## Lre Project Manage

• The estimate at completion identifies either the dollars or hours that represent a realistic appraisal of the work when performed. It is the sum of all direct and indirect costs to date plus the estimate of all authorized work remaining (EAC = cumulative actuals + the estimate-to-complete).

Using the above definitions, we can calculate the variance at completion (VAC):

The estimate at completion (EAC) is the best estimate of the total cost at the completion of the project. The EAC is a periodic evaluation of the project status, usually on a monthly basis or until a significant change has been identified. It is usually the responsibility of the performing organization to prepare the EAC.

The calculation of a new EAC and subsequent revision does not imply that corrective action has been taken. Consider a three-month task that is 99 percent complete and was budgeted to spend \$400K (BCWS). The actual costs to date (ACWP) are \$395K. Using the 50/50 rule, BCWP is \$200K. The estimated cost-to-complete (EAC) ratio is \$395K/\$200K, which implies that we are heading for a 100 percent cost overrun. Obviously, this is not the case.

Using the data in Table 15-5, we can calculate the estimate at completion (EAC) by the expression

EAC = (ACWP/BCWP) X BAC = BAC/CPI = (360/340) X 579,000 = \$613,059

where BAC is the value of BCWS at completion.

The discussion of what value to use for BAC is argumentative. In the above calculation, we used burdened direct labor dollars. Some people prefer to use nonburdened labor with the argument that the project manager controls only direct labor hours and dollars. Also, the calculation for EAC did not include material costs or general and administrative costs.

The above calculation of EAC implies that we are overrunning labor costs by 6.38% and that the final burdened labor cost will exceed the budgeted burdened labor cost by \$34,059. For a more precise calculation of EAC we would need to include material cost (assumed at \$70,000) and G&A. This would give us a final cost, excluding profit, of \$751,365, which is an overrun of \$37,365. The resulting profit would be \$86,000 less \$37,365, or \$48,635. The final analysis is that work is being accomplished almost on schedule except for subtask 4 and subtask 6, but costs are being overrun.

The question that remains is, "Where is the cost overrun occurring?" To answer this question, we must analyze the cost summary sheet for project Z, task 3. Table 15-5 represents a hypothetical case for the cost elements of project Z, task 3. From Table 15-5 we see that negative (overrun) variances exist for labor dollars, overhead dollars, and material costs. Because labor overhead is measured as a percentage of direct labor dollars, the problem appears to be in the direct labor dollars.

From the contractual column in Table 15-5 the project was estimated at \$27.86 per hour direct labor (\$241,000/8650 hours), but actuals to date are \$150,000/4652 hours, or \$32.24 per hour. Therefore, higher-salaried people than anticipated are being employed. This salary increase is partially offset by the fact that there exists a positive variance of 409 direct labor hours, indicating that these higher-salaried employees are performing at a more favorable position than expected on the learning curve. Since the milestones (from Figure 15-16) appear to be on target, work is progressing as planned, except for subtask 4.

The labor overhead rate has not changed. The contractual, BCWS, and BCWP overhead rates were estimated at 140 percent. The actuals, obtained from month-end reports, indicate that the true overhead rate is as predicted.

The following conclusions can be drawn:

• Work is being performed as planned (almost on schedule, although at a more favorable position on the learning curve), except for subtask 4, which is giving us a schedule delay.

• Direct labor costs are increasing through the use of higher-salaried employees.

• Overhead rates are as anticipated.

• Direct labor hours must be reduced even further to compensate for increased costs, or profits will be drastically reduced.

This type of analysis could have been carried out to one more level by identifying exactly which departments were using the more expensive employees. This step should probably be completed anyway to see if lower-paid employees are available and can work at the required position on the learning curve. Had the labor costs been a result of increased labor hours, this step would have definitely been necessary to identify the reason for the overrun in-house. Perhaps poor estimating was the cause.

In Table 15-5, there also appears a positive variance in materials. This likewise should undergo further analysis. The cause may be the result of improperly identified hardware,

TABLE 15-5. PROJECT Z,TASK 3 COST SUMMARY FOR WORK COMPLETED OR IN PROGRESS (COST IN THOUSANDS)

Cumulative to Date

Contractual BCWS BCWP ACWP Variance

Schedule Variance

Subtotal Material dollars

Direct labor hours Direct labor dollars Labor overhead (140%)

Subtotal

Subtotal

Total