this document has been prepared by an

Dear Reader This is the first draft of what is hoped to become a standard document on the subject of Earned Value in the UK. Please read it and think about it. We would like you to do the following: Tell us what you like and dislike. Tell us what’s missing. Tell us if you think there should be a standard. Feed back any comments to [email protected] Please put ‘EV Standard Feedback’ in the subject box. This is your chance to participate in the formulation of an important national document. Your comments are invited until July 31 2001 when a final submission to BSI will be prepared.

This document has been prepared by an APM Earned Value SIG working party chaired by Steve Wake. The organisations participating are: The Association for Project Management BAA – Terminal 5 BaeSystems EDS Laing Ltd MOD – Defence Procurement Agency The National Audit Office The Office of Government Commerce The Project Management Institute(UK) Rolls-Royce plc Sealed Media Unisys

This is where this document fits.

UK EVMS GUIDELINES

WHAT IS EARNED VALUE

BS6079

HOW TO EV

MATURITY LEVEL

ROUTEMAPS EARNED VALUE

SYLLABUS

This document is meant to fill the box above the dotted line called ‘What is Earned Value’. Implementation guidance is the current task of the working party. When it is in good enough shape this will also be posted on the web-site for comment. Expect something in July 2001. You will notice that there is no training course. This does not mean that the SIG will not develop one. But it does mean that it should be possible for any organisation to develop their own course with reference to all the other materials being produced. The Syllabus probably serving as a checklist for any course. Please note that these materials will be freely available in draft form on the web but that they are only draft. Not final. Not official. Please support the official versions when they become available.

EARNED VALUE MANAGEMENT BRITISH STANDARD

DRAFT FOR REVIEW

April 1st 2001

Contents

1 INTRODUCTION............................................................................................ 1

2 APPLICABILITY............................................................................................. 1

3 WHAT IS EARNED VALUE MANAGEMENT? ................................................... 2

3.1 Earned Value Management Principles ..........................................................2 3.2 What are Earned Value Measurements? .......................................................2 3.3 Using Performance Measurements ...............................................................3 3.4 What Are The Benefits? ..............................................................................3

4 PROCESS DISCUSSION................................................................................ 5

4.1 Statement of Work ......................................................................................5 4.2 Project Breakdown Structures ......................................................................5

4.2.1 Why Have Structures? .......................................................................... 5 4.2.2 Work Breakdown Structure .................................................................... 5 4.2.3 Organisation Breakdown Structure ......................................................... 6 4.2.4 Control Accounts .................................................................................. 6 4.2.5 Cost Breakdown Structure ..................................................................... 8

4.3 Work Packages, Planning Packages and Activities ........................................9 4.4 Project Schedule ...................................................................................... 10

4.4.1 Master Schedule................................................................................. 10 4.4.2 Supporting Schedules ......................................................................... 10 4.4.3 Subcontract/Procurement Schedules .................................................... 10

4.5 Setting Budgets ........................................................................................ 10 4.5.1 Budget Cost Types and Rates.............................................................. 11 4.5.2 Contract Budget Baseline .................................................................... 11 4.5.3 Management Reserve ......................................................................... 11 4.5.4 Performance Measurement Baseline .................................................... 11 4.5.5 Undistributed Budget........................................................................... 12 4.5.6 Distributed Budget .............................................................................. 12

4.6 Measuring Progress .................................................................................. 12 4.6.1 Measuring Earned Value ..................................................................... 13 4.6.2 Milestones Complete........................................................................... 13 4.6.3 Percentage Complete.......................................................................... 13 4.6.4 Equivalent Units ................................................................................. 14 4.6.5 Level of Effort ..................................................................................... 14 4.6.6 Apportioned Effort............................................................................... 14

4.7 Establishing a Project Baseline .................................................................. 15 4.7.1 Static Plan ......................................................................................... 15

4.8 Measuring Costs and Committed Costs ...................................................... 16 4.9 Performance Measurement........................................................................ 17

4.9.1 Schedule Performance ........................................................................ 17 4.9.2 Calculating and Reporting Earned Value............................................... 17

4.10 Change Management - Updating Baselines ................................................ 22 4.10.1 Baselines .............................................. Error! Bookmark not defined.

5 IMPLEMENTATION PROCESS ..................................................................... 25

6 SYSTEM REVIEW ....................................................................................... 25

6.1 Integrated Baseline Review (IBR)............................................................... 25 6.2 Demonstration Review .............................................................................. 26 6.3 Surveillance Reviews ................................................................................ 26

7 SUMMARY .................................................................................................. 27

8 WHERE TO GO FOR FURTHER HELP.......................................................... 28

APPENDIX A: EARNED VALUE MANAGEMENT GUIDELINES.............................. 29

APPENDIX B: EARNED VALUE TERMS AND TERMINOLOGY.............................. 35

APPENDIX C – EARNED VALUE EQUATIONS .................................................... 38

Figures Figure 1 - Budget vs Actual Graph......................................................................... 3 Figure 2 - Budget vs Actual plus Earned Value Graph ............................................. 4 Figure 3 - Responsibility Assignment Matrix ........................................................... 7 Figure 4 - WBS/OBS/CBS Inter-Relationship .......................................................... 8 Figure 5 - Budget Elements ................................................................................ 10 Figure 6 - Earned Value Graph............................................................................ 20 Figure 7 - Performance Trend Chart .................................................................... 21 Figure 8 - Performance Graphs ........................................................................... 22 Figure 9 - Transferring Contingency .................................................................... 24

1 INTRODUCTION

Earned Value Management is a system of project control which is based on a structured approach to planning, cost collection and performance measurement. It is a proven process that provides strong benefits for project and control. It facilitates the integration of project scope, schedule and cost objectives and establishment of a baseline plan for performance measurement during the execution of a project. Furthermore, it provides a sound basis for problem identification, corrective actions and management replanning as required. Fundamentally: Earned value is the measurement and monitoring of project progress in terms of cost, time and technical / physical accomplishment against a defined scope of work. EVM translates into formal work definition, distribution of responsibility, budget and schedule baseline establishment, performance measurement, variance and trend analysis and management of corrective actions for the duration of a project. What Do We Need To Know? • How is 'our' project progressing? • What has the project achieved with the budget spent so far? • What is the true out-turn cost going to be? • Can I trust the data in the reports I receive? • Are resources being employed effectively? • Is the customer pleased ? Many projects measure progress by measuring spend to date and estimate future spend. Few projects measure their efficiency of working or the value of work that has been achieved. This Standard describes a systematic and disciplined approach to project control that you should use to help improve your project management, and ultimately contribute to the success of your projects.

2 APPLICABILITY

This Standard may be used by Projects of varying size, scope and duration to ensure that the Earned Value Management process is operated in a consistent manner across all implementing teams. Each implementing project should take into account:

• Project specific requirements • Customer requirements • Lessons learnt from previous implementations • IT toolset requirements • Impact on resources and infrastructure

It is the responsibility of the Project Manager to ensure that progress and performance measurements are realistic and are in accordance with this guide.

3 WHAT IS EARNED VALUE MANAGEMENT?

3.1 Earned Value Management Principles

Earned Value Management (EVM) is about establishing and managing goals throughout the life of a project. It can be summarised as follows: • Defining and authorising contract workscope • Developing a ‘baseline’ against which cost, schedule and technical performance

can be measured • Objective performance measurement • Variance analysis and corrective action reporting • Disciplined and timely incorporation of ‘baseline’ changes A well implemented and maintained Earned Value Management System will facilitate the following: • Verifiable status reports • Clear objective analysis • Considered reasoning • Accountability in decision making process • Awareness of impact on the schedule, cost and across the project • Visibility of results The challenge for an organisation / project is to create a framework which will facilitate the measurement of the three key data elements which are essential to EVMS, namely: • BCWS – The budgeted cost of work scheduled i.e. what we are going to do, the plan • ACWP – The actual cost of work performed i.e. what really happened. • BCWP – The budgeted cost of work performed i.e. what we did of the plan, the

EARNED VALUE. Guidelines exist for companies to use in establishing and applying an Earned Value Management System. These guidelines are expressed in fundamental terms and provide flexibility for each company to optimise its system, and be fully accountable for the effectiveness of its usage. These guidelines (or criteria) are recognised as an international standard, and are attached at Appendix A. It is expected that if an Earned Value Management System is developed that meets the intent of the criteria, it will allow key stakeholders, notably customers and shareholders, to gain confidence that projects are being managed and resources deployed in an effective and consistent manner against a recognised standard. 3.2 What are Earned Value Measurements?

The purpose of Earned Value measurements is to compare the amount of money actually spent with that which has been earned by performing the work to date.

This is normally achieved by comparing spend to date with the amount of money that should have been spent to make the actual progress that has been made. To achieve this three things are needed:

• An initial budget broken down into measurable packages of work

• A method of measuring achievement

• A method of collecting costs against the measurable packages of work

3.3 Using Performance Measurements

Earned Value techniques provide a discipline that engenders good management and, what is more important, provide an early indicator of the state of health of the project from, primarily, a cost and schedule perspective. Any measurements of performance must be treated with caution. They are indicators of the efficiency or performance of a project and should be used as one of the criteria on which Project Managers base their decisions, after having interpreted the information and placed it in context. Performance measures indicate where shortfalls are occurring and where extra resources, or management action, or other support is required in order to overcome the problem. It is an early indicator of problems and gives a pointer as to what may happen to the project if actions are not taken.

3.4 What Are The Benefits?

Figure 1 shows the traditional budget vs actual graph.

TIME

COST

BUDGET

ACTUAL

TIME

N O W

Figure 1 - Budget vs Actual Graph

This graph is traditionally used to compare budget spend with actual spend.

It shows how much has been spent to date and compares it to the budget planned to be used by the report date. IT DOES NOT SHOW :

• If the project is ahead or behind of schedule

• If the project is truly over or under spending

• If the project is getting value for money

• If money has been spent on the right things

• If the problems are over or have only just begun

The graph shown in Figure 2 is similar to the previous graph except that a measure of performance (or status value) has been included. The line included is the EARNED VALUE or ACHIEVEMENT line. This additional line represents the proportion of the budget that has actually been achieved.

TIME

COST

BUDGET

ACTUAL

EARNED

TIME

NOW

Figure 2 - Budget vs Actual plus Earned Value Graph

It indicates the following additional information:

• The project is behind schedule because the amount of work completed is less than that scheduled

• The project is overspent because the cost of the work completed is greater that the budgeted cost of the work

• The project is spending money inefficiently, as it is costing more to achieve less than budget

• The problems do not appear to be contained, since the slope of the actual cost line is greater than the budgeted cost line which indicates that the

overspend is going to increase, even though the Earned Value line does look like it will intersect the budget cost line some time in the future.

4 PROCESS DISCUSSION

4.1 Statement of Work

The Statement of Work (SOW) defines the overall requirements for the project. It forms the basis for allocating work, budget and schedule requirements. The extent to which the SOW fully describes the requirements of the project relates directly to the ability of the EVM system to provide objective measures of performance against the original requirement.

4.2 Breakdown Structures

4.2.1 Why Have Structures?

Breakdown structures are the core of any project planning, costing, monitoring and reporting system. They should be prepared during the bid and are essential to facilitate:

• The definition and clarification of the work to be performed

• The assignment of tasks to organisations responsible for carrying out the work

• Thorough planning

• The establishment and control of baselines

• The objective measurement of accomplishment against the plan at levels where the work is being performed

• The collection, summarising and reporting to higher management, and the Customer, for use in the decision-making process

• Performance measurements

Before any measurements of performance can be undertaken, a project must have established a Work Breakdown Structure (WBS) (or a Product Breakdown Structure) and should have established an Organisation Breakdown Structure (OBS) and a Responsibility Assignment Matrix (RAM). All Control Account Managers (CAM) should have been identified.

4.2.2 Work Breakdown Structure

The hierarchical subdivision of a project into discrete elements of work is known as a Work Breakdown Structure (WBS). This breakdown is sometimes referred to as a

Contract Work Breakdown Structure (CWBS) or a Project Work Breakdown Structure (PWBS). The WBS is developed by identifying the highest level of work in a project, and then these major categories are broken down into smaller components. This breakdown continues until the lowest level of detail is established. This lowest level of detail defines the activities in a project. All aspects of the contract are included and the WBS can be viewed as a graphical hierarchical representation of the Statement of Work (SOW). The Project can be subdivided into manageable elements, called Work Packages (WP), using a variety of approaches. The way in which a WBS should be developed is discussed in Reference * and Reference **. Each work package must have the following attributes (often captured in a WBS dictionary): § Scope § Measure of progress § Traceability up through the WBS § Budget § Assignment of responsibility § Start and finish dates Where the WBS has been subdivided into products, the resultant structure is sometimes referred to as a Product Breakdown Structure (PBS). When developing a WBS, the breakdown should concentrate solely on the work content of the project and should ignore any ramifications of Organisation and cost types, as separate breakdown structures should be developed for these aspects.

4.2.3 Organisation Breakdown Structure

Projects usually involve people from a variety of functions and departments across a Company. A fundamental requirement of a well-managed project is a clear people organisation that relates to the WBS. Where matrix management structures are used, this clarity in organisational definition is particularly important. In order to clarify and define this organisation, an Organisation Chart or Organisation Breakdown Structure (OBS) must be developed. Clear management is essential, with responsibilities and accountabilities clearly defined for all staff and communicated across the team. Staff being introduced into the project should have a clear knowledge of who they report to and what they are responsible for. This is best achieved by the provision of a clear and unambiguous job description. Loose definition of responsibilities, authorities and accountabilities will lead to ambiguities and confusion in the management of the project.

4.2.4 Control Accounts

An Organisation Breakdown Structure (OBS) reflects the way in which the Company has organised the people who will accomplish the work.

A Work Breakdown Structure (WBS) reflects the way in which work has been subdivided. A Cost Breakdown Structure (CBS) reflects the way in which costs are subdivided. To assign work responsibilities to appropriate organisational elements the WBS must be interrelated with the OBS The assignment of lower-level Work Breakdown elements to responsible lower-level managers provides a key control point for management purposes and cost collection. The integration of the WBS and the OBS at the Control Account level can be displayed as a matrix with the OBS elements listed on one axis and the WBS elements on the other. This matrix is called the Responsibility Assignment Matrix (RAM) where each element is a Control Account (CA) with a Control Account Manager (CAM) responsible for its completion to budget. A Control Account will normally comprise a number of work packages. In some cases, Control Account may be a single work package.

Figure 3 - Responsibility Assignment Matrix

It is important that a named responsible person is nominated for each work area. Terms of reference must be defined. The Control Account is the main action point for the planning and control of project work. Nearly all aspects of the project come together at this point including:

• Budgets

• Schedules

CONTROLACCOUNT

CONTROLACCOUNT

CAM

PROJECT

MANAGER

CAM

CAM

FUNCTIONALORGANISATION

(OBS)

CONTRACTWORK

BREAKDOWNSTRUCTURE

(CWBS)

WorkPackages

PlanningPackages

OBS DATASUMMARISATION

CONTROLACCOUNT

WBS D

AT

A SU

MM

AR

ISAT

ION

• Forecasts

• Work Assignments

• Cost Collection

• Progress Assessment

• Problem Identification

• Corrective Actions

Most management actions taken at higher levels occur on an exception basis because of significant problems identified at this level. For these reasons, the levels selected for the establishment of the organisation and the responsibility for Control Accounts should be carefully considered at the outset of the project. While Control Accounts are usually located immediately above the Work Package level, they may be at higher levels. The Control Account in an integrated management system is the lowest level in the structure at which comparisons of actual costs to budgeted costs are normally required by management.

4.2.5 Cost Breakdown Structure

Projects usually involve many different types of costs which need to be summarised through various levels of detail. As Work Packages are subdivisions of work, then each Work Package will comprise a number of differing types of costs. Separate Work Packages should not be raised for different cost types. In order to be able to summarise the different types of costs across both the OBS and the WBS, a Cost Breakdown Structure (CBS) needs to be developed. The relationship between WBS, OBS and CBS is shown in Figure 4.

OR

GA

NI S A

T I ON

W O R K B R E A K D O W N

C O S T

B R E A K D O W N

L A B O U R

M A T E R I A L S

O T H E R S

Figure 4 - WBS/OBS/CBS Inter-Relationship

4.3 Work Packages, Planning Packages and Activities

The WBS is used to sub divide the work into manageable elements and as the basis of planning, estimating, monitoring and reporting. Each Work Package must have a clearly defined start condition and finish point, with all deliverables defined. The scope of each Work Package must be unambiguously defined with the procedures to be followed identified. Once completed, the WBS must be reconciled back to the contract and other formal agreements to ensure that all aspects of the project have been included. The WP is the lowest level at which performance data is normally analysed. It is therefore important to balance the length and scope of the WP against reporting cycle lengths and methods of earning ‘Value’. When larger Work Packages are used it is more difficult to determine status due to the volume of work involved. If Work Packages are defined at too low a level of detail, an inordinate amount of effort will be devoted to defining and tracking them. At the lowest level, each Work Package comprises a number of tasks to be performed. Schedules and costs should not be estimated at the Work Package level but must be estimated at a lower level, the activity. Traditionally, an activity has not been considered as a part of the WBS but has been considered to a separate entity. However, as each activity can only be assigned to a single Work Package and as each activity is a stepping stone towards completion of an end product or a milestone then the activity can be considered as the lowest level of the WBS. The activity is where duration, resources and costs are estimated. Constraints are shown between activities. A project schedule and a cost profile is the consolidation of all activities contained within the WBS. When a WBS has been developed fully, the scope of work narrative will define the activities to be carried out. Further expansion is normally required in order define all activities. The difference is that at this lowest level, each activity will also have an elapsed duration and a resource / cost estimate. Planning Packages (PP’s) represent far-term work, which can not be broken down to a Work Package (or activity) level because of a lack of detailed information. PPs have a commencement date of at least six months in the future (as all work prior to this will exist as Work packages). Planning Packages are structured below the Control Account level, have a defined scope of work and will be allocated a time-phased budget. They have scheduled start and finish dates (hence a duration) and defined budget and scope

Rolling Wave Planning Planning Packages must be converted into Work Packages before they can ‘earn’ achievement, or have costs booked against them. This conversion process is a fundamental of Project Control using EVM, facilitating a more controlled project baseline, and is known as Rolling Wave Planning.

SchedulesSchedules can be created at various levels of the WBS and incorporate various elements of the WBS from Integrated Master Schedules to detailed work package schedules containing the lowest level of activity. It is these schedules that form the basis for assessing actual progress and comparing actual cost against budget. It is important in any EVM system that schedules identify activities that lie on the critical path of the program. This will enable variances from the plan to be appropriately categorised e.g. ‘late but float remains’ as opposed to ‘late and on critical path’.

4.4 Setting Budgets

Budgeting is the process of distributing or allocating cost targets to individual segments of work. Strict budget element relationships must exist at all times in order to assure that the sum of the parts is not greater than the whole.

Figure 5 - Budget Elements

Within Earned Value Management Systems, specific terms are used to denote types of budgets and each area of the budget has specific inclusions/exclusions.

Contract Budget Baseline

Distributed Budget

Control Account Budgets

Undistributed Budget

Management Reserve

Performance Measurement Baseline

Margin

Contract Price

Work Packages Planning Packages

Disc. L of E App E Disc. = DiscreteL of E = Level of EffortApp E = Apportioned Effort

4.4.1 Budget Cost Types and Rates

Budgets (in terms of pounds, hours or other measurable units) should be allocated to every Work Package within each Control Account. Budgets must separately identify labour, material, sub-contract and any other direct costs. Irrespective of the method used, it is essential that the BCWP and the BCWS are based on the same budget rate. It is the summation of all budgeted work that forms the Performance Measurement Baseline. Contract Budget Baseline Contract Budget Baseline (CBB) is the total contract value minus the margin. The CBB represents the total budget of all authorised work for the contract comprising of the Management Reserve (MR) and Performance Measurement Baseline (PMB). This should equal the sum of the authorised budgets. Genrally, the CBB is fixed throughout the duration of the project, unless amended through contractual change. Project baseline budgeting activity results in the further dissection of the CBB with a Performance Measurement Baseline (PMB) and a Management Reserve (MR).

4.4.2 Management Reserve

Management reserve is a portion of the CBB and is derived from the budgeting process. It is held separately for future allocation to Control Accounts and will be used, if required to cover increased workscope requirements for the unforeseen changes that fall within the overall scope of the contract. Management reserve is never used to eliminate current cost variances. Management reserve is not used for changes in work-scope originating from the Customer. These are covered by contract amendments with agreed prices, with the PMB being increased to reflect the changes in work-scope and budget.

4.4.3 Performance Measurement Baseline

The performance measurement baseline (PMB) is the time-phased budget plan, representing all budgets against which the contract performance (cost and schedule) is measured.

It is equal to the total allocated budget less management reserve, and is represented as the Budgeted Cost of Work Scheduled (BCWS). The performance measurement baseline (PMB) consists of undistributed budgets (UB) and distributed budgets (DB). PMB = UB + DB

4.4.4 Undistributed Budget

Undistributed budget (UB) is an amount within the performance measurement baseline which is identified to a defined scope of work, but which has not yet been allocated to Control Accounts. As work is defined and assigned to Control Accounts the undistributed budget is reduced accordingly. Any provisions made as UB are primarily to accommodate temporary situations until Control Accounts can be agreed, or where contract requirements can only be defined in very general terms. Undistributed budget is never used as a substitute for adequate planning, and control is exercised to ensure that budget set aside for specific work is not issued for other work.

4.4.5 Distributed Budget

Distributed budgets are allocated to Control Accounts and should form the majority of budgets within the performance measurement baseline. 4.5 Measuring Progress

The key to performance measurement is the objective assessment of work in progress. All work is either completed, in progress or not yet started. Completed work presents no performance measurement problem, since these Work Packages have been closed. Future work will not be measured until the work gets underway. The only Work Packages to be concerned about are those that are planned to be or are actually in progress at the end of the reporting period. Short Work Packages can minimise the work in progress measurement problem. The longer the Work Package, the more difficult it is to determine the actual status of the work and more Work Packages will be in progress at any given point in time. In progress measurements call for subjective judgements to be made of actual progress and consideration of work remaining. The better these judgements, the more accurate will be the assessments. These judgements have to be made every reporting cycle and require an analysis by the project team on aspects of achievement, risk status and work to complete.

4.5.1 Measuring Earned Value

There are several approaches or methods of measuring Earned Value. The method used is dependent on the type of work being performed. Although a mixture of methods can be used on a single project, a Work Package can only be assigned a single method. Once a method has been assigned to a Work Package, it should never be changed. Measurements must be made at the lowest level of work breakdown possible and consolidated through the WBS up to the total project level. As actual costs are only collected at the booking number level then the lowest level of detail for measuring performance will be the booking number. If costs were to be collected at the activity level then the lowest level of performance measurement would be the activity. In some cases, projects may manually assign their historic costs to individual activities such that this level of detail can be attained. The major difficulty encountered in the determination of BCWP is the evaluation of work in progress (Work Packages that have been started but have not been completed at the period report cut-off). The use of Work Packages with short timescales helps to reduce this problem.

4.5.2 Milestones Complete

Achievement of the Work Package is measured by the achievement of milestones. Each milestone is assigned a proportion of the budget and when the milestone is achieved that proportion of the budget has been earned. This can be done by assigning a cumulative (or discrete) percentage value of the budget to each milestone that is earned when the milestone is achieved. This method of calculating Earned Value works best when there is a large number of frequent milestones. Earned Value is only taken on milestone completion. If the number of milestones is low, then the measuring process becomes too coarse and is no longer useful to the Project Manager.

4.5.3 Percentage Complete

Work packages are included in the calculations based on their percentage completion. As some projects tend to over-report in the early stages it is beneficial to restrict the maximum progress percentage on a Work Package to, say, 80%, with the next step being 100%. This eliminates the problem of many activities and/or Work Packages being at 99% complete for long periods. On some projects, only those Work Packages that have achieved 100% progress may be included. On some projects, Work Packages with a status of 50% and 100% may be included. On other projects, Work Packages at all stages of completion are included. In the absence of defined working norms or rates, percentage complete is best evaluated by assessing the work to complete, comparing this with the overall effort

for the whole Work Package and therefore deriving the percentage complete. Assessments of the Work Packages are made easier if frequent measurable milestones are defined within individual packages.

4.5.4 Equivalent Units

This method is based on measuring the number of units or items that have been completed and comparing the result to the total number of units or items that have to be completed. This approach is normally used in manufacturing, where the BCWP is measured as the number of units produced; for example, if large quantities of a particular item are being produced. This method is not particularly suited for development activity unless it has a repetitive element.

4.5.5 Level of Effort

Level of Effort (LoE) Work Packages are those within a project which are necessary for the project to be successful, but which do not have a specific end result or product and are not directly related to the generation of a specific result or product. Possible examples of such activities include programme management and contract administration. Since LoE earned value is measured by the passage of time, it is important to ensure that the time-phased budget distribution is representative of the baseline schedule. Thus the achievement or the Budgeted Cost of Work Performed (BCWP) is always set equal to the Budgeted Cost of Work Scheduled (BCWS). This means schedule variances never occur, and hence LoE tasks do not allow meaningful earned value schedule analysis to be carried out. However, LoE work packages can generate a cost variance and recorded Actual Costs of Work Performed (ACWP) can still be meaningfully compared to the BCWP. Level of effort Work Packages should be separately defined from other Work Packages so as to avoid distorting any Earned Value Analysis.

4.5.6 Apportioned Effort

Apportioned effort is effort that by itself is not readily divisible into short packages but is directly related to measurable progress within other Work Packages. Apportioned effort is normally used for tasks such as Inspection (during manufacturing). The Control Account Manager apportions the equivalent effort that has been expended in achieving the progress

4.6 Establishing a Project Baseline

4.6.1 Static Plan

The corner-stone of a successful project is having a plan and sticking to it. If the plan is continually changing then any conclusions reached as a result of analysing the plan are shallow. The plan must include all elements of the project. Minor changes at the lowest level of the plan should not affect the overall plan structure. Monthly progress updates must be used to record progress, not to update and change the plan. All project team members must be actively using and reporting against a common plan. Any plans, or significant changes to an established plan, must undergo a formal approval process before they become a baseline plan.

•

4.7 Measuring Costs and Committed Costs

The actual costs of work performed, ACWP, used in the Earned Value calculations include:

• Labour costs

• Direct expenses

• Material costs

• Subcontractor costs

When only actual costs are being used to measure Earned Value, committed costs should not be included in the calculations. Committed costs must be included in the Estimate To Completion (ETC). However, most projects base the time phasing of non labour spend on committed cost dates and not actual cost dates, as it is difficult to estimate when costs become actual costs. In order to compare progress directly with the plan, the actual costs must include the outstanding commitment. An added benefit of including outstanding commitment is that commitments are not forgotten in the overall Estimate At Completion. Care must be taken to ensure that like is compared with like. Each project must decide whether to use actual costs or to use actual cost plus outstanding commitments in their calculations. Once decided, the approach should not be changed during the life of a project. As costs can be transferred or mis-booked during a period, it is recommended that cumulative costs are used in any calculations and that costs for the period be calculated as the difference between the cumulative costs last period and the current cumulative costs.

4.8 Performance Measurement

4.8.1 Schedule Performance

Performance against the schedule is measured in several ways in an EVM system. It is however important, when analysing derived metrics for both current and forecasted performance, to also consider: § Validity of base data § Trends as opposed to ‘one-off’ variances § Risk in remaining work § Written reports § Critical Path

4.8.2 Calculating and Reporting Earned Value

4.8.2.1 How To Calculate Variances / Indexes

All variances are measured in terms of cost and apply equally to all methods of measurement. There are five types of variances / indexes commonly used. SV Schedule Variance - This is the cost comparison of what has been

earned to what was budgeted SV = BCWP - BCWS SV (%) = (SV/BCWS) x 100% CV Cost Variance - This is the cost comparison of what has been earned to

what has been spent CV = BCWP - ACWP CV (%) = (CV/BCWP) x 100% VAC Variance at Completion - This is the cost comparison of the budget at

completion with the current estimate at completion VAC = BAC - EAC VAC (%) = (VAC/BAC) x 100 SPI Schedule Performance Index - Indicates how for behind or ahead of

schedule the project is and tends towards unity as the project progresses. It is of minimal value as the project nears completion.

SPI = BCWP / BCWS CPI Cost Performance Index - This is the index of Earned Value to actual

costs. Below unity is bad, above is good. CPI = BCWP / ACWP In addition to these variances being shown on a cumulative spend graph, the indices can also be plotted cumulatively through the life of a project to show improved (or worse) performance.

4.8.2.2 Estimates at Completion

The Estimate at Completion (EAC) also referred to as the Latest Revised Estimate (LRE), is the best estimate of cost based on realistic plans and assumptions by management and using the most current and accurate information available. The EAC is the sum of the actual costs (ACWP) up to time now plus the best estimates of the costs still to be incurred (Estimate to Completion). Thus: EAC = ACWP Cumulative + ETC. The following should be considered when defining detailed EAC:

• Past performance

• Required efficiency to recover

• Costs incurred to date

• The use of Contract Charging Rates (incorporating overhead cost pools) to obtain the Cost of Labour based estimates (see section 5.4 for derivation of forecast charging rates)

• Technical assessment of tasks remaining

• Cost and schedule variances incurred to date

• Expected future efficiency

• Percentage of task already completed and remaining risks (risk review and probability of cost impact)

• Ongoing or outstanding management actions

• Forecast schedule completion of the task

• Anticipated changes to the scope of work

• Future economic conditions, forecast rate changes (from section 5.4) and escalation indices

• Previous EAC trend

Simple Tests Of Reasonableness As well as the above formulae, there are several tests of reasonableness which can be applied to project data. To Complete Performance Index (TCPI) Current performance indicators (SPI, CPI) will provide a ‘performance to date’ view of the project. TCPI allows a projection of the anticipated performance to achieve either the BAC or the EAC (dependent on which formula is employed). I.e. ‘What level of performance do we need to achieve to meet the BAC or EAC’. A figure greater than 1.0 indicates that future efficiency will need to be greater than planned, conversely less than 1.0 indicates future efficiency may be less than planned to achieve BAC or EAC (dependent on which formula is employed). TCPI can also be compared with the CPI. This can provide additional performance information and a comparison of current efficiency (CPI) to planned efficiency (TCPI). If the TCPI is greater than the current CPI, future efficiency must improve if we are to achieve the BAC/EAC. This technique is often used during the preparation of VAR’s comparing past performance to planned future efficiency. To check the accuracy of the budgeted cost of work performed: BCWP = (ACWP / EAC) x BAC To check the accuracy of forecast costs there are two approaches: EAC = BAC / CPI ETC = (BAC - BCWP) / CPI To check forecast completion dates (in weeks from project start): Forecast Completion = Original Completion / SPI For a full description of the Earned Value formulae, see Appendix C.

4.8.2.3 Reporting Graphs

The following figure demonstrates the performance of a project through the use of the Earned Value data elements. It provides a quick view of current status and prevailing trends. It may be used as a basis for forecasting the project end conditions.

COST

TIME

EARNED VALUE(BCWP)

ACTUAL COSTS(ACWP)

ESTIMATE ATCOMPLETION

(EAC)

BUDGET ATCOMPLETION

(BAC)

TIME NOW

ESTIMATE TOCOMPLETION

(ETC)

VARIANCE ATCOMPLETION

(VAC)

BUDGET(BCWS)

COST VARIANCE

(CV)SCHEDULEVARIANCE

(SV)

Figure 6 - Earned Value Graph

This graph can also include, if required, the Estimate at Completion and the forecast completion date for the previous reporting periods.

4.8.2.4 Variances/Thresholds

So that all variances need not be printed or explained in detail at each reporting cycle it is recommended that variance thresholds are established. These thresholds are set so as to minimise the detail included on reports which only show minor variances. If any of the values being monitored fall within predefined limits then full details are not required on the variances. However, when any of the variances exceed the thresholds then a full variance analysis, together with methods of recovery, should be reported. Thresholds can be set as a value, as a percentage or both. The values set for each project will be decided by the size, complexity, risk, etc., of each project. It is normal for separate thresholds to be set for last reporting period and cumulative performance. Consideration should also be given to the convergence of thresholds over the life of the project.

4.8.2.5 Performance Trend Charts

The performance trend chart shows the percentage change in schedule variance and cost variance at each reporting period. The graph gives a summary view as to whether performance is improving or deteriorating and whether the variances are outside the agreed thresholds.

0

5

10

15

-5

-10

-15

0-5-10-15 5 10 15

SCHEDULE

VARIANCE

%

COST

VARIANCE

%

1

2

3

4

Figure 7 - Performance Trend Chart

The two central circles show the minimum and maximum thresholds. The CV and SV are plotted on the graph at each reporting cycle in the project. The four quadrants of the graph indicate: Top left quadrant Over budget and ahead of schedule Top right quadrant Under budget and ahead of schedule Bottom left quadrant Over budget and behind schedule Bottom right quadrant Under budget and behind schedule An alternative approach to the performance trend chart is to show the change in schedule variance and cost variance on a time phase and to include the management contingency. This graph indicates whether performance is improving and whether this performance has been aided by the transfer of Management Contingency into the budget.

An additional graph that can be used is the CPI / SPI curve.

VARIANCE

SCHEDULE

VARIANCE

COST

VARIANCE

MANAGEMENT

CONTINGENCY

NEGATIVE

Figure 8 - Performance Graphs

The assessment of performance through cost and schedule variance must take into account any potential ‘washout’ of any one budget type over another e.g. where material cost is significantly higher than the cost of the labour required to process/use the material. In these instances, separate WPs should be created for material and labour. 4.9 Change Management - Updating Baselines

The approved project baseline is the time-phased budget against which project progress and performance are measured and reported. This baseline is used as the Budgeted Cost of Work Scheduled (BCWS) against which all calculations are generated. A baseline plan not only defines the financial baseline and structures for a project but also defines the timescales, resources and restraints of the plan. A baseline should be established at the work package level, not at the activity level. Although baselines are essential for all firm and fixed-price contracts, benefits can also be gained when they are used on time and materials or cost plus contracts. Baselines on tasking contracts are more difficult to administer due to their continually changing scope. Any changes to the current baseline must be strictly controlled in order to maintain a valid basis for contract performance. All changes must be reconcilable back to the initial contract. The current baseline must be reconcilable back to the original baseline. Changes to the current baseline must not be made solely due to an overspend or a delay. Any change to a baseline plan should only take place when:

• There is a change to the scope of the project

• Labour rates have been changed

• Project delays or overspends have been deemed irrecoverable by Senior Management and the current baseline does not reflect reality.

Baselines are updated by adding extra budget for additional work scope and / or transferring contingency (MR) costs into the Budget Baseline. Management Reserve can only be transferred with management approval. All transfers must be documented and authorised. The additional budgets can be incorporated into the project using several approaches:

• New Work Packages can be generated solely for the budget transferred

• Existing Work Packages can be closed and new Work Packages opened to include outstanding work plus the additional budget

A mixture of approaches can be taken dependent on the type of Work Package being updated. In addition to the options in allocating the revised budget there are two approaches to the time phasing of the budget:

• The overall budget and performance graphs can be shown as a saw-toothed graph

• History can be recalculated using updated budget

The recommended approaches to be used for transferring or increasing the budget are: If it is possible to differentiate the new work from the existing work then the approach is to create a new Work Package and assign the additional work and the additional budget to the new Work Package. For Work Packages that are in progress, set BCWS equal to BCWP and close the Work Package. Subtract BCWP from the Work Package BAC to determine the remaining budget. Create a new Work Package and assign the outstanding work. Figure 9 shows the effect of this approach.

W P A

W P B W P C

W P A

W P B W P CW P N E W

B A C = 5 0 0

B C W P = 2 5

A C W P = 1 2 5

B A C = 1 2 5

A C W P = 1 2 5

B C W S = 1 2 5

W P C O M P L E T E

B A C = 4 7 5

A C W P = 0

B C W P = 0

B E F O R E A F T E R 1 0 0 U N I T S O F C O N T I N G E N C Y

T R A N S F E R R E D

Figure 9 - Transferring Contingency

Additional budget must not be assigned to a closed WP. If the current baseline is being amended due to an irrecoverable overspend, the approach is to create a new WP, assign the transferred contingency to the new WP and make the new WP 100% complete. If the WP is a Level of Effort WP then the budget can be assigned to the existing WP without a new WP being raised as long as retrospective changes are not made to the phasing of the BCWS. When the new baseline has been completed, the overall future budget graph should be recalculated (from time now only) and a new graph redrawn from the current date until completion. This will result in a 'saw-tooth' graph. The project budget and performance graphs should not be recalculated back to day one of the project. The only exception to making retrospective changes is when there has been a retrospective labour rate change.

5 IMPLEMENTATION PROCESS

Simple flow chart and reference to the accompanying Implementation Guides

6 SYSTEM REVIEW

Once an EVMS has been established it is considered good practice to review the system in order to ensure that it is being operated effectively, and is compliant with recognised standards (the EVM criteria). The reviews may be demanded and conducted by a Customer; alternatively, many companies operate an internal process against the same standards. The Earned Value Management reviews provide confirmation of an early capture of scope, quantifying it in terms of cost and schedule with the structure to manage it in a controlled manner from there on. A strong review will identify areas of weak planning, so enabling improvements early on. Weak reviews may not highlight these issues, and the system will not therefore be strengthened. It is important then that reviews are conducted professionally, to meaningful standards. The consequences of not conducting reviews on an EV system are that poorer quality planning, with a less reliable reporting system will exist. The deficiencies will gradually manifest themselves but over time, and perhaps too late to fix. Earned Value reviews provide several benefits, regardless of whether your customer demands them. a) They confirm that an integrated project management system exists, instead of

just pockets of good planning, b) They will provide a fixed cut-off point to conclude the planning phase. c) They act as maturity gates. They validate reliable performance data, so

avoiding wasted subsequent work on unsound information. d) They reduce risk. e) They should ensure that historic experience from previous projects is captured. f) They can be an effective tool to put the focus on performance measurement. There are three main categories of EVM System Reviews:

6.1 Integrated Baseline Review (IBR)

In order to check out the plan, an Integrated Baseline Review may be held, typically 6 months into the project. An IBR is a formal review preferably conducted by the customer, because they are the ones who understand what they are trying to achieve in the words of the contract. It should ensure the timely establishment of the technical, cost and schedule baselines. It determines the credibility, sufficiency and adequacy of the planning, and ensures that activities are integrated with each other and focus on the risks. This is achieved by a review which includes interviews with the managers lead by subject specialists supported by EV experts, and data traces to ensure process integrity

6.2 Demonstration Review

In order to examine the reporting systems a Demonstration Review may be held typically a year or so into the project The Demonstration review is different to an IBR because it reviews the total system, looking particularly at the reporting operations. The Systems Description is checked fully for compliance against all the Earned Value criteria. In addition to the System Description review, data traces and interviews are undertaken. Covering areas that play a role in operating the system such as Finance and Project Controls as well as the managers. This time all the EV criteria are reviewed. The Demonstration Report is written during the visit, based on the five criteria groups of; organisation, scheduling, planning and budgeting, accounting, analysis and revisions. It highlights where the system is working well and addresses the discrepancy reports on system deficiencies, which have to be closed for the company to then achieve validation.

6.3 Surveillance Reviews

In order to confirm that standards are being maintained periodic Surveillance Reviews throughout the remainder of the project. Like any dynamic control system, there is always a possibility that it may run out of control; similarly with an Earned Value Management system, it can sometimes be easy for the company to fall into complacency and let the management system run without doing any further data checks leading to data integrity problems. At this stage of the contract there are likely to have been substantial changes made to the company’s system. These will include changes, which have been made, as improvements to the system and these will need to be reviewed to ensure they are still in accordance with the guidelines of the criteria. There is also the possibility that there have been a large number of changes to both management and Cost Account Managers, these managers need to be interviewed to ensure that they are fully conversant with the management of Earned Value. Surveillance must ensure that the Project’s EVMS:

• Provides timely and reliable cost, schedule and technical performance information summarised directly from the projects internal management system

• Complies with the criteria • Provides timely indications of actual or potential problems. • Maintains baseline integrity • Provides information that depicts actual conditions and trends. • Provides comprehensive variance analysis at the appropriate levels

including proposed corrective action in regard to cost, schedule, technical performance and other problem areas.

The review process is fully described in the Earned Value Management Accreditation Guideline (TBD)

7 PAYMENT BY EARNED VALUE

Earned Value (BCWP) can form the basis for payment on a contract. It is not advisable to pay 100% of a contract on EV, 80% being the recommended maximum, the remainder being paid via milestones. Payment on Earned Value can be highly incentivising to a supplier or sub-contractor and advantageous to a customer for the following reasons: § Payment is based on actual progress, and when that progress occurs § Timely and accurate data is essential to all parties § Provides added focus to the maturity of the EVMS and the establishment of an agreed

baseline § Requires and develops a culture of trust and partnering between Customer and

Contractor Contractors may have the following concerns regarding Earned Value based payments: § Payment is in arrears – unless mobilisation payments are made, cashflow will be

negative § Customer will require full access to performance data, irrespective of type of contract –

this level of access may be considered excessive, and uncompetitive § Confusion between Budget and Funds, as the PMB becomes a revenue target rather than

baseline for performance measurement § Verification process may be a costly overhead § Potential to drive contractors to distort performance measurement in order to improve

cash flow § Incorporation of changes to Contract Budget Baseline may lead to distortions in the

payment profile Typical Payment Formulae: Payment = BCWP x %CPEV - PEVP BAC where BCWP = Earned Value to date BAC = Budget at Completion %CPEV = Percentage of contract price attributable to EV PEVP = Previous EV payments The split between EV payments and traditional milestones will depend on the type of project, risk being a major factor. The IBR becomes an important project milestone as it produces an agreed baseline and basis for EV payments. As with milestones, procedures for verifying EV payment claims need to be in place.

8 SUMMARY

blah, blah

9 WHERE TO GO FOR FURTHER HELP

blah, blah

APPENDIX A: EARNED VALUE MANAGEMENT GUIDELINES This section provides the basic criteria for projects to use in establishing and operating an integrated Earned Value Management System (EVMS). The criteria concept does not describe a system but a set of criteria that are intended to state the qualities and operational considerations of a project management system using earned value management without mandating system level characteristics. It is expected that compliance with the requirements detailed herein will allow key stakeholders, notably customers and shareholders, to gain confidence that projects are being managed and resources deployed in an effective manner. The criteria require projects’ management control systems to provide data which:

a) provide timely and reliable information about work progress; b) properly relate cost, schedule and technical accomplishment; and c) supply managers with information at a practicable level of summarisation.

The criteria are based on the industry standard (Ref **) and are organised in five major categories. Organisation

1.

Define the authorised work elements for the project. A work breakdown structure (WBS), tailored for effective internal management control, is commonly used in this process.

Paraphrase of Criterion: “Define authorised work and resources via CWBS”

2. Identify the project organisational structure including the major subcontractors responsible for accomplishing the authorised work, and define the organisational elements in which work will be planned and controlled.

Paraphrase of Criterion: “Establish organisational responsibility for work accomplishment via OBS.”

3.

Provide for the integration of the project’s planning, scheduling, budgeting, work authorisation and cost accumulation processes with each other, and as appropriate, the work breakdown structure and the organisational structure.

Paraphrase of Criterion: “Ensure management sub-systems support each other, the CWBS and the OBS.”

4.

Identify the organisation responsible for controlling overhead (indirect costs).

Paraphrase of Criterion: “Who is responsible for overhead cost control.”

5. Provide for integration of the project work breakdown structure and the project organisational structure in a manner that permits cost and schedule performance measurement by elements of either or both structures as needed.

Paraphrase of Criterion: “Integrate CWBS with OBS.”

Planning, Scheduling and Budgeting

6. Schedule the authorised work in a manner which describes the sequence of work and identifies significant task interdependencies required to meet the requirements of the project.

Paraphrase of Criterion: “Schedule all Authorised Work sequentially.”

7. Identify physical products, milestones, technical performance goals, or other indicators that will be used to measure progress.

Paraphrase of Criterion: “Identify interim goals (milestones) by which to measure work accomplishment.”

8. Establish and maintain a time-phased budget baseline, at the control account level, against which project performance can be measured. Budget for far-term efforts may be held in higher level accounts until an appropriate time for allocation at the control account level. Initial budgets established for performance measurement will be based on either internal management goals or the external customer negotiated target cost including estimates for authorised but undefinitised work. If an over target baseline is used for performance measurement reporting purposes, prior notification must be provided to the appropriate senior manager and customer (if required).

Paraphrase of Criterion: “Establish/Maintain at the Control Account Level, a Performance Measurement Baseline (PMB).”

9. Establish budgets for authorised work with identification of significant cost elements (labour, material, etc.) as needed for internal management and for control of subcontractors.

Paraphrase of Criterion: “Establish budgets by element of cost.”

10. To the extent it is practical to identify the authorised work in discrete work packages, establish budgets for this work in terms of pounds, hours, or other measurable units. Where the entire control account is not subdivided into work packages, identify the far term effort in larger planning packages for budget and scheduling purposes.

Paraphrase of Criterion: “Establish budgets at the Work/Planning Package level.”

11. Provide that the sum of all work package budgets plus planning package budgets within a control account equals the control account budget.

Paraphrase of Criterion: “BUDGETWP + BUDGETPP = BUDGETC/A ”

12. Identify and control level of effort activity by time-phased budgets established for this purpose. Only that effort which is unmeasurable or for which measurement is impractical may be classified as level of effort.

Paraphrase of Criterion: “Separately identify and control the use of

LOE”

13. Establish overhead budgets for each significant organisational component of the company for expenses which will become indirect costs. Reflect in the project budgets, at the appropriate level, the amounts in overhead pools that are planned to be allocated to the project as indirect costs.

Paraphrase of Criterion: “Establish overhead budgets and pro rate overhead pools across business base.”

14. Identify management reserves and undistributed budget.

Paraphrase of Criterion: “Identify MR and UB separately.”

15. Provide that the project target cost goal is reconciled with the sum of all internal project budgets and management reserves.

Paraphrase of Criterion: “CBB = BAC OF PMB + MR.”

Accounting Considerations

16. Record direct costs in a manner consistent with the budgets in a formal system controlled by the general books of account.

Paraphrase of Criterion: “Formally record all direct costs.”

17. Summarise direct costs from control accounts into the work breakdown structure without allocation of a single control account to two or more work breakdown structure elements.

Paraphrase of Criterion: “Prohibit multiple accounting as direct costs are summarised through the WBS.”

18. Summarise direct costs from the control accounts into the organisational structure without allocation of a single control account to two or more organisational elements.

Paraphrase of Criterion: “Prohibit multiple accounting as direct costs are summarised through the OBS.”

19. Record all indirect costs which will be allocated to the contract.

Paraphrase of Criterion: “Record all allocable indirect costs.”

20. Identify unit costs, equivalent units costs, or lot costs when needed.

Paraphrase of Criterion: “Identify applicable unit costs.”

21. For EVMS, the material accounting system will provide for: 1) Accurate cost accumulation and assignment of costs to control

accounts in a manner consistent with the budgets using recognised, acceptable, costing techniques.

2) Cost performance measurement at the point in time most suitable for the category of material involved, but no earlier than the time of progress payments or actual receipt of material.

3) Full accountability of all material purchased for the project including the residual inventory.

Paraphrase of Criterion: “Establish an acceptable material accounting system.”

Analysis and Management Reports

22. At least on a monthly basis, generate the following information at the control account and other levels as necessary for management control using actual cost data from, or reconcilable with, the accounting system:

1) Comparison of the amount of planned budget and the amount of budget earned for work accomplished. This comparison provides the schedule variance.

2) Comparison of the amount of the budget earned and the actual (applied/estimated where appropriate) direct costs for the same work. This comparison provides the cost variance.

Paraphrase of Criterion: “Identify performance measurement data elements at the C/A level on a monthly basis.”

23. Identify, at least monthly, the significant differences between both planned and actual schedule performance and planned and actual cost performance, and provide the reasons for the variances in the detail needed by project management.

Paraphrase of Criterion: “Identify schedule deviations on a monthly basis.”

24. Identify budgeted and applied (or actual) indirect costs at the level and frequency needed by management for effective control, along with the reasons for any significant variances.

Paraphrase of Criterion: “Identify overhead performance measurement data on a monthly basis.”

25. Summarise the data elements and associated variances through the project organisation and/or work breakdown structure to support management needs and any customer reporting specified in the contract.

Paraphrase of Criterion: “Sum performance measurement data elements through the CWBS and OBS.”

26. Implement managerial actions taken as the result of earned value information.

Paraphrase of Criterion: “Identify management response to variances.”

27. Develop revised estimates of cost at completion based on performance to date, commitment values for material, and estimates of future conditions. Compare this information with the performance measurement baseline to identify variances at completion important to company management and any applicable customer reporting requirements.

Paraphrase of Criterion: “Develop EACs and compare to CBB and CFSR funds estimates.”

Revisions and Data Maintenance

28. Incorporate authorised changes in a timely manner, recording the effects of such changes in budgets and schedules. In the directed effort prior to negotiation of a change, base such revisions on the amount estimated and budgeted to the project organisations.

Paraphrase of Criterion: “Incorporate all authorised changes in a timely manner.”

29. Reconcile current budgets to prior budgets in terms of changes to the authorised work and internal replanning in the detail needed by management for effective control.

Paraphrase of Criterion: “Reconcile original budgets with current budgets”.

30. Control retroactive changes to records pertaining to work performed that would change previously reported amounts for actual costs, earned value, or budgets. Adjustments should be made only for correction of errors, routine accounting adjustments, effects of customer or management directed changes, or to improve the baseline integrity and accuracy of performance measurement data.

Paraphrase of Criterion: “Prohibit retroactive changes to records.”

31. Prevent revisions to the project budget except for authorised changes.

Paraphrase of Criterion: “Only the Customer may revise the CBB.”

32. Document changes to the performance measurement baseline.

Paraphrase of Criterion: “ Document and report PMB changes to the relevant authority”.

APPENDIX B: EARNED VALUE TERMS AND TERMINOLOGY

Actual Cost of Work Performed (ACWP). The costs actually incurred and recorded in accomplishing the work performed within a given time period.

Allocated Budget. See Total Allocated Budget

Applied Direct Costs. The actual direct costs recognised in the time period associated with the consumption of labour, material, and other direct resources, without regard to the date of commitment or the date of payment. These amounts are to be charged to work-in-process when any of the following takes place:

a. labour, material, or other direct resources are actually consumed;

b. material resources are withdrawn from inventory for use;

c. material resources are received that are uniquely identified to the contract; or

d. major components or assemblies that are specifically and uniquely identified to a single serially numbered end item are received on a line flow basis.

Apportioned Effort. Effort that by itself is not readily measured or divisible into discrete work packages but which is related in direct proportion to the planning and performance on other measured effort.

Authorised Work. All work performed, pursuant to the contract, within the contract price.

Authorised Unpriced Work (AUW). Includes work that is outside the scope of the contract but which is planned and/or performed by the contractor in advance of a formal contract amendment.

Baseline. See Performance Measurement Baseline.

Budget at Completion. The total authorised budget for accomplishing the project scope of work. It is equal to the sum of all allocated budgets plus any undistributed budget (Management Reserve is not included.) The Budget at Completion will form the Performance Measurement Baseline when it is time-phased in accordance with project schedule requirements.

Budgeted Cost for Work Performed (BCWP). The sum of the budgets for completed work packages and completed portions of open work packages, plus the applicable portion of the budgets for level of effort and apportioned effort.

Budgeted Cost for Work Scheduled (BCWS). The sum of the budgets for all work packages, planning packages, etc., scheduled to be accomplished (including in-process work packages), plus the amount of level of effort and apportioned effort scheduled to be accomplished within a given time period.

Budgets for Work Packages. See Work Package Budgets.

Contract Budget Base. The contract target cost plus the estimated cost of authorised unpriced work.

Contract Price. The price payable by the Customer under the contract for the proper delivery of the supplies and services specified in the scope of work of the contract.

Contract Target Cost. The total of the sum of all control accounts plus undistributed budget plus management reserve.

Control Account. A management control point at which actual costs can be accumulated and compared to earned value and budgets (resource plans) for management control

purposes. A control account is a natural management point for cost/schedule planning and control since it represents the work assigned to one responsible organisational element on one Contract Work Breakdown Structure (CWBS) element.

Cost Variance. A metric for the cost performance on a project. It is the algebraic difference between earned value and actual cost (CV = BCWP – ACWP.) A positive value indicates a favourable position and a negative value indicates an unfavourable condition.

Direct Costs. The costs of resources expended in the accomplishment of work which are directly charged to the project, without inclusion of indirect costs.

Earned Value. The value of completed work expressed in terms of the budget assigned to that work.

Estimate at Completion (EAC). Actual direct costs, plus indirect costs allocatable to the contract, plus the estimate of costs (direct and indirect) for remaining authorised work.

Indirect Costs. The costs for common or joint objectives which cannot be identified specifically with a particular project or activity. Also referred to as overhead cost or burden.

Initial Budget. See Original Budget

Internal Replanning. Replanning actions for remaining effort within the recognised total allocated budget and schedule restraints. A normal project control process accomplished within the scope, schedule, and cost objectives of the project.

Level of Effort (LOE). Effort of a general or supportive nature which does not produce definite end products.

Management Reserve. (Synonymous with Management Reserve Budget). An amount of the total allocated budget withheld for management control purposes rather than designated for the accomplishment of a specific task or set of tasks. It is not a part of the Performance Measurement Baseline.

Overhead. See Indirect Costs

Performance Measurement Baseline (PMB). The time-phased budget plan against which contract performance is measured. It is formed by the budgets assigned to scheduled control accounts and the applicable indirect budgets. For future effort, not planned to the control account level, the performance measurement baseline also includes budgets assigned to higher level CWBS elements and undistributed budgets. It equals the total allocated budget less management reserve.

Performing Organisation. A defined unit within the contractor's organisation structure, which applies the resources to perform the work.

Planning Package. A logical aggregation of work within a control account, normally the far-term effort, that can be identified and budgeted in early baseline planning, but is not yet defined into work packages.

Replanning. See Internal Replanning.

Reprogramming. Replanning for the effort remaining in the contract, resulting in a new budget allocation which exceeds the contract budget base.

Responsible Organisation. A defined unit within the contractor's organisational structure which is assigned responsibility for accomplishing specific tasks

Significant Variances. Those differences between planned and actual performance which require further review, analysis, or action. Appropriate thresholds should be established as

to the magnitude of variances which will require variance analysis.

Supplies. The goods and services including Intellectual Property required to be supplied under the contract.

Total Allocated Budget. The sum of all budgets allocated to the contract. Total allocated budget consists of the performance measurement baseline plus all management reserve. The total allocated budget reconciles directly to the contract budget base. Any differences will be documented as to quantity and cause.

Undistributed Budget. Budget applicable to contract effort which has not yet been identified to CWBS elements at or below the lowest level of reporting to the Customer.

Variances. See Significant Variances.

Work Breakdown Structure (WBS). A product-oriented family tree division of hardware, software, services and other work tasks which organises, defines, and graphically displays the product to be produced as well as the work to be accomplished to achieve the specified product.

a. Project Summary Work Breakdown Structure. A summary WBS tailored to a specific defence materiel item by selecting applicable elements from one or more summary WBSs or by adding equivalent elements unique to the project.

b. Contract Work Breakdown Structure (CWBS). The complete WBS for a contract, developed and used by a contractor within the guidelines of MIL-STD-881 and according to the contract work statement. The CWBS includes the levels specified in the contract and the contractor's extension

Work-Package Budgets. Resources which are formally assigned by the contractor to accomplish a work package, expressed in dollars, hours, standards or other measurable units.

Work-Packages. Detailed short-span jobs, or material items identified by the contractor for accomplishing work required to complete the contract. A work package has the following characteristics:

a. it represents units of work at levels where work is performed;

b. it is clearly distinguished from all other work packages;

c. it is assignable to a single organisational element;

d. it has scheduled start and completion dates and, as applicable, interim milestones, all of which are representative of physical accomplishment;

e. it has a budget or assigned value expressed in terms of dollars, man-hours, or other measurable units;

f. its duration is limited to a relatively short span of time or it is sub-divided by discrete value milestones to facilitate the objective measurement of work performed;

g. it is integrated with detailed engineering, manufacturing or other schedules.

APPENDIX C – EARNED VALUE EQUATIONS

Earned Value Equations a) Cost Variance

CV = BCWP – ACWP Positive/negtive indicates under/over planned cost

b) Cost Variance %

CPI % = CV *100 BCWP

C) Cost Performance Index

CPI = BCWP ACWP Indicates whether work will be completed within budget. Over/under 1.0 indicates greater/lesser efficiency.

d) Schedule Variance

SV = BCWP – BCWS Positive/negtive indicates under/over planned cost

e) Schedule Variance %

SPI% = SV *100 BCWS

F) Schedule Performance Index

SPI = BCWP BCWS Indicates whether work will be accomplished to schedule. Over/under 1.0 indicates greater/lesser than schedule accomplishment.

g) Schedule Variance in Months

SV (mths) = SV (cum)______ Average Monthly BCWP

Basic Variance Formulae a) Estimate at Completion1

EAC = ACWP + ETC

b) Estimate to Completion2

ETC = (BAC – BCWP) CPI

c) Estimate at Completion1

EAC = ACWP + BAC – BCWP CPI% * SPI%

d) Estimate to Completion2

ETC = (ATE + OD) – (ATE *SPI ) SPI

e) Independent Estimate at Completion

IEAC = ACWP + BCWR CPI An extrapolation of future cost assuming past performance

f) To Complete Performance Index¹

TCPI (BAC) = BAC –BCWP BAC – ACWP To calculate the required performance index to achieve in order to meet the planned budget

g)To Complete Performance Index²

TCPI = BCWR ETC An index of the anticipated future efficiency, in terms of anticipated expenditure to complete the budgeted work, based on the ETC

h) To Complete Performance Index³

TCPI (EAC) = BAC – BCWP EAC – ACWP To calculate the out-turn cost based on the planned performance rate.

Independent Statistical Forecast Formulae a) Percentage Spent

% Spent = _ACWP *100 BAC

b) Percentage Complete

% Compt = _BCWP * 100 BAC

c) Variance at Completion

VAC = BAC – EAC

d) Variance at Completion

VAC % = VAC * 100 BAC

this document has been prepared by an

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