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Earned Value For Variable Budgets: Dr. Joseph J. Orczyk, PE CCE

1) The chapter discusses variable budget systems which adjust budgets based on actual work quantities, rather than fixed budgets. Variable budgets are more appropriate for cost reimbursable contracts or projects with incomplete definitions where budgets may change. 2) Under a variable budget system, each work package is assigned an initial budget based on estimated quantities. As designs are completed and quantities are known with more certainty, the budgets are adjusted accordingly through a quantity adjusted budget. 3) Key earned value measurements like percent complete, schedule and cost variances, and indices can still be calculated under a variable budget system by relating actual work to the quantity adjusted budget rather than a fixed budget. Productivity is also directly reflected in the cost performance index.

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101 views

Earned Value For Variable Budgets: Dr. Joseph J. Orczyk, PE CCE

1) The chapter discusses variable budget systems which adjust budgets based on actual work quantities, rather than fixed budgets. Variable budgets are more appropriate for cost reimbursable contracts or projects with incomplete definitions where budgets may change. 2) Under a variable budget system, each work package is assigned an initial budget based on estimated quantities. As designs are completed and quantities are known with more certainty, the budgets are adjusted accordingly through a quantity adjusted budget. 3) Key earned value measurements like percent complete, schedule and cost variances, and indices can still be calculated under a variable budget system by relating actual work to the quantity adjusted budget rather than a fixed budget. Productivity is also directly reflected in the cost performance index.

Uploaded by

Sucher Eolas
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© © All Rights Reserved
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AACE INTERNATIONAL EARNED VALUE FOR VARIABLE BUDGETS

Chapter 15

Earned Value for Variable Budgets

Dr. Joseph J. Orczyk, PE CCE

INTRODUCTION In a sense, this is not really a new budget, but is rather a fore-
cast reflecting the latest designed material quantities to be
The concepts discussed in chapter 14 are based on a fixed budg- installed at budgeted productivity. The forecast then
et scenario, which is most often the case in fixed-price work. becomes the yardstick for measuring project achievement.
However, in the case of cost reimbursable contracts and other The real budgets under this system are the unit rates.
situations where the budget is subject to considerable variation,
the fixed budget system will not be appropriate for making The project's final quantity adjusted budget cannot be estab-
judgments on cost and schedule performance. In those cases, lished until design engineering is complete, which is usually
earned value determinations should be based on a variable well after the start of construction. The initial quantity adjust-
budget system. This chapter examines variable budget systems ed budget must therefore be based on forecasted quantities
and when to use them. from sampling and early takeoffs. The quantity adjusted budg-
et is adjusted as better quantity data are supplied from the
LEARNING OBJECTIVES engineering office, and the adjustments impact project
progress measurement. Since frequent quantity adjusted
budget adjustments can cause fluctuations in progress meas-
After completing this chapter, readers should be able to
urement, it is advisable to use the initial budget as the quanti-
ty adjusted budget until such time as reasonably firm quantity
• understand variable budget systems, and
information becomes available. Quantity data is developed in
• determine when to use a fixed versus a variable budget.
a code by code sequence as engineering progresses and final
commodity reviews are completed: earthwork is normally
EARNED VALUE—VARIABLE BUDGETS first, followed by concrete, structural steel, and so on. If the
quantity adjusted budget is developed code by code in the
The System—The variable budget system is particularly same sequence as the final commodity reviews, the transition
suited for a project that is initiated on the basis of an incom- from budget to quantity adjusted budget becomes a smooth
plete definition and that has a floating budget. Each identi- and gradual process. See Tables 15.1 and 15.2 for examples of
fied work package is assigned a budget (workhours and/or calculating quantity adjusted budget and progress.
dollars) based on the best available work quantity informa-
tion at that point in time. Then, as each work package is fully Cost and Schedule Performance—The methods previously
defined, its budget is adjusted to reflect final work quantities. discussed for calculating percent complete, schedule variance
(SV), schedule performance index (SPI), cost variance (CV), and
What Is a Quantity Adjusted Budget?—A quantity adjusted cost performance index (CPI), as described under the fixed
budget (QAB) varies directly with the quantity of work and budget system, are fully applicable in the variable budget sys-
is calculated by multiplying the budgeted workhour rates tem. Earned workhours may be calculated by multiplying per-
(and/or dollar rates) by the actual work quantities. For cent complete by the quantity adjusted budget, or, for those
example, assume that the initial budget for constructing a activities tracked under the units completed method, by multi-
foundation estimated 1,000 cubic yards of concrete at 10 plying the units completed by the budgeted unit rate.
workhours (WH) per cubic yard for a total of 10,000 work-
hours. However, if the actual design quantity were only 950 Productivity Analysis—Under the variable budget system,
cubic yards, the quantity adjusted budget would be equal to the cost performance index is equal to the productivity index
950 cubic yards times the 10 workhours, or 9,500 workhours. because the quantity adjusted budget automatically accounts
for quantity variations. A separate calculation of a productiv-

15.1

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