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Answer: C. Use the Earned Value cost formula and review the results on a periodic basis. If you wait until the project ends to check on costs, it leaves you no time to correct the overages or re-apply unused funds in other areas. Here’s an easy explanation of how to use Earned Value cost formulas to judge where you stand as you go along. Imagine that your team begins a new project. When you planned, the Budgeted Cost of Work Performed (BCWP) was the cost of the work you anticipated would be accomplished toward the project once the work began. You estimated the BCWP amount at $5,000 per week for worker salaries and other items you needed to purchase. Earned Value (EV), the new term for BCWP, is identical in meaning and calculated the same way. You already may have used BCWP (EV) to figure Schedule Variances (SV) in earlier projects. By the time you finish the first week, costs have changed. Several team members have received salary increases, incurred overtime or found tasks took longer than estimated. The project scope has changed slightly and one vendor raised prices. Now, costs of the project are higher than you originally planned. Actual Cost of Work Performed (ACWP), now renamed (AC), is the Earned Value term for the cost paid out, or incurred, to obtain the resources that have been used on your project so far; whether people, materials, equipment or facilities. On this project, you find that the AC at the end of Week One is $6,250. By comparing what you originally anticipated this work would cost (BCWP or EV) to what it really cost (ACWP or AC), you can see if your project is over budget or under budget at this point in time. Here’s the formula. BCWP – ACWP = CV (Cost Variance). Or, using the new terms, If the Cost Variance is – (negative), you have spent more money to this point in time than you planned when you set up the project. If the Cost Variance is + (positive) you have spent less money to this point in time than you planned to get the work of the project accomplished. Think of your bank balance. If you see a negative number, you’ve overspent. If you have a positive amount, there is additional money for you to use. Project management software by Microsoft®, Primavera® or others will calculate BCWP, ACWP and CV for you automatically. This Cost Variance also shows you that for the $6,250 the company spent, the project has earned value from work that is equal to only $5,000. If some costs are greater than you foresaw, will other activities come in under budget to offset them? If not, you have an early indication that you need to adjust your plan if you intend to meet the original cost figures by the end of the project. For more about Earned Value, see the Quick Quiz in the 13 July issue of PMI Community Post.
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I know how much my projects cost at the end when all the accounting is complete, but by then it’s too late to change anything. What should I do to figure costs while I’m running the project?
Thanks to Barbee Davis, M.A., PHR, PMP, for contributing this Quick Quiz and answer. Ms. Davis is a reviewer for the global PMI Registered Education Provider Review Team. She owns Davis Consulting and is a published author, speaker, writer of training materials and an innovator in presentation skill workshops for corporate trainers. She holds a Black Belt in MS Project and teaches at the university level. Ms. Davis encourages your |
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