6.2 Learn important Earned Value terminology - Video Tutorials & Practice Problems

<v ->Earned value is so useful</v> that the US government mandates that all federal programs, any company that is taking money from the federal government, must employ earned value metrics in reporting the status of that project. And they did that, because going way back, and I won't bore you with the history, but going back into the 1960s during the Vietnam War, when McNamara was running the Pentagon, McNamara came from the automotive industry and he was an executive with a very hardnosed and very much by the numbers and by looking at the costs, and he didn't like the way he felt that all of these contractors were ripping off the federal government, particularly defense contractors. And the contracts that they were generating from the Pentagon. And so he said, we need better means to hold their feet to the fire, to make sure that what they're delivering to us is really gonna come when they say it's gonna come, for the price they say it's gonna come, and it's gonna do the work was intended to do. And so he was one of the people, they didn't call it earned value back then, but he was one of the people who was behind this push to totally revamp the way in which we required people to report on the status of their projects. And that led to the current state of earned value as we talk about it today. In your organizations, what I want you to do is we talk about this in the next rest of this lesson, I want you to be thinking not simply in general terms about these ideas, but I want you to be thinking in your own specific situation, how can you employ earned value in your organization if you aren't currently doing so? For those of you that are doing so, some of this may seem like a refresher, but for some of this you may think, that's where those ideas come from. So I know the terminology, but I've never been entirely sure how all these ideas were generated. So let's talk about some of the terms, because these terms sound very conflicting and confusing and whatnot, but it's a set of terms that we really have to be comfortable with. Because in our companies, we often hear them thrown around. And so maybe for the first time, you'll be able to link what somebody has been saying to what that actually means. The first term that you hear quite often is this notion of planned value. Planned value also goes by the initials, PV. Planned value is how much budget money has been assigned to that's scheduled work. So how much is that budgeted to cost? Let's take an example. Suppose I have an activity that I've assigned two workers to do. Those two workers, I pay them each $20 an hour, and their overhead charge is 50% for simplicity sake. So I know that I've got two workers working on this at $20 an hour plus 50% overhead for each one. And further I know that these two people working together on this activity, it will get done in 10 hours. Okay, 10 hours, two workers at $20 each plus overhead. So I can run a simple calculation here and say the planned value for this activity is $20 per hour each. So that's $200 each plus 50% on top of that is another $100 total, and so I've got $500. The plan value for this activity is $500. That's the authorized budget to complete that scheduled activity. Very simple, okay? It's simply linking the budget to the activity itself. The second term, earned value, we're gonna get into this in a lot of detail, but earned value says we wanna take the measure of that work, though, in terms of the budget. So another way to say that is this, how much has actually been earned on this activity to date? So let's go back to my example. There's 10 hours worth of work that's supposed to be done here and it's gonna cost us $500. However, suppose they've only to this point in time, done half of it. So it's supposed to take 10 hours to get done. They've done about five hours worth of work, which I've determined is about halfway done. Well, the actual earned value, what they've earned for me here that I charge against my budget is $250 because they're only halfway done. So that's about $250 against my budget. That's where they stand. 50% here is only 50% of the planned value. So that's what they've earned for me. And don't worry, we're gonna go through some examples of this. So you don't have to just be thinking of this totally off the top of your head. I just want you to understand how these ideas derive from each other. The actual cost of work performed is straight ahead. This is simply what we have been charged against our budget for the work performed in a specific period. So the actual cost is how many activities have gone on, how much we've been charged for those activities to get the work done to this point in time. Actual cost of work performed, usually we just use the initials, AC, actual cost. Schedule performance index. This is gonna be interesting, folks. What we're gonna see here is the schedule performance index is going to allow us to project forward because this is going to determine how well we're meeting our expectations for the schedule up to this point in time. So the rate at which the project is meeting the schedule expectations is the schedule performance index. The federal government, if I'm doing work for them, they would like me to be able to quote to them a schedule performance index of 1.0 or better, if possible. So higher than 1.0, but 1.0 or something very close to that. Because what that implies is that I am on schedule. So 1.0 means we're tracking right on schedule. That's the ideal rate, or anything above that means we're ahead of schedule. Anything below that 0.7, 0.8, something like that, is worrisome because that means we're tracking here at a much lower rate than what we should be. Likewise, we have scheduled performance index, we have cost performance index. Same idea. Now we're looking at the rate at which the project is meeting costs. Again, the government, your boss, your top management, wants to hear you say, we're at 1.0 or something very close to that because that means we are on track. That's all it implies. So if you're talking to someone in your organization and maybe you've never really linked this before and you hear them use words like, what's your SPI? Or what's your CPI right now for that project? Oh, we're doing pretty well, we're at 1.02. Now you know where this is coming from. CPI, SPI refer to these performance indexes and the value that we talking about is trying to meet expectations is at 1.0. So that's just something to to clue in on next time you're in your own organization and people are using that terminology. The last item here is the term budgeted cost at completion. Budgeted cost at completion is what is the total budget as you can see for the project as it's moving forward? What is this ultimately expected to cost us based on these other values? So I'm gonna show these in just a minute, but once we have these ideas in mind, once we see these elements, we're going to apply them to actually develop the earned value for any project. You can apply them in your own organizations for identifying the earned value for projects you're currently working on, or even the earned value for activities that you're responsible for within the project.