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Estimating Costs At Completion

Review this tutorial and the Project Pyramid Exercise until you are fully

comfortable with how to calculate an estimate at completion.

Take Special Note of “Points to Ponder”

EXERCISE 15

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LEARNING OBJECTIVES

ELO 8.1: Given project EVM information, determine impact to the Estimate at Completion (EAC).

ELO 8.2: Given project CPR data, calculate estimate at completion (EAC) range.

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Exercise 15. EAC CALCULATIONS & ASSUMPTIONS

STEP ACTION

1. Review the EAC formulas on slide 14.

2. Answer the Questions on slides 15 & 16

Criteria for Successful Completion

1. Responses consistent with slide show content

2. Responses that demonstrate logical assumptions, per slide show content.

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Estimate at Completion (EAC)

Develop supportable estimates. Start with assumptions. Learn how to use EAC formulas.

Use contractors’ data to determine contract status. Key to an accurate assessment is the contractors’ work package EV methods and definition of complete.

CPI = Cost Performance Index

The cum to date performance efficiency, or value of work completed for every $1.00 spent. A CPI of .80 means $.80 of work was completed for every $1.00 spent.

TCPI = To Complete Performance Index

The efficiency the contractor must achieve in order to meet their stated EAC. PMO will calculate the TCPI to assess the reasonableness of the contractor’s estimate. A TCPI of 1.13 means the contractor’s EAC depends upon completing future work at a rate of $1.13 worth of work for each $1.00 spent. Point to Ponder: If the contractor performance to date is 80%, what is the likelihood the contractor will perform at 113% for all future work?

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SPI = Schedule Performance Index = BCWP divided by BCWS =

The value of work completed for every $1.00 of work planned to complete.

An SPI of .75 means $.75 of work was completed for every $1.00 of work scheduled to be completed.

Points to Ponder:

The calculated schedule variance or schedule efficiency stated in dollars is simply an indicator that a true schedule variance may exist. This can be confirmed only by reviewing the milestone schedule and the critical path elements.

The dollarized SV does not recognize schedule ‘reserve’ also known as schedule ‘slack.’

SV = Schedule Variance = BCWP - BCWS =

Work completed minus work scheduled

About EVM Schedule Indicators

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The CPIcum represents the average efficiency at which the contractor has performed to date. In other words, the value of work completed for every dollar spent. A CPI of .80 means $.80 of work is completed for each $1.00 spent.

The TCPI represents the efficiency the contractor must perform from this point on to the end of the contract in order to meet the contractor’s stated EAC.

In Project Pyramid, the contractor has performed at an average efficiency or CPI cum to date of .71. In other words, the Pharaoh was getting $.71 worth of work for every $1.00 spent.

The contractor’s EAC of $22M says they must immediately begin to perform at an efficiency of 1.33, or complete $1.33 of work for every $1.00 spent, and continue this efficiency til contract completion. Therefore, one might conclude the contractor’s estimate is not likely. At the least, the PMO needs to ask some hard questions.

Next step: Develop your own independent EAC, using the contractor’s data. Your gold card gives you two often used formulas. The basis for all the EAC formulas is the CPI. You know the efficiency to date. You must decide your best guess on the efficiency the contractor will perform for the balance of the contract. A starting point would be to assume the same efficiency will continue. Research tells us the efficiency to date is as good as it is going to get, and performance is even likely to degrade. Sorry, but facts are facts.

Form your assumptions and calculate an EAC range. Best Case, Worst Case, Most Likely. I usually use the contractors’ estimates as the Best Case, since they tend to be wildly optimistic. Do the ‘eye-ball’ reasonable test. Does the curve appear realistic? If the BCWS curve flattens out at the end - not realistic.

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Management Reserve

Total Allocated Budget (TAB)

ACWPC

TimeNow

BCWSC

Completion Date

Schedule VarianceC

Cost VarianceC

PMB

All Realistic Plans/PMBs Form an ‘S’ Curve

BCWPC

Potential Schedule Slip

BAC

EAC

MR

Dotted Line = estimated schedule slip and cost overrun

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Management Reserve

Total Allocated Budget (TAB)

ACWPC

Time Now

BCWSC

Completion Date

PMB

Evaluate the PMB ‘S’ Curve - Notice the Flattened End

BCWPC

Contractor will do this Work Free?

BAC

Dotted Line = estimated schedule slip and cost overrun

EAC

Is this PMB realistic? Are we really getting 3-4 years work free?

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FACT: The Total Allocated Budget (TAB) minus Management Reserve always equals the PMB or BAC. TAB - MR = PMB

Stated another way,

The PMB or BAC plus Management Reserve always equals the Total Allocated Budget. PMB + MR = TAB

If MR equals ‘0’ the PMB = TAB.

Study the following graph.

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Calculate TCPI to Kr EAC

$

YearsTimeNow

Completion Point

NEGOTIATED CONTRACT COST

ACWP

BCWS

ManagementReserve=2M

Budget atCompletion(BAC)=20M

}

BCWP0

2

4

6

81010

12

14

16

18

20

22

0 2 4 6 8 10 12 14 16 18 20

1 3

§ 22M }

T CPI

§ 22MKR EAC

§ 22MKR EAC

Cum CPI

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Calculating an Estimate At Completion (EAC)

The estimate at completion formula is simply: EAC = ACWP + Estimate To Complete (ETC) (EAC = actual costs incurred + estimate to complete)

Make two key assumptions: 1. Will the contractor use the Management Reserve (MR)? Yes/No. 2. Will the contractor continue to perform at the same efficiency (CPI)? Yes/No. Improved efficiency? Degraded efficiency?

The basic EAC formula, EAC=BAC/CPI assumes the CPI (efficiency) cum to date will continue. Historically, this formula gives you an estimate that is as good as it gets. This statistic will probably continue, until we reach the point that we award contracts at a realistic cost, and develop realistic work plans or PMB’s.

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TCPI = Work Remaining =

Cost Remaining KR EAC

Work Remaining

Cost Remaining

Work Completed § BCWP = 10M

Costs Incurred

Total Budget, Authorized Work

§ BAC or TAB = 22M§ KR EAC =22 M

§ ACWP =13M

§ 12M

§ 12 M

Estimated Cost, Authorized Work

§ 9M

§ 9M= TCPI = 1.33

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Calculate TCPI to Kr EAC

$

YearsTimeNow

Completion

NEGOTIATED CONTRACT COST

ACWP

BCWS

ManagementReserve=2M

Budget atCompletion(BAC)=20M

}

BCWP0

2

4

6

81010

12

14

16

18

20

22

0 2 4 6 8 10 12 14 16 18 20

1 3

§ 22M }

T CPI

§ 22MKR EAC

§ 22MKR EAC

Cum CPI = .77 TCPI = 1.33 or 133%

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Is the contractor’s EAC reasonable?

If they have been performing at 77% efficiency, how likely is it they will begin performing at 133% efficiency? And maintain that efficiency through the end of the contract?

Well, if we can’t believe the contractor’s estimate, what is the likely EAC?

That depends on your assumptions...

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Estimates at Completion (EAC) Formulas

METHOD FORMULA

1. BAC/CPIC

2. ACWPC +

3. ACWPC +

4. ACWPC +

BAC - BCWPC

CPIC X SPIC

BAC - BCWPC(BCWP) /(ACWP) 7 MO

BAC - BCWPC

.8 CPIC + .2SPIC

The “Floor”- as good as it gets

Schedule is an issue

Selected months are relevant

Weighted indices are more relevant

The performance index in the formula, or CPI, is PM’s ‘best educated guess’

Past efficiency will continue

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CV

CV%

SV

SV%

CPI cum

SPI cum

TCPI (KR EAC)

Worksheet - Do the calculations using these data. It might look familiar

BCWS cum = 14 BCWP = 10 ACWP = 13 TAB/BAC = 22 *

KR EAC = 22

* Assumes MR will be 0 at contract completion

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STUDENT INDEPENDENT ESTIMATE

Best Case

Worst

Most Likely

Rationale:

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Program Office Estimate at Completion

Assumptions consider risk, past performance, etc.

Calculate estimates using several formulas. See gold card for two.

What EAC formula would you use for the most likely, and why?

Worst Case __________________

Best Case ____________________

Most Likely _____________________

?? EAC = TAB/CPI = $22/.77 = $28.6 ??

Key to these EAC formulas is the CPI, or performance efficiency factor. You will make an assumption as to the efficiency the contractor will achieve for the balance of the contract. Using TAB/CPI, the TAB value represents the assumption that all management reserve will be used, and it will be consumed at the same efficiency, .77. If you use BAC in the formula, BAC/CPI, you are assuming the MR will not be used, or if it used, it will be consumed at 100% efficiency. What do you assume?

Just a suggestion - history tells us the EAC derived assuming the same CPI continues is as good as it gets.

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EV TERMSNCC – Negotiated Contract Cost Contract price less profit/feeAUW – Authorized Unpriced Work Work approved, but not yet negotiatedCBB – Contract Budget Base NCC plus AUWOTB – Over Target Baseline CBB plus recognized overrunTAB – Total Allocated Budget Sum of budgets for authorized work-NCC,CBB or 0TBBAC – Budget At Completion Recognized contract budget -does not include MRPMB – Performance Measurement Integrated scope, schedule, budget - time-phased plan,

Baseline does not include MR MR – Management Reserve Contractor PM contingency budget based on risksUB – Undistributed Budget Authorized work not yet distributed to control accountsCA – Control Accounts Contractors’ key management control points WP – Work Package Near-term, detail-planned control account tasks PP – Planning Package Far-term, broadly defined control account tasks BCWS – Budgeted Cost for Work Scheduled Value of work planned -- WORK PLAN or PMBBCWP – Budgeted Cost for Work Performed Value of work completed -- EARNED VALUEACWP – Actual Cost of Work Performed Cost of work completed-- COSTS INCURREDEAC – Estimate At Completion (EAC) Estimated cost of authorized contract workCDRL - Contract Data Requirements List Obtain information reports via the CDRL

EVM POLICY (DOD 5000.2-R): Two Alternative EV Management Applications1. EVMS Standards : Government certifies management system meets Industry Standards.• Required for non-FFP contract exceeding $73M RDT&E or $315M procurement (CY00$). • PM may apply to contracts below thresholds - consider risks, criticality, complexity.•Contractor’s management system must meet the 32 Industry Standards.•PM obtains Cost Performance Report (CPR) via CDRL.

• CPR has 5 Formats (WBS, Organization, Baseline, Staffing, and Explanations).2. C/SSR: No Government certification - still expect fundamental management system .• Required for non-FFP contract exceeding $6.3M (CY00$) and 12 months in length.• Contractor system with reasonably objective earned value methods is adequate.• PM may obtain either the CPR or Cost/Schedule Status Report (C/SSR). • C/SSR has only 2 Formats (WBS and Explanations)

EVM Home Page — http://www.acq.osd.mil/pm/DSMC EV E-Mail Address — EVM@DSMC.DSM.MIL

DSMC EV Phone No. — (703) 805–2848/2968 (DSN 655)May 2000

Management Reserve

Control Accounts

Contract Price

Work Packages Planning Packages

OTB

CBB

OVERRUN

NCC or Target Cost

AUW

TAB Profit / Fees

PMB

Undistributed Budget

TCPI (TO COMPLETE PERFORMANCE INDEX) relative to contractor EAC

WORK REMAINING =COST REMAINING

BAC* – BCWP cum =EAC – ACWP cum (KR EAC)

Defense Systems Management CollegeEarned Value Management Gold Card

Management ReserveTAB

Cost Variance

Schedule Variance

ACWP

BCWPBCWS

$

EAC

Time Now Completion Date

• Schedule Variance SV = BCWP – BCWS

• Cost Variance CV = BCWP – ACWP

BCWPBCWS

BCWPACWP

VARIANCES Favorable is positive, Unfavorable is negative

CV % =CV

BCWPSV % = SV

BCWS• Variance at Completion VAC = BAC* – EAC

EAC (ESTIMATE AT COMPLETION) either PMO or contractor EACBasic formula premise: EAC = ACWP + ETC (Estimate to Complete)

1. EAC . =CPIC um

BAC* 2. EACC um = ACWPC um + BAC* – BCWP cum(CPI cum) (SPI cum)

• CPI (Cost Performance Index) cum to date

• SPI (Schedule Performance Index) cum to date

PERFORMANCE INDICES

BAC* BCWP cum

ACWP cum BAC*

• Percent Complete =

• Percent Spent =

CPI =

SPI =

Favorable is > 1.0, Unfavorable is < 1.0 _

BAC*PMB

Value of work completed for every $1.00 spent

Value of work completed for every $1.00 of work scheduled

Efficiency the contractor must perform to achieve the contractor EAC. Is the EAC realistic? The CPI is the factual performance efficiency to date. The TCPI is the efficiency the KR must perform from time now on, in order to achieve their EAC. The PMO calculates the TCPI to determine the reasonableness or likelihood of the KR estimate. If performance to date, CPI, is 80%, is it likely the future efficiency, TCPI, will be 115%?

TCPI =

Formulas using cum CPI assume performance to date is indicative of past performance

* BAC, CBB, or TAB

MR

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Cautionary Note:

It is one thing to calculate a number, based on a formula. It is another thing to select the formulas based on a thoughtful, logical process. Your EAC is as valid as your supporting assumptions.

We are looking for your thought processes, rather than a specific number. Take the time to think it through. Use some data from a real program you may be working on. See what EAC you come up with, and why.

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Visualize the PMB, TAB, and MR

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Developing Estimates at Completion, EAC, requires making some assumptions.

Your Gold Card provides some formulas, and your EVM Intro provided additional formulas. You must decide which, or which combination, best fits your program assumptions.

Do you assume all the MR will be used by the end of the contract? And, do you assume the contractor will perform at the same level of efficiency experienced to date? Then your formulas should include MR when using the “BAC.”

If you choose to not include the MR amount in your formula, you are assuming the contractor will perform at 100% efficiency when the MR is used. Then you must remember to add in the MR amount to your final EAC.

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The relationships among TAB, MR, PMB….

Always a true statement:

The BAC cum or PMB + Management Reserve = The Total Allocated Budget

The Total Allocated Budget - Management Reserve = The PMB or BAC cum

As you have surmised, sometimes the Contract Target Cost will not equal the Contract Budget Base or the Total Allocated Budget.

When Authorized Unpriced Work (AUW) is not yet negotiated the CTC does not equal the CBB.

When an Over-Target-Baseline (OTB) is approved, the CBB will not equal the TAB.

The term TAB is used to cover all - NCC/CTC, CBB, TAB

It may be true statement to say the the PMB + MR = CTC (unless AUW exists, or unless an OTB exists.) PMB + MR = TAB always holds true.

See the PMB Changes exercise to help clarify this.

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Management Reserve

Contract Target Cost = Contract Budget Base = Total Allocated Budget

ACWPC

TimeNow

BCWSC

Completion Date

Schedule VarianceC

Cost VarianceC

PROJECTED

SLIPPAGE

PMB

OverBudget

EACThe Contract at a GlanceThe Contract at a Glance

BCWPC

Schedule Slip

BACBAC

MR

TAB