Wednesday, May 18, 2011

Forecasting with EVM: the story of Dick Cheney and the A-12 Avenger

The A-12 Avenger II was a planned stealth bomber plane, proposed by McDonnell Douglas and General Dynamics. The development project of the A-12 was troubled by cost overruns and several delays, causing questions of the program's ability to deliver results upon its objectives. The development program was finally canceled in 1991 by Secretary of Defense Dick Cheney because of performance problems detected using EVM. This decision was widely considered to prove that EVM mattered to secretary of defense-level leadership.

The Secretary of Defense Dick Cheney said: “The A-12 I did terminate. It was not an easy decision to make because it's an important requirement that we're trying to fulfill. But no one could tell me how much the program was going to cost, even just through the full scale development phase, or when it would be available. And data that had been presented at one point a few months ago turned out to be invalid and inaccurate.”

How can we know how much money a project is going to cost?. In order to explain some concepts, variables and abbreviations are used in following formulas. You can find the definitions of these variables in this Blog.

In EVM, the final cost of a project is called Estimated At Completion (EAC). There are three main methods to calculate EAC depending on the nature of deviations. If there hasn´t been deviation, the formula is very simple:

Supposing there has been a deviation and it has been a good example of what is going to happen in the future, EAC would be calculated in the following way:

When a deviation has been something that is not going to happen in the future, EAC would be calculated in the following way:

When we realize that the estimation of the project was a totally wrong or new information arises that has not yet been considered, it would be better to calculate ETC as a new estimation of the remaining cost. In any case:

As you can see, the variables and indexes of EVM have the capability of forecasting the final cost of a project in an easy way. I hope the story of Dick Cheney motivates the decision makers to understand the importance of using EVM.

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