Earned Value Reporting – Estimate to Completion

In this article on Earned Value Reporting we’ll look Estimate to Completion. As explained in the book “The Project Management Question and Answer Book” by Newell and Grashina, the Estimate to Completion describes the expected cost needed to complete all the remaining work for a schedule activity, work breakdown structure component, or the project.

Newell and Grashina’s book is the basis for much of the information in this discussion on Estimate to Completion.

What is the estimate to completion?

The estimate to completion or the ETC is an estimate of the additional money that will be necessary to complete the project. It is calculated from the estimate at completion that we discussed previously.

The estimate to complete is something that can and should be derived as quickly and as early in the process and/or life cycle of the project as possible because it will help the team budget accordingly. However, if the estimate is done early and there is a need at some point to modify it, this can be done once or – if needed -even more than once during the life cycle of the specific project in question.

Can you get into trouble with estimates at completion? You bet you can. As we have seen in the discussion of the EAC, there are many ways that this estimate can be made. The most common form is the budget at completion divided by the cost performance index. This is only a rough estimate of what the project will cost when it is completed.

Using the estimate at completion predicts that the project will overrun or underrun its budget at the end of the project. While it is a good thing to keep the stakeholders and the managers of your company informed that projects are in trouble, it is a weak support for asking that the project be given additional budget. A good project manager who wants to keep his job will take the EAC and use it as additional supporting information to show that the project budget was originally overor understated. In addition to the EAC, the project manager should have much supporting information as to why the project is in the condition that it is in.

Earned Value Reporting – Cost Performance Index

We’ll continue our discussion of Earned Value Reporting by looking at Cost Performance Index in this article. The Cost Performance Index refers to how the project is performing based on the actual spending of the project budget.

Much of the following information came from Newell and Grashina’s book entitled “The Project Management Question and Answer Book.”

What is the cost performance index?

The cost performance index or CPI is a measure of how well the project is doing in terms of spending the project budget. It is a comparison of the actual expenditures to the work that was accomplished. The index is a value that allows projects of different sizes to be compared.

The cost performance index is like the cost variance discussed previously with one important difference. When we calculated the cost variance, the result was a figure in dollars. If the dollars were a negative number, the variance was considered bad, and if the dollars were positive, the variance was considered good. The problem with this method is that it is difficult to compare projects of different sizes to one another. It would be better to have a measure that gave the health of the project regardless of its size. For this purpose we will use indexes.

Instead of subtracting the actual cost of work performed from the budgeted cost of work performed as we did when we calculated the cost variance, we will divide the same two numbers.

CPI = BCWP / ACWP

CPI = EC / AC

We can see that if the project is following its plan, the amount of work accomplished and the amount of money spent to accomplish it are the same, and the resulting value will be one. So, an index of one means that the project is following its project plan.

If the actual cost is greater than what is being accomplished, the denominator in the fraction will be larger than the numerator, and the resulting value will be less than one. This is generally considered to be a bad condition. If the actual cost is less than what is being accomplished, the resulting number will be greater than one and this is considered to be good. Of course any deviation from the project plan is bad even if the deviation is considered favorable. We should investigate to determine why this condition exists.

Example:

Two projects have their cost performance index calculated. Both projects are 10 percent over budget at the time of the calculation. Project One has a budget of $1,000,000, and Project Two has a budget of $10,000. These budget figures are the amounts that should have been spent as of today’s date. We will assume that the project is on schedule at this point in time. What is the cost performance index for each?

Project One is over budget by 10 percent of its budget or $100,000.

Project Two is also over budget by 10 percent of its budget or $1,000.

CPI = BCWP / ACWP

The BCWP is $1,000,000 for Project One.

The ACWP is $1,100,000 for Project One ($1,000,000 + $100,000).

The BCWP is $10,000 for Project Two.

The ACWP is $11,000 for Project Two ($10,000 + $1,000).

CV = BCWP – ACWP

The cost variance for Project One is $1,000,000 ? $1,100,000 or ? $100,000. The cost variance for Project Two is $10,000 ? $11,000 or $1,000 The CPI for Project One is $1,000,000 / $1,100,000 or 0.909. The CPI for Project Two is $10,000 / $11,000 or 0.909.

Notice that the size of the project does not make any difference in the calculation of the index. Projects that are each behind 10 percent have the same value for their cost performance index. This makes assessing the health or sickness of projects of different sizes much easier.

Earned Value Reporting – Intro Part 2

In the previous Intro Part 1 article we began to look at Earned Value Reporting as described in Newell and Grashina’s book “The Project Management Question and Answer Book.” In this Intro Part 2 article, we’ll exam Cumulative Variance Reports before diving deepr into other EVR concepts and reporting mechanisms.

Cumulative Variance Reporting

Sometimes in very large projects there is a problem with representing the project plan and the other earned value factors on a cumulative basis. When the project budget is very large, the vertical scale of the report is so small that minor but important variations cannot be seen well. In this situation a variance reporting method can be used.

To plot the earned values on a variance chart as shown in Figure 2 we simply plot a horizontal line and label it zero. Now, instead of plotting the actual values of the BCWS, BCWP, and ACWP we plot the differences between the BCWS and the other two earned value reporting factors. When we do this, the vertical scale that we need is greatly reduced in size since we are concerned only with plotting the difference between the earned value factors and not the entire budget of the project.

FIGURE 2

The next one, the ACWP or AC, is pretty simple too. This stands for the actual cost of work performed. Like the BCWS it is a plot over time of expenditures. This time, instead of plotting the project’s planned expenditures we are plotting the project’s real expenditures over time. At the end of each reporting period, we take the total amount of money that was spent on the project during that period and plot it as an addition to the total amount of money that had been spent as of the last reporting period.

It is important that every expenditure that is made on the project be collected and be collected in a timely way. The timing of the collection of the actual cost of work performed must match the anticipated timing of the expenditures that were planned and plotted as the BCWS. This is terribly important since, if expenditures are collected early or late in the project in relation to the project plan, the earned value report will show a positive or negative variance when there may really be none.

The ACWP plot is a cumulative plot as well. If the project expenditures are actually what they were planned to be, then the ACWP and the BCWS lines will plot one on top of the other. If the lines do not coincide, there is something different from the plan taking place in the project. We are either spending too much or too fast or we are not spending enough or fast enough to meet our plan.

The next factor is the BCWP or EV. This is the only one that is a little tricky. BCWP stands for the budgeted cost of work performed. It is sometimes called the earned value as well. This is where we get the name of the earned value report. Like the BCWS and the ACWP, the BCWP is a plot of money over time. If you recall, we said earlier that each of the project tasks has a budget and schedule associated with it. The BCWP is a plot of the work that was actually accomplished. If we complete a task that had a budget of $1,000, then the BCWP for that task when it is completed is $1,000. We plot this on a cumulative basis as well. It does not matter whether we spend $1,000 or $2,000 or any other amount to accomplish this task, we earn and plot only the budgeted amount in the BCWP.

Like the ACWP, the BCWP should plot right on top of the BCWS line. If the plot of the BCWP is above or below the BCWS line, it means that the number of tasks that are being completed is greater than or less than the plan. This tells us that we are ahead of or behind schedule. If we have done all of the tasks that were supposed to be done at this point in time, the cumulative value of the BCWP will be precisely equal to the BCWS.

When we put all three of these plots together, we have the earned value report. The plots should plot right on top of one another if the project is being done on time and in accord with the budgeted amount that was in the project plan.

Example:

Suppose a project is in progress and as of today the planned expenditures for the project were to have been $500,000. Suppose also that there were five tasks and the tasks had budgets of $30,000, $100,000, $250,000, $100,000, and $20,000, respectively. The actual cost of each of the tasks that were worked on was $11,000, $120,000, $230,000, $105,000, and $20,000. Tasks 1, 2, 3, and 4 are complete.

What are the BCWS, ACWP, and BCWP (PV, AC, and EV)?

• BCWS is $500,000
• ACWP is $486,000
• BCWP is $480,000

From these figures we can see that the accomplishments of the project as of today are somewhat less than what was planned for. This is the difference between the earned value and the planned value to date. The planned value is the BCWS and the earned value is the BCWP. This means that we are $20,000 behind schedule.

We can also see that the actual cost is $14,000 less than the planned expenditures to date. This means that we are somewhat under budget. Unfortunately we are $14,000 under budget but also $20,000 behind schedule. If we add the $20,000 of work that should have been completed but was not, we find ourselves projecting a $6,000 over budget condition. It could be that things are actually worse than they appear at first glance. If the performance to date continues, the amount over budget will probably be even higher at the end of the project. This is usually considered a bad situation.

The Importance of Testing

Any IT solution that is implemented without the proper amount of testing performed throughout the project is a definite recipe for disaster. Testing is an ongoing process – both formally and informally. It happens in development, it happens in the actual testing phase, it happens just prior to deployment and it happens post-deployment.

In his book “Project Management Nation”, Jason Charvat discusses the importance of testing throughout an engagement and identifies the different types of testing that we usually carry out in both informal and formal processes. By sharing this information here, I am not fully endorsing it, however I do find it interesting and likely beneficial to our readers.

The Importance of Testing

Without a well-thought testing effort, the project will undoubtedly fail overall and will impact the entire operational performance of the solution. With a poorly tested solution, the support and maintenance cost will escalate exponentially, and the reliability of the solution will be poor. Therefore, project managers need to realize that the testing effort is a necessity, not merely as an ad hoc task that is the last hurdle before deployment.

The project manager should pay specific attention to developing a complete testing plan and schedule. At this stage, the project manager should have realized that this effort would have to be accommodated within the project budget, as many of the testing resources will be designing, testing, and validating the solution throughout the entire project life cycle—and this consumes work-hours and resources. The testing effort begins at the initial project phase (i.e., preparing test plans) and continues throughout until the closure phase.

Testing Criteria

It is essential to conduct tests under realistic conditions. Often times the testers on a project deliberately go out to destroy the solution during the testing phase in order to do a proper test. Some sensible ground rules for acceptance testing are necessary and need to be established before any testing commences. Typically, some of these rules should include the following:

• Using real data and real operators.
• Test the solution as the developers build it. This way, errors can be corrected immediately.
• Involve project members who understand design and user specifications.
• Determine what is included within the test and what is not.
• Involve users of the project who know how the system will be used.
• Test to see that interfacing the new solution to the current infrastructure has no unexpected consequences.
• Allow time for repetition of those unsatisfactory test results in the project schedule.

Types of Testing

There are many different types of testing that can take place on an IT project, and the project manager must verify exactly which tests will be required and when. Below is a list of the most common types of testing that usually encountered on a project:

Criteria for Successful Project Management Offices

I was recently reviewing articles that I’ve written about successes and failures of Project Management Offices (PMOs) and some of the things that make that success or failure happen. I started making a list of these items and thought it might be helpful to share that info with the readers here on PM Tips again in this very condensed format. Remember, these are just my opinions that I’ve expressed in some of my articles along the way.

For PMO to be Effective:

• Director must be a key role in the organization
  • Must have backing and support of executive management
• Director must champion the efforts of the PMs
  • Don’t take credit for their actions
  • Provide ongoing support
  • Assist on critical/visible projects
  • Help breakdown resource acquisition barriers
• Director must run the PMO, not many projects
  • Project focus for the director should mainly be on the highly visible projects where exec decision-making is going to be needed on a regular basis or the business is extremely critical to the organization
  • Organization must value the PMO enough to ensure the director is not bogged down too much to be a successful leader

PMO Promotion

It is the responsibility of the PMO leadership to properly promote the PMO and help ensure its viability and visibility. Its viability is maintained by doing the following:

• Implementing proper and repeatable processes to consistently and successfully manage projects
• Implementing consistent templates for managing project and reporting status to customers and executive management
• Hiring competent, experienced Project Managers to lead projects for the organization
• Implementing proper compensation plans to retain good PM resources
• Implementing adequate training and on-boarding programs and processes to ensure that PMs are well-trained and up to speed on the PMO processes and practices

The PMO’s visibility is maintained by doing the following:

• Reporting project portfolio status on a regular basis and in a meaningful and useful format so that executive management realizes the PMO’s value
• Implementing solid PMO practices to ensure that the high-visibility customers are happy and referencable and the high-visibility projects are successful
• Inviting executive leadership to regularly attend weekly PMO meetings and sit in on project status meetings for the critical, high-visibility projects
• Managing project budgets thoroughly and reporting budget status up through executive leadership to show bottom-line PMO and Project Manager value

The PMO Director, as the leader of the PMO, must be a strong leader with pull inside the organization to ensure that these things happen. Otherwise, the PMO runs the danger of becoming obsolete or, at the very least, insignificant…and the mission critical projects will pass right by the PMO to special teams outside the PMO’s jurisdiction. Executive leadership must see value and ensuring that happens begins with the PMO leadership.

PMOs fail usually for one of the following three reasons:

• Lack of strong, focused leadership
• Lack of repeatable process
• Lack of executive leadership support

Five Signs Your PMO is not Meeting Your Organization’s Needs:

• Executive Management is not Included in the PMO Process
• Training Plans are Non-Existent
• Common Templates and Processes do not Exist
• Poor Upward Project Reporting
• Major Projects Circumvent the Process

All successful PMOs feature four basic components:

• The right processes
• The right tools
• The right people
• Executive level organization support

You can always hire different people. You can bring in consultants to help define better processes or identify better tracking tools. But without the executive-level support, none of it will happen or at least it won’t succeed.

Successful PMOs make an impact on organizational success by performing the following tasks:

• Aligning project delivery with strategic business goals and priorities
• Requiring that every project have an effective PM
• Implementing an appropriate PM methodology
• Consistent management and oversight of the project portfolio
• Obtaining and maintaining company leadership support