Earned Value and It’s Tecnquices

 

I have used these teniques for years. They are very poweful and can answer the questions Project Management must ask.And for those going after a PMP certifiction expect a lot of these quetions!

Interpretations of various Earned Value Calculations

Questions every Project Manager Must Ask:

Schedule Variance (Are we ahead or behind schedule?)

 

·         The Schedule Variance (SV) determines whether a project is ahead of or behind schedule. It is calculated by subtracting the Planned Value (PV) from the Earned Value (EV). A positive value indicates a favorable condition and a negative value indicates an unfavorable condition. For Project EZ: SV _ EV _ PV _ 32 _ 48 _ _16 {unfavorable}

·         The Schedule Variance can be expressed as a percentage by dividing the Schedule Variance (SV) by the Planned Value (PV):

SV% _ SV / PV__16 / 48 _ _33% {unfavorable}

 

In other words, the project is 33 percent behind schedule, meaning that 33 percent of the planned work has not been accomplished.

 

Schedule Performance Index (How efficiently are we using time?)

 

·         The Schedule Performance Index (SPI) indicates how efficiently the project team is using its time. SPI is calculated by dividing the Earned Value (EV) by the Planned Value (PV). For Project EZ:

SPI _ EV / PV _ 32 / 48 _ 0.67 {unfavorable} bad

·         This Schedule Performance Index indicates that—on average—for each 8-hour day worked on the project, only 5 hours and 20 minutes worth of the planned work is being performed; that is, work is being accomplished at 67 percent efficiency.

 

Time Estimate at Completion (When are we likely to finish work?)

 

·         Using the Schedule Performance Index (SPI) and the average Planned Value (PV) per unit of time, the project team can generate a rough estimate of when the project will be completed, if current trends continue, compared to when it was originally supposed to be completed (see Box 3-1). For Project EZ: EACt (BAC/SPI)/(BAC/months) _ (150/0.6667)/(150/12) _ 18 months

 

The originally estimated completion time for the project was 12 months, so the project manager now knows that if work continues at the current rate the project will take six months longer than originally planned. It is important to note that this method generates a fairly rough estimate and must always be compared with the status reflected by a time-based schedule method such as critical path method. It is possible that an Earned value analysis could show no schedule variance and yet the project is still behind schedule; for example, when tasks that are planned to be completed in the future are performed ahead of tasks on the critical path.

  

Cost Variance (Are we under or over our budget?)

 

A project’s Cost Variance (CV) shows whether a project is under or over budget. This measure is determined by subtracting the Actual Cost (AC) from the Earned Value (EV). The CV for the Project EZ example shows:

CV _ EV _ AC _ 32 _ 40 _ _8 {unfavorable}

This number can be expressed as a percentage by dividing the Cost Variance (CV) by the Earned Value (EV).

CV% _ CV / EV__8 / 32 _ _25% {unfavorable}

 

In other words, to date, the project is 25 percent over budget for the work performed.

Cost Performance Index (How efficiently are we using our resources?)

Earned Value and Actual Cost can also be used to calculate the cumulative Cost Performance Index (CPI), which is one of the clearest indicators of the cumulative cost efficiency of a project. CPI gauges how efficiently the team is using its resources.

 

It is determined by dividing the Earned Value (EV) by the Actual Cost (AC). In regards to Project EZ, the CPI is:

CPI _ EV / AC _ 32 / 40 _ 0.80 _ 0.80 {unfavorable}

 

Translated into dollars, this means that Project EZ has a cost efficiency that provides US $0.80 worth of work for every project dollar spent to date.

 

To-Complete Performance Index (How efficiently must we use our remaining

resources?)

 

Another very useful index is the To-Complete Performance Index (TCPI), which helps the team determine the efficiency that must be achieved on the remaining work for a project to meet a specified endpoint, such as the Budget at Completion (BAC) or the team’s revised Estimate at Completion (EAC) (see the following discussions of EAC and ETC). The TCPI for achieving the BAC is calculated by dividing the work remaining by the budget remaining as follows:

 

TCPI _ (BAC _ EV) / (BAC _ AC) _ (150 _ 32) / (150 _ 40) _ 1.07

 

This means that for Project EZ to achieve the BAC, performance must improve from a CPI of 0.80 to a TCPI of 1.07 for performance of the remaining work.

 

Estimate at Completion (What is the project likely to cost?)

 

The calculated Estimate at Completion (EAC) projects for the team the final cost of the project if current performance trends continue. One common method for calculating the EAC is to divide the Budget at Completion (BAC) by the cumulative Cost Performance Index (CPI). For Project EZ, this is: EAC _ BAC / CPI _ 150 / 0.80 _ 187.50

 

This forecasting formula assumes that the cumulative performance reflected in the CPI is likely to continue for the duration of the project. Other formulas used to forecast cost at completion with earned value data are outlined in Box 3-2. Estimates based on project team and management analysis of remaining work are discussed in the following section on Estimate to Complete (ETC).

 

Variance at Completion (Will we be under or over budget?)

 

With the EAC figure in hand, the manager can now compute the cost Variance at Completion (VAC), which shows the team whether the project will finish under or over budget, by subtracting the EAC from the BAC. For Project EZ, this is: VAC _ BAC _ EAC _ 150 _ 187.50 _ _37.50 In other words, if current trends continue, the project will cost an additional 37.50 units worth of resources than originally planned. This can be expressed as a percentage by dividing VAC by BAC.

VAC% _ VAC / BAC__37.50 / 150 _ _25%

 

Estimate to Complete (What will the remaining work cost?)

 

There are two ways to develop the Estimate to Complete (ETC), which shows what the remaining work will cost. One way is a management ETC developed by workers and/or managers based on an analysis of the remaining work. The management ETC can be added to the Actual Cost (AC) to derive the management Estimate at Completion (EAC) of the total cost of the project at completion. EAC _ AC _ ETC _ 40  

 

As a check on these management estimates, organizations can use a calculated ETC based on the efficiency-to-date measured by the CPI. The calculated ETC can be used to determine the calculated Estimate at Completion (EAC), which the team can compare with the management EAC. For Project EZ, the ETC and EAC are calculated as follows:

ETC _ (BAC _ EV) / CPI _ (150 _ 32) / 0.80 _ 147.50

EAC _ AC _ ETC _ 40  147.50 _ 187.50

Note that this EAC formula is equivalent to the following (see Box 3-2):

EAC _ AC _ [(BAC _ EV) / CPI] _ BAC / CPI

 

Management by Exception

EVM provides an organization with the capability of practicing ‘‘management-by exception’’ on its projects. This practice contributes greatly to the efficiency and effectiveness of project management, by allowing managers and others to focus on project execution and invoke control actions only when and where they are needed. EVM performance measures, used in conjunction with the project work breakdown structure (WBS), provide the objective data needed to practice ‘‘management-by exception.’’

 

Using EVM, an organization can establish acceptable levels of performance for a project and its work tasks. Variance percentages and efficiency indices are most often used. For instance, an organization may consider a Cost Variance (CV) of plus or minus 10 percent to be an acceptable range of variance from the project management plan. In this case, no management action would be taken except when and where a CV falls outside of this acceptable range. While a negative variance is potentially problematic, a positive variance may represent an opportunity.

 

Because EVM occurs first at the task level, where the scope, schedule, and cost of work are planned and controlled, the ‘‘management-by-exception’’ also starts at this level. Managers use EVM performance measures to determine whether action thresholds have been reached for their tasks and control accounts. And with the use of a work breakdown structure, which ties the tasks and control accounts of a project together, EVM and ‘‘management-by-exception’’ can be used at any level of the project (specified in the WBS).

 

While variance and efficiency thresholds are commonly used in EVM, trends in the performance measures for a project can help a project manager decipher or anticipate a potential performance problem. For instance, a cumulative Cost Performance Index (CPI) that is within an acceptable range, but has been trending down toward the efficiency threshold for several measurement periods, may be cause for some concern and prompt an examination of the underlying cause of the trend. If the trend is seen at the project level, a WBS will enable the manager to ’’drill down’’ to lower levels to see what underlies the trend.

 

Graphs of variance and efficiency data are helpful tools in performing this kind of Earned Value analysis. Plotting the CV percentage or the CPI over time, for example, will indicate their values and show their trends. Computer software, especially some developed specifically for project management and EVM, is capable of producing such graphs. Box 3-3 outlines other basic kinds of performance management and reporting displays that are frequently used in EVM. Appendix E provides additional sources of information on EVM concepts, methods, and practices.

 

 

 

 

 

 

 

 

PMP Notes for Project Cost Managment

These are just notes I had during my PMP study sessions More can be said and examples given for all of these notes.

• Price – what customer is willing to pay; justify the cost
• Cost – resources consumed; spending –  time phased expenditures
• “50 – 50 rule” – 50% of the earned value is credited as earned value when the activity begines. The remaining 50% is not credited until all the work is done.
• Resource planning – affected by the nature of the project and organization.
• Life cycle costing – product/ service future committments (guaruntees, warrenties and ongoing services)
• Value engineering – creative approach used to optimize life cycle costs, save time, increase profits, improve quality, expand market share, solve problems, and/or use resources more effectively. It is used with life cycle costing to reduce cost and time, improve quality and performance and optimize the decision-making. A technique used in product analysis in the scope planning process.
• “Order of magnitude scheduling” – beginnning; -25% to +75%
• Budget scheduling  -10% to +25%
• Definitive estimate  -5% to +10%
• Bottom up scheduling – definitive; rolling up the items of the WBS, -5% to +10%; higher cost and longer time to get estimate
• Top Down scheduling – limited infomrmation; on single estimate; not very accurate
• Anallogous scheduling – top downl; use of experts; for example, a 1000 sq foot house costs $50 for each foot in the past, now a 1000 new one should have the same cost and a 3000 sq foot one should cost 3 times more.
• Parametric – top down; use parameters; statistical relationsips; most likely to be reliable when 1) historical information used to develop the model is accurate; 2) the parameters used in the model are readily quantifiable; 3) the model is scalable (i.e. it works well for a very large project as well as a very small project). For example, a 1000 sq ft house costs $50 for each foot in the past and the new house has 3000 sq ft so the new cost should be 3000*$50.
• Cost budgeting – allocating; include cost of risk reponses; contigency plans and management reserve for unidentified risks.
• Variances many have differt impact over project phases. Earlier variances are more significant.
• Earned Value – approved cost estimates for activities completed during a given period. IT usually comes from the budget unit cost with actual units.
• Cost performance index (CPI) = Earned Value (EV) / Actual cost (AC), the amount of work accomplished per dollar spend.
• Cost variance (CV) = EV – AC
• Schedule Performance index (SPI) =  EV – Present Value (PV)
• Critical ration = CPI * SPI
• Estimate at completion (EAC) can be calculated different ways; When it is based on project performace and risk quatificaiton, current variances are typical. EAC = BAC/CPI or EAC = AC + (BAC-EV/(CPI * SPI)
• A more optimistic calculation when current variances are atypical and similar variances are not likely to occur in the future: EAC = AC + BAC – EV
• The estimate to complete (ETC) = EAC – EV = BAC/CPI – EV = BAC/EV*AC – EV
• Estimated time to complete is the budgeted tome to complete / SPI
• Variance at completion (VAC) = EAC – BAC
• Project completed, EV = PV. All values available to e earned have been earned
• Level of effort costs – AC = EV, earned on passage of time
• Spending variance = Present value (PV) – Actual value (AC)
• Project physical progress valued by schedule variance EV – PV. You are ahead of if this calculation is >0.
• If a project is over budget 25% during project phases, the project wil be completed with an iver budget condition greater than 25%
• Economic Value Added (EVA) – net profit compensates for cost of assets
• Sum of hte year’s digits method – 5 year, total is 5+4+3+2+1=15, first year 5/15, second year 4/15, third yeat 3/15…
• Double declining balances – 50% off the book value each year
• The total project budget contains the operating project budget or baseline, the contingency reserve and the management reserve. The projet baseline is increased by the amount of risk although the total project budget stays the same.