# W8_SSG_Estimate Final Cost Using Earn Value NOT considering SPI

PROBLEM DEFINITION

After we sign the project contract, we start doing the job. While project is in progress, we need to forecast final cost of the project.

DEVELOPMENT OF FEASIBLE ALTERNATIVES

In order to be able to forecast the final cost, there are some factors to be considered, i.e. Plan value, Earn Value, actual cost, Cost performance Index. We will develop final forecast cost by considering above variable.

DEVELOPMENT OF OUTCOMES FOR EACH ALTERNATIVE

As plan value directly related to progress, the breakdown of the plan value, earn value, an actual cost, CPI, and SPI is referring to progress breakdown structure, i.e. Product Breakdown Structure (PBS) of Norzok Z-014.

Level 1- Budget Value of Project

Overall Budget Value will be on Top Level (Level 1, PBS View) and will be broken down in to following value:

Figure 1. Level 1 Project Budget of Project (PBS view)

Level 2- Activities weighting factor

Level 2 budget will be broken down in to phase level (SAB –point of view) with it’s value :

Figure 2. Level 2 Weight Factor (point PBS point of view)

SELECTION OF CRITERIA

There are some criterions to be an acceptable progress measurement. Some of them are:

ü  Earn Value calculation is generated to sufficient detail.

ü  All CPI elemet cover all the progress element

ü  CPI calculation is based on account that progress > 25 %.

ü  The equation used to estimate final cost is following:

Equation 1

IAC = ((AC-EV)/((EV/AC)))

Where:

IAC = Independent Estimate at Completion

AC = Actual Cumulative Cost

BAC = Budgeted at Completion

EV = Earned Value

SPI = Schedule Performance Index

ANALYSIS FOR THE ALTERNATIVES

Below is the Estimate final value by considering CPI and SPI using equation 1 and equation 2 above as of October 5, 2013 on level 0 (Product Breakdown Structure).

Figure 3. Project  Estimate Final Cost (PBS view)

For the monitoring and forecasting purpose, below is the project status as per October 5, 2013.

Figure 4. Project Status as per October 5, 2013

SELECTION ON THE PREFERRED ALTERNATIVES

Below are selected alternative for Onshore Gas Production & Pipeline Projects forecsting cost result:

Figure 5, Cost Forecast using Earn value NOT considering SPI

PERFORMANCE MONITORING AND POST EVALUATION RESULT

Based on the status above that project SPI 0,84 < 1,0, the project is delay and CPI 0,79<1 means the project is tend to overrun. Based on equation 1, Final cost forecast will be overrun 28.92%,

REFERENCES

Gary C. Humphreys.(2011).Project Management using Earn value 2nd Edition. Humphreys & Associate Management Consultant.

Norsok Standard.(2012).Standard Cost Coding System. Access October 04, 2013 from

http://www.standard.no/PageFiles/22773/Z-014%20Edition%202%20May%202012.pdf

Ecosys.(2013).Earn Value Management. Access October 05, 2013 from

http://www.ecosys.net/solutions/earned-value-management/

Paradip Mehta.(2013).Applying Earn Value on Both Small and Large Projects.Access October 05, 2013 from

The University of New Mexico.(2006). Brief Introduction to Earned Value Management (EVM).Access October 05, 2013 from

http://www.ece.vt.edu/swe/lwa/memo/lwa0066.pdf

Department Energy of United States.(2013). Earn Value Management Tutorial.Access October 05, 2013 from

http://www.srs.gov/general/EFCOG/04Training/DOETutorials/Module2WBS.pdf

Eleanor Haupt.(2013). Basic of Earn Value Management.Access October 05, 2013 from

http://www.projectmanager.org/pdfarchives/2006_conf/Basics_of_EVM_PartII-Eleanor_Haupt.pdf

Filed under Sutoyo S, Week 08

### 2 responses to “W8_SSG_Estimate Final Cost Using Earn Value NOT considering SPI”

1. Same comment as your W9 posting…..

One other question that you want to be sure you are able to answer. WHY is using the SPI X CPI formula BETTER than using CPI alone? Asked another way, what COSTS does the SPI take into account that the CPI alone does not?

FWIW, I just submitted this question to AACE for the EVP Exam…. Now, I have no idea if they will or will not accept my proposed question but it is well worth making sure you can answer just in case…

BR,
Dr. PDG, Jakarta

• Sutoyo Saragih

Pak Paul,
This is the answer just come out from my head (which is may be not correct).
“CPI is a function of effectiveness which is does not considering the time. For example in one group of craft labor lead by one supervisor. This group has 100 mhrs budget to execute the work. They do perform the work on schedule by using 100 mhrs full skilled craft labor. In this scenario, the unit cost let’s say \$100 / hrs for skilled labor.
Another Group also has budget 100 mhrs to execute the work and they can complete the Job even the group is using less skilled labor. The reason they can complete the job as per budget is because the supervisor smart enough to manage his man. In this case, the unit cost would be less than the first one let’s say US 90 / mhrs.
If we see those two scenarios, we can see that the 2nd group has better CPI compared to 1st group but the same SPI.

Rgds,
Sutoyo