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 loosing money on the project.
- For our example: 20k / 30K = 0.666
OK. This is bad. We’re loosing 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.
Next time, we’ll tackle project estimates.