Download Lecture 05 FA 2014

Yarmouk University
Hijjawi Faculty For Engineering Tech
Project Management and
Quality Control
Fall 2014
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Overview
 Cost Budgeting
 Preparing a financial plan for every major expense
category, such as administrative cost, financing cost,
production cost.
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Cost Escalation
 Cost Escalation: The amount by which actual costs
increase to overrun the initial estimated costs.
 Reasons for Cost Escalations:
 Uncertainty and lack of accurate information
 Changes in design or requirements
 Economic and social variables in the environment
 Work inefficiency, poor communication, and lack of control
 Ego involvement of the estimator
 Kind of project contract
 Bias and Ambition
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Cost Estimating and the Systems
Development Life Cycle
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Time
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System Life Cycle Costs
 Life Cycle Costs (LCC)
Are all costs of a system throughout its full
cradle-to-grave life cycle.
 Purpose of Life Cycle Cost Analysis:
To anticipate the realities of operating, maintaining,
and (ultimately) disposing of the end-item system
To establish target costs for operating, maintaining,
and disposing of the end-item system.
To design the system so it will meet those target
costs.
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Estimating Process
Estimate versus Target or Goal
• Estimate: a realistic assessment based upon known facts
about the work, required resources, constraints, and
the environment, derived from estimating methods
• Target or goal: a desired outcome, commitment, or
promise.
• Don’t confuse estimates with goals. The estimating
process is directed at producing good estimates, not
restating targets or goals.
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Estimating Process
Accuracy versus Precision
• Accuracy: the closeness of the estimated value to the
actual value
• Precision: the number of decimal places in the
estimate.
• Accuracy of estimates is more important than precision
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Cost Estimating Process
 Estimated costs are determined using four basic techniques:
1) Expert opinion
•
An expert provides a reasonable cost estimate due to breadth of
experience and expertise.
2) Analogy Estimate
•
•
developed by reviewing costs from previous, similar projects.
Adjustments are made due to differences between the proposed
project and those similar projects.
3) Parametric Estimate
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Derived from an empirical or mathematical relationship.
•
Parametric: Formula or Cost Function, see the following example
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Cost Estimating Process
Cost, cabling = 150 (total area + 10%)
+ 300 (number of rooms)
+ 125 (number of floors)
4) Cost Engineering
• refers to detailed cost analysis of individual cost
categories at the work package or task level.
• provides the most accurate estimate of all the methods.
• is the most time-consuming, requiring considerable
work-definition detail and design information—both of
which might not be available until later in the project.
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Cost Engineering Estimate
for a Small Project
 A, B, …, H: are eight
work packages
 1,2, and 3: are labor grades
(labor classifications that
indicates capabilities and
sometimes associated pay
ranges)
 The numbers inside the
boxes are the estimated
number of labor hours per
week
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Cost Engineering Estimate
for a Small Project (Cont’d)
 For each work package Table 9-1 shows estimates the cost of
material, equipment and supplies, subcontracting, and other nonlabor
expenses such as freight charges and travel.
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Cost Estimating Process
 Any of the previous methods for cost estimating can be
used in any area of project.
 Parametric and cost engineering methods are the best
 Rule of Thumb:
The smaller the work packages or portion of the enditem estimated, the better the estimate
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Cost Engineering Estimate
for Larger Projects
 Cost Estimating Process for larger projects include the
following steps:
1. PM: Uses WBS to identify work packages
2. FM: Subdivide work packages into identifiable
tasks; determine labor, material, facilities, and
resources requirements for each
3. Supervisors/team leads: Estimate number of labor
hours and quantities of materials needed
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Cost Estimating Process
Procedure for larger projects
Project Management
WBS information
1.
2.
Functional Management
3.
Work team
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Cost Engineering Estimate
for Larger Projects (Cont’d)
4. FM: check and aggregate time and material
estimates
5. FM: convert time estimates into costs
6. PM: checks over and approves all estimates aggregates
costs; added in overhead costs:
Project cost = ∑direct costs + ∑ overhead costs
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Cost Estimating Process
Project Management
6.
WBS information
Functional Management
4., 5.
Work team
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Cost Engineering Estimate
for Larger Projects (Cont’d)
7) The project manager adds contingency amounts to estimates to
offset uncertainty.
 Base Estimate = Σ (WP Estimates + WP Contingency)
(to handle “known-unknowns”: are sources of cost increases that
experience indicates as possible or highly likely; they include scrap and
waste, design changes, increases in the scope, size, or function of the enditem, and delays due to weather.
 Final Cost Estimate = Base Estimate + Overheads +
Project Contingency
(to handle “unknown unknowns”; PM controls this)
“Unknown unknowns” are external factors that affect project costs but
cannot be pinpointed or estimated. Examples include fluctuation in
exchange rates, shortages in resources, changes in the market or
competitive environment.
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Cost Engineering Estimate
for Larger Projects (Cont’d)
8) The project manager compares bottom-up estimates to topdown targets or goals. Attempt to reconcile differences.
– Top-down refers to estimating the cost by looking at the project as a
whole. A top-down estimate is typically based upon an expert opinion or
analogy to other, similar projects.
– Bottom-up refers to estimating costs by breaking the project down into
elements—individual project work packages and end-item components
cost.
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Estimation Process
Project Management 7., 8..
WBS information
WBS
information
Functional Management
Work team
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Elements of Typical Budget
I. Direct Costs
Direct Labor (DL)
Charges for labor working directly on project
Direct Overhead on Labor (% of DL)
Labor support: benefits, etc.
E.g., 40%
50,000.00
20,000.00
Direct Nonlabor and Materials (M)
Subcontractors, consultants, travel, telephone, materials,
purchased parts, etc.
10,000.00
Direct Overhead on Nonlabor and Materials (% of M)
Shipping, insurance, security, etc. E.g., 33.33%
3,333.33
Direct Total
83,333.33
II. General & Administrative (% of Direct Total) E.g., 20%
(Indirect overhead)
Corporate overhead: proposals, publicity, president, etc.
16,667.00
Budget Amount
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Performance Analysis
The Planned Value (PV)
• Planned Value (PV): is the approved value of the work to be
completed in a given time period; i.e. it is the money that you should
have spent as per the schedule.
• As per the PMBOK Guide “Planned Value (PV) is the authorized
budget assigned to work to be accomplished for an activity or WBS
component. Total planned value for the project is also known as Budget At
Completion (BAC).”
• PV = (Planned % Complete) X (BAC)
• Planned Value is also known as The Budgeted Cost of Work
Scheduled (BCWS).
• PV or BCWS = Hourly Rate * Total Hours Scheduled
(Example: PV = ($100/hr * 8 hr) = $800)
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Example on PV
• You have a project to be completed in 12 months and the
total cost of the project is $100,000. Six months have passed
and the schedule says that 50% of the work should be
completed. What is the Planned Value?
• Project duration – 12 months
Project Cost (BAC) – $100,000
Time elapsed – 6 months
Percent complete – 50% (as per the schedule)
• The definition of Planned Value says that Planned Value is the value of the
work that should have been completed so far (as per the schedule). Therefore,
in this case we should have completed 50% of the total work. Hence,
• Planned Value = 50% of value of the total work = 50% of BAC
• = (50%) ($100,000)= $50,000.
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Performance Analysis
The Earned Value (EV)
• The Earned Value (EV) is the value of the work actually
completed to date; i.e. it is the value of the project that you have
earned so far.
• As per the PMBOK Guide “Earned Value (EV) is the value of work
performed expressed in terms of the approved budget assigned to that work
for an activity or WBS Component.”
• Earned Value is also known as the Budgeted Cost of Work
Performed (BCWP).
• EV or BCWP = Baselined Cost * % Complete Actual
(Example: EV = baseline of $800 * 91.7% complete= $734)
Note: (% Actual Complete = 11 hours spent /12 hours
estimated to finish
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Example on EV
• You have a project to be completed in 12 months and the
total cost of the project is $100,000. Six months have passed
and $60,000 is spent, but on closer review you find that only
40% of the work is completed so far. What is the Earned
Value (EV)?
• The definition of Earned Value says that it is the value of the project that has
been earned. In this case only 40% of the work has been completed. Hence,
• Earned Value (EV) = 40% of value of total work
= 40 % of BAC
= (40%)($100,000)
= (0.4)($100,000)
= $40,000
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Performance Analysis
The Actual Cost (AC)
• The Actual Cost is the total cost incurred for the
actual work completed to date; i.e. it is the amount of
money you have spent till now.
• As per the PMBOK Guide “Actual Cost (AC) is the total
cost actually incurred in accomplishing work performed for an
activity or WBS component.”
• Actual Cost is also known as the Actual Cost of Work
Performed (ACWP).
• AC or ACWP = Hourly Rate * Total Hours Spent
(Example: AC = $100 * 11 hours= $1100 )
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Example on AC
• You have a project to be completed in 12 months and the
total cost of the project is $100,000. Six months have passed
and $60,000 is spent, but on closer review you find that only
40% of the work is completed so far.
• What is the Actual Cost (AC)?
• Finding the Actual Cost (AC) is simplest of all. As per the
definition of Actual Cost, it is the amount of money that you
have been spent so far. And in our question, you have spent
$60,000 on the project so far. Hence,
Actual Cost is $60,000
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Earned Value
Management(EVM)
 EVM
is a project management technique for measuring
project performance and progress in an objective manner.
 Because EVM has the ability to combine measurements
of :
Scope,
Schedule
and cost,
in a single integrated system, EVM is able to provide
accurate forecasts of project performance problems,
which is an important contribution for project
management.
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Project Tracking Without EVM
 Figure 1 shows the cumulative budget (cost) for
this project as a function of time (the blue line,
labeled PV).
 It also shows the cumulative actual cost of the
project (red line) through week 8.
 To those unfamiliar with EVM, it might appear
that this project was over budget through week 4
and then under budget from week 6 through week
8. However, what is missing from this chart is any
understanding of how much work has been
accomplished during the project.
 If the project were actually completed at week 8, then the project would actually be well
under budget and well ahead of schedule.
 If, on the other hand, the project is only 10% complete at week 8, the project is
significantly over budget and behind schedule.
 A method is needed to measure technical performance objectively and quantitatively,
and that is what EVM accomplishes.
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Project Tracking With EVM
Figure 2 shows the EV curve (in
green) along with the PV curve from
Figure 1.
 The chart indicates that technical
performance (i.e., progress) started
more rapidly than planned, but slowed
significantly and fell behind schedule
at week 7 and 8.
This chart illustrates the schedule
performance aspect of EVM.
Note: The Project manager identifies every detailed element of work that has been
completed, and sums the PV for each of these completed elements. Earned value may be
accumulated monthly, weekly, or as progress is made.
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Project Tracking With EVM
 Figure 3 shows the same EV
curve (green) with the actual cost
data from Figure 1 (in red).
 It can be seen that the project
was actually under budget, relative to
the amount of work accomplished,
since the start of the project.
 This is a much better conclusion
than might be derived from Figure 1.
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Project Tracking With EVM
 Figure 4 shows all three curves
together – which is a typical EVM line
chart.
 The best way to read these threeline charts is to identify the EV curve
first, then compare it to PV (for
schedule performance) and AC (for
cost performance).
 It can be seen from this illustration that a true understanding of
cost performance and schedule performance relies first on measuring
technical performance objectively. This is the foundational principle of EVM.
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Schedule Performance
 The following EVM formulas are for schedule management, and
do not require accumulation of actual cost (AC):
Scheduled Variance (SV) = EV - PV
(Example: SV = $734 - $800 = -$66)
 SV > 0 is good (ahead of schedule).
 SV = 0 at project completion because then all of the planned
values will have been earned.
Schedule Performance Index (SPI) = EV/PV
Example: SPI = ($734/$800) = 0.91 [ SPI<1]
 SPI > 1 is good (ahead of schedule).

SPI
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Cost Performance
 Budget at completion (BAC): The total planned value (PV or
BCWS) at the end of the project.
Cost Variance (CV) = EV - AC
Example: CV = $734 - $1100 = -$366 (indicating a cost overrun))
 CV greater than 0 is good (under budget).
Cost Performance Index (CPI) = EV/AC
CPI = $734/ $1100= 0.66 [CPI < 1] (indicating over budget)
 CPI< 1  that the cost of completing the work is higher than planned (bad);
 CPI= 1  that the cost of completing the work is right on plan (good);
 CPI> 1  that the cost of completing the work is less than planned (good
(under budget) or sometimes bad - may mean that the plan was too
conservative! The planners tie up available funds for other purposes).
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Forecast Cost At Completion
FCAC = Forecast Cost At Completion
= % by which on schedule x BCAC
= (ACWP/BCWP) x BCAC
=(AC/EV) x BCAC
= BCAC/(EV/AC)
= BCAC/CPI
where
 BCAC = Budgeted Cost At Completion
 ACWP = Actual Cost of Work Performed = AC
 BCWP = Budgeted Cost of Work Performed = EV
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Example on FCAC
 If the Budgeted Cost at Completion (BCAT) is
$990,000. At week 20, BCWP = $432,000 whereas ACWP
= $560,000. Calculate the FCAC.
 Solution: BCAT = $990,000
BCWP = EV = $432,000
ACWP = AC =$ 560,000
CPI = EV/AC = 432/560=0.77
(CPI<1  (over budget)
FCAC = $990,000/(432/560) = $1,283,333
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Forecast Cost To Complete
 FCTC is the estimate to complete the
remaining work of the project.
ACWP =AC
FCAC = FCTC + ACWP
BCWP =EV
CPI=EV/AC
FCTC = Forecast Cost To Completion
= Forecast Cost At Completion – ACWP
= FCAC – ACWP
= (BCAC/CPI) – (BCWP/CPI)
= (BCAC - BCWP)/CPI
=(BCAC-EV)/CPI
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Example on FCTC
FCTC = (BCAC - BCWP)/CPI
= ($ 990,000 - $ 432,000)/0.77
= $723,333.
 Summary: In week 20 we have completed 432,000 (EV) of
budgeted work at a cost of 560,000 (AC).
 Given the current trend, we expect to complete the project
at cost remaining of $723,333 for a final project cost of
$1,283,333. (i.e. $723,333 = $1,283,333 - $560,000)
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Example
Status & Forecast
1400
FCAC
SD (Status Day)
1200
BCAC
Cost ($1,000's)
1000
BCWS(PV)
At Week 20:
PV = $512,000
EV= $432,000
AC= $560,000
800
600
400
FBCWP(EV)
FACWP (AC)
200
0
0
10
20
30
40
50
Week
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Example
Status & Forecast
1400
FCAC
SD
1200
BCAC
Cost ($1,000's)
1000
BCWS
At Week 20:
PV = $512,000
EV= $432,000
AC= $560,000
800
600
400
FBCWP
FACWP
200
0
0
10
20
30
Week
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Scheduled
Revised
Completion
Completion
40
Variances
 Accounting Variance (AV):
AV= BCWS – ACWP = PV-AC
 Schedule Variance (SV):
SV= BCWP – BCWS = EV-PV
 Time Variance (TV):
TV = SD – BCSP
 Cost Variance
SD: Status Date
BCSP: date when BCWS = BCWP
CV= BCWP – ACWP=EV-AC
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Project (Week 20)
Project Status
600
At Week 20:
PV = $512,000
EV= $432,000
AC= $560,000
Cost ($1,000)
500
400
300
AV
SV
BCWS
BCWP
ACWP
200
100
0
0
5
10
15
20
25
Week
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SV = BCWP - BCWS = EV-PV =-$80,000
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Performance Indices
• SPI = Schedule Performance Index
SPI = BCWP/BCWS=EV/PV
SPI > 1
work ahead of schedule
• CPI = Cost Performance Index
CPI = BCWP/ACWP=EV/AC
CPI > 1
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Project (Week 20)
• SPI = BCWP/BCWS
= 432/512 = .84
• CPI = BCWP/ACWP
= 432/560 = .77
Project is behind schedule
With budget overrun
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S
U
M
M
A
R
Y
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Exercise 1
1)
You’re managing a project to install 200 windows in a new skyscraper
(‫ )ناطحة سحاب‬and need to figure out your budget. Each week of the
project costs the same: your team members are paid a total of $4,000
every week, and you need $1,000 worth of parts each week to do the
work. If the project is scheduled to last 16 weeks, what’s the BAC for
the project?
2) What will the Planned % Complete be four weeks into the project?
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Exercise 1
3) What should the PV be four weeks into the project?
4) You’ve checked with your team, but they have bad news. The schedule
says they were supposed to have installed 50 windows by now, but
they only installed 40. Can you figure out the actual % complete?
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Exercise 1
5) Look at the planned value, and then look at the Earned Value. Are you
delivering all the value you planned on delivering?
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Exercise 2
• Jeff and Charles have a total budget of $10,000, and they’re currently
halfway through the schedule.
• So their planned value is?
• Uh-oh! On a closer look, it seems they’ve really only gotten 40% of the
work done.
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Exercise 2
• Now that you have the EV and PV, you can tell Jeff and Charles if
they’re getting their money’s worth!
• So are we ahead of schedule or behind it?
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Exercise 3
• Your project has a total budget of $300,000. You check your records and
find that you’ve spent $175,000 so far. The team has completed 40% of
the project work, but when you check the schedule it says that they
should have completed 50% of the work. Calculate the following:
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Exercise 4
• You’re managing a highway construction project. Your total budget is
$650,000, and there are a total of 7,500 hours of work scheduled on the
project. You check with your accounting department, and they tell you
that you’ve spent a total of $400,000. According to the schedule, your
crew should have worked 4,500 hours, but your foreman says that the
crew was allowed to work some overtime, and they’ve actually put in
5,100 hours of work. Calculate these Earned Value numbers:
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Exercise 5
•
You are the project manager at an industrial design firm. You expect to spend a total of
$55,000 on your current project. Your plan calls for six people working on the project
eight hours a day, five days a week for four weeks. According to the schedule, your team
should have just finished the third week of the project. When you review what the team
has done so far, you find that they have completed 50% of the work, at a cost of $25,000.
Based on this information, calculate the Earned Value numbers:
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Exercise 6
• Your current project is an $800,000 software development effort, with
two teams of programmers that will work for six months, at a total of
10,000 hours. According to the project schedule, your team should be
done with 38% of the work. You find that the project is currently 40%
complete. You’ve spent 50% of the budget so far. Calculate
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• Estimate at Completion (EAC). The same as (FCAC)
• Estimate to Complete (ETC). The same as (FCTC)
• Variance at Completion (VAC).
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Exercise 7
•
You’re a project manager working on a large project scheduled to last for two years.
You’ve got six different teams working on five major functional areas. Some teams are
ahead of schedule, and others are falling behind. That means that you have cost overruns
in some areas, but you’ve saved costs in others—and that’s making it very hard to get an
intuitive grasp on whether your project is over or under budget! It’s nine months into
your project. The total budget for your project is $4,200,000. You’ve spent $1,650,000 so
far, and you’ve got a CPI of .875. Use the Earned Value Management formulas from
forecasting to figure out where things stand.
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Exercise 7
•
Now it’s six months later, and your project looks very different. You need to work out a
new forecast for what your budget situation will be like at project completion. You’ve now
spent a total of $2,625,000. You look at all of the activities done by the team, and you find
that the project is 70% complete. Can you come up with a new forecast for your project?
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Exercise 7
•
If EV is $93,406 and SPI is 0.91, what is the planned value?
•
If PV is $252,000 and BAC is $350,000, what is the planned percent complete?
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Exercise 7
•
Now try one on your own. If BAC is $126,500 and EAC is $115,000, what is the CPI?
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Exercise 8
•
BAC is $40,000 and EAC is $30,000, EV is $17,000, and AC is $15,000. What is the BACbased TCPI?
•
BAC is $100,000 and EAC is $107,000, EV is $68,000, and AC is $70,000. What is the EACbased TCPI?
•
BAC is $20,000 and EAC is $20,000, AC is $15,000 and the project is 75% complete. What
is the EAC-based TCPI?
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Questions
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