Dear PM Advisor. Aug 25, 2014

Dear PM Advisor,

I struggle with all the Earned Value Formulae. Any hints for making this portion of the PMP test easier to study for?

Can’t see the value in Albuquerque

Dear Can’t,

Once you struggle with the more philosophical questions on the PMP exam you’ll see the calculations like those Earned Value ones as a breath of fresh air. But first let me give you some hints to make these easier for you.

You are usually given some numbers and asked to calculate the rest. I’m going to assume you know some elementary Algebra before you take the test. Here are the three numbers you are usually given: 

Planned Value (PV), Actual Cost (AC) and Earned Value (EV). 

If they are evil they will give you one of the below formulae and you will need to use that basic Algebra to determine the missing number from above. Either way, you’ll need to remember the following formulae and below I’ll show you the easy way to do this.

There are four rules to remember:    

1. EV always come first in the calculation
2. AC goes with anything that says Cost
3. Negative Variances are always bad
4. Indexes less than 1.0 are always bad

So let’s put these rules to the test. You are asked to calculate Cost Variance. You get Variances by subtracting one number from another. Rule 1 says EV always goes first. Rule 2 says AC goes with any Cost calculation.

Thus CV = EV –AC     Simple, right?

What does that leave you with for Schedule Variance?  EV goes first, Rule 2 is not in effect so the only thing left to put in the equation is PV.

Thus SV = EV – PV.

The same two rules apply for the Index calculations.

Cost Performance Index requires EV to go first, only this time the EV goes in on top of the line. 

We’re talking about cost so AC goes on the bottom.

Thus CPI = EV/AC

SPI must use PV since that’s all that’s left.

Thus SPI = EV/PV

Rules 3 and 4 help you convert formulae into reality. If you have a negative SV, you are behind schedule. A negative CV means you are OVER budget. Don’t get confused by the negative number. Negative is bad, being over budget is bad.

Same with the indexes. Less than 1 is bad so a SPI of 0.8 means you are behind schedule. Over 1.0 is good so a CPI of 1.2 means you are UNDER budget.

Remembering these hints will help you with about 5 of the 200 questions you will be faced with. For those that require TCPI or ETC, you just have to memorize the formulae. More on these in a future post.

Good luck,

PM Advisor

Send your questions to Bruce@RoundTablePM.com

Dear PM Advisor. Aug 18, 2014

Dear PM Advisor,

How would you define and measure EVM?

Regards,

Hugo

Dear Hugo,

That's a quick question with a long answer.

I define Earned Value Management as the only objective way of measuring that you get what you pay for. It is an objective way of determining true project % complete because it uses baseline costs to give you credit for completion of tasks.

Here is a link to the method I use to measure EVM:

Good luck,

PM Advisor.

Dear PM Advisor, Feb 10, 2014

Dear PM Advisor,

I struggle with all the Earned Value Formulae. Any hints for making this portion of the PMP test easier to study for?

Can’t see the value in Albuquerque

Dear Can’t,

Once you struggle with the more philosophical questions on the PMP exam you’ll see the calculations like those Earned Value ones as a breath of fresh air. But first let me give you some hints to make these easier for you.

You are usually given some numbers and asked to calculate the rest. I’m going to assume you know some elementary Algebra before you take the test. Here are the three numbers you are usually given: Planned Value (PV), Actual Cost (AC) and Earned Value (EV). If they are evil they will give you one of the below calculations and you will need to use that basic Algebra to determine the missing number from above. Either way, you’ll need to remember the following formulae and below I’ll show you the easy way to do this.

There are four rules to remember:

1. EV always come first in the calculation
2. AC goes with anything that says Cost
3. Negative Variances are always bad
4. Indexes less than 1.0 are always bad

So let’s use these rules. You are asked to calculate Cost Variance. You get Variances by subtracting one number from another. Rule 1 says EV always goes first. Rule 2 says AC goes with any Cost calculation.

Thus CV = EV –AC  Simple, right?

What does that leave you with for Schedule Variance?  EV goes first, Rule 2 is not in effect so the only thing left to put in the equation is PV.

Thus SV = EV – PV

The same two rules apply for the Index calculations.

Cost Performance Index requires EV to go first, only this time the EV goes in on top of the line. We’re talking about cost so AC goes on the bottom.

Thus CPI = EV/AC

Schedule Performance Index, SPI, must use PV since that’s all that’s left.

Thus SPI = EV/PV

Rules 3 and 4 help you convert formulae into reality. If you have a negative SV, you are behind schedule. A negative CV means you are OVER budget. Don’t get confused by the negative number. Negative is bad, being over budget is bad.

Same with the indexes. Less than 1 is bad so a SPI of 0.8 means you are behind schedule. Over 1.0 is good so a CPI of 1.2 means you are UNDER budget.

Remembering these hints will help you with about 5 of the 200 questions you will be faced with. For the one or two questions that require TCPI or ETC, you just have to memorize the formulae. More on these in a future post.

Good luck,

PM Advisor

Send your questions to Bruce@RoundTablePM.com

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.

Send your questions to bfieggen@gmail.com

Earned Value Case Study

Using the Earned Value method of monitoring and controlling budget as described in the previous post, I have had almost entirely positive experiences with my clients. One experience didn't start out so positive.

Our project was to validate a computer system. We proposed the project carefully, using past information but making some assumptions based on information given us by our client. One of these assumptions was that the requirements document was in good enough shape for us to write a functional specification. As always, we made these assumptions visible as part of the proposal. (I'll have to write a separate post about the importance of doing this but you'll see how it helped in this case study.)

When we started the project, we found that the specification couldn't be started because the requirements document was in no shape to use as a starting point. We would have to rewrite this and then move to the specification. This meant more time spent on the project and more money.

So, when I showed up at the first status meeting with the earned value numbers, I shocked the client by predicting that the project would end two weeks late and cost an extra $10,000. They were livid!
"You're one week into the project and already you're two weeks behind schedule and $10,000 over budget!" was their response.

They were used to vendors keeping quiet about the overages and schedule delays until the project was almost over and then asking for the extra time and money. My boss was angry at me also because, frankly, that was the way he was used to doing business and he had warned me that being open with the customers was a bad idea. He was afraid we'd be fired from the project.

I met with the customer and explained the situation. I told them it was a good thing to find this problem early because they had the power to do something about it now. By explaining the cause of the overage and delay, I gave them three choices on how to proceed:

1. Continue as we were going. We would rewrite the requirements, then the specification and continue the project. The project would cost an extra $10,000 and take an extra two weeks.
2. They could rewrite the requirements document while we stepped away from the project, then return to restart. This would take at least 2 weeks (the client was super busy) but would cost no extra money.
3. We would rewrite the requirements but the client would take over some of the later tasks (when their workload had diminished) to recoup the $10,000. This would cost them no money or schedule but would take some of their people's time later.

My client was amazed. They were given options on what mattered most to them: time, money or internal resources. They chose option 3 and the project finished on time and on budget. They confided with me later that they were so appreciative of the transparency of our methodology and their ability to influence the course of the project; something they had never experienced with any other vendor. The customer is loyal to us to this day.

Practical Method for Determining Project % Complete

How many times do you ask this question of one of your vendors and receive an answer that you don’t believe? What percentage of the project is complete? This is a simple question that allows you to compare this figure against the percent budget spent to see how likely it is that this project will finish on budget. Your vendors will make up all sorts of reasons for you to believe their statistics that show how complete the project is. Wouldn’t you like an objective calculation that gives you this number exactly?

I have been using a simple technique that allows me to plan projects, forecast their costs and communicate their weekly status with complete accuracy. My clients are always happy with the information they receive. This is not to say my projects always come in under budget. My projects are plagued with the same uncertainties any other projects face, some causing budget overruns. The difference is that I communicate these overruns weekly, honestly, can pinpoint the causes and allow my clients to make business decisions based on them. I don’t wait until the project is 75% complete and all the money is spent to ask for more money.

There is no magic behind the technique. The federal government mandates that projects run for them use a technique known as Earned Value Project Management to report time against task.  But not many laymen understand it without some intensive training in the technique. Everyone understands what it means when a project is 2 weeks behind schedule, but most would be confused if told it is $10,000 behind schedule.

It is possible, however, to salvage some of the official earned value calculations to generate two numbers that are meaningful to customers: Percentage of the project that is complete and percentage of the budget that has been spent.

Below is an excerpt from a status report that shows these two numbers in the budget portion:

So how do I generate and then justify these numbers?

The Planning Phase

I plan each project in front of the clients,