# Ihab Saad – Earned Value Analysis EV

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Music, good afternoon,

and today we're going to talk about a new subject related to

project scheduling, which is measuring the project performance

through a technique called earned value analysis.

In a recent study by the construction industry Institute,

they found out that cost and schedule are two very

representative measures of the Project Health, and they found

that there's a direct correlation between the scheduled performance

and the cost performance as indicators of how the project is

performing in general. So the closer the cost, the actual cost

and schedule are to the planned values, the better the project

performance is and will be at the end. So basically, cost and

schedule are definitely two measures, two active and valuable

measures to gage the Project Health and its performance from

time to time on a regular basis, to try to forecast the end result

for that particular project. However, measuring cost and time

or cost and schedule performance usually have some problems, if not

not done properly. Among these problems is that trying to measure

the schedule and cost performance for the sake of reporting on

general project performance in general project managers sometimes

fall in the trap of comparing apples to oranges, and this

primarily results from comparing two moving targets, or making a

comparison between two moving targets at the same time without

having something to compare to. So for example, if I want to measure

the speed of something that's moving, I have to compare it

either to something that's stationary or to something that's

moving at a certain speed that I already know. So I can measure the

relative speed or the relative difference between the two speeds.

If we do not have such benchmarks, we will not have valid comparisons

when it comes to time and schedule. So successful project

managers at the very beginning should establish agreed upon

baselines related to cost and time, and these are going to be

basically the approved budget at the very beginning of the project

and the approved baseline schedule that in general, the general

contractor submits to the owner for review and approval. Once

these are established, once these are approved, they become our

benchmarks or our measuring lines, and we can start measuring

progress from these fixed benchmarks. We also have to

establish some thresholds to measure our variances. So for

example, we know that sometimes we might be a little bit above

budget, little bit below budget or ahead of schedule or behind

schedule. So we have to establish thresholds, and they can be color

coded, for example. So green is anywhere if we're performing at

schedule or on but on time plus or minus, let's say three to 5% so if

we are in a range, little bit ahead of schedule, little bit

behind schedule or right on schedule, we are fine. So this can

be green.

If the range of variance is greater than or anywhere between

five and seven or 8% for example, it can be yellow. We are

approaching the level of danger or warning. Anything above that is

going to become red. So again, color coding that will go will

show us, just with a visual inspection, how the project is

performing. So we have to establish these thresholds from

the very beginning and monitor the project accordingly.

So what's earned value? Earned value analysis used to also be

known as C slash, SCSC, which is which stands for cost slash,

schedule control systems, criteria, very complicated name

that was invented by the Department of Defense because they

were the first ones to use it to measure the performance on their

projects. So in In brief, we call it earned value analysis, or EV.

It builds on the concept of comparing apples to apples and

oranges to oranges. So again, when we're going to make a comparison,

it has to be a valid comparison, and not just comparing two numbers

that are totally unrelated.

It enables the project managers, through a simple and effective

analysis, to get timely updates and forecasts of projects, time

and cost performance. The key word here is timely, because if you get

the update too late, unfortunately, its value is very

much reduced because you cannot make any corrective actions or any

improvements on the project. So if you get all of these updates at

the end of the project that's past history. It's just a documentation

of the project performance, without the ability to change any

of its outcomes. So we have to do these on a regular basis and in a

very timely fashion. So if we're going to update our schedule on a

weekly basis, for example, we can generate that report or that

analysis on a weekly basis. Same.

Thing, it's very highly recommendable that whenever you

update your schedule, you also update your budget, so you can get

a comparison of time and cost at the same time on a very regular

basis.

So to discuss earned value, let's start by this short story or

example on a project that is under construction.

The president of a company received a call. The CEO of a

large company was contacted by his CFO, the Chief Financial Officer,

usually an accountant, who informed him of the following,

saying that, sir, according to the approved schedule and our accurate

cost estimate, until this morning we should have spent $38.5 million

on the project. So the cost expenditure up till this morning

should have been $38.5 million however, according to my latest

calculations, until this morning, and this is we're talking about an

accountant who's very meticulous, very accurate, until this morning,

we have actually spent $40.3 million

so to the account that it appears that we have a big variance here.

That's a considerable variance, by the way. So he says, Sir, this is

a serious matter that requires your immediate attention. I

recommend you fire the project manager and maybe also the Vice

President for Operations. There's no

love lost between the two. So what do you think if the CEO of the

company listens to that very accurate and meticulous

accountant, Chief Accountant, Chief Financial Officer, what

should they do if you were in that situation? What What would you do?

The question is, do we have enough information to make an educated

decision about something as important as firing someone or

hiring someone or changing the outcome of the project? So let's

see whether these numbers, as accurate as they are, as correct

as they are, really reflect the status of the project, or is there

something missing? And here we're going to start with what we call

the tale of

three fruits.

So basically, through this story, we have not only two fruits,

apples and oranges, but we must also look at the third fruit. So

in the previous report, the CFO made a classical mistake of

comparing an apple to an orange. He looked at two numbers, two

different values, which really represent an apple and an orange.

So there's nothing to compare between an apple and an orange.

We're going to see that in just a second. So the apple,

the apple represents the budgeted cost to be spent on the scheduled

work, the $38.3 million or whatever it was so. And this is

going to be called the budgeted cost for work scheduled. Budgeted

cost because it was based on the estimate for work schedule,

because it was based on the baseline schedule that was

approved by the client. And that number is the value that the CFO

told the owner, until this morning we should have spent. Should have

spent means it was a budgeted cost, and until this morning,

which is the work done to date, according to the schedule, based

on the scheduled performance. And then he told him, yet until this

morning, we have actually spent. So now he's talking about actual

expenditure we have actually spent. It was 40 point something

million dollars. Again, big difference. So the orange

represents the actual cost spent on the actual amount of work

performed,

or actual cost for work performed, AC, WP, so we have two four letter

words, BCWS and acwp. What do we have in common? If we try to split

these words into two parts. In the first part, we have BC, for the

second one, we have AC. They are not common, budgeted costs and

actual costs are quite different. The second half is work schedule,

Ws and work performed. WP again, work scheduled is what we should

have done. Work performed is what we have actually accomplished. So

again, they might be different, so there's nothing

comparable between the two terms. Therefore, what we're going to do

is we're gonna slice this apple into two halves, and we're gonna

slice this orange into two halves, and we're gonna look at the hybrid

fruit that we're gonna call the orpal, or the appenge. Orpal, half

orange, half apple, apench, half apple, half orange. Either term is

fine with me.

So the solution is the average, or the orphan, which looks something

like this, half apple, half orange. When we split this apple

in halves, we took the left half of the apple and the left half of

the Apple was BC budgeted cost. And then when we took the half of

the orange, we took the right half of the orange, which represents

word.

Cost, which means we are performing under budget, which is

having some savings, and that's definitely good. Scheduled

variance, or SV, is equal to the earned value minus the planned

value. Again, negative is bad, because

planned value

is greater than the earned value, which means we are behind

schedule, and positive is good, which means that the earned value,

what we have earned, is greater than the planned value, which

means we have achieved more than what we were supposed to do in the

same period of time, which means that we are ahead of schedule.

The cost performance index, sometimes also called cost

performance ratio. So ratio or index is the same thing, and it

results from the Division of two different terms. And in this case,

instead of subtracting one term from another actual cost from

earned value, we divide earned value by actual cost. So in this

case, we have something to be compared to one under perfect

conditions, the earned value is equal to the actual cost if we are

performing exactly according to budget. So in this case, comparing

to to one, if the earned value is greater than the actual cost,

which means that we have earned more than what we we actually

spent, then greater than one is good and less than one is bad,

because the actual cost is going to exceed the earned value.

Similarly, for the schedule, if the earned value is greater than

the planned value, greater than one is good, because we would be

ahead of schedule. Less than one is bad.

The estimate at completion can be calculated in three different

ways. Either it's the budget at completion divided by the cost

performance index, or it is the actual cost plus the estimate to

complete, or it is the actual cost plus budget at completion minus

earned value. Either one of these three terms can give us the

estimate at completion, the estimate to complete is equal to

estimate at completion minus the actual cost.

Variance at completion is equal to budget at completion, our original

budget minus estimate at completion based on the current

progress. Positive is good, which means that we are saving money.

Negative is bad, which means we're going to finish above budget and

to complete performance index, or TCPI, is budget at completion

minus earned value divided by budget at completion minus actual

cost. Now, from these different terms, the most commonly used

terms are the first four, which are the cost variance, scheduled

variance, cost performance index or cost performance ratio, and

scheduled performance index or scheduled performance ratio. We're

going to see in a minute how to calculate these.

So now let's look at that graph representing the

time on the horizontal axis and cost on the vertical axis. Now

when we look at this curve, this reminds us of what we used to know

as the S curve, or the progress curve, and the final point on that

progress curve is our budget at completion of BAC. Now that dotted

vertical green line represents our cutoff date, as we used to do in

updating, in Project updating, so as of this cutoff date, we have

different values based on our budget and based on our schedule.

Both plans, we should have spent $38.5 million according to that

up to that cutoff date. However,

our actual cost for work performed or actual cost is $40.3 million

and now this is the classical mistake when the CFO made the

comparison between these two moving targets. Notice that this

curve is not continued, because this is actual and we don't know

how are we going to perform in the future. We can, however, forecast

our future based on our current progress. But up to this point,

we're just reporting past history of actual performance, and we have

not projected that into the future yet. And now we're looking for

that third term, something in between these two, which is now

this is the forecast, as you can see, and it's a dotted line that

shows that our estimate at completion here is going to be

above the budget at completion if we keep performing the same way.

So it seems that we're not doing well. Now let's look at the third

number, the orphan that we're looking for, and we're going to

talk later about how to perform to calculate that number. But if that

number were here, bcwp, or earned value, if it was some somewhere

between these two numbers, we're going to look at different

scenarios. What if that point is above both curves? What if it is

below both curves? What if it's in between and what? And what's the

respective order of these points. How does that affect our Calc?

Relations. We're going to talk about that in a minute, but let's

assume for the moment that the budgeted cost forward performed

was calculated equal to 39.8

so now let's look at according to the equations that we discussed on

the previous slide. Let's calculate our variances and our

indices. So the first variance is the comparison of the apple to the

orange, which is equal to the accounting variance. What we call

accounting variance. The reason I did not include it on the previous

slide is that we as project managers and cost engineers and so

on, we should not use that number. This number is sometimes

mistakenly used by accountants, but we as project managers should

not use that number. We should know how it's calculated, but we

should not use it. The accounting variance is equal to actual cost

for rule perform, minus budget, cost for schedule, and here it

shows that we are far above our budget. But again, that's not the

measure that we're looking at, because that does not measure time

in any way.

Now let's start looking at comparable numbers. Here we have

bcwp, which is the earned value, and BCWS, which is the PV or the

planned value. What do they have in common? BC and BC, if we remove

the common half of each one of these words, we end up with word

performed compared to work scheduled.

So if the word performed is greater than the work scheduled,

if we have a positive number from this equation, word performed is

greater than the work schedule, that means that we are ahead of

schedule, ahead of schedule by an amount of work equal to the value

or the difference between these two, which is about $1.3 million

so our scheduled performance is fine. We have achieved more work

than we were supposed to do or we were planned to, up till that

cutoff date. So schedule wise, we're doing well. So this is the

scheduled variance, and then we're going to compare the cost

variance. Again, comparing an or an orpal to an orange, the common

part is the or, which is, in this case, the WP and the WP. So

comparing earned value to actual cost. We're going to remove the

common term WP. So we're comparing BC to AC, budgeted cost to actual

cost. In this case, the actual cost is above the budgeted cost,

which means we're going to get a negative value here. And as we

learned from the previous slide, negative value means bad we are we

are over budget. So in this case, we are over budget by about half a

million dollars, which is difference between 40.3 and 39.8

so basically, if we want to report on the actual status of this

project, we can use just two words to report a general very brief

report. Is it good, good, good, bad, bad, good or bad, bad. So is

the schedule good and the cost good? So it would be good, good,

or the schedule is good and the cost is bad, which is good, bad,

exactly what we have here. Or is it bad, good, the schedule is bad,

but the cost is good or bad, bad, which would be if that bcwp is the

lowest point is below acwp And BCWS. So if the earned value falls

below both other point, the two other points, if it's the lowest

point, then that would be a bad bet. However, if that point is

above both other points. If above the two points, then it would be

good, good, because in this case, we would be ahead of schedule and

below budget, which is which would be a perfect situation.

So the analysis results from the previous graph, we can conclude

the following, the scheduled variance is $1.3 million positive,

so we are ahead of schedule by an amount of work worth $1.3 million

which is good, and the cost variance, we have a negative

number, negative half a million, which means the project is above

budget by point 5 million, which is bad. Therefore the final

situation for this project is good, bad

or bad, good, depending on if you compare the cost first and then

the scheduled second.

The variances, however, however important as they are, do not show

the full picture, because what if, for example, I get a cost variance

of negative half a million dollars. Okay, we are above

budget. But how drastic the situation is, how bad the

situation is. If I were to tell you, for example, that the value

of the project is $1 billion

so half a million compared to 1 billion,

that's negligible, we can recover that covid.

In our schedule is going to be represented by a cost item, cost

center or cost unit. So whenever we report, we're going to report

on time and cost at the same time.

In case of emergency, use the Pareto law 8020

which basically says that 20% of the activities in the project

represent 80% of the cost of the project. So I, if I cannot perform

time and cost control over 100% of the activities, at least, I'm

gonna focus on the 20% of the activities that represent 80% of

the total project cost. And that would give me an acceptable level

of control. It's not perfect, but 80% is not too bad, either,

especially that it's achieved with only monitoring, monitoring 20% of

the activities. And how do we get these 20% of the activities? This

is for another discussion.

Now here, here's an example that shows a very simple example on a

network represented by six activities, A through F. And this

is the duration in weeks for each activity, and this is the

precedence, which means what are the IPAs? So A and B are the

beginning activities for this project. And then we have here the

succession of the different activities, and we also have

budgeted cost per week. And this is obtained from our estimate.

Budgeted cost per week. How much do we expect to spend on this

activity per week according to the estimate? And then here we have a

blank column where we have to calculate the total budget. And

very easily, the total budget is going to be obtained by

multiplying the budgeted cost per week times the duration in weeks.

So basically, for activity A, for example, it would be $690

for activity B, it would be six times 280, and so on and so forth.

By adding these numbers together, what we're going to get is, what

if you said BC WP, if you said BCWS, that would be half correct

and half incorrect, because it would be BCWS only at the end of

the project, not at the time we are measuring BCWS at the end of

the project is basically what we call BAC, or the budget at

completion. Therefore the sum of these numbers is not going to be

used in our equation whatsoever.

Now the problem is, or the question is, at the end of week

nine, which is our cutoff date, our green line, the actual project

status was as follows. These numbers were calculated from the

site, and this progress was reported from the site for

activity, it was 100% complete, so PCT, 100%

therefore it was complete. B, 100% C, 75%

D, 0% E, 60% and F, 50%

and these are the actual costs of each one of these activities,

actual cost, actual cost up to the end of week nine. So actual cost

for the work performed up till the end of week nine. Therefore, if we

add these numbers together, that's going to give us the acwp at the

end of week nine.

Now we need to calculate the earned value. What is the earned

value up till the end of week nine as well. So for each activity

here, we have assumed a linear relationship between cost and

schedule, and that the BCWS is determined from the earliest start

date. So assuming a linear relationship between cost and

schedule, which means that the cost is uniformly distributed

along the duration of the activity. That's why we mentioned

that the cost is the same for each week. This is the assumption that

we need. So the question now is, how are we going to determine

whether this project is ahead of schedule, behind schedule, on

budget, above budget, below budget, and we're going to try to

measure the cost variance, scheduled variance,

and the CPI and the SPI. So what we need to do here is to draw a

cumulative cost curve for this project, showing the duration and

cost, which is basically our s or progress curve. And then we need

on that curve to identify acwp or actual cost BCWS, or planned

value. Bcwp or earned value, CV, cost variance, SV, scheduled

variance on the curve. And we need also to determine the values of

the CPR or CPI cost performance ratio, or cost performance index,

and SPR or SPI schedule performance ratio or scheduled

performance index. And finally, in your expert opinion, what is the

status of this project, schedule wise and cost wise. So are we

ahead of schedule? Behind schedule, above budget, below

budget? Is it good, good, good, bad, bad, bad, good or bad, bad.

Ed, this is what we're going to answer through solving that

example in the next presentation.