Summer reposts: Project metrics: earned value management with a 6-function calculator

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Background on the posts

I wrote these two posts because I got tired of reading how complicated it was to compute project metrics. Project metrics are NOT complicated, it’s simple math! So I thought if I wrote my understanding of those metrics, it might help some people.

It turns out these two posts are the most popular ones on the blog!

I hope you enjoy them 🙂

Project metrics: earned value management with a 6-function calculator

Project metrics have a bad reputation. Things like Earned Value and Schedule Performance Index are presented as complex calculations that only experts can master.

Nothing could be further from the truth

Actually, most project metric calculations can be done by anyone with grade-school math skills. The challenge in project metrics calculations is not in the formulas themselves, but in mixing project management concepts with mathematical operators.

Still, these concepts are basic to project management. Every good project manager should understand them.

Start with the basics: Earned Value, Planned Value, Actual Cost

These three are not really formulas. They are the three figures project metrics use to create all the other ones, like the Cost Performance Index and the Estimate to Complete.

  • Planned Value is how much you were supposed to do in a given period of time.
    • For example, let’s say you’re half-way through a  6-month project. Normally, you should be half-way done as well on the project. This means your Planned Value is 50% of the total value (or budget) of your project.
  • Earned Value is how much you’ve really accomplished in the project.
    • Let’s stick with your 6-month project. Let’s pretend that you’re only 40% done with the project. That portion of your project budget is the Earned Value.
  • Actual Cost is how much you’ve spent on your project.
    • Still with the 6-month project, let’s say you’ve spent 60% of your budget already. That portion of your project budget is your Actual Cost.

Now, let’s take those percentages and turn them into numbers. We’ll work with a 50 000$ budget.

  • 50% of 50 000$ is 25 000$. This is your Planned Value.
  • 40% of 50 000$ is 20 000$. This is your Earned Value.
  • 60% of 50 000$ is 30 000$. This is your Actual Cost.

But what does it mean?

25K planned, 20K earned, and 30K in expenses. Doesn’t it look simpler this way? If we’ve earned less than planned, one would say the project is late. Moreover, if our expenses are higher than our earnings, one would also say we’re over budget.

That’s all those pesky metrics are about. Now, we (and our project sponsors) will want to know the actual numbers. I found that understanding those formulas was easier than just learning them by heart.

  • The Cost Variance is about the difference between how much has been done and how much it really cost.
    • Earned Value – Actual Cost = Cost Variance
    • This makes sense. The Earned Value figure corresponds to how much of the project is done. And this proportion should also (more or less) be the same of the project budget.
    • If you’re under budget, you’ll have a positive number. If you’re over budget, you’ll see a negative number.
    • For our example: 20K – 30K = -10K

OK, now we know we’re over budget by 10 000$. What does it mean? Is this a big number or a small number? 10K on a small project would be a big deal. 10K on a million-dollar project may just be normal variance.

This is why we need a ratio.

  • The Cost Performance Index is about how bad (or how good) the project is going, budget-wise.
    • Earned Value / Actual Cost = Cost Performance Index
    • Basically, we use the same two figures from the Cost Variance formula, but we change this symbol ( – ) for this one ( /). We’ll compare how much we’ve accomplished with how much we spent to accomplish it.
    • If we’re under budget, the number will be above 1 (100%+). This means we’ve produced more value than it cost us to produce it. It means we’re making a profit in the project. If the number is less than 1, it means it’s costing us more to produce the project than we’ll earn from it. We’re losing money on the project.
    • For our example: 20k / 30K = 0.666

OK. This is bad. We’re losing a lot of money on that project. In fact, we’re only making two thirds or the money we’re putting into the project in the first place.

However, we need to see if the project is just more expensive, or if we’re late too – which would mean we’re really in trouble with the project. For that we’ll need to compare Planned Value and Earned Value.

Essentially, the Schedule Variance formulas are the same as the Cost Variance formulas. You simply replace the Actual Cost with Planned
Value:

  • Earned Value – Planned Value = Schedule Variance
    • Here, we’re comparing how much we were supposed to do (Planned Value), with how much we’ve really done (Earned Value).
    • For our example: 20K – 25K = -5K
  • Earned Value / Planned Value = Schedule Performance Index
    • Here, we’re making a ratio to know the proportion that this difference represents.
    • For our example: 20K / 25K = 0.8

If we look at those numbers, we’re quite late as well, about 20% slower than planned.

With three simple numbers and two formulas, we were able – with only two of the six functions on that calculator, to tell that our project is late and over budget.

Was that complicated? Hardly.

Variance and Index calculations are simple.  In fact, they use the basic math we learn in grade school. You could put these 4 formulas in a spreadsheet can compute your project metrics with one hand tied behind you back.

Estimates

Estimates seem even trickier than variances and indexes. Because a lot of the original estimating process is fuzzy, it’s easy to assume figures like Estimate to Complete and Estimate at Completion would be hard to understand and hard to believe that – Gasp! – they can be computed with a pen and paper.

Just like last time, we’ll work with a  6-month fictional project with a 50 000$ budget. In order to compute Estimate to Complete and Estimate at Completion, we need the following figures:

  • Budget at Completion is your project’s total budget. This is (usually) decided when the project is approved
    • With our project example, the Budget at Completion is 50 000$.
  • Earned Value is how much you’ve really accomplished in the project.
    • Working with our 6-month project. Let’s pretend that you’re only 40% done with the project. That portion of your project budget is the Earned Value.
  • Actual Cost is how much you’ve spent on your project.
    • Still with the 6-month project, let’s say you’ve spent 60% of your budget already. That portion of your project budget is your Actual Cost.

Now, let’s recap our figures.

  • 50 000$ is your Budget at Completion.
  • 40% of 50 000$ is 20 000$. This is your Earned Value.
  • 60% of 50 000$ is 30 000$. This is your Actual Cost.

Estimate to Complete: what’s left to do in your project?

The Estimate to Complete is the remaining work to be done on the project. In order to know how much is left to do, we’ll need to know what’s been accomplished – this is the Earned Value.

  • Budget at Completion – Earned Value = Estimate to Complete
  • Contrary to the previous project metrics, this is just a number. It tells us how much is left to do on the project.
  • For our example: 50K – 20K = 30K.

There is another method to compute Estimate to Complete. You can account for higher costs using a typical variance. An example of a typical variance would be if the speed of work was overestimated, and
it takes longer to do the work than expected. When you are in a situation like this, you can apply that variation to the rest of the project, and thus have a better Estimate to Complete to work with.

  • Estimate to complete / Cost Performance Index = Estimate to Complete with typical variance
  • Since we already computed the Cost Performance Index in the last post, we’ll use it here.
  • For our example:  30K / 0.666 = 45.05K

That makes a BIG difference in how much it’s going to cost to finish to project, don’t you think?

Estimate at Completion: how much is it going to cost?

Essentially, the Estimate to Complete figure is just a number. We don’t know if it’s good or bad, until we can figure how much the whole project is going to cost. This is the Estimate at Completion.

This is also a very easy number to compute. You simply add what you’ve spent already (Actual Cost) and what you think it will cost to finish the project (Estimate to Complete).

  • Actual Cost + Estimate to Complete = Estimate at Completion
  • For our example (let’s use the typical variance): 30K + 45.-5K = 75.05K

Variance at Completion: how off target are you?

The last thing we want to know now, is are we over budget, and if so, by how much? This is another simple computation that gives us the Variance at Completion, the difference between the original budget and the forecast cost.

  • Budget at Completion – Estimate at Completion = Variance at completion
  • Just like the Schedule Variance and the Cost Variance we worked
    with last time, if you’re under budget, you’ll have a positive number.
    If you’re over budget, you’ll see a negative number.
  • For our example: 50K – 75.05K = -25.05K

The -25.05K tells us we are 25 000$ over budget. For a 50 000$ project, we could say your project is in trouble.

Was that so hard? I don’t think so.

For all of you who are worried about passing the PMP exam because of the math skills required, you’ve just read 80% of the math you are expected to use in the PMP exam. As long as you understand these formulas, you have nothing to worry about.

Here is a spreadsheet with all those nifty formulas.

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