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Earned value Project Management (evpm)

  2. 3. PREAMBLE <ul><li>Lets assume that we gave a Rs 80,000/- contract for some repair work in our house. The job was to be completed in 15 days and involved major repairs in one of the toilets. Repair needs were mutually agreed. </li></ul><ul><li>After 15 days our monitoring tells us that all is not going well. There have been problems in locating various water pipes in the bathroom. </li></ul><ul><li>The contractor billed us Rs 85,000/- for the work. </li></ul>
  3. 4. Your comments on the situation?
  4. 5. Earned Value Project Management <ul><li>A closer inspection reveals that only 3/4 th of the job is complete. So what we can find out from this? – and more importantly – what can we do about it? </li></ul>
  5. 6. Earned Value Project Management <ul><li>Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV) </li></ul><ul><li>= Rs 80,000/- </li></ul><ul><li>Actual Cost of Work Performed (ACWP) or Actual Cost (AC) = Rs 85,000/- </li></ul><ul><li>Budgeted Cost of Work Performed (BCWP) or Earned Value (EV) </li></ul><ul><li>= 0.75 x 80,000 </li></ul><ul><li>= Rs 60,000/- </li></ul><ul><li>Concept of earned value tells us that after 15 days, using earned value vocabulary, the situation is as under: </li></ul>
  6. 7. Earned Value Project Management Cost Variance (CV) Cost Variance = EV – AC (BCWP – ACWP) = Rs 60,000 – Rs 85,000 = (-) Rs 25,000 Negative value indicating cost overruns.
  7. 8. Earned Value Project Management <ul><li>In a typical spend plan analysis, physical progress is seldom taken into account when analyzing cost performance. </li></ul><ul><li>Instead, a project’s actual costs are simply compared to planned costs often with misleading results. </li></ul>Remember
  8. 9. Earned Value Project Management <ul><li>Cost variance of (-) Rs 25,000/- means that we are required to pay Rs 85,000/- for Rs 60,000/- worth of work. For the work we have got done, we have overspend by Rs 25,000/-. </li></ul><ul><li>Note that ‘cost variance’ is being assessed “against the value of the work that has been completed”. </li></ul><ul><li>Any negative cost variance figure suggests over spending and positive cost variance indicates cost savings. </li></ul>
  9. 10. Earned Value Project Management Schedule Variance (SV) This is the algebraic difference between Earned Value of the work performed and the budgeted value of the work planned. In our case Schedule Variance = BCWP – BCWS (EV) – (PV) = Rs 60,000 – Rs 80,000 = (-) Rs 20,000
  10. 11. You find anything odd about the measuring of schedule variance?
  11. 12. Earned Value Project Management Schedule variance is being measured in monetary units – not time units.
  12. 13. Earned Value Project Management A positive value for this variance represents work ahead of schedule, and negative value indicates behind schedule or schedule slippage
  13. 14. Earned Value Project Management These variances not only tell the project manager about the true, rather than the apparent state of the project, they also ………………
  14. 15. Earned Value Project Management In this case, the larger CV (42% of the EV) as compared to SV (33% of EV) tells us that we need to look more at the cost overrun aspects.
  15. 16. EARNED VALUE INDICES <ul><li>Practitioners sometimes prefer to use schedule and cost indices over the absolute values of SV and CV, because these indices can be considered efficiency ratios. </li></ul><ul><li>Graphed indices over the project life cycle can be very illuminating and useful. </li></ul><ul><li>Trends are easily identified for deliverables and the whole project. </li></ul>
  16. 17. EARNED VALUE INDICES <ul><li>Indices are typically used for project costs and schedules that allow the Project Manager and customer to view progress from several angles. </li></ul><ul><li>An index of 1.00 (100 percent) indicates progress is as planned. An index greater than 1.0 shows progress is better than expected. </li></ul><ul><li>An index less than 1.00 suggests progress is poorer than planned and deserves attention. </li></ul>
  17. 18. SCHEDULE PERFORMANCE INDEX (SPI) <ul><li>The portion of a job achieved is indicated by SPI. In our case </li></ul>SPI = = = = 0.75 <ul><li>We planned to accomplish Rs 80,000/- of work, but only did Rs 60,000/- worth of work, thus we are behind planned schedule by Rs 20,000/- of work. </li></ul><ul><li>The index also shows that 75 paisas worth of work has been accomplished for each rupee worth of scheduled work. </li></ul>BCWP BCWS EV PV 60,000 80,000
  18. 19. SCHEDULE PERFORMANCE INDEX (SPI) <ul><li>Given this performance the job will be completed in </li></ul>15 0.75 = 20 days
  19. 20. COST PERFORMANCE INDEX (CPI) <ul><li>The “burn rate” at which we are spending money – it can also be interpreted as an efficiency rate – is called the Cost Performance Index (CPI) and is computed as </li></ul>CPI = = = = 0.705 <ul><li>CPI of 0.705 means that for each rupee being spent, the project is achieving 70.5 paisas of value. </li></ul>BCWP ACWP EV AC 60,000 85,000
  20. 21. COST PERFORMANCE INDEX (CPI) <ul><li>The estimate of final project cost is called the “Estimate At Completion” (EAC) – a forecast value expressed in either rupees and / or hours, to represent the projected final costs of a project when all work is completed. </li></ul>BAC CPI EAC = BAC = Budget At Completion. The sum of all authorized budgets allocated to a project. It is synonymous with earned value term “Performance Measurement Baseline”.
  21. 22. COST PERFORMANCE INDEX (CPI) 80,000 0.705 EAC = In our case it is ………….. = Rs 1,13,475.17
  22. 23. COST PERFORMANCE INDEX (CPI) How would you explain the significance of EAC, SPI and CPI we have calculated?
  23. 24. COST PERFORMANCE INDEX (CPI) EAC allows us to forecast the total project costs on the basis of efficiency with which work performance is achieved.
  24. 25. COST PERFORMANCE INDEX (CPI) EV PV <ul><li>When you compare where you are by now (EV) </li></ul><ul><li>With where you planned to be (PV) </li></ul><ul><li>You get a reading of progress called SPI </li></ul>= SPI
  25. 26. COST PERFORMANCE INDEX (CPI) EV AC Compare What have you done by now (EV) To What you have spent by now (AC) You Get a reading on productivity called CPI = CPI Ratio
  26. 27. COST PERFORMANCE INDEX (CPI) <ul><li>How much you planned to have accomplished by now (in Rs or hours)  PV </li></ul><ul><li>How much you actually spent by now (in Rs or hours)  AC </li></ul><ul><li>The value in terms of your baseline budget of the work accomplished by now (in Rs or hours  EV) </li></ul>Summary
  27. 28. COST PERFORMANCE INDEX (CPI) Interpretation of Indices ........Summary Table 1: Efficiency Indices Index Cost (CPI) Schedule (SPI) > 1.00 Under Cost Ahead of schedule = 1.00 On Cost On schedule < 1.00 Over Cost Behind schedule
  29. 30. PROJECT FEATURES <ul><li>Project estimate Rs 1.5M to produce 10 units in house. </li></ul><ul><li>Project team came to this budget after a careful study of the product and preparation of project documents. </li></ul><ul><li>Project time: 18 months </li></ul><ul><li>First project report: 3 months </li></ul><ul><li>EVPM be employed on this project </li></ul>
  30. 31. PROJECT FEATURES <ul><li>In a presentation made to the CEO and management board </li></ul><ul><ul><li>Budget was revised to Rs 1.0M </li></ul></ul><ul><ul><li>Time reduced to 12 months </li></ul></ul>
  31. 32. FIRST QUARTERLY PROJECT STATUS REPORT <ul><li>A brief summary indicated the following results: </li></ul><ul><ul><li>3 of the ten units had been scheduled for completion at the three-month point, but only two accomplished, thus the team was behind its planned schedule. </li></ul></ul><ul><ul><li>It had forecast expenditures of Rs 300,000 and had committed Rs 300,000, so the team was right on schedule with its funding profile. Any optimistic person could easily paint a positive picture of the project. </li></ul></ul>
  32. 33. FIRST QUARTERLY PROJECT STATUS REPORT “ We are right on our cost spending plan, a little behind schedule perhaps, but we are doing well” , would be the positive spin put on these results by most practitioners.
  33. 34. EVPM EMPLOYMENT <ul><li>Remember the CEO had specifically asked that EVPM be employed on this project. That requirement adds a slightly different orientation to project performance data. </li></ul><ul><li>EVPM requires a detailed bottom-up performance plan, and a “three dimensional” measurement against the base line plan. </li></ul><ul><li>EVPM also requires a periodic forecast of the final expected results, based on actual performance. </li></ul>
  34. 35. <ul><li>In order to employ EV, there must be plan in place that will allow for continuous measurement of actual performance. This may sound difficult, but it is not. Earned Value simply requires a focus on the completed physical or intellectual work, together with management’s authorized budget for the completed work. We call this the “Earned Value”. </li></ul>EVPM EMPLOYMENT
  35. 36. <ul><li>In order to employ EV concept, a project must measure three dimensions of performance: </li></ul><ul><ul><li>The first dimension is called the planned value (also called the Budgeted Cost of the Work Scheduled – BCWS). To determine planned value (PV), the project must ascertain: </li></ul></ul>EVPM EMPLOYMENT
  36. 37. <ul><ul><ul><li>How much physical or intellectual work has been scheduled to be completed as of a point in time. </li></ul></ul></ul><ul><ul><ul><li>Management’s authorized budget for this authorized work. </li></ul></ul></ul><ul><ul><ul><li>PV is simply a direct fall out of those detailed tasks specified on the project master schedule (PMS). </li></ul></ul></ul>EVPM EMPLOYMENT
  37. 38. EV requires a baseline master project schedule; or stated another way without a master project schedule, one cannot employ Earned Value. EVPM EMPLOYMENT
  38. 39. <ul><li>In this case, the master schedule had specified three units to be completed as of the first quarter, and each unit had a budgeted value of Rs 100,000 per unit. </li></ul><ul><li>Thus, the project team could determine that the planned value for the first three months of the project was Rs 300,000. </li></ul>EVPM EMPLOYMENT
  39. 40. <ul><li>Next, project team members will need to measure the second dimension called “earned value” for the same reporting period. To measure EV they will need to determine: </li></ul><ul><ul><li>How much of the authorized work they actually accomplished. </li></ul></ul><ul><ul><li>The amount of management’s original budget for the accomplished work. </li></ul></ul><ul><ul><li>Their actual performance results; they completed two units each with a value of Rs 100,000, for a total earned value of Rs 200,000/-. </li></ul></ul>EVPM EMPLOYMENT
  40. 41. <ul><li>The third dimension that team members need to determine is how much money was spent converting the planned value into earned value during the measurement period. So they look at the cost ledger and find that they have incurred actual costs of Rs 300,000/-. </li></ul><ul><li>The three dimensions of EVPM are now set for the first quarter and expressed in monetary terms and a performance pattern has emerged for this project: </li></ul>EVPM EMPLOYMENT
  41. 42. <ul><ul><li>The Planned Value (PV) ____________. </li></ul></ul><ul><ul><li>The Earned Value (EV) _____________. </li></ul></ul><ul><ul><li>The Actual Cost (AC) _______________. </li></ul></ul>EVPM EMPLOYMENT
  42. 43. <ul><li>The earned value principle is not difficult to understand – it comes from a basic concept that goes back to industrial engineering and accounting procedures of the nineteenth century – some sixty years before project management arrived on the scene. </li></ul>EVPM EMPLOYMENT
  43. 44. <ul><li>Prior to introduction of EV methods, project managers were used to measuring the performance of their projects by reference to Gantt charts and Critical Path Analysis for the scheduling aspect, and any difference between the planned expenditure and the actual costs to see how the money was going. </li></ul>EVPM EMPLOYMENT
  44. 45. <ul><li>From a time dating back to the 1950s, it was realized that this was not a very satisfactory way of managing projects as there was always the problem of reconciling these two different measures of project progress i.e. time and cost. </li></ul>EVPM EMPLOYMENT
  45. 46. <ul><li>Furthermore, some organizations were embarrassed by cost overruns that never seemed to be predicted until it was too late to do anything, but swallow hard and pay up. </li></ul>EVPM EMPLOYMENT
  46. 47. <ul><li>The answer they came up with was perfectly simple: make both a detailed plan and detailed valuation of all the work in the project before you start, then as the project progresses, make a note at each reporting point of: </li></ul><ul><ul><li>How much value should have been achieved according to the plan. </li></ul></ul><ul><ul><li>How much value has been created according to the work done. </li></ul></ul><ul><ul><li>How much money has actually been spent </li></ul></ul>EVPM EMPLOYMENT
  47. 48. Cost Actual spend Value generated Planned value Time These three quantities are the basis of all earned value performance measurements Fig 1
  48. 49. <ul><li>With EV, a “schedule variance” is defined as the difference between…………….. </li></ul>EVPM EMPLOYMENT
  49. 50. <ul><li>In this case, team members planned to accomplish Rs 300,000/- of work but only did ___________; thus, they are behind their planned baseline schedule by __________. Not so bad until they realize that they only accomplished, 67 paisas worth for each planned rupee. </li></ul>EVPM EMPLOYMENT
  50. 51. <ul><li>Lastly, they need to know if there was a “cost variance”. An earned value cost variance is determined by taking the earned value accomplished and subtracting the _________________. </li></ul>EVPM EMPLOYMENT
  51. 52. <ul><li>Team members spent Rs 300,000/- in actual costs to accomplish only Rs 200,000/- in earned value. Not so good when they realize that for each rupee, they spent, they got only 67 paisas of earned value. Thus, this project is behind its planned baseline schedule, and overrunning costs. </li></ul><ul><li>The negative schedule variance is serious, but the negative cost variance may be non-recoverable. </li></ul>EVPM EMPLOYMENT
  52. 53. <ul><li>This project at the end of the first quarter is performing at only 67% of its planned schedule, and 67% of cost performance. Stated another way, it is overrunning its costs by 50%. </li></ul>EVPM EMPLOYMENT
  53. 54. EVPM EMPLOYMENT Although only at 20% completion point, by monitoring these three dimensions of earned value data, the project is forecasting a significant final overrun of costs.
  54. 55. <ul><li>The project has already spent Rs 300,000/- to complete only Rs 200,000/- of work, so it is experiencing a Rs 100,000/- overrun of costs, and if the project continues at its present “cost efficiency” rate of earning 67 paisas for each rupee spent, it would need a 50% increased budget to complete the work. </li></ul>EVPM EMPLOYMENT
  55. 56. EVPM EMPLOYMENT Decisions After Project Quarterly Progress Review Project budget revised to Rs 1.5M Time schedule remained at 12 months Main performance objective Getting project back on schedule
  56. 57. EVPM EMPLOYMENT Final Results <ul><li>Project completed with all technical requirements on time within 12 months schedule. </li></ul><ul><li>Final actual costs Rs 2.0M. </li></ul><ul><li>The new product worked exactly as required. </li></ul><ul><li>The management picked up early signals at 20% completion point of cost overruns and provided necessary funds by cancelling two projects of lesser importance. </li></ul>
  58. 59. EVPM EMPLOYMENT The value of Earned Value Postmortem:
  59. 60. EVPM EMPLOYMENT Will the use of earned value on projects prevent cost overruns? Question:
  60. 61. EVPM EMPLOYMENT <ul><li>Never. Overruns are typically caused by some combination of these three factors: </li></ul><ul><ul><li>Management authorization of too low a budget to do the job </li></ul></ul><ul><ul><li>Poor technical performance from the project team </li></ul></ul><ul><ul><li>Scope creep </li></ul></ul>
  61. 62. EVPM EMPLOYMENT <ul><li>If management authorizes an inadequate budget, the project team performs poorly, or the work is constantly added because the project scope was never properly defined in the first place. EV will not prevent cost growth. EV cannot perform a miracle! </li></ul>
  62. 63. EVPM EMPLOYMENT <ul><li>The central focus of EV has been consistent: </li></ul>“ The accurate measurement of the physical work performed against a baseline plan. It has provided a reliable prediction of the final costs and schedule requirements for a given project.
  63. 64. EVPM EMPLOYMENT <ul><li>EV is based on an integrated management approach that provides the best indicator of true cost performance, available with no other project management technique </li></ul>
  64. 65. EVPM EMPLOYMENT <ul><li>EV requires that the project’s scope be fully defined, and that a bottom-up baseline plan be put in place to integrate the scope with authorized resources in a specified time-frame. </li></ul>
  65. 66. EVPM EMPLOYMENT <ul><li>Project management tools must be simple and easy to use or they will be ignored. Likewise EV must be made simple or it will be ignored. </li></ul>
  67. 68. Internal Development Project ---The plan--- Fig 2: A typical project cost expenditure projection Authorized Budget 1,000,000 Cost Spend Plan Thousands (000) 1,000 750 500 250 1 2 3 4 Quarters
  68. 69. Internal Development Project ---1 st Quarter Results-- Fig 3: Traditional cost management: plan versus actual costs Authorized Budget 1,000,000 Planned Costs = 300K Thousands (000) 1,000 750 500 250 1 2 3 4 Quarters Actual Costs = 300K Status date
  69. 70. Internal Development Project ---1 st Quarter Results--- Fig 4: Earned value project management: 3 dimensional Authorized Budget 1,000,000 Planned Value = 300 Thousands (000) 1,000 750 500 250 1 2 3 4 Quarters Actual Costs = 300K Status date Earned Value = 200K
  70. 71. EVPM EMPLOYMENT <ul><li>We can also call this actual condition what it is: </li></ul>“ Overrun of costs. The project can be said to be running a negative Rs 100,000, cost variance. The delicate relationships reflected with these actual cost and schedule performance relationships can now be used to predict the final costs and schedule results of the project”.
  71. 72. EVPM EMPLOYMENT <ul><li>This project is in trouble. But one could not have discerned that condition using a traditional cost management approach. It is only when EV brings in three dimensions of performance that we can tell the project is experiencing problems. </li></ul><ul><li>Such issues need to be addressed immediately by the project manager in order to avoid adverse cost overruns and schedule slippage. </li></ul>
  73. 74. <ul><li>There is an important and fundamental distinction to be made between the data available for management using a traditional cost control approach as compared to the three-dimensional data available when a project employs EV. </li></ul>
  74. 75. Fig 5: The Fundamental Differences Traditional Project Cost Management Planned funds = 300 K Actual costs = 300 K Variance from an expenditure plan = (0K) Earned Value Project Management Planned value = 300 K Earned value = 200 K Variance from the planned schedule = (- 100K) Actual costs = 300 K The “true” cost variance = (- 100K)
  75. 76. Fig 6: Project S-Curves Cumulative cost (in thousands) 80 60 40 20 40 35 30 25 20 15 10 5 45 Elapsed Time (in weeks)
  76. 77. Table 2: Budgeted Costs for Project Siera Activity Duration (in weeks) 5 10 15 20 25 30 35 40 45 Total Design 6 2 - - - - - - - Engineer - 4 8 8 8 - - - - Install - - - 4 20 6 - - - Test - - - - - 2 6 4 2 Total 6 6 8 12 28 8 6 4 2 Cumulative 6 12 20 32 60 68 74 78 80 80
  77. 78. Fig 7: Project Siera’s S-Curve showing negative Variance Cumulative cost (in thousands) 80 60 40 20 40 35 30 25 20 15 10 5 45 Elapsed Time (in weeks) 10,000 Negative Var. Cumulative Budgeted Cost Cumulative Actual Cost
  79. 80. S-curves <ul><li>Assume that your organization tracks project costs employing an S-curve approach and uses that information to assess the status of an on-going project. </li></ul><ul><li>Also assume that the project is to be completed in 12 months and has a budget of Rs 150,000/-. At the six-month check up you discover that the project S-curve shows significant shortfall; you have spent far less on the project to date than was originally budgeted. </li></ul>
  80. 81. Is this good or bad news?
  81. 82. <ul><li>The bottom line is this: </li></ul><ul><ul><li>“ Simply evaluating a project’s status according to its performance on time versus budget expenditures may lead us into making inaccurate assumptions about project performance”. </li></ul></ul>S-curves
  82. 83. <ul><li>Of greater concern, however, is the relationship of the value of the work done, the EV, compared to the funds expended to accomplish the work. A total of Rs 300,00/- was expended to accomplish only Rs 200,000/- worth of work. </li></ul><ul><li>Thus the project has experienced a cost overrun of Rs 100,000/- for the work performed todate. </li></ul>S-curves
  83. 84. <ul><li>This negative cost trend is of critical importance to the project because experience has indicated that such cost overruns do not correct themselves overtime, in fact cost overruns tend to get worse. </li></ul>S-curves
  85. 86. Cost Project S-curves Schedule Performance Fig 8: Monitoring Project Performance S-curves
  86. 87. <ul><li>Project S-curve analysis directly links budget expenditures with the project schedule. Again the obvious disadvantage to this approach is that it ignores the project performance linkage. </li></ul>S-curves
  87. 88. Cost Tracking control charts, Gantt charts Schedule Performance Fig 9: Monitoring Project Performance S-curves
  88. 89. <ul><li>Project control charts such as tracking Gantt charts link project performance with schedule, but may give budget expenditures short shrift. The essence of a tracking approach to project status is to emphasize project performance overtime. </li></ul>S-curves
  89. 90. <ul><li>While argument could be made that budget is implicitly assumed to be spent in some preconceived fashion, this metric does not directly apply a link between the use of time and performance factors with project cost. </li></ul>S-curves
  90. 91. Cost Tracking control charts, Gantt charts Schedule Performance Fig 10: Monitoring Project Performance Earned Value S-curves
  91. 92. <ul><li>Technical performance goals must be developed first. </li></ul><ul><li>These goals are basis and reason for the project. </li></ul><ul><li>These goals provide the focal point for what will be delivered and what the customer needs. </li></ul><ul><li>Schedule and cost must be subordinate to technical performance. </li></ul>S-curves
  92. 93. <ul><li>Schedule goals must follow the technical performance goals and to provide a path that is unconstrained by cost considerations at this time. </li></ul><ul><li>Cost goals follow both technical performance and schedule goals. </li></ul><ul><li>Building a product with many more features and functions than are needed will affect schedule and cost. </li></ul><ul><li>Therefore, the technical performance goals need to be linked to what customers want and is willing to pay. </li></ul>S-curves
  93. 94. Forecasting the Final Cost and Schedule Results
  94. 95. <ul><li>EV allows any project to continuously monitor its cost (CPI) and schedule (SPI) efficiency rates, reflecting actual performance trends. These efficiency indices can also be used to statistically forecast the expected final position on a continuous basis to precisely quantify their actual performance. </li></ul>Forecasting the Final Cost and Schedule Results
  95. 96. <ul><li>Overs the years, a number of formulae have evolved to statistically forecast the final estimated cost at completion (EAC). By last count there were close to twenty distinct formulae available to predict the final cost position. </li></ul>Forecasting the Final Cost and Schedule Results
  96. 97. The Project Manager’s “Official Estimate” (Actual costs + a new “bottom-up” ETC EVPM independent statistical EAC comparisons: <ul><li>Low-end over-run to date…. the “best case” (Mathematical EAC formula) </li></ul><ul><li>Middle range EAC… the “most likely case” (Cumulative CPI EAC formula) </li></ul><ul><li>High-end range EAC…. The “worst case” (Cumulative CPI x SPI EAC formula) </li></ul>Fig 11: Forecasting a Range of Estimates at Completion ♣ ♣ ♣ ♣
  97. 98. How do projects typically estimate their final costs? Question: Forecasting the Final Cost and Schedule Results
  98. 99. <ul><li>Most projects, when it becomes apparent that they are going to exceed management’s authorized budget, will take their total costs for work performed, and prepare a new detailed estimate to complete (ETC) all of the remaining work. The formula is thus: </li></ul><ul><ul><ul><li>“ Cumulative actual costs plus a new ETC”. </li></ul></ul></ul><ul><li>This forecast is likely the most reliable because it builds on the actual experience of the project for the work performed to date. </li></ul>Answer: Forecasting the Final Cost and Schedule Results
  99. 100. What’s wrong with this approach? Question: Forecasting the Final Cost and Schedule Results
  100. 101. Preparing a new ETC is a royal pain in the neck! Preparing a new ETC is non-project work . The very people who are performing on the project, who are often frustrated because they are running behind their schedule, must stop doing real project work and prepare a new baseline plan called the ETC. Answer: Forecasting the Final Cost and Schedule Results
  101. 102. <ul><li>Whenever a project commits to employing even a simple form of EV, the project team will want to focus on the actual results against their baseline plan. They will look for exceptions to the plan and monitor the schedule and cost variances as shown. </li></ul>Forecasting the Final Cost and Schedule Results
  102. 103. Fig 12: Monitoring earned value performance Perfect “Schedule” performance = 1.0 (for every 1.00 work planned you get 1.00 in earned value) Perfect “Cost” performance = 1.0 (for every 1.00 in cost actuals you get 1.00 in earned value) Good = +1.0 Plan = 1.0 Poor = -1.0 1.00 + –
  103. 104. <ul><li>The process of statistically forecasting a range of final cost estimates will centre on setting three variables for a project, as of any given point of time: </li></ul><ul><ul><li>Determine the total actual costs incurred to date. </li></ul></ul>Forecasting the Final Cost and Schedule Results
  104. 105. <ul><ul><li>Determine the value of the Work Remaining (WR). By definition, this is considered to be the budgeted value for the uncompleted work. This is typically expressed as the total budget at completion (BAC) less the EV already accomplished, which equals WR. </li></ul></ul><ul><ul><li>Divide the Work Remaining (WR) by some performance factor (PF). For example 1.0 or the CPI or the CPI times SPI. </li></ul></ul>Forecasting the Final Cost and Schedule Results
  105. 106. EVPM Independent Statistical EAC Comparisons
  106. 107. 1. “The Mathematical” or “Overrun-to-Date” Estimate at Completion
  107. 108. Fig 13: The “Mathematical” or “Overrun-to-Date” EAC Short EAC Formula: AC + BAC – EV 1.00 + – Status date Cost Overrun to date Long EAC Formula: Actual Costs + Remaining Work (BAC – EV) 1.0 pf
  108. 109. <ul><li>This EAC formula is not widely accepted in public sector organizations, but it is frequently used within private industry for a couple of valid reasons: </li></ul>EVPM Independent Statistical EAC Comparison
  109. 110. First reason to use this formula: The Mathematical or Overrun-to-date is often the first indication announcing to the project manager and executive management the first indication that they may have cost problem on their project. If a project spends Rs. 300,000/- to accomplish only Rs. 200,000/- of budgeted work, the project experienced a “cost overrun” for the initial work that it has performed. Management deserves to know this fact. EVPM Independent Statistical EAC Comparison
  110. 111. Second reason to use this formula: The Mathematical EAC is important because an early overrun does not go away with the passage of time. It is rare for an early front-end overrun disappearing through exemplary performance of the remaining work. EVPM Independent Statistical EAC Comparison
  111. 112. In a project baseline, where are the best scope definition, best planning, best budget, and best scheduled dates placed; in the first half or the last half of the baseline? Question: EVPM Independent Statistical EAC Comparison
  112. 113. Likely the best of every thing will be incorporated in to the first half baseline. Thus, if a project incurs an overrun in the first half, what are the chances of making a later recovery of the overrun? Little to none. This EAC formula provides a sort of minimum overrun that does not go away. Answer: EVPM Independent Statistical EAC Comparison
  113. 114. <ul><li>Short of a project dropping scope features (i.e. the outright elimination of authorized tasks), an overrun in the early phases of the projects is very serious and likely constitutes a permanent loss of funds for any project. </li></ul><ul><li>The Mathematical or Overrun-to-Date formula adds utility in that it constitutes the lowest “best case” scenario in the range of possible final costs for any project. </li></ul>EVPM Independent Statistical EAC Comparison
  114. 115. 2. The “Cumulative CPI” Estimate at Completion
  115. 116. <ul><li>Likely the most common and most respected of all the EV statistical forecasting methods is called the “cumulative CPI”, estimate at completion (EAC). </li></ul>EVPM Independent Statistical EAC Comparison
  116. 117. Fig 14: The Low-end “Cumulative CPI” EAC Short EAC Formula: BAC = EAC Cum. CPI 1.00 + – Status date Cumulative CPI Plan EAC Long EAC Formula: Actual Costs + Remaining Work (BAC – EV) (Cumulative CPI pf)
  117. 118. <ul><li>While any project team will want to monitor its periodic position to assess recent performance results, periodic data are also subject to anomalies, sometimes caused by placing good data into wrong time frame. Cumulative performance data tends to smooth out variations, but nevertheless retains its value as a long term forecasting tool. </li></ul>EVPM Independent Statistical EAC Comparison
  118. 119. <ul><li>The cumulative (not periodic) CPI provides particularly reliable index to watch because it has been demonstrated to be an accurate and reliable forecasting metric. </li></ul><ul><li>The cumulative CPI has been shown to stabilize from as early as the 20 percent completion point of the project. One important scientific study described the value of using cumulative CPI to forecast the final cost results on projects. </li></ul>EVPM Independent Statistical EAC Comparison
  119. 120. <ul><li>“ ------------------- researchers found that the cumulative CPI does not change by more than ten percent once a contract is 20 percent complete, in most cases, the cumulative CPI only worsens as a contract proceeds to completion”. </li></ul>EVPM Independent Statistical EAC Comparison
  120. 121. <ul><li>Important empirical findings with all projects employing EV: </li></ul><ul><ul><li>Project performance results at 20 percent completion point will stabilize. </li></ul></ul><ul><ul><li>The remaining performance will not likely change by more than plus or minus 10 percent at the point of project completion. </li></ul></ul><ul><ul><li>No other project management technique provides such performance in sight. </li></ul></ul>EVPM Independent Statistical EAC Comparison
  121. 122. 3. The “Cumulative CPI times SPI” estimate at completion
  122. 123. <ul><li>The last statistical formula that has wide professional acceptance in forecasting the final project costs is one that combines both the cost efficiency (CPI) factor and the schedule efficiency (SPI) factor. </li></ul>EVPM Independent Statistical EAC Comparison
  123. 124. Fig 15: The High-end “Cumulative CPI times SPI” EAC There is no short EAC Formula Long EAC Formula: Actual Costs + Remaining Work (BAC – EV) (Cumulative CPI x SPI pf) 1.00 + – Status date Cumulative SPI Plan EAC Cumulative CPI
  124. 125. <ul><li>There is a natural human tendency to want to get back on schedule even if it means consuming more resources to accomplish the same amount of authorized work. The use of paid overtime and additional resources (more people) is often employed, which simply results in permanent, non recoverable cost damage to the most important efficiency factor, the CPI. </li></ul>EVPM Independent Statistical EAC Comparison
  125. 126. What is the utility of providing a statistical range (low /most likely / high) of final cost results for a given project? Question: EVPM Independent Statistical EAC Comparison
  126. 127. Simply put, it is to test the reasonableness of the project manager’s “official” cost position against a statistical range of possible EV forecasts. EV forecasts can quickly provide management with an understanding of the cost risk facing any project. Answer: EVPM Independent Statistical EAC Comparison
  127. 128. <ul><li>If the project manger predicts a final cost performance of project outside the statistical range either above or below it, then the rationale for his position should be explained to all parties with a vested interest in the project. </li></ul>EVPM Independent Statistical EAC Comparison
  128. 129. Time Management: Predicting the Projects Final Completion Date
  129. 130. <ul><li>How long will it take to complete the project? </li></ul><ul><li>This is another matter of great interest to any project manager, to executive management, and especially to the owner or paying customer. By definition, a project can only be completed within the ------------------------------. </li></ul>Time Management
  130. 131. <ul><li>Outer limits of its critical path, which is defined as such: “ the critical path is the longest path through a project and so determines the earliest completion for the work” </li></ul>Time Management
  131. 132. <ul><li>The management of the project’s critical path and the near (sub) critical paths are thus vital to the successful completion of any project at the earliest possible date. An important point to understand: </li></ul>Time Management
  132. 133. <ul><li>The EV schedule performance data alone will not be sufficient to manage or predict the project’s time dimension. Projects need to have a solid scheduling process in place that allows them to manage their critical paths. </li></ul>Time Management
  133. 134. <ul><li>As discussed earlier: </li></ul><ul><ul><li>The EV schedule variances represent the difference between what was actually physically accomplished (the EV) less what was planned to be accomplished (the PV) </li></ul></ul>SV = EV – PV Time Management
  134. 135. <ul><li>Negative EV schedule variances are important because they are often one of the first indications of a problem. Negative SV indicates that the project is falling behind its baseline plan. EV schedule variances may be used in conjunction with the CPM as a way of reinforcing the forecast date for project completion. However: </li></ul>Time Management
  135. 136. “ Do not rely on EV schedule variance alone to help predict the final completion date for a project. Time Management
  136. 137. Fig 16: Monitoring the earned value schedule performance Status date Planned value Earned value 2 months behind 2 months late? Budget Budget 100% 75% 50% 25% Year 2 Year 1
  137. 138. <ul><li>As a general rule, management at all levels dislikes being behind schedule, no matter how critical the schedule variance may be. It is sometimes an emotional issue, resulting in a decree such as </li></ul>Everyone on overtime or Bring in more people for this job Time Management
  138. 139. <ul><li>When ever a project is employing EV and it experiences a negative schedule condition, it should understand the true meaning of this condition: </li></ul>Negative schedule variance indicates that the project is running behind in accomplishing its planned work, that is, it is running a schedule position of less than 1.0 as shown. Time Management
  139. 140. Fig 17: Earned value schedule variances must be analyzed Compare late earned value tasks against the critical path and high risk tasks 1.00 + – Status date Cumulative SPI Baseline Plan These tasks are late to the baseline schedule Time
  140. 141. <ul><li>Those tasks that are late to the original baseline plan should be carefully assessed to determine two issues: </li></ul><ul><ul><li>Issue One: Are any, of the late tasks on the project’s critical path, or on the near (sub) critical paths, so as to potentially delay the final completion of the project? If so overtime and / or additional resources may be warranted. </li></ul></ul>Recommendation Time Management
  141. 142. <ul><ul><li>Issue Two: Are the late tasks considered to be high risks to the project, that is, do they constitute a risk of not meeting project objectives? If so, overtime and /or additional resources may be warranted. </li></ul></ul>Time Management
  142. 143. <ul><li>If, however, these late-to-the-baseline plan tasks are determined to have a positive schedule float position (slack) and are not felt to represent high risks to the project, then added resources should not be authorized. The reason? </li></ul>Time Management
  143. 144. <ul><li>Any added resources will have a permanent negative impact on the cost efficiency rate and produce no positive critical path schedule results. The critical path will determine the earliest time that the project can be completed. </li></ul>Time Management
  144. 145. <ul><li>Unless there are compelling reasons, additional resources should not be spent merely because the project is experiencing a negative schedule variance. </li></ul>Time Management
  145. 146. <ul><li>The bottom-line questions for any project are typically: </li></ul><ul><li>How much will it cost to complete the job? </li></ul><ul><li>How much time until the project is over? </li></ul>Time Management
  146. 147. <ul><li>Two reliable techniques are currently available to any Project Manager: </li></ul><ul><li>The use of EV schedule / cost performance data. </li></ul><ul><li>The critical path method </li></ul>Time Management
  147. 148. Activation Limits of EVM Indices
  148. 149. Fig 18 Activation Limits of EVM Indices Index Thresholds Action SPI /CPI Greater than 1.25 Work ahead of schedule, should use time on other problem / issues. Very good productivity should use improvement on other problem / issues. Between 0.9 and 1.25 Schedule as expected. No action. Productivity as expected. No action. Between 0.75 and 0.9 Warning! Work getting behind schedule, should act to get on track / Warning! Productivity low should act to get on track Less than 0.75 Out of control
  149. 150. <ul><li>When these proven indices are used by people working with a single integrated data base, they can provide accurate and reliable forecast to the age-old questions: </li></ul><ul><li>How long will my project take to complete? </li></ul><ul><li>How much money will it cost? </li></ul>Activation Limits of EVM Indices
  150. 151. <ul><li>Use EV data to predict the project’s cost dimension. </li></ul><ul><li>Use CPM to predict the project’s time dimension. </li></ul>Activation Limits of EVM Indices
  151. 152. Three Factors Determine the Final Project Results
  152. 153. <ul><li>While the EV performance indices can be most useful in predicting the final results on any project, the benefits from these indices are dependent on three critical factors. </li></ul>Three Factors
  153. 154. Factor-1: The quality of project baseline plan <ul><li>EV will measure performance to the baseline plan, whether the plan is realistic or ambitious or impossible to meet. The quality of project plans will vary and will influence the final result. Some people consistently </li></ul>“ FIRE FIRST AND AIM LATER” Three Factors
  154. 155. <ul><li>The quickest way to experience “scope creep” is not to adequately define the initial project scope. </li></ul><ul><li>The surest way to “overrun” project costs is to under budget the project. </li></ul><ul><li>The best way to assure a schedule slip is to mandate a completion date that is impossible to achieve. </li></ul>Three Factors
  155. 156. <ul><li>EV accurately measures project performance, but must assume that scope definition is adequate and that the project has been given an achievable budget and a realistic schedule. </li></ul>Three Factors
  156. 157. Factor-2: Actual performance against the approved baseline plan <ul><li>Is the project’s performance meeting, exceeding, or falling behind the approved project plan? Such performance factors can be quantified and monitored for the duration of the project. Both, the CPI and the SPI can be watched for trends, and also used to statistically forecast the final results for any project employing EV. </li></ul>Three Factors
  157. 158. Factor-3: Management’s determination to influence the final results <ul><li>If project management closely tracks the EV performance trends and does not like, or can not accept, the final forecast results, to what extent will management take aggressive actions on the remaining work to alter the final outcome? </li></ul>Three Factors
  158. 159. <ul><li>Final project results can often be altered, but only when aggressive management actions are taken …….. early. </li></ul><ul><li>To what extent will project performance data be monitored and the data believed by management? </li></ul>Three Factors
  159. 160. <ul><li>What actions will be authorized to alter the management approach on the remaining project tasks? </li></ul><ul><li>And, finally, if the project’s final forecasts are unacceptable, to what extent will all discretionary (non critical) work be eliminated, budgets reduced, risks taken, and so forth, in order to bring the final projected results down to acceptable levels? </li></ul>Three Factors
  160. 161. Forecasting Final Project Status - TCPI Metric
  161. 162. Forecasting Final Project Status - TCPI Metric <ul><li>One of the most valuable metrics resulting from EV employment is known as the “to complete performance index (TCPI). It should be used in conjunction with tracking the cumulative CPI. Basically: </li></ul>TCPI = on the status check date Work remaining Funds remaining
  162. 163. Fig 19: The To-Complete (the work) Performance Index (TCPI) Work remaining Funds remaining = TCPI Formula: 1.00 + – Status date Cumulative CPI Baseline Plan TCPI
  163. 164. <ul><li>The cumulative CPI represents work that has already been completed and TCPI constitutes future work. TCPI addresses the question: </li></ul>“ What performance factor (CPI) must the project achieve in order to stay within the tangible future financial goal?” <ul><li>It takes the “work remaining” and divides it by “funds remaining”. </li></ul>Forecasting Final Project Status - TCPI Metric
  164. 165. <ul><li>The funds remaining can be represented by two distinct financial goals as shown in figure fig-20 </li></ul>Forecasting Final Project Status - TCPI Metric
  165. 166. TCPI using management’s “ Budget at Completion” (BAC): Fig 20: Two “To-Complete Performance Index” (TCPI) Formulas TCPI using the Project Manager’s “ Estimate at Completion” (EAC): Work Remaining (BAC – EV) Funds Remaining (BAC – AC) = TCPI (BAC) Work Remaining (BAC – EV) Funds Remaining (EAC – AC) = TCPI (EAC)
  166. 167. The TCPI Using Management's Budget at Completion
  167. 168. The TCPI Using Management Budgets at Completion <ul><li>The TCPI metric is important any time a project experiences negative cost performance, that is, when CPI is running below 1.0 performance. A negative CPI indicates that the project is spending -------------------------. </li></ul>
  168. 169. <ul><li>More than it has budgeted for the work completed. It is overrunning costs. The question then becomes: </li></ul>“ Will the current overrun cause the project to need more funds than management has authorized in its budget (BAC)?” The TCPI Using Management Budgets at Completion
  169. 170. Fig 21: The relationship of Cumulative CPI versus TCPI Status date at 50% Complete Sunk Costs Opportunity Costs 1.00 + – Cumulative CPI Baseline Plan TCPI .75 1.25
  170. 171. <ul><li>The cumulative CPI can best thought of as actual “sunk costs”. If a project spends more money than it has budgeted for the completed work, those costs are likely gone for ever. Early cost overruns are rarely (if ever) recovered by subsequent performance. </li></ul>The TCPI Using Management Budgets at Completion
  171. 172. <ul><li>The remaining work can thus be considered to be “opportunity costs”. That is, if any cost improvement is to be made, they must come from that remaining work. </li></ul>The TCPI Using Management Budgets at Completion
  172. 173. <ul><li>When managing a portfolio of projects, executives will want to begin the continuous comparison of EV performance data as early as possible-10%, 20%, 30% etc. </li></ul><ul><li>To illustrate the utility of the TCPI, we will focus on the 50% completion point to describe the concept. </li></ul>The TCPI Using Management Budgets at Completion
  173. 174. <ul><li>When monitoring the TCPI, the juncture of 50% completion point is critical to any project. It represents the point at which the sunk cost will precisely equal to the opportunity costs. </li></ul>The TCPI Using Management Budgets at Completion
  174. 175. <ul><li>However, once the project goes past the 50% completion point the sunk cost will exceed the opportunity costs and the required performance factor to meet the financial goal will increase exponentially. </li></ul><ul><li>At some point, the project manager and executive management must recognize that “more funds are needed” in order to complete the project. Management then has some hard choices to make. </li></ul>The TCPI Using Management Budgets at Completion
  175. 176. The TCPI Using The PM’s Estimate at Completion (EAC)
  176. 177. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>Once it becomes obvious that a project can no longer be completed within management’s authorized funds (BAC), the next question then becomes: </li></ul>“ What is the real number needed to complete the project, the estimate at completion (EAC)?
  177. 178. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>We are not talking here about the statistically calculated EACs discussed earlier – the Mathematical, or CPI or CPI times SPI calculated EACs. </li></ul><ul><li>Rather we are referring to the project manager’s official position on what it will take to complete the project. </li></ul><ul><li>This is typically created by taking the actual costs to date, and then preparing detailed task-by-task estimate to complete the job. </li></ul>
  178. 179. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>One’s personal pride often comes into play. Sometimes, the real number of required costs to complete the project is suppressed, at least temporarily. The project manager’s official EAC may increase each month ----------- little piece at a time. This condition is unfortunate, but too often real. </li></ul>
  179. 180. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>However, senior management and the buying customer deserve to know the full truth. They may elect to cancel the project and invest their funds in other endeavors. </li></ul><ul><li>It is their money, and they deserve to know the full truth. </li></ul>
  180. 181. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>That is where the TCPI based on available EAC funds becomes a valuable tool. A TCPI based on the EAC funds can be used to validate the reasonableness of the project manager’s official EAC. </li></ul>
  181. 182. Fig 22: Using the TCPI to validate the Project Manager’s EAC 1.00 + – Cumulative CPI Baseline Plan PM EAC (1) (2) (3) Math EAC Cum. CPI EAC CPI x SPI EAC
  182. 183. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>The utility of TCPI based on either the BAC or EAC is that allows management at all levels to assess the forecast future of a project based on the past EV performance. </li></ul>
  183. 184. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>It portrays in graphical form the past performance (sunk costs) versus the future expectations (opportunity costs), so that management at all levels can feel comfortable that their financial goals can, in fact, be achieved. </li></ul><ul><li>The TCPI can be a valuable aid in this process. </li></ul>
  184. 185. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>The TCPI is compared to cumulative CPI to determine if the target EAC is reasonable: </li></ul><ul><ul><li>A target EAC is assumed to be reasonable, if the TCPI is within plus or minus 0.05 of the cumulative CPI EVM metric. </li></ul></ul><ul><ul><li>Some industry system descriptions allow a 0.10 margin. </li></ul></ul>
  185. 186. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><ul><li>If a TCPI is more than 0.05 higher than the cumulative CPI the target EAC may be overly optimistic. </li></ul></ul><ul><ul><li>If the cumulative CPI is more than 0.05 higher than the TCPI, the target EAC may be overly pessimistic. </li></ul></ul>
  186. 187. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>Given a TCPI of 1.1, the plain language definition is: </li></ul><ul><ul><ul><li>For every rupee spent from here to the end of the contract, a rupee and ten paisas of budgeted work must be completed or earned to achieve the target EAC. </li></ul></ul></ul><ul><li>Likewise a TCPI of 0.95 would mean: For every rupee spent from here to the end of the contract, only 95 paisas worth of budgeted work must be completed. </li></ul>
  187. 188. The TCPI Using The PM’s Estimate at Completion (EAC) <ul><li>TCPI metric’s primary purpose is as an EAC reasonableness metric. EAC is an independent EVM variable (also latest revised estimate, LRE). The EAC is not the result of an EVM equation, but represents the project estimate at completion based on risk and all available project data. </li></ul>
  188. 189. Methods Used to Plan and Measure EV
  189. 190. Method’s used to Plan and Measure EV <ul><li>EV is dependent upon the project’s scheduling system to provide mechanisms for measurement of performance. </li></ul><ul><li>Stated another way, without a scheduling system in place, EV performance cannot take place. </li></ul>
  190. 191. Method’s used to Plan and Measure EV <ul><li>A project scheduling system will by definition reflect the project’s scope of work and then place all the defined work tasks into a specific time frame for execution. </li></ul><ul><li>When one adds resources (management’s authorized budget) to the scheduling system and metrics to plan and consume such resources, the EV performance plan is in place. </li></ul>
  191. 192. Method’s used to Plan and Measure EV <ul><li>Bear in mind that a major requirement of EVPM is: </li></ul><ul><ul><li>“ That where ever practicable, objective measures (rather than management judgment) should be used to take credit for work performed. </li></ul></ul>
  192. 193. Fig 23: EV Measurement Methods Typically used for non-recurring tasks Used for either non-recurring or recurring tasks 1. Milestones weighted values. 2. Fixed formula (40/60, 25/75, 50/50 etc). 3. Percent complete estimates. 4. Percent complete with milestone gates. 5. Equivalent units. 6. Earned standards.
  193. 194. 1. Milestones with Weighted Values <ul><li>Each designated milestone is assigned a specified budgeted value, which will be earned upon 100 percent completion of the event. </li></ul><ul><li>The total work package budget is divided based on a weighted value assigned to each milestone. Once work is underway, values should not be changed. </li></ul>Method’s used to Plan and Measure EV
  194. 195. <ul><li>The weighted milestone method is a preferred method used in performance measurement, but it is also a most difficult method to initially plan and then administer. </li></ul><ul><li>This approach requires a close working relationship between the work package managers, the scheduling people, and the resource-estimating function in order to set meaningful milestone values for all planned work. </li></ul>Method’s used to Plan and Measure EV
  195. 196. Fig 24: Measure Earned Value with the Project Schedule 1. Milestones with Weighted Values 2. Fixed formula which adds to 100% 25% 75% 50% 50% 40% 60% 3. Percent complete estimates 100% 4. Percent complete with Milestone Gates 33% 67% 100%
  196. 197. 2. Fixed (Start/Finish) Formula by Task: (40/60, 25/75, 50/50 etc. <ul><li>For example the 25/75 method works well when applied to those work packages that are scheduled to start and be completed within the same or two measurement periods. In this scenario, 25% of the budget value is earned when the activity starts, and other 75% of the budget value is earned when the task is completed. </li></ul>Method’s used to Plan and Measure EV
  197. 198. <ul><li>One important rule to follow when using this method is that the defined tasks should not exceed one or two maximum reporting periods, measured weekly or monthly. </li></ul>Method’s used to Plan and Measure EV
  198. 199. 3. Percent Complete Estimates <ul><li>This discrete measurement method allows for a periodic (weekly or monthly) estimate of the percentage work completed during the reporting period. </li></ul><ul><li>Such (subjective) estimates are made by the individual in charge of a given work package. For ease of administration such estimates are expressed as a cumulative value against the full (100%) value of the specified work package. </li></ul>Method’s used to Plan and Measure EV
  199. 200. <ul><li>To minimize inflated subjective estimates, some firms have developed internal written procedures (operating guidelines) on specific segments of work to more accurately assign percent complete values based on actual work accomplishment. </li></ul>Method’s used to Plan and Measure EV
  200. 201. <ul><li>Examples of these guidelines may be: </li></ul><ul><ul><ul><li>Planning completed, lines of code released, drawings issued, materials ordered, parts received, tool orders released, etc. </li></ul></ul></ul>Method’s used to Plan and Measure EV
  201. 202. <ul><li>Another effective practice, which is sometimes used to buffer excessive optimism while using the percent completion method is to set a “maximum ceiling” allowed for any work package until it is 100% complete. </li></ul>Method’s used to Plan and Measure EV
  202. 203. <ul><li>Thus with an 80% ceiling in place, a given work package may earn up to 80% of the manager’s subjective estimate until the task is 100% complete, at which time the balance of 20% may be earned. </li></ul>Method’s used to Plan and Measure EV
  203. 204. 4. A Combination of Percent with Milestone Gates <ul><li>Recently, there has been an evolution in EV applications that seems to have captured the best of both measurement techniques: </li></ul><ul><ul><ul><li>“ The ease of subjective percent complete estimates used in conjunction with hard tangible milestones”. </li></ul></ul></ul>Method’s used to Plan and Measure EV
  204. 205. <ul><li>This method seems to work well in any industry and with any type of project. Thus, the broad universal acceptance of EVPM may well be the result of finding the right balance between ease of implementation and accurate performance measurement. </li></ul><ul><ul><ul><li>“ Subjective estimates with milestones as “Gates” may provide that balance”. </li></ul></ul></ul>Method’s used to Plan and Measure EV
  205. 206. 5. Equivalent Completed Units <ul><li>This measurement method allows for a given Planned Value to be earned for each full unit of work completed, and also for a fractional equivalent of a full unit. </li></ul><ul><li>The equivalent completed unit approach works well when the project periods are of an extended duration. It is also used for the management of repetitive work. </li></ul>Method’s used to Plan and Measure EV
  206. 207. 6. Earned Standards <ul><li>The use of earned standards to initially set a budget and subsequently to measure the earned performance of repetitive work is perhaps the most sophisticated of all the methods, and requires the most discipline on the part of the participants. </li></ul>Method’s used to Plan and Measure EV
  207. 208. <ul><li>It requires the prior establishment of equivalent unit standards for performance of the tasks to be completed. </li></ul><ul><li>Historical cost performance data, time and motion studies, set up and lost time factors etc, are all essential to the process of measuring performance against earned work standards. </li></ul>Method’s used to Plan and Measure EV
  208. 209. The Genesis and Evolution of Earned Value
  209. 210. <ul><li>The EV concept was conceived over a hundred years ago, sometime in the later part of the nineteenth century. </li></ul>The Genesis and Evolution of Earned Value
  210. 211. Phase 0 – The Factory Floor: In the late 1800s <ul><li>Industrial engineers employ a “three dimensional” approach to assess their performance efficiency or work done in the factory. </li></ul><ul><li>They measure performance against a base line called the “planned standards” and then measure the “earned standards” achieved against the “actual expenses”, incurred to accurately measure the performance in their factories. </li></ul>Method’s used to Plan and Measure EV
  211. 212. <ul><li>The result of this approach is Earned Value Management in its most fundamental form. Perhaps of most significance: </li></ul><ul><ul><li>The industrial engineers have defined a “cost variance” as representing the difference between the actual costs spent and the earned standards achieved. </li></ul></ul>Method’s used to Plan and Measure EV Phase 0
  212. 213. Phase 1 – PERT / Cost: 1962-1965 <ul><li>PERT was first introduced to industry as a network scheduling and risk management device by the US Navy in 1958. PERT’s original approach was two-fold: </li></ul><ul><ul><li>To simulate the development planning of a new project in the form of a logic flow diagram. </li></ul></ul><ul><ul><li>And to assess the statistical probability of actually achieving the plan </li></ul></ul>Method’s used to Plan and Measure EV
  213. 214. <ul><li>Around 1962, the advocates of PERT as a scheduling tool chose to take another bold step to expand the concept. Their thinking: </li></ul><ul><ul><li>“ If one could accurately simulate the logic of a project taking the form of a network, why not add resources into the network and manage both time and costs?” </li></ul></ul><ul><li>The result was the introduction of PERT / Costs in 1962. </li></ul>Method’s used to Plan and Measure EV Phase 1
  214. 215. <ul><li>To accurately describe environment at the time: </li></ul><ul><ul><li>“ Since neither the computer hardware nor the computer software programs were available to properly support simple network scheduling, the addition of cost resources into these logic networks merely aggravated the problem”. </li></ul></ul>Method’s used to Plan and Measure EV Phase 1
  215. 216. <ul><li>Neither the original PERT (which then went by the term “PERT / TIME”) nor “PERT / COSTS survived by the mid 1960s. Today the term PERT does live on, but only as a generic title to describe any network scheduling method. In fact, most of the networks today that are called PERT are actually Precedence Diagram Method (PDM) networks, not true PERT networks. </li></ul>Method’s used to Plan and Measure EV Phase 1
  216. 217. <ul><li>What of importance did survive from the short-lived PERT / COSTS experience was the earned value concept. The implementation of PERT / COSTS in the industry at the time required eleven reporting formats from the contractors. One of these formats include a: </li></ul><ul><ul><li>“ Cost of work report”. Its format contained what was then called the “value of work performed” versus the actual costs. </li></ul></ul>Method’s used to Plan and Measure EV Phase 1
  217. 218. <ul><li>A comparison of the actual costs accumulated to date and the contract estimate for the work performed to date will show whether the work is being performed at a cost which is greater or less than planned. </li></ul><ul><li>Thus, Earned Value as a project management tool was initially introduced to modern industry in 1962. As a part of PERT / COST, however, it would not last long. </li></ul>Method’s used to Plan and Measure EV Phase 1
  218. 219. <ul><li>PERT / COST had a life span of perhaps three years, but it did leave an exciting legacy: </li></ul><ul><ul><li>“ The use of earned value to monitor the true cost performance during the life of any project”. </li></ul></ul>Method’s used to Plan and Measure EV Phase 1
  219. 220. <ul><li>By the mid 1960s, both PERT / TIME and PERT / COST had all but vanished from the scene. Industry executives and private companies did not take kindly to being told what management techniques they must employ and how they must manage their projects, no matter how beneficial such ideas may have been. The DOD realized that they had to take a more sensitive approach towards private industry; and they did just that with the introduction of the C/SCSC approach. </li></ul>Method’s used to Plan and Measure EV Phase 1
  220. 221. Phase 2 – C / SCSC: 1967 to 1996 <ul><li>The USAF took the lead to set standards that would allow it to oversee industry performance, without specifically telling industry what it must do. </li></ul><ul><li>The notion of merely requiring that contractors satisfy broadly defined “criteria” with their existing management control systems was born. </li></ul>Method’s used to Plan and Measure EV
  221. 222. <ul><li>A subtle departure from PERT experience but it made all difference between success and failure for the new approach. </li></ul><ul><li>The criteria concept simply required a response from industry to some basic questions, based on sound management principles: </li></ul>Method’s used to Plan and Measure EV Phase 2
  222. 223. <ul><ul><li>Does the contractor break down the work into short span packages that can be budgeted, scheduled and evaluated? </li></ul></ul><ul><ul><li>Do they have a cost accumulation system? </li></ul></ul><ul><ul><li>Do they measure performance against those packages of work ..…….. and do. </li></ul></ul><ul><ul><li>They report status and variances to their internal management? </li></ul></ul>Method’s used to Plan and Measure EV Phase 2
  223. 224. <ul><li>Introduced in Dec 1967 the C/SCSC carefully incorporated the earned value concept in the form of thirty-five criteria that were imposed on any private contractor wishing to be chosen for a new major systems contract or subcontract that exceeded 20 million dollars. </li></ul>Method’s used to Plan and Measure EV Phase 2
  224. 225. Phase 3 – Earned Value Management (ANSI/ EIA 748): 1996 to the Present <ul><li>To reduce complexity in the C/SCSC, the industry established their own version of the 35-C/SCSC in 1995. </li></ul><ul><li>The called the new industry version the: </li></ul><ul><ul><li>“ Earned Value Management System (EVMS) criteria” </li></ul></ul>Method’s used to Plan and Measure EV
  225. 226. <ul><li>It contained 32 criteria. Gone were the vague terms like BCWS and BCWP, in their place were “Planned Value” and “Earned Value”. </li></ul><ul><li>In Dec 1996, 32 criteria industry Earned Value Management System was issued as DOD Instruction 500.2R. And finally in 1998, this was issued as an American National Standard Institute / Electronic Industry Association (ANSI / EIA – 748) document. </li></ul>Method’s used to Plan and Measure EV Phase 3
  226. 227. Fig 25: Getting back to Earned Value Basics Factory Floor ------------------------ 1890 PERT / COST -------------------------- 1962 C / SCSC ------------------------ 1967-1996 EVM ANSI-EIA-748 Standard -- 1998 Simple EVPM ------ into 21 st Century
  227. 228. EPILOGUE Focussing on Value of Work Accomplished (i.e. the earned value)
  228. 229. What Do Project Managers Want to Know?
  229. 230. <ul><li>Is the project on schedule? </li></ul><ul><li>Is the project on budget? </li></ul><ul><li>Simple project analysis tools can answer these questions using time and cost tracking. </li></ul>What do Project Managers want to know? Earned value asks and answers more important questions: <ul><li>How much of the budget “should have been” spent at this point in the project? </li></ul><ul><li>How much “Value” has the work on the project “Earned” so far? </li></ul>
  230. 231. <ul><li>Most corporate / public sector executives measure their cost performance on projects by using only two dimensions: </li></ul><ul><ul><li>“ The projected cost versus actual costs” </li></ul></ul><ul><li>Thus if all the allotted budget is spent, they are right on target. If less is spent, then there is an underrun of costs. If more is spent, then an overrun exists. </li></ul>What do Project Managers want to know?
  231. 232. This is not cost performance, but rather funding performance. What do Project Managers want to know?
  232. 233. What is missing? What do Project Managers want to know?
  233. 234. <ul><li>It is the measurement of the “value of the work performed”, for the money spent – we call this missing link the Earned Value. </li></ul>What do Project Managers want to know?
  234. 235. <ul><li>If a project’s budget was set at Rs 100 million and only Rs 90 million were spent, but it had only accomplished Rs 80 million in work value, what should you call this condition? </li></ul>What do Project Managers want to know?
  235. 236. <ul><li>It should be called what it is: </li></ul>What do Project Managers want to know? A Rs 10 million overrun of costs
  236. 237. <ul><li>The missing third dimension on most public sector projects today is a measurement of the value of the physical work accomplished for the money being spent. </li></ul>What do Project Managers want to know?
  237. 238. <ul><li>A century ago, the industrial engineers led by the father of scientific management, Frederick W. Taylor, were correct in their assessment of what represented “true” cost performance in their factories. </li></ul><ul><li>Cost performance represented the difference between the accomplished work (represented by earned standards) versus the actual costs incurred. </li></ul>What do Project Managers want to know?
  238. 239. <ul><li>It was not the difference between the planned costs and actual costs. </li></ul>What do Project Managers want to know?
  239. 240. Fig 26 Is this any good? Time Cost Planned Cost Cost to date
  240. 241. <ul><li>Today many corporate executives still do not grasp this simple concept and are content to focus on projected costs versus actual costs, calling this their “cost performance”. </li></ul>What do Project Managers want to know?
  241. 242. <ul><li>The early industrial engineers created what they called their “planned standards” representing two components: </li></ul><ul><ul><li>The authorized physical work </li></ul></ul><ul><ul><li>Authorized budget for the authorized work </li></ul></ul>What do Project Managers want to know?
  242. 243. <ul><li>Planned standards simply represented their baseline plan. It was only when such work was completed that they could determine their true cost performance. </li></ul>What do Project Managers want to know?
  243. 244. <ul><li>Thus a century ago Taylor focussed on the “earned standards” that represented physically accomplished work, plus its original authorized budget. </li></ul><ul><li>He then compared the earned standards against the actual hours expended to determine the true “cost performance”. It worked then. It can work now! </li></ul>What do Project Managers want to know?
  244. 245. <ul><li>Scientifically documented empirical evidence collected from over 700 DOD contracts (projects) that have employed EVM, demonstrate a pattern of consistent and predictable performance. Summary of findings is as shown: </li></ul>What do Project Managers want to know?
  245. 246. <ul><li>Given </li></ul><ul><ul><li>Contract more than 15% complete </li></ul></ul><ul><ul><ul><li>Overrun at completion will not be less than overrun to date. </li></ul></ul></ul><ul><ul><ul><li>Percent overrun at completion will be greater than percent overrun to date. </li></ul></ul></ul><ul><li>Conclusion </li></ul><ul><ul><li>You can’t recover </li></ul></ul><ul><li>Who says </li></ul><ul><ul><li>More than 700 major DOD contracts since 1977 </li></ul></ul><ul><li>Why </li></ul><ul><ul><li>If you under estimated the near, there is no hope that you can do better on the far term planning. </li></ul></ul>Fig 27: The DOD EV BOK
  246. 247. WARNING KEEP AWAY! Motto of unsuccessful project manager
  247. 248. “ Living with latent unease is better than facing the unpalatable truth”