Measuring Progress and Predicting Outcomes
First of all let’s distinguish between the expressions “project management success” and “project success.” Project management success is primarily about producing the final deliverable as per specifications, on time and within budget, whereas project success is mostly about realising business case benefits, and achieving these are usually beyond the control of us project managers.
There are several predictors of project management success including the competence of the project manager, the project team cohesion, the adequacy of the original time and cost estimates, and the riskiness of the undertaking. Too little time and/or money make it very difficult for us project managers to achieve on-time completion within our approved budgets no matter how effective and efficient we are. And too little time and money is not uncommon. It is sometimes the consequence of poor estimating, unanticipated variations, rework and risks, and sometimes the consequence of eager project sponsors who might deliberately minimise time and/or cost in order to get their pet propositions approved. Focusing on parameters of time and cost is a difficult but a necessary job. Without monitoring and controlling the project, it is nearly impossible to complete the entire scope of work on time and within cost constraints.
This blog item concerns Earned Value Analysis (EVA) as a technique for measuring project performance to date and for predicting the eventual cost and time to complete the project work scope, not to be confused with Economic Value Added, which is concerned with an organisation’s economic profit. Earned Value Analysis (EVA) is used as a tool for control since it tells us how our project is going, in terms of cost, scope and time. That is, whether the cost is under control and if it will go over our planned budget or when the project will be completed if we continue working at the same pace. Thus EVA is helpful to plan and identify changes needed to our plan depending on current progress. EVA focuses on analysis, whereas EVM (Earned Value Management) moves beyond analysis to management, using EVA information for decision-making.
The predicted total project cost and time are extrapolations based on performance to date. EVA is an approach for measuring how much work has been completed on a project at a given point of time. We calculate how much time the project work has taken and what budget been used. These values are then compared with the planned values of time and cost. If the time taken to do the particular task is greater than what we planned, it means that the project is running behind schedule. Similarly, if the cost is more than we planned, it means our project has not been managed efficiently in terms of cost. Anyway, don’t panic if that explanation is unclear, just follow these steps:
1. Prepare the project Work Breakdown Structure (WBS) whereby we break our project into smaller chunks. In effect, these chunks are smaller projects usually referred to as tasks or activities that will be delegated, contracted out or done by us project managers.
2. Estimate the duration and cost of each separate task, allowing for all likely labour, management, material and equipment costs, plus any contingency that our risk analysis reveals is appropriate.
3. Prepare a “bottom-up” budget to determine with greater accuracy the total estimated cost of our project. (Incidentally, at this point we may realise that we have insufficient budget. If so, we should prepare a case for more money or for some reduction in specifications for project deliverables. Some features and functions may need to go.)
4. Prepare a Network Diagram to determine the sequence in which project tasks must be completed.
5. Convert our Network Diagram into a Gantt chart that clearly shows what work is to be done and over what periods of time.
6. Prepare a project cash flow estimate, which can be shown in graph form as an accumulative cost curve for the life of our project. This curve is typically shaped like a flattened “S” showing an increased rate of spending during project execution. In EVA or EVM parlance this baseline is referred to as the Budgeted Cost of Work Scheduled (BCWS) or simply Planned Value (PV). It is the baseline against which we measure progress, and it will look something like this:
There are three key project performance measures associated with EVM and their abbreviations:
1. Planned Value (PV). Also called Budgeted Cost of Work Scheduled (BCWS) is the project expenditure that we anticipate over the life of the project, as shown in above graph.
2. Actual Cost (AC). Also called Actual Cost of Work Performed (ACWP) is the aggregate cost that is spent on a project when it is implemented.
3. Earned Value (EV). Also called Budgeted Cost of Work Performed (BCWP) is the work that has actually been done, but costed using the original estimates.
Thus, PV or BCWS is the baseline against which we compare our project’s current AC or ACWP and EV or BCWP in order to determine schedule and budgetary performance to date and also to forecast our project’s total cost and duration. Such project performance is expressed using the following measures:
1. Cost Variance (CV). As the name suggests, Cost Variance calculates the difference between the cost actually incurred and the planned cost. It checks whether we have gone according to our budgeted cost or not. CV = EV – AC. If CV is negative, it means that actual cost of performing the work is more than planned (AC > PV).
2. Cost Performance Index (CPI). This ratio shows cost performance. CPI = EV / AC where an index of less than 1 means that actual costs are more than were budgeted, and an index of more than 1 means thar actual costs are less than anticipated.
3. Schedule Variance (SV). This measure shows the difference between the actual and planned time taken to complete our project or an activity of a project. It checks whether the project has taken more or less time than that of the planned schedule. SV = EV – PV where a negative figure means our project is behind schedule and a positive figure means ahead of schedule.
4. Schedule Performance Index (SPI). This ratio shows schedule performance.
SPI = EV / PV where an index of less than 1 means behind schedule and more than 1 means ahead of schedule.
5. Estimate at Completion (EAC). Used to find the estimated cost of our project at completion, based on present performance. EAC = PV of whole project/current CPI.
6. Estimated time to complete (ETC). Used to find the approximate time to complete the project, based on present performance. ETC = Original Duration/ Current SPI.
7. Critical Ratio (CR). Single measure of overall performance todate. CR = CPI x SPI.
These EVA abbreviations and formula are summarised in the following table:
Below is the EVA graph now showing not only BCWS or PV, but also the project performance curves to date for ACWP or AC and BCWP or EV. Given this information we can determine SV, CV, SPI, CPI, and CR. While the BCWS includes contingencies of time and cost for identofied risks, the management reserve is an allowance for the unexpected. In this example, the project is both over spent and behind buget. If you want to use a calculator for these formula go to this address http://www.ajdesigner.com/phpearnedvalue/cost_performance_index.php#ajscroll
Other combinations of these project performance curves are possible, some of which are shown in the following graphs. Of course, if all is going precisely to plan all these curves would coincide. And in reality the curves are not so smooth and may often cross over each other. Also, EVA accuracy depends on the timeliness and reliability of input data. And of course EVA has no measurement of quality, which could mean that we have done all the work on time and within-budget, but the deliverables do not conform with specifications.
CPI, SPI and CR may also be plotted on a Control Chart on which we may also show levels of acceptable performance. If you want to use an MS Excel-based EVM calculator hit right here.
Following is an EVA exercise that requires we complete the table and then plot the accumulative figures for BCWS, ACWP and BCWP on the graph paper provided. In this instance, the project is a cable-laying job where output is a measure of distance. BCWS is the baseline curve that once determined is plotted from project start to finish. The other two curves can be plotted up to an including week 8. Once we have plotted the performance curves we will appreciate that this project is very much under performing, although presumably we would have detected the trend earlier and taken timely action.
The resultant graph should look like the photo shown below on a slightly more elongated time scale that emphasises schedule slippage. That’s an interesting thing about graphs, we can alter their scale to emphasise or de-emphasise progress or the lack of it. And if we do not want anyone to understand what is going on, but not keen to admit their ignorance, use a logarithmic scale. Anyway, to read this graph, draw a horizontal line joining BCWP ($6,000) to BCWS, then drop a perpendicular line from BCWP in order to read current schedule slippage – just over one week behind schedule. The current overspend is the vertical distance between BCWP ($6,000) and ACWP ($11,080), which equals $5,080. So progress is not looking too smart, although you may have left the project by now. More demoralising, if things continue on their current course the project may take 27 weeks to complete, which is 12 weeks late and cost $25,000 representing some $10,000 over budget – a lethal combination for us project managers.