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CEPM504: Using Earned Value Management for Project

Managers What you'll do

Identify strategies for computing planned cost, planned value, and earned value Examine strategies for conducting project meetings in a way that they serve their purpose Examine Schedule Performance Index and Cost Performance Index so that you can use them to your benefit Forecast project cost using standard methods

Course Description

By calculating how much work has been completed on your project as progress goes on, you can update your forecasts regarding how much work is left to do and how long it will actually take to finish. At the same time, by calculating how much money you have already invested in your project, you can forecast how much more money you will have to spend in order to

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finish it. However, to really understand whether a project has gone off track, we need to connect these two elements, cost and the amount of work completed, together. That is where earned value comes in. Earned value helps you understand if the value of the work completed is consistent with the funds expended. It also gives you a mechanism to forecast what it might cost to complete the project, given past performance. Hence, performing earned value calculations puts you in a position to make informed decisions as to corrective actions. In this course, from Linda K. Nozick, Director and Professor of Civil and Environmental Engineering at Cornell, you will learn about Earned Value (EV) and how it can be productively used to control a project.

This course is designed for seasoned project managers who seek an introduction to EVM to achieve better practical results for implementing project controls, including financial controls and schedule controls. The calculations presented here are meant for any experienced project manager, including those who are not engineers, to apply to any size project. Students in this course must already have a foundational understanding of standard project management tools and processes including project networks, project budgets and schedules, and work breakdown structures.

Linda K. Nozick Professor and Director of Civil and Environmental Engineering College of Engineering, Cornell

CEPM504: Using Earned Value Management for Project Managers Cornell University

University

Linda K. Nozick is Professor and Director of Civil and Environmental Engineering at Cornell University. She is a past Director of the College Program in Systems Engineering, a program she co-founded. She has been the recipient of several awards including a CAREER award from the National Science Foundation and a Presidential Early Career Award for Scientists and Engineers from President Clinton for "the development of innovative solutions to problems associated with the transportation of hazardous waste." She has authored over 60 peer-reviewed publications, many focused on transportation, the movement of hazardous materials and the modeling of critical infrastructure systems. She has been an associate editor for Naval Research Logistics and a member of the editorial board of Transportation Research Part A. She has served on two National Academy Committees to advise the US Department of Energy on renewal of their infrastructure. During the 1998-1999 academic year she was a Visiting Associate Professor in the Operations Research Department at the Naval Postgraduate School in Monterey, California. Professor Nozick holds a B.S. in Systems Analysis and Engineering from the George Washington University and a M.S.E and Ph.D. in Systems Engineering from the University of Pennsylvania.

CEPM504: Using Earned Value Management for Project Managers Cornell University

Table of Contents

Meet Your Class

1. Meet Your Class

Module 1: Implement Project Controls through Meetings

1. Module Introduction: Implement Project Controls through Meetings

2. Watch: What Are Project Controls? 3. Watch: Project Meetings Done Right 4. Tool: Best Practices for Meetings 5. Getting Great Value from Meetings 6. Course Project, Part One: Implementing Project Controls

through Meetings 7. Module Wrap-up: Implement Project Controls through

Meetings

Module 2: Calculate Planned Cost, Actual Cost, and Earned Value

1. Module Introduction: Calculate Planned Cost, Actual Cost,

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and Earned Value 2. Tool: The Work Breakdown Structure Tutorial 3. Watch: The Project Budget 4. Top-Down or Bottom-Up? 5. Watch: Understanding "Planned Cost" 6. Watch: Understanding "Actual Cost" 7. Watch: Using "Planned Value" 8. Watch: Determining "Earned Value" 9. Course Project, Part Two: Calculate Planned Cost, Actual

Cost, and Earned Value 10. Module Wrap-up: Calculate Planned Cost, Actual Cost, and

Earned Value

Module 3: Forecast Project Cost

1. Module Introduction: Forecast Project Cost 2. Watch: Understanding Schedule Variance 3. Watch: Understanding Cost Variance 4. Watch: Examine the Schedule Performance Index 5. Watch: Examine the the Cost Performance Index 6. Watch: SPI and CPI: Why Do You Need Both? 7. Examine SPI and CPI 8. Watch: How Variances and Performances Indexes are Helpful 9. Watch: Forecasting Cost Method 1, Using Earned Value 10. Watch: Forecasting Cost Method 2, Using CPI 11. Course Project, Part Three: Forecasting Project Cost 12. Module Wrap-up: Forecast Project Cost 13. Read: Thank You and Farewell

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Meet Your Class 1. Meet Your Class

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Meet Your Class

Using the discussion below, please introduce yourself to the class. We're all eager to learn more about you. What do you hope to learn from the course? What is your profession? Where are you located? Please respond in a text format or as a video using the film strip icon that is available when you click "Reply."

(If posting a video response, we recommend that you do not use your cell phone as most do not use Flash software which is required to convert the recording.)

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Module 1: Implement Project Controls through Meetings

1. Module Introduction: Implement Project Controls through Meetings

through Meetings 7. Module Wrap-up: Implement Project Controls through

Meetings

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Module Introduction: Implement Project Controls through Meetings

The success of any project depends, in large part, on how well you can plan and monitor the work throughout the project life cycle. When project managers talk about "project controls," they may

be referring to a broad range of tools, systems, or methodologies, but all controls have one aim: to minimize the gaps between plans and execution. In this module, you will examine how you can use one tool, project meetings, to deliver better results. Project meetings tend to be an area in which many project managers struggle to get full team support and helpful participation. Why is this so? What can you do to get better results?

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Watch: What Are Project Controls?

As a project manager, a large part of your responsibility is not to sit back passively and collect status reports, but to actively track progress against goals, measure costs, monitor spending and schedules, and identify when corrective measures are needed. All of this has to be done on an iterative basis, and you'll use tools to do it.

Transcript

Project controls are a really important element of project management. Project controls are actually all of the metrics, processes and tools that we use to understand the current status of a project, and we use it through the entire course of the project to understand how it's performing. These controls also let us identify when corrective action is needed and what the magnitude and type of corrective action that is necessary.

So as you can imagine from these definition, project controls are actually very broad in scope. There are a lot of things that fall under project controls. For instance, all the stuff on scheduling, schedule tracking, schedule updating, everything we've talked about related to risk management including identification, assessment, and the design of interventions, along with everything associated with cost estimation and controlling costs.

There are actually very few things that are actually outside the

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scope of project control if you think carefully about it. Things like communication management are not in the scope of project controls. All the human elements that arise in project management, those are really not in the scope of project controls. All the things associated with quality control. Those are not within the scope of project controls. But many, many important things are within that scope. Actually, good project management and good project control, as we know, begins at the very beginning of the project. At the very beginning of the life cycle. You can't have a project in good control if you don't understand the scope, for instance, of that project.

So specifying the skill and doing that very carefully, is actually part of having good project controls. Also understanding how you're going to deal with changes as they come up in the project. All the issues associated with change management, this is part of project controls. If we don't know how to do that well, we're clearly not going to be able to be in much control of our projects. Also project controls identify the establishment of milestones, and how we manage working towards those milestones. Also, project controls includes all the estimation and tracking elements, and updating of the cost estimates. All of these things are really important to a well- executed project over time. Notice that all of these elements of project controls, they're not just, you establish them once and you walk away. They all require monitoring.

So you're not just identifying the controls and putting them in place, but you're monitoring those controls and you're using those controls for corrective action to understand when you need

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corrective action and what the magnitude of that corrective action needs to look like. If you don't have any monitoring, then you really don't have any control over the execution of your project. And the same is true for budget. So budgetary controls. All this idea of you establish a budget, you manage to that budget, you understand when there are deviations from that budget, you update that budget. All of those things are very important to establish in good project controls.

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Watch: Project Meetings Done Right

Project meetings are a necessity. Valuable information gets shared. So why do so many team members resist or even resent project meetings? Professor Nozick discusses how you, as a project manager, can make sure that your meetings are actually serving project goals and delivering value.

Transcript

The design and implementation of project controls will require project meetings. The exercise of those controls will also require meetings. Those meetings will be to collect data. They will be required to address issues as they arise, so that you can—when project controls show a signal of something not going right, that corrective action, the right corrective action can be identified and taken. So project meetings are going to wind up being a very important element of the process. Some folks on your teams may feel that the meetings are interfering with progress. This is not an uncommon feeling in the project management domain.

So we need to think very carefully about how to conduct those meetings so that that feeling doesn't permeate the entire group. How do we wind up with that sort of a feeling? Well if the meetings aren't scheduled and conducted properly, this idea of feeling like they're a waste of time can creep in. How does this start to happen in more precise terms? Well, it happens usually very innocently. You start having meetings and you don't stop them when the

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purpose of those meetings has been achieved, right? Or you schedule a meeting in haste as a reaction to an issue and you don't think carefully through the goals of the meetings. So meetings can certainly be necessary to address an issue that crops up, there's no doubt about that, it can be very important to addressing an issue that crops up.

But before the meeting occurs, it's really important to understand what are the goals of that meeting, be able to communicate that goal carefully to everybody so they can understand i, and then there needs to be a plan in place as to how that meeting will be conducted so those goals are achieved, okay? And another way meetings can turn out to feel like they're a waste of time is when they're much too long. So you've got to think carefully about how long a meeting should be to achieve its intended purpose. So, in fact, all meetings regardless of the motivation, they need to have a clearly established purpose, and that purpose has to be able to be understood by all of the attendees. That will include meetings for which the sole purpose is just to collect data.

Implementing and using project controls, will require the collection of data. So you're going to wind up having meetings with individuals, or collections of individuals, so you can continue to update those controls to understand what those metrics look like. Also, project meetings are going to wind up being necessary to keep people informed so that they can actually work as a team. That is one of the main mechanisms to coordinate activity. Also, to clarify scope. As projects go on, there may be questions about is this inside or outside of the scope? And so, there'll be meetings

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that only to disseminate decisions to people, so they can understand them and they can ask questions.

So, meetings have very important purposes, and they need to occur, but they need to occur in such a way that people feel that they're a value to their time, that they're useful. And also we do have to pay a little bit of attention to the social dynamic of our project. We don't really think of it in these terms, but meetings actually do lead to a social dynamic on a project. And that social dynamic is also important to productivity, so that your team really functions as a team. And this aspects of meetings is actually particularly important when you talk about younger people to the team, newer members of the team. And also for folks working on parts of the project that maybe more solitary in nature. These meetings are one of the main ways of social interacting with people. And when you interact more with people in both a social and a technical level the work turns out to be more effective, conducted more effectively.

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Tool: Best Practices for Meetings

Use the Best Practices for Meetings tool

In order to implement project controls effectively, you need to be able host project meetings that serve their intended purpose. Use the list of best practices here to guide your efforts and make sure your project meetings are delivering value for the project and the team members. This will help avoid wasted effort and the perception that project meetings are a waste of valuable time.

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Getting Great Value from Meetings Discussion topic:

It's not uncommon for team members to complain that project meetings are a waste of time. What do you do to make sure that your project meetings serve their intended purpose? Create a post in which you share your best tip or strategy for getting great value from project meetings.

Instructions:

Click Reply to post a comment or reply to another comment. Please consider that this is a professional forum; courtesy and professional language and tone are expected. Before posting, please review eCornell's policy regarding plagiarism (the presentation of someone else's work as your own without source credit).

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Course Project, Part One: Implementing Project Controls through Meetings

As you have seen, running effective project meetings is critical to achieving the goals that your organization has set. In this part of the course project, you will create an action plan to guide your efforts on the job as you plan, host, and run project meetings with your team and stakeholders. Completion of this project is a course requirement.

Instructions:

Download the "Using Earned Value Management for Project Managers" course project. Complete Part One. Save your work. You will not submit your work now. You will submit your completed project at the end of the course for instructor review and credit.

Before you begin:

Review the grading rubric for this assignment. Please review eCornell's policy regarding plagiarism.

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Module Wrap-up: Implement Project Controls through Meetings

As you have seen, the success of any size project is dependent on how well you can plan and monitor the work throughout the project life cycle. There are many routes to implementing strong project controls, including network scheduling and Gantt charts, among other tools and techniques, but all controls have one aim: to minimize the gaps between plans and execution. In this module, you examined how you can use one tool, project meetings, to deliver better results. Project meetings tend to be an area in which many project managers struggle to get full team support and helpful participation. A one-size-fits-all approach will not work here. You have to find a way to be successful within the context of your project, your team, and your organization. You have now created an individualized action plan to guide your efforts in this regard.

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Module 2: Calculate Planned Cost, Actual Cost, and Earned

Value 1. Module Introduction: Calculate Planned Cost, Actual Cost,

Cost, and Earned Value 10. Module Wrap-up: Calculate Planned Cost, Actual Cost, and

Earned Value

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Module Introduction: Calculate Planned Cost, Actual Cost, and Earned Value

You have seen the ways in which you can implement better project controls just through handling routine meetings with the project team and stakeholders more effectively. Now you will

examine the ways in which you can monitor and control progress through the project life cycle by comparing your plans to actual work accomplished and monitoring for variances. You will define "earned value," and look at the ways that you can calculate planned cost, actual cost, and earned value, and then practice using this information to your benefit as you make project decisions.

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Tool: The Work Breakdown Structure Tutorial

The Work Breakdown Structure Tutorial may refresh your memory

To complete this course, it will be important for you to have familiarity with creating a work breakdown structure, which is a standard project management tool. As a seasoned project manager, you are probably already very familiar with work breakdown structures. In the event that you have not worked with them recently, Professor Nozick has prepared this tutorial to refresh your memory about their purpose and creation. If you frequently work with work breakdown structures, you may not need this refresher.

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Watch: The Project Budget

There's more than one way to develop a project budget, as Professor Nozick explains. Done correctly, a project budget starts at the very beginning of the life cycle of the project, when you identify the number and type of tasks to be done, and the skilled people, materials, and facilities needed. All of these inputs help you develop your project budget.

Graphic adapted from "Designing to Reduce Construction Costs," Paulson, Boyd; ASCE San Diego conference; April, 1976.

Transcript

So, the project budget reflects the magnitude and the timing of the work to be done over the course of the project. If you look at this graph here you can see that a cost curve generally has kind of an S-shaped focus to it. At the very beginning, you spend relatively slowly on a project, then as it really reaches its full stride, you wind up spending quite rapidly on the project. This figure also is meant to remind you that over time the influence, the decisions made at the early part of the project have a very large influence on how the project will turn out in the end, how the execution will occur. So if you look at the other curve that's on this graph this is just a reminder that says, those early decisions, you make a number of decisions that really hem you in for the future of the execution of the project. If those decisions are good, you're on a really good trajectory. If those decisions are not quite as good, you might not

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be on quite as good on trajectory.

So how do we develop a project budget? Because a lot of this module is all about controls, project controls. And financial controls and schedule controls are really important elements to that. So let's talk for a few moments about developing the project budget. Actually the developing of the project budget starts at the very beginning of the lifecycle of the project, when you start to develop that work breakdown structure. Remember back to when we described the work breakdown structure. That leads to the identification of the tasks in the project.

When you identify each of the tasks, you're identifying the amount of work that needs to be done. You're also including in that identification what kinds of people, and the number of them that will be needed to do it. What materials you will need to do it, as well as what facilities will be necessary. Maybe what subcontractors will be required. So this will actually provide quite a lot of input to what the budget is going to look like. We take those tasks and we translate those into a resource-feasible schedule over time. Once we have that resource-feasible schedule we can now estimate what the planned budget is going to be, or the budget at completion. How much it will cost to do the entire project.

This is called bottom-up budgeting. There's a another idea that had developed a budget for a project it's more of a top down structure. And this sort of a structure assumes that the managers actually know how much the project should cost and then they allocate money downwards to each of the tasks. So those are the two kind of competing ideas of how you can think of building up a

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project budget.

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Top-Down or Bottom-Up? Discussion topic:

Professor Nozick discussed two methods of deriving a project budget: "top-down" and "bottom-up." Which of these do you prefer?

Create a post in which you make a case for the method you use more frequently, and explain what you see as the benefits of using that method.

Instructions:

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Watch: Understanding "Planned Cost"

Using your work breakdown structure, you can develop planned costs for your project. These may end up being different than the actual costs that will be incurred. Professor Nozick will explain how to develop planned costs and why they may vary from the actual.

Transcript

Realized cost or actual cost are the funds spent doing the actual work. Before we execute the project, we develop what we call planned costs. It's what we expect to spend based on the work breakdown structure, and the resulting project, resource constraint project schedule. Why are actual costs and the planned costs different sometimes? They're often different, because oftentimes there's a task, or many tasks, that don't come in exactly as we anticipated for costs. For instance, on a particular task, additional staff may become necessary, because the work is harder than we anticipated. Or we need some extra material, because there's more waste in the process than we anticipated. On the other side, it could be that the work turns out to be easier on a particular task. And so less staff and less time is needed, and in fact the task costs less. The planned cost for that task are actually higher than the actual cost turns out to be.

Lets go through the idea of how to develop planned costs for a project, through using this example. So, in this example we have six activities and we have two resources available, one of type A

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and one of type B, and they are available through the entire course of the project, however, long that may turn out to be. So, when we look at the project network there is an activity between, which is drawn in the activity network that connects node one with node two. That activity takes nine time periods to execute. It takes one unit of resource A the entire time it's active. Similarly the activity that's represented by the arc that connects node two with node three, that takes three time periods to execute and it takes one unit of resource B over each of those three periods. Using the project network and our resource constraints, that is we only have one unit of resource A and one unit of resource B available continuously throughout the entire project, we can develop the resource loaded schedule, and this will tell us how long the project will take to execute. It also tells us what the critical sequence of activities are.

So in this case it turns out that the activity from node one to node two, from node two to node three, from node three to node six, and from node five to node six, that's the critical sequence. Notice it's not just a critical path, it's actually a critical sequence of activities because we have resource constraints. The longest path through the project is not sufficient to describe how long the project will in fact take to do. Now we need to associate with each of the resources a cost, because we now know when each resource will be active, and for how long. And we're going to make the assumption that when the resource is not working on this activity, this project, they will be doing something else and therefore no cost is billed to the project.

Okay. So suppose resource A cost $5000 per period of use and

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resource B cost $3000 per period of resource use. In the first time period, we have one activity which is active, that is the activity from one to two, because the activity from one to four can't start because we only have one unit of resource A available. And we're going to assign it to the task that connects nodes one and node two. And that will cost us $5000 per time period. So in the first time period, the second time period, all the way through to the ninth time period, We're going to spend $5000 per period. And you can see by the table that we can just add up across the time periods all of the costs, and we can figure out what the budget at completion will be. In this case, it's $159,000 to complete this project. And you can create a graph of that cumulative dollar spent, and that's your planned cost over time. And that's an important element for project controls. That's going to be the amount of money you'll expect to spend in that spending profile over time.

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Watch: Understanding "Actual Cost"

The planned costs were based on the work breakdown structure. The realized costs or actual costs are the funds spent doing the actual work. Why not just track spending? Why do you need to forecast a planned cost and compare it to the actual cost? Professor Nozick explains.

Transcript

So at the beginning of the project, once the work breakdown structure has been completed, and a resource constraint project schedule has been identified, we now know we can estimate the cost of the project over its duration. A full spend plan. That's the planned cost of the project. And let's go back to our example we had a moment ago, there are six activities. We have two resources, type A and type B, we have one unit of each, across, available to us whenever we need them. But we only pay for them whenever we're using them across the planning horizon. From that project network and our resource constraints we can create the resource loaded schedule, and we can identify the planned costs. Now, actual costs, as the project proceeds the actual costs may not be exactly the planned costs. They may be different.

So let's go through an example of this and look at what happens when they are different, or what can happen. So suppose we're in the execution of the project and the time period is 17. And we're on a particular step in the task that connects node three with node six.

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and it turns out that that step is substantially harder than we thought. In fact, it's so hard that now we're at the end of time period 22 and that activity is just completed. Task three to six is, the activity that connects nodes three with six is finished, but it's now time period 22, that's not what we were thinking. So now we have to update our schedule, and in fact our project schedule goes from thinking that we're going to be at 27 time periods to finish, now we're actually at 32. We've had to slide out our schedule, because something came up, it was harder than we thought. So guess what? Our anticipated cost and our actual cost are not going to line up.

So if we think about what our budget looked like as of time period 22, and what our actual costs turned out to be as of time period 22, we can graph that. We can look at the difference. And we're now tracking costs. We have planned costs, we have actual costs. As of 22 the costs actually look the same, planned and actual. But we know something's wrong, because we know that activity took longer than we thought, but it's not showing up because we've elongated the activity. We've simply slid out another activity that on per period basis cost the same amount as this one. So in terms of actual cost, we're still tracking planned, but we're off. And you can see we're going to spend more in the end.

So I haven't updated planned cost in this graph, but you can see we're still tracking planned. So there's no signal. This is a problem. Why is there no signal? It's because of how the project schedule looks. Okay, we haven't really integrated the fact that our project schedule has slipped with our cost estimation. And that's an

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important comment, okay, and that's really where this whole area of earned value comes in, and planned value. And that's what we'll talk about over the next sequence of modules, is how to address that shortcoming. so that when we do project controls we can understand that in fact we are behind when we are behind.

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Watch: Using "Planned Value"

We've now looked at forecasting project costs and comparing what was expected to what it actually cost to complete the project, or part of the project. By completing tasks on the project network, you're also creating value. Professor Nozick discusses what we mean by value in this context, and how it informs project management work.

Transcript

So over the course of the project, we're not just incurring costs, we're completing work. In fact, we're creating value, okay, we're earning value. So over the course of the project we will create earned value. Before the project starts we'll create a plan for how we're going to earn that value over time. So the earned value or planned value, planned value is actually the escalation in the value of the work you've completed over the course of the project. And this is computable using the project schedule. The planned value of the project over time, can be computed using the project schedule, and it's really analogous to the planned costs. Because the value should rise as the costs rise. And in fact it becomes the authorized budget.

So, if you go back to our example with our project network, and our resource loaded project network through our project schedule, and go back and look at value by task. Originally we talked in terms of cost by task. So if you think about that first activity, the one that

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connects node one with node two, that takes nine periods to do, and takes a unit of resource A during each period that it's active. Over the course of each of those nine periods, we're going to get $5,000 worth of value out of executing that activity. It's also going to be the cost to execute that activity. So if we do it all perfectly on time, by the end of that activity we will have incurred the full project task cost. If it happens perfectly on time, we'll also have incurred exactly the same in project value.

So, we can now plan the value by each activity that gets done, and then we can create that plan value over the course of the entire project. And at least do an estimate that the planned value for the project is $159,000, just like the planned cost, and it has the escalation over time that's parallel to the planned costs. But now we can track the actual performance in cost terms and in schedule terms. In cost terms, using planned cost versus actual. And in schedule, planned value versus earned value. How much we really do earn in each period.

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Watch: Determining "Earned Value"

When the team completes work against the project plan, that's earning value for the organization. Now you will examine what is meant by "earned value," and how you can calculate earned value on your projects. This will be an important part of monitoring and control.

Transcript

So earned value is the estimated value of all the work that's been completed. As the project is executed, work gets done and costs are incurred. So the project that we're in the midst of completing, there's value associated with the work we've already done, or the earned value. And then there's also the actual costs that have been incurred. So let's go back to our example. We have our sixth activity example, and we also have our project network. Our resource constrained project schedule comes out of that, because remember again, we have one unit of A available all the time And one unit of B.

So suppose we're executing this project. We're stepping right along, and now it's November 30, 2016. We have finished activity one to two, and we have finished activity one to four. And we're in the process of trying to complete activity two to three. And all was going fine. Our planned value and our earned value, our cost, they're right in line. Everything is going as expected. Uh-oh, it's December 1st, the very beginning of December. And we find out

CEPM504: Using Earned Value Management for Project Managers Cornell University

we made a mistake. And the process of executing activity two, three. We weren't finished with it yet, we had done two of the periods, we thought, two months of it, but it looks like we're going to need to redo it. So that means we're now going to have a variance from what we planned on.

Okay, we're going to need to update our resource constrained project schedule. So it looks like activity 2-3 is going to take another three months. So we have two months of schedule slip. We had done two months but the work there is going to need to be reworked completely for one reason or another, and now we're going to need three more months. So now our project is not going to finish when we though it will. It's going to slip by two months. Well now our earned value as of December 1st is not our planned value, because we've lost effectively, $6,000 of value, right? Because we have to redo that piece of work.

Okay, our actual costs are now above our earned value. And you might notice in this figure, I've also just forecasted out as if the rest of the project will continue the way we anticipated from where we are December 1st. There will be a number of different ways to think about how to forecast future costs, and we'll talk about them a little bit later. But this is one mechanism to do it. To assume it will execute as we anticipate it in the original schedule, just shifted by two months.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Course Project, Part Two: Calculate Planned Cost, Actual Cost, and Earned Value

In this part of the course project, you will work with an actual budget and practice working with planned cost, actual cost, and earned value. As you have seen in this module, these measurements will help you make sure that your project is performing to expectations (or implement corrective measures if it's not).

Completion of this project is a course requirement.

Instructions:

If you have not done so already, download the "Using Earned Value Management for Project Managers" course project, if you have not already done so. Complete Part Two. Save your work. You will not submit your work now. You will submit your completed project at the end of the course for instructor review and credit.

Before you begin:

Review the grading rubric for this assignment. Please review eCornell's policy regarding plagiarism.

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Module Wrap-up: Calculate Planned Cost, Actual Cost, and Earned Value

Budgets, schedules, status, milestones: all of these are part of the standard toolkit of project managers. Now you have examined some of the ways in which you can implement better project controls by comparing your plans to actual work accomplished and monitoring for variances. You have define "earned value," and you have explored how to calculate planned cost, actual cost, and earned value. You have also practiced using this information to your benefit to inform better project-mangement decisions.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Module 3: Forecast Project Cost 1. Module Introduction: Forecast Project Cost 2. Watch: Understanding Schedule Variance 3. Watch: Understanding Cost Variance 4. Watch: Examine the Schedule Performance Index 5. Watch: Examine the the Cost Performance Index 6. Watch: SPI and CPI: Why Do You Need Both? 7. Examine SPI and CPI 8. Watch: How Variances and Performances Indexes are Helpful 9. Watch: Forecasting Cost Method 1, Using Earned Value 10. Watch: Forecasting Cost Method 2, Using CPI 11. Course Project, Part Three: Forecasting Project Cost 12. Module Wrap-up: Forecast Project Cost 13. Read: Thank You and Farewell

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Module Introduction: Forecast Project Cost

You have examined how to assess the performance of the project at a given point in time. That's not all there is to project control. You will also need to be able to say something about how

you think the cost will evolve over the rest of the project. You're gathering information as the project executes. Because the project team is doing activities and the organization is paying for them, you are earning value. That information is useful in making estimates of what it will take to go from the moment where you are right now in a project execution all the way to the end. So, suppose you're in a specific point in the project execution, and you now need an updated forecast to final costs. How do you make that forecast? You have actual cost that you've incurred from the beginning of the project until now, but how do you go about constructing the forecast, which will take those actual costs and then marry them in some way with what your estimate is of what's coming to get a final budget at completion or a final cost at the end? There are many options available. In this module, you will examine different ways of forecasting cost.

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Watch: Understanding Schedule Variance

By comparing how much work you had planned to get done versus how much has actually been accomplished, you can derive a very helpful measure of performance and efficiency.

Try it: As of today, your project's earned value is $250,000 and the planned earned value is $300,000.

Transcript

Schedule variance is a very useful way to understand how we are performing in terms of accomplishing work, compared to what we plan to accomplish. So, schedule variance is the difference between earned value and planned earned value, as what we have actually achieved, versus what we planned on achieving. So it's a straight forward way to compare progress with the plan. So it's useful to notice that if we use the formula schedule variance equals earned value minus planned earned value, that value can either be positive, negative, or zero. If it's positive it means we've done more work, our earned value is higher than what we planned to have earned. We're ahead, we're ahead of schedule. If it's negative it means we've learned less than we expected to at this point in the project, or we're behind schedule. And if it's zero we're exactly on schedule.

So let's go to back to our example and let's do a computation of

CEPM504: Using Earned Value Management for Project Managers Cornell University

schedule variance. So in our example, we were part way through doing that one activity, one to four, and we, no sorry, two to three, and we realized that we were going to have to redo two months worth of work. Okay, and we created a new schedule. So at this moment, it's December 1st. Our planned value at this point was $61,000. We expected to have finished two activities, and be two months into the next one. But in fact we lost two months of work which costs us $6,000. Our actual earned value was only $55,000. Our planned value was $61,000. So 55,000 minus 61,000 is negative 6,000. Our schedule variance is negative 6,000. We're behind schedule and this tells us by how much.

What does this mean? Are you on schedule?

The difference between earned value ($250,000) and planned earned value ($300,000) is -$50,000.

It's negative, so you have earned less than you anticipated earning. You are behind schedule.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Watch: Understanding Cost Variance

As Professor Nozick explains here, you can calculate the difference between the costs you have actually incurred on the project versus the amount you had planned on incurring. You can measure that difference and attach a dollar value to it. Doing so will help you control costs and scope, and you can see why: if the variance between planned and actual becomes significant, you may decide you need to implement corrective actions.

As you have seen, schedule and cost variance taken together are very useful measures of project progress. They give you insight into when corrected actions are needed. If both are positive or zero, your project is on track. If either or both are negative, there may be a need for corrective action. Of course, it's going to depend on how negative they are, how big the differences are, in order to gauge the magnitude of the corrective action that's going to be necessary. But they provide a very coherent way to understand how you're performing with respect to schedule and how you're performing with respect to costs.

Transcript

So in parallel to schedule variance, we can also compute a cost variance. So cost variance compares actual cost to planned cost. So what we compute cost variance as earned value minus actual

CEPM504: Using Earned Value Management for Project Managers Cornell University

cost. So earned value is how much work we've actually achieved, and actual cost is what it cost us to do it. If this turns out to be a positive value, we're under budget because we've done more work or we've accomplished more than we spent. If it's negative, it means we're over budget. It's costing us more to do the work we anticipated to do. And 0 means that we're exactly on budget. So if we go back to our old example, and activity 2-3 will take another three months, we have a two month schedule slip.

In terms of cost variance we're also $6,000 off. Our earned value is $55,000, our actual cost is $61,000. Our cost variance is $55,000 minus $61,000, or minus $6,000. Because it cost us, now why are they identical. In this case they're identical because that two, those two months we had to throw out of that activity 2-3, they actually came in exactly on budget for those two months. So our actual cost and what we need to do to where we are in our project, the cost variance and the schedule variance are identical. For that reason. If it cost us extra money to do those two months that we had to toss away, they wouldn't be the same.

So as an example, suppose that in October 2016 and in a November 2016, it took us $10,000 to do those two months of activity that connects nodes two and three. What happens then? What's the calculation look like then? Well then as of December 1, we still have a value of $55,000 no change. But our cost would actually be 65,000 our actual cost as opposed to the 61,000. The 61,000 assumed that it cost us $3,000 a month for that resource B, but in this case if it costs us 10,000 total, it's actually costing us $5,000 a month. It's an extra $4,000. Our actual costs are

CEPM504: Using Earned Value Management for Project Managers Cornell University

$65,000. So in that case, you compute cost variance as $55,000 minus $65,000. And our cost variance is $10,000. It's now lager than our scheduled variance.

Try it: As of today, your project's earned value is $50,000 and the actual cost is $127,312.

What does this mean? Are you within budget?

The difference between earned value ($50,000) and actual costs incurred ($127,312) is -$77,312.

It's negative, so it's costing you more to do the work than you anticipated. You are over budget.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Watch: Examine the Schedule Performance Index

Now Professor Nozick will lead you on an exploration of the schedule performance index, which allows you to calculate schedule efficiency by measuring earned value over planned value at any given point in time.

Transcript

Let's talk a little bit about schedule and cost performance indexes. Both of this indexes convey information about the level of efficiency in the execution of the project. The schedule performance index does so in terms of schedule, or is a measure of schedule efficiency. The cost performances index does so in terms of cost, so it's a measure of cost efficiency. Let's start with the schedule performance index. So the schedule performance index is actually earned value over planned value. Okay, and notice we will measure that at a specific point in time. So over the course of the project, you can always compute the schedule performance index.

Okay, you'll notice that ratio could be greater than one, less than one or exactly one. If it's exactly one, what you've earned in terms of value at this point in the project, is what you've planned to have earned as of this point in the project. And so you're exactly on schedule. If earned value is higher than what you've planned to

CEPM504: Using Earned Value Management for Project Managers Cornell University

earn by this point in the project, you're actually ahead of schedule. And if earned, and the value is then greater than one of SPI. If earned value is less than planned value, SPI is less than one, and you're behind schedule.

So let's go back to our favorite example. Let's go back to our December 1st of 2016 when you noticed all of activity 2-3 needs to be redone. So two months of work is not going to be useful. We can then compute the schedule performance index. Remember, we already computed the schedule variance. If we assume that those two months of activity 2-3 cost us $6,0000, 3,000 a month. What we spent is then $61,000. We would have planned to spend by that point in time on the project $61,000 but we haven't earned 61,000 in value. We've only earned 55,000 because that activity those two months has not created value for us.

So the schedule variance is $6,000 and it's negative. And the schedule performance index is actually 55,000, the earned value divided by the planned value which is 61,000. So it's about .9. And we're behind schedule, notice both the variance calculations is negative and the schedule performance index is less than one, indicating that we're behind schedule.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Watch: Examine the the Cost Performance Index

So now you will examine more closely the cost performance index. This asks you to examine the ratio between earned value and actual costs, and what conclusions about project performance and efficiency you can draw from that. Professor Nozick explains more.

Transcript

Now let's talk a little bit about the cost performance index. This is parallel to the schedule performance index we just spoke about. But for the cost performance index, the focus is on the ratio between earned value and actual costs. When this ratio is greater than one, we're actually under budget, we've done more work than what it costs us to do the work. Okay, more work has happened than we had anticipated and then work turned out to be cheaper. Less than one implies that in fact the project is earning less than the costs are incurred. So we're going to be over budget. And equal to one means we're right on track. Our earning and spending is right in line exactly with the plan.

So let's do an example of cost performance index. Let's go back to our example and it's now December 1st, 2016, and we've gotten the bad news that that activity 2-3 needs to be redone. And it gets worse, in fact, we look at the actuals for costs, and it turns out that in October of 2016 and November of 2016, a total of $10,000 was

CEPM504: Using Earned Value Management for Project Managers Cornell University

spent on task two to three, instead of the 6000 we had planned. So as of December 1, 2016, we've earned 55,000 our actual cost is 65,000. Our cost variance is negative 10,000. We're over budget. Our scheduled variance is still the negative $6000. Our cost performance index is 55,000 divided by 65,000 or 0.846. We're over budget, and we can see that both from the variance calculation and from the cost performance index calculation.

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Watch: SPI and CPI: Why Do You Need Both?

The schedule performance index and the cost performance index are both helpful. They serve different purposes and complement each other, as Professor Nozick explains.

Transcript

So you might be curious now, why do we need to have both variances and indexes? So we talked about a cost variance and a schedule variance. We talked about a schedule performance index and a cost performance index. Can we just have one and not the other? Well they serve different purposes and they're complimentary. So the variances give in dollar value whether or not you're above or behind schedule, okay? Or whether you're doing well or you have deficiencies, cost or schedule. Indexes also indicate the status of a project, but one of the nice parts of an index is it's normalized. So over the course of the project, the dollar value magnitudes may mean more or less for the variance calculations. When you move across the project, in normalized terms, those values don't grow over time. They're still supposed to be a little bit above one, above one, beneath one, zero as opposed to growing in different kinds of scales for the variance calculations.

The same as if you go across projects and you want to compare performance across projects. The projects might have very different scopes, very different scales, so the variances are somehow hard to compare, but the performance indexes are not

CEPM504: Using Earned Value Management for Project Managers Cornell University

as hard to compare because they're normalized. Also it's a little easier to understand how to use the performance indexes when you want to forecast future cost. Because when we start doing the project, we have a budget at completion, we have what we expect to spend on the project. As we go through the project, we gather information on the execution of the project and we may need to update that forecast, update that estimate, creating a new forecast of costs. And the performance index is one piece of data we can use those kinds of measures to update that budget at completion value.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Examine SPI and CPI

Answer the following questions to check your understanding of the concepts presented in this module.

You must achieve a score of 100% on this quiz to complete the course. You may take it as many times as needed to achieve that score.

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Watch: How Variances and Performances Indexes are Helpful

Part of your project-management effort involves being able to make good predictions about costs going forward. You need to be able to predict with some accuracy how much more it will cost to complete the project, as Professor Nozick explains.

Transcript

So we've talked quite a bit about how to assess the performance of the project at a given point in time. That's not all there is to project control. We'll also need to be able to say something about how we think the cost will evolve over the rest of the project. We're gathering information as the project executes, because we're doing activities, we're paying for them, we are earning value. That information is useful in making estimates of what it will take to go from the moment we are right now in a project execution all the way to the end. So, suppose we're in a specific point in the project execution, and we now need an updated forecast to final costs. How do we make that forecast? We have actual cost that we've incurred from the beginning of the project until now, we should be using it.

So how do we go about constructing the forecast, which will take those actual costs and then marry them in some way with what our estimate of what's coming, to get a final budget at completion or a

CEPM504: Using Earned Value Management for Project Managers Cornell University

final cost at the end. So there's some choices about how to do it. In fact, there are many choices about how to do it. I'm just going to give some illustrative ones, so we'll go through three ways of doing it. All of them have pluses and minuses. The first one we'll talk about is, suppose we assume that the rest of the work will be executed exactly as we planned in the original plan. All we really have to do then is to integrate the actual cost we've incurred up till now.

Another mechanism to create a forecast would be to use CPI, the cost performance index, to somehow scale the cost of the remaining work, based on the cost efficiency, we have been able to achieve up to this point in time in the project. We could also integrate into that estimate the scheduled performance index... and the cost performance index, to also scale the remaining costs, and that's the basis of the third method. But if you look out in the literature, you'll find there's a number of ways to build these forecasts, and I'm just going to talk about three of them.

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Watch: Forecasting Cost Method 1, Using Earned Value

The first method you will examine uses earned value. Suppose you assume that the rest of the work will be executed exactly as you had planned in the original plan. All you really have to do to forecast cost is to integrate the actual cost you've incurred up until now.

Note to students: Professor Nozick misspoke at 2:04. She said we "spent 55,000." Actually, we spent 61,000 but only produced 55,000 of value. The calculations are correct.

Transcript

So, let's do an example of forecasting cost. We're at some point in the execution of a project. We have actual cost and now we need to make an updated estimate for how much it's going to cost to complete the project. One mechanism to do that is to assume that all the remaining activities will be done consistent with the baseline schedule, and the baseline costs. All we really have to do then is to integrate the actual costs for the part of the project that's already done, to the estimate for the remaining activities.

So let's do that in the context of our six activity example. We had a project network with six activities. We had a resource loaded schedule. We thought we would finish as of the end of April 2018.

CEPM504: Using Earned Value Management for Project Managers Cornell University

As of November 30th, 2016 we were humming along. Two activities were complete and we were two months into activity 2-3. And then we noticed on December 1st we had a problem, and all of that activity 2-3 needed to be redone. So we had to update our project schedule and in fact it meant that we would have two months of schedule slip, we'd finish in June of 2018 instead of April. And we now have actual costs. The actual costs take us through December 1st. We spent $61,000. We did activities 1-2 and 1-4. We had started 2-3 and had to eliminate all of that work.

So by December 1st, 2016 we spent $61,000. We had only $55,000 of earned value at that point in time because only the two activities, the work was done to the specification necessary. At the beginning of the project, we thought the entire project would cost us $159,000. What we have left is $104,000 worth of work remaining. We've spent 55,000, so our final estimate is $165,000, and we have a $6,000 cost variance at the end. So that's our new forecast for the cost of this project. It went up from 159,000 to 165,000, that's the result of having to redo the first two months of activity 2-3. And we had already spent $6,000 for the work, but we need to do it again. And the spend plan is going to go longer this time. It's going to go out to the end of the project which is now two months longer.

So let's talk a little bit about this sort of a method. What are the assumptions behind it? So when can you take the actual cost you've already incurred and simply then use the baseline cost for all the remaining activity that you haven't done? Well this is a very reasonable thing, if you feel like the thing that delayed the past

CEPM504: Using Earned Value Management for Project Managers Cornell University

work was really confined to that work only. If you think it's going to bubble through to new activities that you haven't done, well then you're going to need to inflate up those costs in one way or another if it's actually a delay.

In our example, it's a cost overrun, and it's also a delay. It could be that you're ahead of schedule and, in fact, it's cost you less than you expect, and your new budget at completion is lower. If you're going to use the old cost, it means that you don't believe what happened to help you at the beginning is going to continue to persist through the rest of the project. As long as you believe that's true, this is a very logical method to use to integrate, to create a forecast.

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Watch: Forecasting Cost Method 2, Using CPI

Another mechanism to create a forecast would be to use the cost performance index to somehow scale the cost of the remaining work, based on the cost efficiency, you have been able to achieve up to this point in time in the project. You could also integrate into that estimate the scheduled performance index.

Transcript

So in the previous discussion of how to estimate costs, we simply took remaining cost on the project. We took the old schedule, the planned schedule for the activities that hadn't been done and simply grabbed their costs. We added that to the actual cost to create the budget at completion, what we expect the entire project to cost us. We didn't translate any impacts that actual cost turned out to be from what we planned them to be into impacts on later activity costs. We did that under the assumption that whatever happened in the beginning to make the cost higher or lower than what we expected, was really confined to that part of the project and wouldn't leak over to the new parts of the project, the ones we haven't done yet. You could make an alternative argument in many cases, that in fact whatever has happened in the past is reflective of the future.

So whatever inefficiencies we had with respect to cost previously will haunt us for the rest of the project or whatever breaks we had with respect to costs will actually will see more benefits later on of

CEPM504: Using Earned Value Management for Project Managers Cornell University

that same character. So if we believe that that is actually true, we can use the cost performance index to scale the cost of the remaining work. And use that to estimate the cost of the future work that we haven't done yet. We wed that to the actual cost we've already incurred, we now have a forecast for future cost, or for total cost of the project. So just to remind you, CPI or Cost Performance Index is earned value divided by actual cost. So if we were to use this method, we could take the entire planned cost of the project and divide by our CPI, and that would give us an estimate of the final cost for the project.

Okay, that amounts to taking planned cost, multiplying by actual cost, and then dividing by earned value. Again, this is going to assume that whatever cost based efficiency we've been experiencing in the past we'll experience in the future. So if we go back to our old example, we had $159,000 project, that's what we expected it to cost us. As of December 1, 2016 We had spent $61,000, we had gotten $55,000 in value. We had a CPI of .902 approximately. So if you take 159,000 and divide it by .0902 You get about $176,270. This amounts to us forecasting that there will be a cost overrun in the vicinity of $17,000. That just takes the efficiency we've seen to date, in terms of our project, and in terms of cost, and projects the same one into the future. So as long as you believe past performance is reflective of future performance, this is a very logical way to do it, but it's focused on cost overrun, or cost performance, cost efficiency. We haven't integrated anything about schedule efficiency in here.

CEPM504: Using Earned Value Management for Project Managers Cornell University

Course Project, Part Three: Forecasting Project Cost

Now you will use the methods presented in this module to practice forecasting cost. This is a critical part of earned value management. Having the ability to forecast cost effectively will help you deliver better results for your organization on your projects.

Completion of this project is a course requirement.

Instructions:

If you have not already done so, download the "Using Earned Value Management for Project Managers" course project. Complete Part Three. Save your work. Review your completed course project, then click the Submit Assignment button on this page to attach your course project document and send it to your instructor for evaluation and credit.

Before you begin:

Review the grading rubric for this assignment. Please review eCornell's policy regarding plagiarism.

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Module Wrap-up: Forecast Project Cost

Project control involves more than just monitoring efforts and tracking costs on an ongoing basis. You also need to be able to gather critical information throughout execution so that you can accurately predict costs going forward. You'll use earned value to help make those predictions. You have now explored how to create an updated forecast of final costs. Constructing the forecast will take the actual project costs and marry them in some way with your estimate of what's coming to get a final budget at completion or a final cost at the end. There are many options available to project managers to create these estimates of final costs, and in this module, you examined some of them.

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Linda K. Nozick Professor and Director

Civil and Environmental Engineering Cornell University

Congratulations on completing "Using Earned Value Management for Project Managers." I hope you now feel more comfortable using different methods to forecast cost, calculate earned value and both the schedule and cost performance index, and use these tools to help implement better project controls.

I hope you are in a better position to use effective tools and strategies to serve your projects and your organization.

From all of us at Cornell University and eCornell, thank you for participating in this course.

Read: Thank You and Farewell

CEPM504: Using Earned Value Management for Project Managers Cornell University

Sincerely,

Linda K. Nozick

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CEPM504: Using Earned Value Management for Project Managers Cornell University

Table Of Contents
Meet Your Class
Module 1: Implement Project Controls through Meetings
Module 2: Calculate Planned Cost, Actual Cost, and Earned Value
Module 3: Forecast Project Cost