In this post, we continue our discussion of the tools and techniques of this process 7.4 Control Costs. In the last post, we covered the “generic” tools and techniques that would apply to any control process for any knowledge area, namely, Expert Judgment and the Project Management Information System (such as Microsoft Project).
Here are the tools and techniques that are specific to this process, although they are also used in the control process for another major constraint on the project, that of controlling the schedule. (The numbering is not consecutive because I am skipping the “generic” tools and technique that were covered in the last post.)
7.4.2 Control Costs: Tools and Techniques
7.4.2.2 Data Analysis
This covers a broad array of techniques that are used to analyze the extent to which the actual results (which you get from the input “Work Performance Data”) vary from what is in the plan (in particular, the cost baseline component of the Project Management Plan).
- Earned value analysis–there are three basic constraints on a project: scope (the work packages in the WBS), time (the project schedule) and cost (the project budget). There are three key quantities that are used in earned value management (sometimes referred to as EVM): PV (planned value), EV (earned value), and AC (actual cost). Let’s discuss each one in turn:
- Planned value or PV is a measure of the scheduled or planned work. Specifically, it is the authorized budget for the work to be accomplished for an activity.
- Earned value (EV) is a measure of the scope actually accomplished. Specifically , it is the budget for the work that has actually been completed.
- Actual cost (AC) is a measure of the costs actually incurred. Specifically, it is the realized cost for the work performed on an activity.
- Variance analysis–with the building blocks of PV, EV and AC, you can compute the variance between the actual results (as expressed in EV and AC) and what is in the plan (as expressed in PV). There are four types of variance analysis that can be done by taking various combinations of these building blocks:
- Schedule variance (SV) = EV – PV (a positive number is good, a negative number is bad, meaning the project is behind schedule)
- Schedule performance index (SPI) = EV/PV (a number greater than one is good, a number less than one is bad, meaning the project is behind schedule)
- Cost variance (CV) = EV – AC (a positive number is good, a negative number is bad, meaning a cost overrun)
- Cost performance index (CPI) = EV/AC (a number greater than one is good, a number less than one is bad, meaning a cost overrun)
- Trend analysis–the variance analysis quantities listed above are a “snapshot” of the current performance on the project, but you can compare these same quantities over time to get an idea of the trend of the project performance. If you see a cost performance index or CPI that is less than 1.0 now, you can take a corrective action that will bring the CPI above zero. However, if you see that the CPI for the past few months is positive, but will be less than zero in two months if the current trend continues, you can take a preventive action to make sure the CPI doesn’t go below zero in the future.
- Forecasting–the amount of the total budget for the project is sometimes referred to as the budget at completion or BAC, because it is what is projected to be spent on the project if it completed based on the current budget. But let’s say you are halfway done with the project, and it turns out you have spent all of the money that was budgeted for the project. In this case, your CPI or cost performance index is 0.5, meaning that for every dollar you budgeted, you only got half of the amount of work done. How much will you have to pay for the entire project? Well, if you make the assumption that your CPI for the rest of the project is the same and you are only working at a 50% rate of efficiency, you will have to pay twice as much as you budgeted for originally. This assumes that you will pay from now to completion the same amount that you have already paid to get to this half-way point. This estimated amount that you will have to pay from now to completion is called the estimate to completion or ETC. The total new estimated cost of doing the entire project is called the estimate at completion or EAC. There are several ways to compute the EAC depending on the situation:
- EAC = AC + (bottom-up) ETC This requires looking at the WBS and taking the actual costs already incurred (AC) and adding it to an estimate of the remaining work to be done (ETC).
- EAC = AC + (BAC – EV). For the work remaining, if the assumption is that the work will be done according to the project budget (CPI = 1.0), then you can take the actual costs (AC) and add it to the value of the work that remains (BAC – EV). This is used if the variance encountered is a one-time deal based on a factor which can be easily corrected with a corrective action.
- EAC = BAC/CPI. For the work remaining, if the assumption is that the work will be done based on the current CPI, then you can take the BAC and divide it by the CPI as in the example I just gave. If your CPI is 0.5, that means you are working at 50% efficiency from a cost standpoint; so it will take twice as much money to do the project than what you budgeted. So EAC = BAC/CPI = BAC/0.5 = 2 x BAC.
- EAC = AC + [(BAC – EV)/ (CPI x SPI)]. For the work remaining, if the assumption is that the work will be done on the current CPI AND the current SPI (schedule performance index), then you take the actual costs already incurred (AC) and add it to the remaining costs (BAC – EV) and adjust it by dividing by both the factors CPI and SPI.
- Reserve analysis–this comes about from the risk management knowledge area. If there are identified risks associated with an activity, the money for possible risk responses is included in the contingency reserves for that activity. The budgeted amount for that activity will include the actual costs for the activity plus the contingency reserves for any possible risk responses. Let’s say the activity is done, and the identified risks do not occur. Those unused contingency reserves may be removed from the project budget so that those financial resources can be used on other projects. Of course, if during the course of doing the project, risks are identified which were not identified at the start and included on the risk register, there may be a need for a request for additional reserves to be added to the project budget.
7.4.2.3 To-Complete Performance Index (TCPI)
This is actual a forecasting tool, because what it does is compute what your CPI has to be from here on out in order to complete the project within the allotted budget. It is calculated by taking the remaining work (BAC – EV) and dividing by the remaining costs in the budget (BAC – AC).
If the allotted budget is not going to be sufficient, then an alternative version of the TCPI does the following. It is calculated first by getting the new estimate for how much it will take to complete the project (EAC), and then taking the remaining work (BAC – EV) and dividing it by the costs in the remainder of the revised budget estimate (EAC – AC). If you have been running the project up to this point with a CPI that is less than 1.0, you will have to have a CPI that is greater than 1.0 (with greater cost efficiency) in order to complete the project. Likewise, if you have been running the project up to this point with a CPI that is greater than 1.0, than you complete the project even if your CPI is less than 1.0 from here on out. The TCPI, of course, will tell you exactly what that CPI amount has to be in order to “break even” at the end of the project.
With all of these tools related to earned value analysis (sometimes called earned value management or EVM), you may want to search my website with the term examples from previous versions of the PMBOK Guide, because although some of the content in the Guide has changed, the basic theory behind EVM is the same.
The next post will be on outputs for this process.
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