. The
predicted total cost of the project is $650,000. What is the Estimate
To Complete?

The Estimate At Completion is $650,000.

The Actual Cost is $430,000. (the project has spent” is another way of saying Actual Cost)

Estimate To Complete = $650,000 – $430,000 = $220,000

Estimate to Complete (ETC)
Three months into the five month kitchen remodeling project passed. The original
budget was $1,500 and approximately 40% of the work was completed. Currently the
project running over-budget, as indicated by a cost performance index (CPI) of 0.67.
Actual costs to-date is $900. The contractor found some mold in the sheetrock and
needed to be replaced, causing a one-time variance, forecast the EAC and the ETC:

EAC = AC + BAC – EV = $900 + $1,500 - $600 = $1,800 (how much we will spend at the end of the
project)
ETC = EAC – AC = $1,800 - $900 = $900 (how much we will spend from this point forward)

If, however, the performance of the future activities will continue with same pattern of
the current activates.
EAC = BAC ÷ CPI = $1,500 / 0.67 = $2,239
ETC = EAC – AC = $2,239 - $900 = $1,339
Project Performance
Example PM Plan Earned Value Worksheet
• The project manager or task leader enters either a earned percentage or a $ value.

• Actual Cost is also entered. In this worksheet, actual cost can also include open
commitments such as unpaid invoices for material and equipment.

• Based on the data entered, this project is both behind schedule and over budget. Even
though the current CV = $4,000, the VAC indicates a potential overrun of $5,517.
Project Performance
Project has Negative SV and CV
• In the lower half of the graph, the
EV is below both the PV and AC
indicating problems with cost and
schedule.
• The upper half of the graph shows
both CPI and SPI relative to a value
of 1. It is showing that progress is
being made to improve, but
problem remains.

• The black EV bars in the Gantt

schedule shows that ‘Design’ and
‘Prototype’ activities are behind
schedule.
Project Performance
Status when have (- SV) and zero (0) CV
▪ The EV and AC are
equal, thus actual cost
are inline with
accomplishments.
▪ Even though the project is
behind schedule, the
schedule variance trend
shows a strong
improvement in schedule.
Project Performance
Status when have zero (0) SV, (+ CV)

▪ This project is on
schedule and
should be
completed under
budget.
▪ With the project all
of the earned bars
line up with the
green status line.
Project Performance
Why 50% Complete may not be half the schedule bar!

• In the above sample, all three activities have earned values of 50% of BAC, but the black
earned bars are not the same length even though the planned bars are the same.
• Task A is behind schedule, because 75% of the budget was to be spent by end of December.
• Task B is ahead of schedule, because only 25% of the budget was to be spent by end of
December.
Project Performance
Individual months cost:

Cumulative months cost:

Project Performance
Project
Performance
Project Performance
Evaluate how the project is progressing at the end of the month 7, using an Earned Value Analysis in terms
of cost and time.

At the end of MONTH 7, BCWS= $ 56,600, BCWP= $ 61,000, ACWP= $ 50,000

Cost Variance (CV) = BCWP – ACWP

= 61,000 - 50,000 = $ + 11,000
➢ Positive Cost Variance Indicates the project is under budget.

CPI = BCWP / ACWP

=61,000 /50,000 = 1.22
➢ A value of more than one means that money is being spent efficiently on the project. Therefore, as
CPI is 1.22, this means that for every $1 spent on the project you are getting $1.22 of value.

Schedule Variance (SV) = BCWP – BCWS

= 61,000 -56,600 = $ 4,400
➢ Positive Schedule Variance indicates we are ahead of schedule.
Project Performance
Evaluate how the project is progressing at the end of the month 7, using an Earned Value
Analysis in terms of cost and time.

SPI = BCWP / BCWS

= 61,000 /56,600 = 1.077
➢ SPI value above 1 indicates project team is very efficient in utilizing the time allocate
d to the project.

Estimate the at completion cost and to completion cost, knowing that project faced difficult
underground conditions, which was not in the plan.

Estimate at Completion = AC + (BAC – BCWP) Estimate To Complete = EAC – ACWP

= 50,000 + (88,600-61,000) = $ 77,600 = 77,600 - 50,000 = $ 27,600

Project Performance