PROJECT MANAGEMENT FOR TELECOMMUNICATIONS MANAGERS CHAPTER 12 ppsx

EARNED VALUE Earned Value is a tool which enables project managers to determine where the project stands in relation to the budget and the schedule, even on projects with hundreds or tho

EARNED VALUE

Earned Value is a tool which enables project managers to determine where the project stands in relation to the budget and the schedule, even on projects with hundreds or thousands of activities, some of which are on track

at any given time, while others are either ahead of schedule or behind Since Earned Value refers to cost, this concept could have been introduced in Chapter 7 with the other financial concepts Or, since Earned Value shows the status of the Schedule, the concept could have been introduced in Chapter 8 But, given that the main value is as a tool for project management, this project management chapter seems to be the best place to cover this very important concept

In order to describe this concept, we use the terms already mentioned in Chapter 7:

BCWS- budgeted cost of work scheduled or PV – planned value BAC- budget at completion

ACWP- actual cost of work performed or AC – actual cost EAC- estimate at completion

The PMBOK® Guide uses the terms PV and AC Both terms are included here because some people use one version, while others use the second version Then we add some additional concepts, related to the amount of work completed, and the overall schedule and budget status:

BCWP- Budgeted cost of worked performed = Earned Value CV- Cost variance - which is BCWP - ACWP

SV- Schedule variance - which is BCWP - BCWS

BCWP is also called Earned Value (EV) Using this tool at any point in time we can evaluate the amount of work actually completed Then we calculate the dollars that were budgeted for completing that work The cumulative graph of these budgeted costs is the budgeted cost of work performed Let’s walk through this

First, we have a list of project activities For each of these activities, we have a planned cost, or the amount that we budgeted to complete that activity And, for each, we have a start date and a finish date in the schedule

At any given point in time some activities will have started, some will not, and others will be finished If we can get a solid estimate of how far along each of the activities is at the point in time – and this is a big if in itself – then we can determine the overall status of the project using Earned Value Let’s look at this graphically

The Earned Value is the Budgeted cost of Work Performed What does this mean For any item there is a budget If we have completed that item, we have obtained a value What value? According to our plan, the value of that item is the amount that was budgeted So we have obtained the value that was in the budget Note that this does not reflect in any way the actual cost

to obtain this value The cost of this item might have been higher then, the same as, or lower than the budgeted value If the actual cost was higher, then for this item we are under budget; if lower we are obviously over budget If

we can calculate this amount for each of the action items, then we can determine for the project as a whole whether we are over budget, under budget, or on track financially

For items that have not yet started, the value obtained is zero But for items that are partially completed, things become more complicated Someone has to determine the value obtained for each of these Probably the best way to determine this value is to ask the people working on the activity how much work has been completed to date This needs to be done carefully Most people feel that they have worked hard, and accomplished quite a lot when they are working on activities It is quite common for people to estimate that an activity is 80% finished, then find that the last 20% of the work takes 80% of the time So, in order to balance this, the PM should ask how much work is remaining on the item An estimate of the remaining work, subtracted from 100%, should give a more accurate reading of the percentage complete Once this percentage completion is known, we know what percentage of the value has been obtained We can then multiply the budgeted amount for the activity by this percentage to calculate the value obtained to date, or the earned value Again, when we have all of the earned values, we can add these to get the overall EV for the project This can then

be compared to the actual cost to determine the budget status, called the cost variance, (CV) and to the planned value to get the schedule status, called the schedule variance (SV) See figure 1

CV = BCWP-ACWP

SV = BCWP-BCWS

This technique can be used to identify trends early In fact, problems will show up even if these are masked by the usual calculations of actual cost versus budget Because it takes all related factors into account, even on a complex project, this technique can unearth problems that are undetectable using other methods of analysis Because this tool identifies potential problems early, the PM should start using this technique early in the project

Additional information can also be calculated, if required, as shown in the following formulae

SPI: Schedule performance index is BCWP/BCWS or EV/PV

CPI: Cost performance index is BCWP/ACWP or EV/AC

EAC = BAC/CPI

ETC = EAC/ACWP

VAC: Variance at completion BAC- EAC

TCPI: To complete performance index (BAC-BCWP)/ (BAC­ ACWP) or (BAC – EV)/(BAC-AC)

Percent complete BCWP/BAC or ACWP/EAC

However, be careful in using such calculations You must know more than the numbers to apply these formulae properly If people have been working hard, but facing some difficulties in the work, and these are expected to continue, so that the project is expected to progress at more or less the same rate as it has been progressing in the past, then the formula for EAC can be used However, if the current variances are negative due to some significant one time problems that occurred in the early stages of the project, then the formula does not apply, because the performance indices are valid for the conditions experienced to date, not for those expected in the remainder of the project In that case, to calculate the EAC, the PM would have to get estimates for cost to complete each of the remaining activities, add these, and then add on the cost to get to the current point That would give the actual estimate to completion Another technique which should give a reasonable estimate in these circumstances would be to calculate the amount budgeted for the work remaining, and add this to the actual cost to date Since the remaining work is expected to proceed according to the original plans, this should give an accurate completion estimate

To look at another parameter, consider CPI CPI is a productivity measure It is measuring how well the project is doing against the planned budget If it is less than 1, then the project is in trouble The same is true for SPI If it is greater than 1 then the team has completed more work than planned by this time (SPI) But be careful in making this assessment Maybe the team put a large amount of contingency into the early portion of the

schedule to help cover for a risk, but it did not happen So that contingency may not have been needed yet The project will appear to be doing better than budget However, if the contingency is needed later instead, this would bring the index down at that time

In summary, earned value is a valuable tool Some of the benefits of using it are that it shows trends early, so that these can be dealt with It allows calculation of completion time even when the order of tasks is shuffled The calculations can be done by milestone or by discipline if desired These calculations can be combined with critical path analysis to give an even more comprehensive picture of the project status