Controlling the Project Cost with EVA
According to the PMBOK Guide®, Project Cost Management includes the processes to plan, estimate, budget, finance, fund, manage, and control costs so the project can be completed within the approved budget.
Any project manager will meet the project cost objective if money spent at the project completion is on budget or under budget. Project budget is usually approved when the project is authorized, and should be a major project restriction. Sometimes project budget is changed when a project rebaseline is motivated.
In order to finish on budget, we need to report cost performance at each project follow-up meeting. The most used technique to measure project cost performance professionally is based on the standard Earned Value Management (EVM). We say EVA (Earned Value Analysis) to refer to the data analysis technique that uses EVM. According to the EVM standard, at each status date we need three data to analyze the project cost performance:
- Planned Value –PV– or Budgeted Cost of Work Scheduled –BCWS– is the authorized budget assigned to scheduled work, up to the status date. PV equals Budget at Completion –BAC– at project completion.
- Earned Value –EV– or Budgeted Cost of Work Performed –BCWP– is the measure of work performed expressed in terms of the budget authorized for that work, up to the status date. EV also equals BAC at project completion, like PV.
- Actual Cost –AC– or Actual Cost of Work Performed –ACWP– is the realized cost incurred for the work performed, up to the status date.
EVA analysis shows cumulative variances up to date and forecast values at project completion. This information allows the steering committee to take decisions and propose corrective or preventive actions. Measure and adjust regularly is key to control project costs.
See bellow an example of EVA analysis charts:
Data PV=€469K, AC=€348K and EV=€250K, shows cost performance to date is not acceptable:
- Cost Performance Index (CPI=0.72) means that project is completing 72 cents per euro spent.
- Currently we have an over cost of €98K. If we continue like this, we expect a final variance of €294K (Estimate at Completion EAC=€1044K).
- Schedule Performance Index (SPI=0.53) means that we are progressing at a pace of 53% over planned. Schedule Variance time SV(t) tells us that we are delayed for 34 days.
Root analysis found out that client was asking for more requirements without accepting deliverables. Following the escalating process, a meeting was called to extend scope, schedule and cost.
Budget at Completion –BAC– was increased from €750K to €800K. Cost baseline was changed:
Finally, this was the EVA analysis at project closure:
The project finished with an over cost of €55K, very high for sure, but not so high as estimated in the previous report of €294K. In fact, charts show the improvement after rebaseline.