Finding the "Just Right" Actual Cost Level of Detail for EVM
This blog post was authored by David Moore, Director of Business Services at PrimePM (a Deltek partner).
An on-going discussion within industry is the level of actual cost detail needed to manage a project effectively. This is particularly true for a contractor with earned value management (EVM) reporting requirements. The minimum requirement is actual costs at the control account level. Is the work package level better?
The level of actual cost data directly impacts the data available for performance analysis and maintaining the estimate to complete (ETC) in an EVM cost tool such as Deltek Cobra. Adding the ETC to the actual costs incurred to date assists in determining the likely total estimate at completion (EAC) for the project. The classic EVM line chart below illustrates this. It shows the cumulative time phased budget, earned value and actual costs to date, ETC for the remaining work, and EAC used for performance analysis.
Let’s say your accounting system only provides actual costs at the control account level. That means the lowest level you can calculate the cost variance and other earned value metrics that use the actual cost values is the control account level. What about maintaining the ETC?
Some companies enter their ETC values at the control account level in the EVM tool. Ideally, these control account ETC values should reflect the current schedule and related resource requirements at the activity or work package level.
A better approach is to maintain the ETCs at the activity or work package level where resources are identified – the same level as the budget and earned value data regardless of the level of actual cost data. Why? Assuming the baseline schedule resource loaded activities were used to produce the time phased budget baseline, the current schedule status is the basis for claiming earned value and maintaining the ETC. The result? The ETC always reflects the current progress, realized risks, and current plan to complete the remaining work. Using Cobra, you can easily roll up the work package data to the control account level and still perform other performance analysis at the work package level. Do you need actual costs at the same level as the budget, earned value, and ETC data to adequately evaluate project performance and maintain a useful EAC?
The answer depends on the desired level of visibility and control. This is where scaling your project control system comes into play. Scaling is the art of selecting the appropriate level of data detail and project control practices to fit a project’s characteristics such as type of work, complexity, duration, risks, and contractual requirements.
Given a choice, actual costs at the work package level makes sense for complex, high-risk projects that require more management control. A complete set of EVM data at the activity and work package level helps the project control team to identify and proactively handle issues as well as manage resource requirements for the remaining work. It also provides reliable source data for the project manager to create a risk-based range of forecast project completion dates and expected total cost at completion. For a routine low risk project, actual costs at the control account level may make perfect sense. More data detail does not add value.
This is where EVM tools such as Cobra can make a difference when collecting actual costs from an ERP system such as Deltek’s Costpoint, SAP, or Oracle for performance analysis at any level of data detail. You can configure Cobra to model the way you do business and how data are coded in your financial system. With Cobra’s flexible coding structures, you can use this data model to create and maintain your time phased budget data, the basis for calculating earned value and maintaining the ETC. The result? When accumulating actual costs for work performed, it is consistent with how you planned and budgeted the work regardless of the actual cost level of detail.
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Cobra’s database connection and data sharing utilities also support data traceability and reconciliation. You can easily configure the actual cost data from any financial system and pull it into Cobra for performance analysis. You can verify there is a single authoritative source for the actual cost data in Cobra.
Another useful feature in Cobra is custom cost classes. Earned value must be claimed in the same accounting period as actual costs are recorded. In situations where the recording of actual costs is delayed such as for material or subcontractor work effort, you enter estimated actuals in Cobra for performance analysis. The estimated actuals are replaced with the recorded actual costs when they become available. This eliminates false variances when you have rightly claimed earned value but the actual costs aren’t available for the current reporting period. Using a custom cost class, you can segregate estimated actuals from the official recorded actual costs. Following your defined internal process, you clear the estimated actual value once you have pulled the actual costs from the financial system for use in Cobra.
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