6.3 Recognize the steps in Earned Value management - Video Tutorials & Practice Problems

<v ->The steps in earned value</v> require some very distinct elements, and so I wanna walk through them pretty carefully here as well. As we've been doing all along, first, we have to clearly define each activity that's necessary to complete that project. Well, that shouldn't be too much of a problem. We've been doing that. All the way back to the work breakdown structure is when we first identify those different activities. So we've got the tasks. Remember we're using the words activity and task interchangeably. So if you hear me flip back and forth between activity and task, I'm saying the same thing. We have those based on the work breakdown structure. We also now have to identify who's going to do it. Are we gonna, who are we going to match up to do this? How much do we pay this person? So that's where the resource need comes in and the cost of that resource which is then ultimately the budget line. So each activity is going to have an associated budget line with it, the activity, the person doing it, the cost for that activity. We're going to create usage schedules. So the usage schedules means how well we're running through those different activities and how the resources are performing for those activities. So usage means at any point in time how much has that person accomplished to this point. That's really what it means. Where do we stand at any point in time, real-time data, with those activities? Then we develop what's called the time-phased budget. Now, we're gonna get in that in just a minute. You're going to like this idea. The time-phased budget is very different than your average standard budget. If you just take a budget for a project and you say, "This project is going to cost $100,000," that's useful information to a point because I can take that to top management. I can try and get authorization for the project. They're gonna ask what it's gonna cost. I say, "I've worked it out. It's gonna cost $100,000." That's not necessarily useful information when it comes to tracking and monitoring the status of the project because let's say my project goes for six months. Where does the money get spent? Where is this expenditure? I have $100,000 budget, but I have a six-month duration. That's not helpful information for tracking the status of the project. I need to know something a little bit more. I need to know how that money is going to be spent over time. That's what a time-phased budget is telling me. It's saying it's not enough to have a budget, and it's not enough to have a schedule. I want you to link up all those scheduled activities with when they're supposed to occur and the budget associated with them. That then creates a time-phased budget. We'll see an example of this in just a minute, but that's the logical idea behind it. We also need the total costs. We need to be paying attention to the bills. Part of your job then in earned value is to constantly be monitoring the work being done, the money being spent. Remember, some of that money being spent isn't in the form of lunches, or materials, or getting a new PC, or buying steel for the construction site. A big chunk of that money being spent is what we are accruing and what we're assigning each resource working on the project to that budget. So if I have four people working on a project who each earn for this company or each is being paid $100,000 per annum, and they're working full time for me for a period of nine months, then in the simplest possible terms, $75,000 of each person's salary is being assigned to my project. There's $300,000 right there, in nothing other than assignable resource charges because those four people, I have to know what they're making on an annualized basis, and I have to, or an hourly basis, it works either way, and then I have to assign those hours into my project. So the total costs for doing each tasks, yes, some of it's materials, but a big chunk of it, for most of us, is the resource charges themselves. And so make sure you understand how much you're paying your people per hour fully loaded rate. The fully loaded rate includes the overhead charges. What's their hourly rate? That's gotta be worked into my costs of that project. Then what we do is we calculate a budget variance, the difference between the plans and the actual, and a schedule variance, the difference between where we should be and where we actually are. So we need these steps in order to determine the earned value. Now, visually, let's look at it from a slightly different perspective. What I've just done here is I've shown you some terminology for earned value, but we can also see these things logically. And for those of you who are more intuitive learners, if you wanna get a visual that kind of illustrates the same sort of thing I've just been talking about, take a look at this figure. This figure is a simplified way to explain the difference here. Now, notice that down there on the y-axis, we have the budget, and the cost is, the overall cost and the overall schedule is on the x-axis. So the budget for this project is that first value there on the y-axis. And the schedule, the scheduled project is the first value on the x-axis. So those, the joining, the union of those two there, that intersection point is the planned value. That's what we planned to budget for this project to be finished in that period of time. That's the amount we were expecting. Any slippage, meaning the difference between what the schedule was and how long it actually took to complete those activities, is called slip. And so you see the slip moves out there to the right-hand side, and that becomes really the schedule as it was performed. So we have the schedule, what we planned, what we expected it to be. That's the planned value. But the slippage there equates to what we actually performed in terms of the overall budget. We have the scheduled amount. That's where the planned value comes in. But we have the performed value which shows the slippage in the overall schedule, how much in action, how long it actually took to complete. We can perform the same sort of analysis by looking at our budgeted cost for the project versus actual cost, and unfortunately here, I've deliberately created bad news. So the actual cost for this project is significantly higher than the budgeted cost. And, again, the intersection of what we actually performed and what we actually spent indicates the actual cost. So the planned value is disrupted by slippage of time which eventually leads to what we really earned, the earned value, and anything above that, the overspend, then indicates the actual cost. Another way to look at this because there's an alternative figure that kind of illustrates the same thing, and I'd like you, if you focus on this idea, let's assume you notice there there's an assessment date. Right there in the middle of that slide, I've got a particular cutoff point. So time is running along, again, the x-axis. Cumulative cost is running along the y-axis. And at a certain point in time, let's say it's July 1st, I wanna assess the status of the project, how it's going. Now, do you see that middle curve there, and it's the planned value curve. You notice that has this interesting resemblance to kind of a lazy S-curve? That's not by accident. This is, once again, that S-curve idea showing up because in earned value, we are still making use of the overall planned value for this project which adheres to our original budget, and that budget is based on the idea of an S-curve. That's the planned value. Now, notice we have a problem because although on July 1st there, our assessment date, we have a planned value that's kind of sweeping along the bottom, we've actually overspent, so our actual cost now is significantly above that point, while at the same time we haven't performed all that well. So the project is behind schedule in the sense that we haven't gotten as much work done as we had hoped. So our earned value is significantly below the planned value, and our actual costs are significantly above them. That gives us a look at how we can project further. And what we're gonna see later in this lesson is that dotted line is going to show something called the estimate at completion because our budgeted completion was what we had budgeted for this project. But you can see, the way we're running right now, we have a problem because we're definitely in an overspend situation. And you can see the tracking on July 1st which suggests, "You know what? If this continues at this rate, our estimate at completion is going to be a lot higher, and we may need to tap into some management reserve that we have there so that we can cover those extra costs. And the schedule, you notice, is slipping as well." Not only is the estimate at completion going to be more budget money, it's also gonna slide further out and take us longer to complete. So that's an example of two things. Number one, it's an example of us seeing how earned value plays out at any point in time because what we're gonna be showing is that we can then track those projections moving forward. And so depending where we are here, that's gonna suggest where we're likely to be by the end of the project. One thing I can tell you looking at that is we had that, remember the cost performance index and schedule performance index? I think most of us, if we look at that, we can see that we're significantly behind. We're below where we should be both in cost and schedule. How much we are? We don't know. There's no way to tell just looking at this figure, but we can see that it's definitely not a 1.0 that we're dealing with here. So how can we do earned value? How do we illustrate the idea behind earned value? I'm gonna do this by a simple example, but this is gonna illustrate a lot of different components of earned value. So I hope you bear with me as I work through this example. Feel free to recycle, rewind this back to different points in time because if there are some points we get to and you think, "Okay, wait a minute, you just lost me in that step," cycle back to see the logic of it again to see where I came from with it because what I wanna do is make sure that when we complete this that we all have a working knowledge of how do we create time-phased budgets, how do we apply time-phased budgets to an earned value problem, and how do we calculate those important metrics that we can use for projections moving forward. So look at the example here in front of you. What I've done is I've taken a relatively simple project, and I've broken it down. Now, this may be the full project. This may be only a partial of the project. It really doesn't matter. For our sake, let's assume that this is a full project that's intended to run for four months. The overall project plan, how much this project is supposed to cost my company, you can see is over there in the column that's under Plan where it says if you add up all of those different activities, $38,000. I just shaved off the thousands, but let's say it's $38,000. So the first thing I've done is I've identified it's four months, but, more importantly, I've also identified I have four activities. I have staffing, blueprinting, prototyping, and design work. These four activities have to be done for this project. So I've four activities, and I've put together my project schedule so that I know some really interesting stuff. I know, for example, that this project starts in January, but if you see there, the only work that's being done in January is staffing. Likewise, in February, the only work there as being done is staffing, and it's not until March that blueprinting and prototyping kick in, and finally design work in April. So what I've done is I've created, that term I used a few minutes ago, a time-phased budget. So I have a budget of 38,000, but I'm also identifying when that money is intended to be spent. So take a look with me just as another way to see the time-phased budget. If you track downwards in these columns, you'll see the monthly plan which is about the sixth line down. So right after design work, we have this monthly plan. And it shows in January, we're expecting to spend $8,000, February, 7,000. March, we're gonna spend six because that's the addition of the blueprinting and prototyping work to be done there. And finally in April, we're expecting to spend $17,000, all of that equaling the 38. Alternatively, so that's one way I can look at it, that's the time-phased expenditure, the money over time. I can also look at the expenditures as they're planned on the basis of the activities themselves. So I've costed out staffing to cost the total of $15,000. We can see that again from the column there. It's titled Plan. So the staffing is 15, the blueprinting is gonna be 10, the prototyping is 10, and the design work is three. Either way, they both equal or total $38,000. So that's the overall plan for the project in general. Now, I've given you a little more information. In addition to the plan for what this project is supposed to do, let's say that at a point in time, and it doesn't matter, it's a point in time that I choose to pick, I could say it's at the end of March or whatever. Let's just say, though, at a point in time, maybe we'll say the end of April, I've gone in and I've assessed the status of the project. How are we doing? Okay? So it's the end of April. We know where we should be. Let's see how we're actually doing. And so you see that column there that says %C? That means percent complete. And so at the end of April, I gather my people together, and I start formulating a status update of the overall project, and I talk to the person in charge of staffing, and he says, "Not a problem, boss, all done." So I write down there 100% complete. I turn to my blueprinting person. I say, "How's it going?" He says, "Well, we're nearly there. We're just almost at the finish line." And I say, "Give me." He says, "80% done. Hope to be done pretty quickly, but 80% is accurate." Okay, I write 80% for him. My prototyping person, I look at him and he gives me a funny look back, says, "Well, we're just a little bit over halfway done." So what does that mean? He says, "Well, we're about 60% completed with it right now, I would say." And I give him a look, say, "Well, you know, it has to be done." "I know, I know, but you know, we experienced some problems. We're gonna catch up." I say, "Okay." So I write down 60% for him. And finally, the design person, I say, "How are we done?" He says, "Well, I gotta be honest with you. Because of the delays from its prototyping, I've just really gotten started. I'm not more than about a third of the way into this." I say, "Okay." I've taken my time-phased budget, and I've overlaid a very important chunk of information which is the percentage of the activity that has been completed to that point in time. So the activities laid out in time, their completion. I also have the other information here, not only how much of the work has been done but I wanna know how much money has been spent. So let's go to the columns here, all the way back to January, and follow that to the bottom. And we see there that the monthly plan for January was to spend $8,000. Fortunately, the monthly actual, two columns below that, two rows below that, is $8,000, so I'm on target. I was planning to spend eight, I did spend eight. In the next month, in February, I was planning to spend $7,000. Unfortunately, the monthly actual there is showing $11,000 spent, so $4,000 over. I have a positive variance here of $4,000. So the cumulative actual now is 19,000, whereas it should have been, the cumulative plan was 15,000. And so you can continue. You can see that in March, the planned expenditure was $6,000, the actual was eight. In April, the planned expenditure was 17,000, the actual so far, well, this is good news, is 13,000 because they obviously haven't gotten all the work done. So we've only spent 13 to this point, so the overall cumulative actual to the end of April is $40,000. The planned, as you can see there, was 38. The actual percentage completions for these activities now, all this is the information I need to actually calculate earned value, so let's do that. Let's take this information as we've devised it from talking to our people to get their estimates of completion and paying attention to the budget, what's been spent, and let's see how we stand. So when I walk into the boss's meeting on Friday afternoon to give him a status update of my project, I've got some real data to share with him. So what do I do? Well, first thing we know is, using the terminology before, is we know that that $38,000 is the planned value. That was how much money we were expecting to spend both on the cumulative overall per month but, more importantly, for each one of those activities. So if I chart that Plan column working downwards, 15,000 for staffing, 10,000 for blueprinting, et cetera, I come up with 38,000. That is the planned value, the planned amount of money to be spent overall in this fourth month period. Additionally, I wanna know what the earned value is for those values, but remember all I've gotten from my people is the percent complete. Now, think of it this way. If you are expected to do something for me and it's gonna cost $10,000, but you've only completed half of the work, then how much value have you really earned? How much have you earned in completion of that project? You've only done half of it, and you've spent half of the money. You would say, "I've earned $5,000. I've earned half of what I expected to make so far for that project, for that value." And it's the same way here. You can see that what we do is when we have a planned amount and we have the percentage complete, we can now multiply the planned amount by the percentage complete to determine the actual value that we have earned to this point in time. And notice, in some cases, it's less than the full amount. So all the staffing, we've completed it, so our earned value there is the full 15,000. For blueprinting, we're 80% done, so we can't declare all $10,000 as having been earned 'cause we haven't earned it all, we've earned 8,000, and so on and so on. And so going through each one of these percent completes versus the planned value allows us to total up the overall earned value. So the summed amount gives us the overall earned value to this point in time with this project. So we have 15 plus eight plus six plus one, or our earned value total is $30,000. Now, let's reflect on that for just a minute. So I'm gonna cycle back just to make sure we understand the logic here. Earned value says you can only classify as completed the amount of the project or the amount of the activity that has actually been done to that point in time. When we have completed 100% of an activity, we can classify all of that full amount as earned value to this point. But what happens if we haven't earned 100%? What happens if it's some percentage less than that? Well, it's not fair to say that we've earned full value for that activity when we haven't. And so that's why percentage complete is so critical. We have the planned value, the budget numbers, the planned value for each of those activities, but we have to compare that with the actual amount that has been completed, and that gives us the earned value. So you can see in our example very important information, all the information really that we need to this point in time. We have the planned value which was $38,000 at the end of April. We have the actual cost which is $40,000. The cumulative actual cost at the end of April, we've spent $40,000, and we have the amount we've actually earned. The earned value to the end of April was $30,000. With this information, what we're gonna be able to do now is we're gonna be able to take this, and we're going to apply it to actually giving the boss a real answer to his question which is "How's your project going, Pinto?" So these are the important bits of information. You can see them on the screen there in front of you. These are the things we're gonna make use of in order to get a better sense for how the project status is going.