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They say no battle plan survives first contact with the enemy, and the same is often true of project planning. Part of project management is monitoring whether your project is on schedule and sticking to the budget. Budgeted cost of work performed, or BCWP, is a metric for figuring out mid-project how well you're doing.
TL;DR (Too Long; Didn't Read)
The BCWP formula is simple. If you've completed, say, 35% of the project, the budgeted cost of work performed is 35% of the budget. For a $40,000 project at 35% completion, the BCWP formula says you should have spent $14,000. This is also known as the earned value of the project.
Earned Value Management
BCWP is one of multiple alphabetical metrics — ACWP (actual cost of work performed), BCWS (budgeted cost of work scheduled), SPI (schedule performance index) — used in earned value management (EVM). EVM is a project management system for calculating how well the project measures up against the original budget baseline. Earned value management starts with three key metrics:
- Planned value (PV): How much was budgeted for work up to this date? This is also known as the budgeted cost of work scheduled.
- Earned value (EV): This is the same as BCWP, a measure of how much of the budget you should have spent. If, say, you've completed 60% of a $2 million project, the BCWP formula says your spending should be $1.2 million, or 60% of the budget.
- Actual cost of work performed (ACWP): How much have you actually spent? This is also known as actual cost of work performed.
EVM builds on these metrics to see how well or how badly the project compares to the original budget and schedule.
Project Performance Metrics
Once you calculate BCWS, BCWP and ACWP, you can plug them into various formulas to get a clear view of project performance.
- Schedule variance: Subtract PV from EV to see how far you're behind.
- Cost variance: In the cost variance formula, you subtract ACWP from BCWP to get a figure for how much you're over budget.
- Schedule performance index: Divide the BCWP figure by the BCWS. If the result is less than one, you're behind schedule.
- Cost performance index: Divide BCWP by actual costs. If the result is lower than one, you're over budget.
Earned Value Management Example
Suppose you're working on a $300,000, six-month project. Your project management plan shows that the amount you'll spend and the work accomplished should be consistent from month to month. After three months, for instance, you'll be half finished, and the budgeted cost of work scheduled is $150,000.
- In reality, your team has only completed 40% of the work, so the earned value or budgeted cost of work performed is $120,000. The actual cost of work performed is $130,000.
- You've completed 40% of the work but should have completed 50%. The schedule variance is -10%.
- You've completed $120,000 worth of work but spent $130,000. The cost variance is $-10,000.
- The schedule performance index is .8. You've done 80% of the work you should have by this point.
- The cost performance index is .9. You've spent 10% more than you should have.
Dividing the CPI into the budget gives you a projected final budget at completion of $333,333. You can either ask for a budget increase or find some way to cut $33,333 from the remaining budget. You also have to figure out whether you can get the schedule back on track.
Limits of EVM
Earned value management is a useful tool, but you have to use it well and know its limits.
- If you wait too long to measure BCWS, BCWP and so on, you won't be able to get much use from the data. You need to deploy them regularly and frequently and start early in the project.
- Earned value isn't a straight-line trajectory. Your SPI and CPI can look bad at one point and then improve (or vice versa) without you doing anything.
- EVM says nothing about quality. If your project is only ahead of time and under budget because your team is cutting corners, the EVM will still look like you're doing good work.
- If you miss cost data, all your EVM calculations will be skewed.
- EVM needs context. If the metrics don't look good, there may be reasons outside the team's performance that explain it.
- Use the budgeted cost of work performed to locate the actual cost of work performed and the cost variance to determine whether there will be any cost overruns.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com