Key Takeaways
- Earned Value Management (EVM) integrates scope, schedule, and cost data to measure project performance objectively
- CPI (Cost Performance Index) = EV/AC measures cost efficiency; CPI > 1.0 means under budget, CPI < 1.0 means over budget
- SPI (Schedule Performance Index) = EV/PV measures schedule efficiency; SPI > 1.0 means ahead of schedule
- EAC (Estimate at Completion) = BAC/CPI forecasts total project cost if current cost trends continue
- TCPI (To-Complete Performance Index) calculates the efficiency needed for remaining work to meet budget or revised estimate
Cost Management
Cost management involves planning, estimating, budgeting, financing, funding, managing, and controlling costs so the project can be completed within the approved budget. In predictive projects, the cost baseline is established during planning and managed through earned value techniques.
Cost Management Processes
| Process | Purpose | Key Output |
|---|---|---|
| Plan Cost Management | Define policies and procedures | Cost Management Plan |
| Estimate Costs | Develop cost approximations | Activity Cost Estimates |
| Determine Budget | Establish authorized cost baseline | Cost Baseline |
| Control Costs | Monitor status and manage changes | Work Performance Information |
Cost Estimating Techniques
Estimation Methods Comparison
| Technique | Description | Accuracy | When to Use |
|---|---|---|---|
| Analogous (Top-Down) | Use similar past project data | -25% to +75% | Early estimates, limited data |
| Parametric | Use statistical relationships | -10% to +25% | When parameters are known |
| Bottom-Up | Estimate each work package, aggregate | -5% to +10% | Detailed planning phase |
| Three-Point | Use optimistic, most likely, pessimistic | Varies | When uncertainty exists |
Three-Point Estimating Formulas
| Distribution | Formula | Use Case |
|---|---|---|
| Triangular | E = (O + M + P) / 3 | Equal weight to all estimates |
| Beta (PERT) | E = (O + 4M + P) / 6 | More weight to most likely |
| Standard Deviation | SD = (P - O) / 6 | Measure of uncertainty |
| Variance | V = [(P - O) / 6]^2 | For summing uncertainties |
Example: Three-Point Estimate
| Estimate Type | Days |
|---|---|
| Optimistic (O) | 4 |
| Most Likely (M) | 6 |
| Pessimistic (P) | 14 |
Beta (PERT) Estimate = (4 + 4(6) + 14) / 6 = (4 + 24 + 14) / 6 = 42/6 = 7 days
Standard Deviation = (14 - 4) / 6 = 10/6 = 1.67 days
Cost Baseline and Budget
Components of Project Budget
| Component | Description |
|---|---|
| Activity Cost Estimates | Cost for each work package |
| Contingency Reserves | Known-unknown risks (part of baseline) |
| Cost Baseline | Authorized time-phased budget |
| Management Reserves | Unknown-unknown risks (not in baseline) |
| Project Budget | Cost Baseline + Management Reserves |
Earned Value Management (EVM)
EVM is a methodology that integrates scope, schedule, and cost data to measure project performance objectively. It answers three fundamental questions:
- Where are we compared to where we planned to be?
- How efficiently are we using our resources?
- What do we expect the project to cost at completion?
Core EVM Values
| Metric | Formula | Description |
|---|---|---|
| PV (Planned Value) | From schedule baseline | Value of work PLANNED to be done |
| EV (Earned Value) | % Complete x BAC | Value of work ACTUALLY done |
| AC (Actual Cost) | From accounting | Cost ACTUALLY incurred |
| BAC (Budget at Completion) | Original budget | Total budgeted cost for the project |
Understanding EV
EV answers: "What is the budgeted value of the work we've actually completed?"
Example: If a $100,000 project is 40% complete, EV = $40,000
EVM Variance Analysis
Variance Formulas
| Variance | Formula | Interpretation |
|---|---|---|
| CV (Cost Variance) | EV - AC | Positive = Under budget |
| SV (Schedule Variance) | EV - PV | Positive = Ahead of schedule |
Variance Example
| Metric | Value |
|---|---|
| BAC | $100,000 |
| PV (Planned) | $50,000 |
| EV (Earned) | $45,000 |
| AC (Actual) | $60,000 |
CV = EV - AC = $45,000 - $60,000 = -$15,000 (Over budget by $15,000)
SV = EV - PV = $45,000 - $50,000 = -$5,000 (Behind schedule by $5,000 of work)
EVM Performance Indices
Index Formulas
| Index | Formula | Interpretation |
|---|---|---|
| CPI (Cost Performance Index) | EV / AC | > 1.0 = Under budget |
| SPI (Schedule Performance Index) | EV / PV | > 1.0 = Ahead of schedule |
Memory Aid for Interpretation
| Index Value | Cost (CPI) | Schedule (SPI) |
|---|---|---|
| > 1.0 | Under budget | Ahead of schedule |
| = 1.0 | On budget | On schedule |
| < 1.0 | Over budget | Behind schedule |
Index Example (Using Previous Values)
CPI = EV / AC = $45,000 / $60,000 = 0.75 (For every $1 spent, only $0.75 of value earned)
SPI = EV / PV = $45,000 / $50,000 = 0.90 (Only 90% of planned work completed)
EVM Forecasting
Estimate at Completion (EAC) Formulas
| Scenario | Formula | When to Use |
|---|---|---|
| Atypical Variance | EAC = AC + (BAC - EV) | Past variances won't continue |
| Typical Variance | EAC = BAC / CPI | Current cost trends will continue |
| Schedule & Cost Impact | EAC = AC + [(BAC - EV) / (CPI x SPI)] | Both affect remaining work |
| Bottom-Up Re-estimate | EAC = AC + ETC | When original estimate is flawed |
Other Forecasting Formulas
| Metric | Formula | Description |
|---|---|---|
| ETC (Estimate to Complete) | EAC - AC | Cost needed to finish remaining work |
| VAC (Variance at Completion) | BAC - EAC | Expected over/under run at completion |
Forecasting Example
Using CPI = 0.75, BAC = $100,000, EV = $45,000, AC = $60,000:
EAC = BAC / CPI = $100,000 / 0.75 = $133,333
ETC = EAC - AC = $133,333 - $60,000 = $73,333
VAC = BAC - EAC = $100,000 - $133,333 = -$33,333 (Expected $33,333 over budget)
To-Complete Performance Index (TCPI)
TCPI calculates the cost performance required for remaining work to meet a target:
TCPI Formulas
| Target | Formula | Use |
|---|---|---|
| Meet BAC | TCPI = (BAC - EV) / (BAC - AC) | To finish within original budget |
| Meet EAC | TCPI = (BAC - EV) / (EAC - AC) | To finish at revised estimate |
TCPI Interpretation
| TCPI Value | Meaning |
|---|---|
| > 1.0 | Must be MORE efficient to meet target (harder) |
| = 1.0 | Continue at same efficiency |
| < 1.0 | Can be LESS efficient and still meet target (easier) |
TCPI Example
BAC = $100,000, EV = $45,000, AC = $60,000
TCPI to meet BAC = (BAC - EV) / (BAC - AC) = ($100,000 - $45,000) / ($100,000 - $60,000) = $55,000 / $40,000 = 1.375
Interpretation: Must achieve CPI of 1.375 on remaining work to meet original budget — very challenging!
Complete EVM Formula Reference
| Acronym | Name | Formula | Interpretation |
|---|---|---|---|
| PV | Planned Value | Schedule baseline | Work planned |
| EV | Earned Value | % Complete x BAC | Work done |
| AC | Actual Cost | Accounting data | Cost incurred |
| BAC | Budget at Completion | Original budget | Total budget |
| CV | Cost Variance | EV - AC | +/- = Under/Over |
| SV | Schedule Variance | EV - PV | +/- = Ahead/Behind |
| CPI | Cost Performance Index | EV / AC | > 1 = Under budget |
| SPI | Schedule Performance Index | EV / PV | > 1 = Ahead |
| EAC | Estimate at Completion | BAC / CPI (typical) | Forecast total cost |
| ETC | Estimate to Complete | EAC - AC | Remaining cost |
| VAC | Variance at Completion | BAC - EAC | Over/Under at end |
| TCPI | To-Complete Performance Index | (BAC-EV)/(BAC-AC) | Required efficiency |
Key Takeaways
- EVM integrates scope, schedule, and cost for objective performance measurement
- EV (Earned Value) = % Complete x BAC represents the value of work accomplished
- CPI = EV/AC measures cost efficiency (> 1.0 = under budget)
- SPI = EV/PV measures schedule efficiency (> 1.0 = ahead of schedule)
- EAC = BAC/CPI forecasts final cost if current trends continue
- TCPI shows the efficiency required on remaining work to meet a target
A project has BAC = $200,000, EV = $80,000, and AC = $100,000. What is the Cost Performance Index (CPI)?
Using the same project data (BAC = $200,000, EV = $80,000, AC = $100,000), what is the Estimate at Completion (EAC) if current cost trends continue?
A project shows SV = -$10,000 and CV = +$5,000. What does this indicate about project status?