MCPPP#6

MGT 6304, Managing Complex Projects 1

Course Learning Outcomes for Unit VI Upon completion of this unit, students should be able to:

3. Evaluate earned value metrics. 3.1 Calculate the actual cost, planned value, and earned value for given data. 3.2 Evaluate indexes for cost and schedule. 3.3 Explain what the metrics mean in terms of the overall health of the project.

Course/Unit Learning Outcomes

Learning Activity

3.1 Unit Lesson Chapter 11 Unit VI PowerPoint Presentation

3.2 Unit Lesson Chapter 11 Unit VI PowerPoint Presentation

3.3 Unit Lesson Chapter 11 Unit VI PowerPoint Presentation

Required Unit Resources Chapter 11: Assessing Project Progress

Unit Lesson

Project Monitoring Monitoring a project is all about comparing the progress toward achieving the goals of the project as described in original project plan. Monitoring, therefore, includes the activities of collecting progress data, analyzing it, and comparing it against what was intended (i.e., the plan). Notice how monitoring is not simply collecting project data. It is also the act comparing these data against the plan. While having a project plan seems straightforward, often it is not. The reason why is related to the tendency for the project plan to shift as the project progresses. This happens when the client changes what was originally requested. The change may be very small, but the fact that something has changed has made the project scope fluid rather than fixed. Some interim deliverables may need to be restarted; some completed deliverables may need to be reworked and completely new work initiated. Like a snowball rolling downhill, additional small changes begin to build up to the point where the original scope as well as the original plan supporting it may no longer be valid. Eventually, the client will ask for an accounting of key progress measures such as budget status, milestones, and progress toward completion of project deliverables. Responding to the client in the context of shifting scope will be difficult. It is likely that the additional scope that crept into the project created additional work that led to a delayed schedule and increased spending. The project manager will be tempted to say something like, “Yes, I am over budget and behind schedule, but that is only because of the additional work that was requested.” The client at this point is likely to ask, “What additional work?” or “Why are you making excuses?” This scenario illustrates that monitoring progress not only requires a plan but an integrated change control process that insists upon setting a baseline plan. The

UNIT VI STUDY GUIDE

Project Monitoring

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baseline plan communicates to the client that the project plan is a line in the sand that cannot be crossed without the submission, review, and approval of a formal change request. With a baseline plan in place, the data collected with respect to the project spending as well as the progress toward completing project deliverables may be successfully matched against what was originally intended. While setting and communicating the project baseline may seem like nothing more than common sense, project managers may be reluctant to do so for fear of angering the customer by saying “no” to informal additions to project work. The case can be made, however, that the practice of insisting on the baseline and change control is a good housekeeping measure that is in the best interest of the client.

Progress Measurement Difficulty Not all projects have progress milestones that are easy to observe. For example, the building of a fence or a pipeline may be visually inspected to assess progress to plan. This cannot be easily carried out in a project that is developing software or complex systems. Progress measurement often relies on the project team member to report. But reporting takes time. In the heat of battle when project team members are focused on getting things done so that the project may be delivered on time, progress reporting tends to fall by the wayside and is reported late, inaccurately, or both. When this is the case, no methodology for reporting progress will be very useful.

Earned Value and Ambiguity Consider the scenario of a project review where the project manager stands and states the following:

We are six months into a one-year project, and I am pleased to report that while we originally planned to spend half our budget, approximately $15,000, we have only spent $9,000. So far, we have saved $6,000!”

This announcement sounds amazing, and it indicates that either (a) the project manager and team have some financial prowess that was previously unsuspected; (b) the project team got a lucky break, things went better than expected, and the project ended by spending less than planned; or (c) the original estimates for the project cost were too high. The reasons for being apparently under budget are many, but there is also a sleeping issue behind the project manager’s report. What is the issue? While it is true that less money was spent than planned at this point in the project, it is not clear how much work was completed up to this point in the project. For example, if the project is at the 50% point of the schedule and 50% of the work is complete, it stands to reason that the project spending should be consistent with the 50% progress. However, the project manager reported on schedule and budget, not on schedule, budget, and the monetary value of the completed work. While the project has spent less than planned, it is not clear how much work was done. It is possible, therefore, for the project to be over rather than under budget. How could this be possible? Returning to the 50% schedule example, if 50% point of the project schedule is reached, and the project spent 50% of the budget; this is only an under-budget situation if 50% of the work was completed. If, for example, only 40% of the work was completed, then while spending is less than planned, the money that was spent exceeded what was allocated for 40% of the work. The project appears to be under budget, but it is over budget. Earned value management is the solution devised to overcome the ambiguity associated with the appearance of being under budget. Instead of offering two metrics, one for schedule and one for budget, earned value includes a third metric—the monetary value of the completed work. This third element clarifies the true status of the project.

Explaining Earned Value Earned value is known to intimidate project managers due to its proliferation of acronyms. Often a project team will have a spreadsheet or a couple of pages in a document describing various earned value acronyms and metrics. What many project managers are not aware of is that earned value metrics have been simplified

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over the years. There are only three primary earned value metrics for which all other measures are derived. They are as follows:

The power of earned value may be illustrated using the example given above. For this example, assume that the PV for the complete project is $30,000. But at the current point in the schedule, the budget or PV is $15,000, the AC is $13,000, and the EV is $12,000. Since the budget was $15,000 and the actual spending was only $13,000, then it appears on the face of it that the project is under budget. This impression disappears upon the use of the earned value metrics to calculate the CV or cost variance as well as the SV or schedule variance. The CV formula is CV = EV - AC The SV formula is SV = EV - PV When the actual project numbers are plugged in, the results are as follows: CV = $12,000 - $13,000 = -$1,000 SV = $12,000 - $15,000 = -$3,000 It is observed that not only is the project not under budget, (it is over!), but it is also behind schedule (because work valued at $3,000 that was supposed to be completed is not yet completed). Understanding earned value immediately proves its worth by means of simple calculations.

Earned Value Indexes The variances are useful for determining both budget and schedule status. Negative numbers are not good, and they communicate the project being over budget and behind schedule whenever they appear. There is another way to calculate earned value, and this method uses indexes rather than absolute values. Using indexes are helpful since the results are given in ratios that may be compared between projects regardless of the overall size when a variance would not work well. Consider a $1 million CV. This sounds very bad because it is a large number. However, it may be acceptable for a project worth $100 million. The earned value indexes are as follows: CPI (Cost Performance Index) CPI = EV / AC SPI (Schedule Performance Index) SPI = EV / PV

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When indexes are used in the previous example, we have the following: CPI = $12,000 / $13,000 = .92 SPI = $12,000 / $15,000 = .8 It is observed that an index at 1 or greater is good, and less than 1 is bad. When the above index numbers are interpreted, it could be said that, “For every dollar spent on the project, we are receiving 92 cents in return,” and “We have completed only 80% of what was originally planned.” While there are many more complex ways to employ indexes in earned value, here is a simple way to use them to make projections about the future status of the project. Consider the example of the CPI above of .92. If the remaining budget were $17,000, and the cost-run rate remained the same, then the required budget for this run rate would equal $17,000 / .92 = $18,478. Also, if the project had 90 days remaining and the SPI of .8 was projected to remain the same, then 90 / .8 = 112.5 or approximately 113 days rather than 90 days. This is a simple example, but the basic principle is used for more complex projections that consider the existing amounts spent. Because of this use of the indexes as well as the fact that indexes work well when comparing projects of unequal scales, indexes are generally preferred over earned value variances.