Monday, April 15, 2013

Dear PM Advisor. April 14, 2013

Dear PM Advisor,

What's TCPI?

Earned Value in Manhattan

Dear Earned Value,

Judging by your name, you are aware that TCPI is one of the calculations you use in Earned Value Management.It is pretty simply explained though a little more difficult to calculate. In general it means: What return do you need to get on your future project spends to ensure you complete the project on budget?

Let's look at a simple example.
Client is paying vendor $5,000 per document to create 10 documents over 10 weeks assuming 40 hours per week at $125 per hour.

5 weeks into the project, where are we? We expected 5 documents worth $25,000. Planned Value, PV = $25,000
However, only 4 documents turned over from vendor. Earned Value, EV = $20,000
And, the vendor billed client 240 hours for the generation of the four reports. Actual Cost, AC  = $30,000

So in this case we have a Cost variance, CV = EV - AC of $10,000
And we have a Schedule Variance, SV = EV - PV of $5,000

Cost Performance Index, the indication of how much value we are getting for every dollar spent is:
CPI = EV/AC = 20/25 = 0.80

In order for us to complete the project on budget, we need to have a To Complete Performance Index TCPI far enough above 1. The formula is: TCPI = (BAC-EV)/(BAC-AC) where BAC is Budget at Completion or the original project budget.

Let's see how this works in our example.
TCPI = (50-20)/(50-30) = 30/20 = 1.50

So on the above project, we need to get $1.50 for every future dollar spent to ensure we complete on budget. A tall order but one that sounds right given that we are already halfway through the project and spending a lot more than we were supposed to.

Good luck,

PM Advisor.

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