Earned Value Management

What is a CPI Forecast

Before I get started on the details, I’ll give you a quick definition: A CPI Forecast allows project controls professionals to predict the performance of their project using a subjective CPI value rather than the calculated CPI that’s determined based on past performance. In case you’re wondering what that all means, I’ll go on to explain.  First, CPI stands for “Cost Performance Indicator" (or Index). It’s a standard EVM metric, and is calculated using the following formula: CPI = Earned Value (EV) / Actual Cost (AC) A CPI Forecast is a mechanism for providing a subjective view on the standard calculation. Using EVM for calculating the remaining costs to complete on a project – like ETC and EAC – typically use the project’s latest Progress Measurement as the basis for that calculation. This is effectively using past performance to predict the future.  What it’s saying is, for example, “Judging from where you’re at right now, your project is underperforming at a performance index of 0.8.  With that performance to date, your ETC will be $X.” While this is important information for project analysis and forecasting, users often need an alternative way to view these projections. It may be the case that there are very good reasons for the poor performance to date, and corrective action has been taken – so that the performance metric of 0.8 might be misleading. Or maybe, unforeseen circumstances had dragged performance for a while, and things are looking better now for the remainder of the project. To give you an example, let’s say that the first 6-months of a project occurred during winter; when progress moves slower than it does during the spring & summer.  A project manager wouldn’t want to

EVM Explained: Planned Value

Many EV professionals would argue that Planned Value is one of the most important metrics in earned value analysis.  It provides the critical benchmark from which numerous other metrics are being compared. To give you an idea of what PV is, consider the example where you have a $1 million project that is scheduled to take 10 months to complete. An important aspect of project controls is to be able to plan out how that $1m will be spent over the 10 months. It obviously won’t be spent in one single lump. Neither will it be spent in an even, perfectly distributed rate over the 10 months. The project spend will follow an uneven pattern – loosely following the schedule of activities and purchases that occur over the project’s duration. Planning the budget over the project’s timeline is called Time-Phased Budgeting. Planned Value is the value of scheduled project spend at a point in time of a project's duration. Planned value is also referred to as Budgeted Cost of Work Scheduled (BCWS). Comparing Planned Value against Earned Value and Actual Cost Calculating Planned Value is dependent on there being a time-phased budget in place for the project. By time-phasing the budget, project controls can determine what the expected budget outlay is planned to be at any point during the project.  Once the project has been underway for two months for example, a PV calculation will tell you how much of that budget was supposed to have been spent by that point in time.  The answer, as I’m sure you’ve guessed, is not 20% of that 10-month project. The calculation has to take into account every item or activity budgeted on the

EVM Explained: Variance

“If you keep going at this speed, you’re going to be late!” That’s my simplistic real-life analogy of earned value management. It’s a simple bit of math that we all do in our heads anytime we’re trying to get somewhere or finish something.  If you gave yourself an hour to get there and after a half-hour you’re still less than half-way, you’re going to be late.  It’s that simple. As simple as it is, it requires us to know quite a bit of information about the current situation in order to calculate late vs. on-time.  Just like EVM, you need to know 3 key elements to make the calculation: Your speed Remaining distance to go Remaining time left Cost Variance If you know those 3 values, you can not only calculate whether or not you’re going to be late, but you’ll also know how late.  In earned value management, the “how late” answer would be called Variance. Whether we’re talking about time, cost or hours, variance is determined by knowing three things about your project: Your budget How much of that budget you’ve spent so far (actual) How much work has been completed (as a percent) To save you from having to read it here, you can have a look at this site to get the details on the math for calculating variance (and any other earned value metrics). Depending on your preference, variance can be expressed as a whole number or as a percent. Most people tend to speak about variance in percent terms since it gives you a sense of the magnitude.  For example, “we’re 17% over budget.”  It’s key to point out that that would be a

I Have Mastered the Art of Talking to Myself Without Moving My Lips

Hey, don’t laugh, it’s a key skill. The only creepy thing about it is I can look at someone right in the eye and be muttering to myself at the same time. And even though I have at least another 40 years before I’m at that station in life where muttering is just something you do,  I’m getting an early start because I’ve discovered that it has high value.  I’m not the first to discover this, as it turns out. Experiments have been done to prove that regularly talking to yourself is a positive thing: http://newsfeed.time.com/2012/04/25/talking-to-yourself-may-actually-be-a-good-idea/. All the scientific research aside, the value I get from my outward-inner-dialogue is the art of practicing my next line.  That’s because I so often find myself in boardroom meetings with very passionate people.  Which is probably not that uncommon.  What’s also not uncommon, is that the people in the room don’t all share the same views. They can be passionately expressing opposing views with each other while earnestly trying their best to do what’s best for their company.  I, on the other hand, am an outsider invited in – and I’m equally passionate about trying to mediate them towards achieving the ideal solution to some often delicate challenges. The muttering comes in handy because I can try-out ideas out loud, so to speak, before I actually say them. It’s funny how things can sound so different in your head, compared to how they sound when they’re actually spoken. Or mumbled. About a week ago I was a participant in a very heated debate on a company’s policy towards the layout of their standard work breakdown structure for their projects going forward. They were growing

How do you Figure out a Realistic Cost to Complete?

Project Owners spend an extraordinary amount of time trying to get an accurate reading on all the costs to complete for a project.  On big projects, it’s hard enough determining what’s been spent to date, nevermind remaining. Gathering the right information to calculate forecasted spend can be tricky to do and requires good tools & processes to piece together a realistic estimate of projected costs. With hundreds of suppliers and contractors busily doing work and delivering materials every day, it’s a big task for Owners to keep track of how exactly things are progressing. Understanding “progress” is key. Without information on progress to date, you can’t figure out amounts remaining. Most decent project managers (especially on the owner side) understand this very well. As a result, they spend a good part of their day making a lot of phone calls &  email requests to vendors - along with regular site visits - to get an idea of how much has been completed and how much is left to do on every project activity. They’ll then punch in numbers to manually calculate those remaining amounts to produce a status report. In addition to all that, they also rely on vendor invoices. They’ll subtract invoices from the budget, and voila, all in, that’s their gauge on the cost to complete. Off goes the report to internal stakeholders. It’s not very accurate, but it’s what they have to deal with. Considering it’s such an important piece of information, it’s amazing that such a loose, time-consuming and manual system is still used. Especially one that’s full of guesswork and potential for errors.  It can be even more effort if the project manager is

Why EVM Matters

Earned Value Management? When asked about where their project stands against initial budget and schedule, most project managers will have a pretty good idea. They’d be able to tell you something like, “We’re running quite close to budget”, or “We’re almost half done”. However, without the tools and tracking to provide sufficient substance to those statements, gut-feel assertions like that are often dangerous guesses that can lead to cost overruns and delays. Earned Value Management provides the tools and techniques to tell a project manager where he or she really stands in their project. It can not only report on how much over/under budget or ahead/behind schedule a project is; it can also inform a PM as to how a project is trending, so as to better predict schedule and cost remaining to complete their project.  This provides the project manager a solid grounding on current status along with a good estimate of projected final results & timing. Armed with better analysis tools like this, the cost savings to projects – along with the improved communication and control – are clear incentives to look at adopting EVM in almost any project organization. Earned value management is much simpler than it sounds. It is simple because it’s something that we all do in everyday life – we just don’t usually use an elaborate name for it like EVM. Put simply, EVM is the technical term used for the process of getting quick and accurate answers to the “Where Am I At” questions on any project (construction, IT, or other). And we’re all continuously trying to assess where we’re at in most everything we do: whether it’s managing a complex construction project, or simply planning a birthday

Reduce Errors by Forecasting Regularly

Running forecasts on your project is an extremely powerful way to get critical insight into your project’s current status and projected final results.  Forecasts, however, do a lot more than that; especially if you run forecasts on regular intervals. Regularly forecasting is a key strategy for the project manager in any construction project. There are several reasons for this. First of all, entering percent complete on the tasks in your project is prone to some subjectivity and error. Regardless of how you go about determining percent complete – whether it’s pre-defined earning rules,  best-guess approach or team-based assessment – it’s practically impossible to know exactly how far along any task is. There are a number of techniques for mitigating the errors in applying percent complete – and we’ll talk about more of these in other articles – but one of these techniques lies is the power of executing forecasts on a regular basis. In 4castplus, forecasts are easy to do and provide a quick, high-value snapshot of where things are at right now in your project. What you may not have realized is that 4castplus also keeps a copy of all the information in your project as it was in that forecast period. So taking that snapshot means that all that information is preserved for historical reporting. If you run forecasts on, for example, a weekly basis, 4castplus will enable you run reports on the history of how your project progressed over time, on a week-by-week basis. Have a look at the screenshot below (click on it for a full view). It shows a summary-detail report that’s interactive for the user to click-through the forecast periods in a project. The detail report below shows all

Anticipation and the Project Bottom Line

Projecting the Final Results The big question everyone – including all project managers and stakeholders – wants to know is, “How long and how much.” That’s a reasonable and typical question; and it’s a question that resonates for the project as a whole, as well as every piece and subsection within a project. When it comes to actually using the information collected when adopting Earned Value Management, you need to know the full value of that information. And a big part of the value of that is in getting a handle on what the final numbers will be - and then communicating that information to other project stakeholders.   Earned Value and Cost Performance Index When we discuss things like Earned Value (EV) and Cost Performance Index (CPI), while these are important indicators as to the current health of the project, they additionally serve as stepping stones to get to the bottom line numbers. The ultimate bottom line numbers are: Estimate At Complete and Variance.   Anticipate Estimate At Complete is essentially the projected final cost. It’s ultimately what everyone wants to know, and it’s really what makes news. Whether you’re talking about the project as a whole or any section within the project, everyone wants to know, “What’s the final cost looking like?” Forecasting the results of a project not only enables a project team on any construction project to communicate project outcomes, it delivers the power to anticipate. Being able to anticipate what’s going to happen is the ultimate control weapon. It’s why we all check the weather before we leave the house in the morning – we want to be prepared. The second key Bottom Line indicator is Variance. Variance is one

Got projects going over budget?

You're Not Alone. Project cost overruns are common. Statistics will tell you that over 85% of projects go over budget. But Why? What are the mechanics behind project cost overruns and project schedule delays? Plenty of talented and experienced professionals engage in dialog about this very topic every day, and try to arrive at conclusions about how to stop projects from going over budget. In this article I’d like to shed some light on the underlying workings as to the root causes of cost overruns and schedule delays. In order to tackle the problem of how to eliminate overruns, it’s important to understand the main reasons why they happen. Obviously, there’s no one-sentence answer to these questions since every project is unique and the influences that trigger overruns can vary tremendously. Luckily, however, there’s been quite a bit of research and experimentation around this exact problem - since it is a pervasive issue that so many businesses, large and small, struggle with. As a result, there have emerged some key factors we can point to that are the major contributors to projects going over budget and suffering schedule delays. A lot of project managers and business owners have their own theories; and after a good deal of listening and reading, many will have you believe that it all comes down to one thing: Project Changes. Technically speaking project changes are arguably the biggest contributor to projects going over budget and blowing schedule deadlines, but for the purposes of this discussion, let’s leave Change and Change Management out of it. I’m saying that because I don’t believe changes are truly the root cause of cost overruns. I believe that if you approach a project anticipating that

How are those EVM Numbers Calculated?

1. What is Earned Value Management? Earned Value Management is a critical Construction Project Management method that enables project managers to forecast project costs and additionally shows current performance and productivity metrics throughout a project's execution. Earned Value Management sounds way more complicated than it is. It is actually something that you’ve likely done many times before - both when managing projects, as well as in day-to-day life - but you may not have known that it had such an elaborate name as 'Earned Value Management' (EVM). The concepts of EVM are not complicated, but they’re not necessarily familiar to most people; so this document provides an explanation that describes what EVM is, how the numbers are calculated, and most importantly, what they should mean to you. Earned Value Management (EVM) is described as an effective method of analyzing your project costs objectively. So what does that mean? Here’s a simple example to give you some context (you’ll have to reach back to a little 3rd grade math): “I’m half-way through replacing the sink in my bathroom, but I’ve just realized that I’ve already spent $600 of my $1,000 budget that I originally estimated for the job. My initial $1,000 estimate included all labor and materials, and it’s taken a bit longer and cost a bit more than I thought.” With that description, I’ve just done an earned value assessment of my little job. To run Earned Value calculations, I only need three numbers: 1) the original estimate, 2) the percent complete, and 3) how much I've spent so far. Here’s what it looks like from an EVM perspective: Estimate: $1,000 Percent Complete: 50% Current Actual Costs: $600 Percent Spent: 60% Estimate to Complete: $500.

By |September 2nd, 2011|Categories: Earned Value Management|0 Comments