Cost Control: the Earned Value method

variances from plan”. The goal or outcome of cost control are revised cost estimates, budget up- dates, and corrective action.

Cost control is not only about monitoring the costs and recording data; a very important part of cost control is also analyzing the data and taking corrective action before it is too late (Kerzner, 2001). Most project managers know the problems of using only partial information to track the status of a project: when only costs and time are used to monitor the progress of a project, the true status of a project cannot be determined. For example: half of the project budget may be used when the project is half-way in its time scheduled. This may indicate that the project is doing well, while much less than half of the work may be finished.

This is why an integrated cost/schedule/performance system is needed, that will provide the project manager with meaningful feedback during the project rather than afterwards. This will also ensure that corrective action can be taken in time, when corrections can still be made at the least costs (Turner, 1993; Oberlender, 2000). Kerzner (2001) confirms this: possible cost reductions are more readily available in the early project phases, but as the project progresses through its life cycle, the cost of corrective action becomes higher and higher.

So, in order to control costs, the actual expenditures should not be measured against the scheduled expenditures, but against some measure of performance: how much of the work is actually done. The WBS will help to do so (Turner, 1993). The cost estimates are prepared against the WBS, since it specifies the work elements and the resources needed to obtain its deliverables – the WBS identifies the project elements to which costs should/will be allocated (PMI, 2000). It is the framework on which costs, time and performance can be compared against the forecasts made for each level of the WBS (Kerzner, 2001).

Earned Value

In order to know the status of a project, different variances can be calculated. Variance analysis is reviewed more in-depth in Appendix IV. It is also the basis for Earned Value Management (EVM). Three basic types of costs are used in variance analysis, and are also used to apply EVM:

• Budgeted Cost for Work Scheduled (BCWS): the budgeted amount of cost for work sched- uled to be accomplished in a given time period (Planned Value)

• Budgeted Cost for Work Performed (BCWP): The budgeted amount of cost for completed work in a given time period. This is sometimes referred to as Earned Value.

• Actual Cost of Work Performed (ACWP): the amount reported as actually expended in com- pleting the work accomplished in a given time period (Actual Costs).

The ‘earned value’ (BCWP) concept is important to be able to estimate the variance in costs at the end of a project: a forecasting variable to predict whether the project will finish over or under budg- et. However, earned value is applied to completed work. To establish the percentage complete for a project, the work-in-progress also needs to be taken into account, for some allowance has to be made for activities started but not finished yet (Kerzner, 2001; Turner, 1993). The percentage com- plete is the budget used so far, as a percentage of the estimated total budget. There can be a large amount of work-in-progress, and this method is used to take that amount of work into consideration

as well. There are different methods to determine the percentage complete of an activity (Ober- lender, 2000):

• Units completed: the measurement of work is determined as a percentage that is calculated by dividing the number of specifications completed by the total number of specifications to be produced. Each part of the specifications should therefore require an equal effort of work.

• Incremental Milestone: the incremental milestone method is appropriate for activities that consist of easily recognized milestones.

• The Start/Finish Percentage: this method is applicable to those activities that lack clear in- termediate milestones. Those tasks are given 50% complete when the activity is started, and 100% when finished.

• The Ratio method: is applicable to tasks such as project management that have no particular end product, but are needed for the duration of the project. The percent complete is then estimated by dividing hours spent to date by the current estimate of hours at completion

Turner (1993) argues that some subjective estimate of percentage completed for activities can be made, but that it is likely to be an overestimate. He states that it has proven to be more accurate to assume that, on average, activities in progress are half finished. In other words, he is rooting for the start/finish percentage method, and this is backed up by Kerzner (2001). He calls it the 50/50 rule: “half of the budget for each element is recorded at the time that the work is scheduled to begin, and the other half at the time that the work is scheduled to be completed. For a project with a large number of elements, the amount of distortion from such a procedure is minimal”.

After the percentages for each individual element have been determined, the Earned Value can be calculated, using this percentage completed:

Earned Value (BCWP) = (Budgeted work-hours (for the particular task) ) x (percentage complete) After determining the progress for each task, using one of the methods above, the percentage com- plete for the overall project can be determined using earned value (Oberlender, 2000):

Percentage complete = (earned work-hours all accounts) / (Budgeted work-hours all accounts) To complete analyzing the project’s status, the Budget At Completion (BAC) and the Estimate At Completion (EAC) have to be determined. The BAC is the sum of all budgets (BCWS) allocated to the project, and often coincides with the ‘project baseline’. It shows what the total effort should cost. The EAC identifies the hours/monetary value that represent a realistic estimate of the finished work. It is the sum of all costs to date plus the estimate of all work remaining (Kerzner, 2001).

Using these definitions of the BAC and EAC, the Variance At Completion (VAC) can be determined:

VAC = BAC – EAC

Overall, it is stated that, although Earned Value gives a crude estimate, it can identify trends concern- ing the status of specific WBS elements. Earned values can be used to check whether costs are being

overrun, or if they are caused by activities finishing faster than planned (Kerzner, 2001). It can an- swer the essential questions “where are we today?” and “where will we end up?”

EVM for Enexis E&P

In the case of Enexis, EVM can be a great tool to assess how a project is doing. It will also help to make forecasts that are probably more reliable. In order to be able to use EVM, the information on planned and actual costs need to be derived from the control system in use. As stated before, a WBS is one precondition in using EVM. It is of importance for this research to review which other requi- sites there are to be able to use the method.