Schedule Updating and Project Control - Construction Project Scheduling and Control - page 200

The project is over budget by $400 (earned $6,400 but spent 12 $6,800).
If work continues at the same pace and pattern, the contractor will finish
this project 15 days ahead of schedule but with a budget deficit of $1,500.
Several factors must be taken into consideration when interpreting the
preceding numbers. Most importantly, we don't have enough information to
explain the variances. It is possible that the contractor is deliberately expedit-
ing work and that this is the cause of the cost overrun. It is possible that this
extra cost is justifiable to the contractor.
The BCWS represents the baseline schedule and budget. The BCWP represents
the “earned value” (i.e., the contractor's earning for work performed, based on the
contract price). The ACWP represents the actual costs spent so far.
Both the variances and performance indexes are measures of variances from the
baseline. The variances are absolute measures in units of dollars and days. The per-
formance indexes are relative measures in percentages. To “dramatize” the difference
between absolute and relative measures, let us consider two activities: the first with
a $100 budget and the second with a $10,000 budget. If we have a cost variance
(CV) of −$25 in each activity, the cost performance index (CPI for the first is 0.75
(seriously low) and 0.998 for the other (consider it perfect). Contractors strive for a
nonnegative cost and schedule variances, and cost and schedule performance indexes
at or exceeding 1.0.
In most cases, the forecasted amounts are used to raise a red (or yellow) flag rather
than to accurately predict future amounts. For example, in the previous example, the
contractor can tell his crew, “We are running $400 over budget and we are just 27%
complete. If we don't do anything about it, we will end up with a $1,500 deficit.” In
projects in which a penalty is imposed for finishing late and/or a bonus for finishing
early, forecasting can be a key tool for making a decision to accelerate the project. 13
Analysis of the causes for variance is beyond the scope of this topic. However, it is
important to point out four issues:
1. Minor variances are usually expected and tolerated (although discouraged
when negative). Major variances should be investigated.
2. For a negative variance (schedule or cost), it could be an indication of
underperformance or unrealistic baseline. For example, labor productivity
may have been lower than expected. This could be due to uncontrolled
circumstances (whether forgivable or not) or due to underestimation in the
baseline. Material prices could have risen unexpectedly, or waste may have
12 The contractor's overhead and profit are part of the “expenses.”
13 For example, see the see the topic on contractor-created float discussed previously in this chapter.