# Earned Value Management – The Effect of Level of Effort (LoE)

**Introduction**

Level of Effort is typically chosen where it is difficult to define the work content or scope, Management activities are a typical example here. It is important to note that there can still be a Cost Variance (CV) on LoE type activities.

LoE as defined in Earned Value terms is where the earned work is the same as the planned work (BCWP = BCWS or EV = PV), in other words the Schedule Variance (SV) will always be equal to zero and the Schedule Performance Index (SPI) will always be equal to one.

There are occasions however where this rule may be broken, and when using Level of Effort it is important to understand some potential effects that may impact on the Earned Value calculations.

This is best demonstrated in a set of diagrams:

**LoE Operating as it should.**

In the below example we have our baseline to date (BCWS or PV) which is shown as the BLUE block. The work achieved to date (BCWP or EV) is represented by the GREEN block and the actual spend to date is shown as the RED block.

This picture shows the data as we would expect a LoE activity to be operating, the achievement (BCWP or EV) equals the baseline to date (BCWS or PV). As expected the SV will be zero.

There may be occasions where the start date of an LoE activity is re-forecasted to start later than initially planned.

**Re-Forecasted Start Date**

Period One

As you can see from the below diagram, the baseline profile has remained the same yet the activity has now been re-forecasted to start at a later date. The work achieved (BCWP or EV) to date does not equal the baseline to date (BCWS or PV) so the SV is not zero.

Period Two.

This effect continues through each period and each period that passes the Schedule Variance (SV) only increases.

Period Three.

Period Four.

In this period we are about to actually start the re-forecasted LoE activity, just look at the effect in the next period.

Period Five.

As this is a LoE activity and as we have already described earlier this means that the SV will always equal zero and the SPI will always equal one. Now the activity has started all the total amount of the budget planned to date (BCWS or PV) will be claimed.

Only this period actuals (ACWP or AC) will be claimed as the work has started in this period. Straight away this is giving a false indication of reality, as we move through the periods the position only worsens.

Period Six.

Period Seven.

Period Eight.

In this period it could be assumed that the work has been completed as the work achieved to date (BCWP or EV) equals the Budget At Complete (BAC), however in reality there is still several more weeks to achieve.

Looking at period 8 the data is indicating that the work has been completed and there has been an underspend for the achievement of that work. This is painting a favourable picture when in actual fact spend will still to be accrued until the activity has completed in reality.

As the SPI and CPI are unreliable in this instance there would be an impact to other calculations such as IEAC1 and IEAC2. As the BCWP is not a true representation of reality the TCPI(E) and TCPI(B) would also be unreliable hindering the predictive capability of Earned Value.

For further articles on Earned Value Management and other Project Control articles please visit our blog on our website www.myxacom.com where knowledge is no weight to carry.

# Earned Value Management – Basic Calculations

**Introduction**

Earned Value Management provides numerous metrics and indices for analysis to enable predictions of likely out-turn costs.

This article runs through the basic calculations involved in generating Earned Value data.

**Schedule variance (SV) **

This value is the difference between the work achieved to date (BCWP or EV) and the work planned to be achieved to date (BCWS or PV). The number generated will indicate if things are behind or ahead of where they should be. A negative value indicates that things are running behind schedule and a positive value indicates that things are running ahead of schedule.

SV= BCWP – BCWS

or

SV= EV – PV

**Cost Variance (CV)**

This value is the difference between the work achieved to date (BCWP or EV) and the cost to achieve that work (ACWP or AC). The number generated will indicate if things are underspent or overspent against the work achieved to date. A positive value indicates that there is an underspend and a negative value indicates that there is an overspend.

CV = BCWP – ACWP

or

SV= EV – AC

**Schedule Performance Index (SPI)**

The SPI is an indicator that is calculated by dividing the work achieved to date (BCWP or EV) by the work planned to be achieved to date (BCWS or PV). The value generated will either be above, equal or below one. A value above one indicates that things are progressing ahead of the planned position, tracking on one indicates that things are progressing as planned and below one indicates that the things are running behind the planned position.

SPI = BCWP/BCWS

or

SPI = EV / PV

**Cost Performance Index (CPI)**

The CPI is an indicator that is calculated by dividing the work achieved to date (BCWP or EV) by the cost to achieve that work (ACWP or AC). The value generated will either be above, equal or below one. A value above one indicates that for every one unit invested in the project there is a return greater than the investment. Tracking on one indicates that for every one unit invested that one unit is being returned and below one indicates that for every one unit invested the return is less than the investment.

CPI = BCWP/ACWP

or

SPI = EV / AC

**Estimate at Complete (EAC)**

The EAC is a forecasted position on completion, this is generated by adding the actuals spent to date (ACWP or AC) with the remaining work to go also known as the Estimate To Complete (ETC). The remaining work to go or ETC can be auto-generated but is more realistic to have members of the project team estimate the remaining work to go rather than subtract spend to date from the to total budget.

EAC = ACWP + ETC

or

EAC = AC + ETC

**Independent Estimate at Complete 1 (IEAC1)**

The IEAC1 generates a forecasted cost on completion by subtracting performance to date (BCWP or EV) from the total budget known as the Budget At Complete (BAC). This is the divided by the Cost Performance Index (CPI) and the actual spend to date (ACWP or AC) is then added. Using the CPI provides an optimistic view on the likely out turn cost based on past performance.

IEAC1 = ACWP + (BAC – BCWP)/CPI

or

IEAC1 = AC + (BAC – EV)/CPI

**Independent Estimate at Complete 2 (IEAC2)**

The IEAC2 generates a forecasted cost on completion by subtracting performance to date (BCWP or EV) from the total budget known as the Budget At Complete (BAC). This is the divided by the Cost Performance Index (CPI) which is multiplied by the Schedule Performance Index (SPI). The actual spend to date (ACWP or AC) is then added. Using the CPI multiplied by the SPI provides a pessimistic view on the likely out turn cost based on past performance.

IEAC2 = ACWP + (BAC – BCWP)/(CPI x SPI)

or

IEAC2 = AC + (BAC – EV)/(CPI x SPI)

**To Complete Performance Index (Estimate) (TCPI(E))**

The TCPI(E) provides an indices that indicates if the EAC is likely to be achieved. It should be used in conjunction with the Cost Performance Index (CPI) to indicate if historically this value has been achieved. If the TCPI(E) is higher than the historical CPI trends then it is unlikely that the forecasted completion cost will be achieved and the EAC value may have to be revised to a larger out turn cost. If the TCPI(E) value is lower than the historical CPI trends then the final outturn cost may be too ambitious and warrant a reduction. If the TCPI(E) and CPI figures are relatively close then the EAC could be considered a reasonable reflection given historical performance.

TCPI(E) = BAC-BCWP/EAC-ACWP

or

TCPI(E) = BAC-EV/EAC-AC

**To Complete Performance Index (Budget) (TCPI(B))**

The TCPI(B) provides an indices that indicates if the Budget At Complete (BAC) is likely to be achieved. It should be used in conjunction with the Cost Performance Index (CPI) to indicate if historically this value has been achieved. If the TCPI(B) is higher than the historical CPI trends then it is unlikely that the for BAC will be achieved. If the TCPI(B) value is lower than the historical CPI trends then the final outturn cost will be lower than the BAC. If the TCPI(E) and CPI figures are relatively close then the BAC is likely to be met.

TCPI(B) = BAC-BCWP/BAC-ACWP

or

TCPI(B) = BAC-EV/BAC-AC

**Variance At Complete (VAC)**

The Variance At Complete (VAC) is the difference between the Budget At Complete (BAC) and the Estimate at Complete (EAC). If the value is negative then there is likely to be an overspend on completion of the project, however if the value is positive then there is likely to be an underspend on completion.

VAC= BAC – EAC

# Earned Value Management – TCPI(E) & CPI

The power of Earned Value data lies in the forecast data that can be used to challenge and indicate the likely out turn cost of a project on completion.

TCPI(E) stands for Target Cost Performance Index (Estimate), the value derived from the TCPI(E) formula indicates the level of efficiency from the reporting period to the completion of the project that the project requires to achieve to meet the forecasted Estimate At Completion.

The formula for TCPI(E) is:

TCPI(E) = (Budget At Complete – Budgeted Cost of Work Performed)/(Estimate At Complete – Actual Cost of Work Performed)

It is important to use the TCPI(E) value in conjunction with the trend of the CPI value to assess if the TCPI(E) value is achievable given past performance. If it is considered not to be then the Estimate At Complete (EAC) may require revision.

For example if the CPI has historically trended around 0.65 and the TCPI(E) is indicating that to achieve the EAC there needs to be an increase to 1.28 from this point forward then what is the likelihood of achieving this? If this is not likely then the EAC would need to be revisited.

For further articles on Earned Value Management and other Project Control articles please visit our blog on our website www.myxacom.com where knowledge is no weight to carry.

# Earned Value Management – IEAC1 & IEAC2

The power of Earned Value data lies in the forecast data that can be used to challenge and indicate the likely out turn cost of a project on completion.

Two of such indicators are Independent Estimate At Complete 1 and Independent Estimate At Complete 2, more commonly known as IEAC1 and IEAC2.

The IEAC1 formula calculates the IEAC by subtracting the performance to date from the total budgeted value at completion and dividing by the Cost Performance index (CPI). This provides a more optimistic view of the likely out-turn cost than IEAC2.

IEAC1 = Actual Cost of Work Performed + (Budget At Complete – Performance to Data)/Cost Performance Index.

The IEAC2 formula calculates the IEAC by subtracting the performance to date from the total budgeted value at completion and dividing by the Cost Performance index (CPI) multiplied by the Schedule Performance Index (SPI). This provides a more pessimistic view of the likely out-turn cost than IEAC2.

IEAC2 = Actual Cost of Work Performed + (Budget At Complete – Performance to Data)/(Cost Performance Index X Schedule Performance Index).

The IEAC values are typically used to indicate the likely out-turn cost of a project at completion based on performance to date. This can be used to assess and challenge Estimate At Complete values provided by the project teams to help ensure that a realistic out-turn cost is forecasted.

It is important to used IEAC in conjunction with EAC as the IEAC is mathematical outcome and does not take into consideration the potential savings or additional overspends that project team members are aware of.

For further articles on Earned Value Management and other Project Control articles please visit our blog on our website www.myxacom.com where knowledge is no weight to carry.