6.4 Employ earned value to develop key tracking metrics - Video Tutorials & Practice Problems

<v Instructor>So let's take an example.</v> The first thing we wanna know is we take that information we have and so we put together schedule variances. Now remember, I've already calculated this. We saw this before, that we wanna know the schedule variance. We have a planned value of $38,000. We have that earned value that was $30,000. We have a scheduled performance index, which consists of the ratio of earned value over planned value. Remember what I said? Ideally, what we would hope for, the best case scenario is 1.0 or higher. Well, you can eyeball that. You can see immediately we have a problem. The planned value is supposed to be $38,000. The actual earned value, unfortunately, is $30,000. Our schedule performance index, earned value over planned value, works out to 0.79. That's a problem. That means, at this point in time, we're approximately 21% operating below where we should be operating. So we have a worrisome schedule performance index at this point in time. Now the other thing the boss wants to know is, okay, you have an SPI of 0.79. What does that mean to completion? Well, suppose our project was just those four months. So we had those four activities over January, February, March and April. Four-month length original project. The boss wants to know what does this mean to completion? The estimated time to completion is the reciprocal of the SPI. In other words, it's one over that value, 0.79, times the original planned duration. So original planned duration is four months. The reciprocal here, one over 0.79 times that four months gives us the number five. So when the boss says, "What's the status of your project, Pinto?" I can say, "As of the end of April, I am projecting to completion here that it will take till the end of May." The boss may say, "You were supposed to finish it in April." I was gonna say, "You're right. However, because of problems, blah, blah, blah, it's gonna take that extra month." And so this gives me a basis for projecting not only where I am right now, so I have an SPI of 0.79 which is not very good. But more importantly, to the boss is what does this mean to finish the project? That last item, the estimated time to completion is really the critical piece of the puzzle that we need in order to understand what the real status of our project is at this point in time. We can also do this with the cost. Just like schedule variances, we can come up with cost variances. and we know from that example, and again, cycle back if you want to so you can see that and you can refresh your memory here. But we know from that example that cost variances work around the idea, first of all, what's the actual cost of work performed? Do you remember what that was? That was $40,000. That was eight plus 11 plus eight plus 13. So a total of $40,000 has been spent to date. Remember, planned value was $38,000. Earned value was $30,000. Our cost performance index is the earned value over the actual cost, or in this case, $30,000 over the actual money spent, which was 40. So we earned 30, we've actually spent 40 we're operating at a CPI now of 0.75. In other words, significantly even worse than our schedule performance index. We're at 0.75, which is probably worrisome information. Just how bad is it? Well, remember the boss doesn't just wanna know where I am today. The boss also wants to know where the project's gonna end up. That's why earned value allows us to project forward. And so what we're gonna do here is talk about this not just where we are, but where we're going. And that value says we can take the estimated cost to completion and do exactly what we did with the other value. We take the reciprocal of 0.75 and we multiply that by the planned value, the amount of money we were planning to spend to complete this project, which was $38,000. Well, not very good information is it? We were expecting to spend $38,000. I have to walk back into my boss now when he says, "Where do we stand with your project, Pinto?" And I have to say, "At the rate we are going, as of the end of April, my projection is we will finish it at the end of May, one month late, and it will cost $50,700 or $12,700 more than our original plan for this project was intended to spend." So I'm in a bad situation here, aren't I? I've got a project that's late and that's pretty badly over budget. So I'm kind of missing on both senses, the worst of both worlds. But that's an example of what earned value does for us. And notice, not only can I track currently, at any point in time the status of my project, I waited until the end of April to calculate this. Folks, I could just as easily have done this at the end of February, at the end of March, or sometime in between. I can pick whenever I want to do it. And in fact, going back to my example, the Department of Defense with their projections and their mandates require that contractors report on a regular basis of ongoing defense contracts, or, in fact, any kind of contracts that they're getting money from the federal government for. So it may be on a quarterly basis, it may be once, twice a year, it may be much shorter. That really is between that company and the federal government and the the earned value mandates that they sign on for with the contract. But you can bet one of the ways the people know how they're doing is because they're required to identify ongoing constant status in the project and they're all required to projective completion. Let me take one specific example. The Joint Strike Fighter that's been contracted by the Pentagon and is being developed with a Marine version, a Navy version, and an Air Force version of the F-35 is constantly being watched by all branches of the military because it's being developed with some very different, unique features to it. And each time they have to report on the current status of the project and it's projection out. And the projection numbers are very worrisome to the point where we're talking in the range of hundreds of billions of dollars for the full life cycle cost of this one project. So one defense platform, the F-35, is projecting and it's all projections, but the projections here are significantly above budget. To the point where I've seen some articles written that are saying perhaps alarmists, perhaps not, but are calling the F-35 Joint Strike Fighter the Pentagon's first trillion dollar project. That may be over-inflated. But most of us would recognize the fact that the project has overrun its budgets and projections to the point going forward are pretty worrisome. The beauty of earned value is that earned value allows us to do a lot of completions, a lot of values, a lot of understanding of what the project is likely to do. And so in order to make this work, we have to have very accurate and up-to-date information. We have to make sure that we're collecting correct information. We're not collecting sort of padded numbers or magic numbers. We're collecting real information on all of those activities at every point in time. Not only what the current status, how much money has been spent, but how much value has been earned. So accurate, upfront information, up-to-date information is critical. Now, there's some problems with this. And if we think about it, the problems probably occur to some of you folks right away. One problem is earned value hinges on the accuracy of those numbers that are calculated, doesn't it? So for example, I can come up with all my budget numbers. I can say "Yes, in our example we just did, we've spent $40,000 to date." I can come up with a planned value because that's just part of my time phase budget. So that's relatively easy to capture as well. The critical piece of the puzzle, the one that you have to pay most attention to when you're using earned value, is that final determinant of how much percentage completion of those activities has actually occurred. Where do we really stand with this? Because the biggest ways to spoof earned value lie in the estimates of completion numbers. For example, let's say that I am 25% done with a particular activity in your project. You're the project manager and I'm working for you. I'm only 25% done with it. If you aren't paying close attention to me, if you're willing to take my word for it, and if I'm very busy because I've got four other people that I have to do work for them so I'm just kind of partially assigned to you and I've got a lot of other folks that are banging on me. You ask me, "What's the status of my project, Pinto?" And to put you off, to fend you off, I might say, "Oh, I'm 60% done or 70% done." I might come up with some number. I just pull that out of the air. And if you aren't aware or recognize that that's just an arbitrary number unless there's some value to attach to it. In other words, how do you determine whether or not I'm giving you accurate information? Is 70% a realistic estimate or am I just using a number that I just created to sort of cloud my true status? So the information that we have to collect is very critical and it has to be done as accurately as possible. Now, there's some different ways that we can collect that information. There's some decision rules out there, and I'd like to talk about a few of them to see to what degree these help or perhaps hinder our collecting accurate information. The first decision rule is called the 0/100 rule. Now 0/100, all that means is that for some companies, a activity is zero. We assign a zero to it in terms of percentage completion until it is completed. So it is either not done or it's done. But there's no way points in between. So zero means not done. Or once it's done, then all of a sudden, it magically gets that 100% complete. Why might we do that? Some activities that are relatively short duration. So even though our overall project is six months duration, the work that you're doing or your activity is only two or three days in length. In the overall project schedule, that's a small chunk or a small sliver. I'm not going to waste a lot of time worrying about whether you are 50% done or 75% done or whatever because it's a very narrow, finite duration activity. So 100 to zero or just that may be sufficient. We don't need to kind of parse this out in between. Some people use the 50/50 rule. 50/50 rule says activities are either 0% done until the point in time when they are halfway done, and you have to have some way that you can independently and objectively evaluate that it is halfway done. So depending upon what the deliverable for that activity is, is there some means by which I can determine that "Yes, you are in fact halfway done with it." And then it's 100% done. So 0, 50, 100, and those are the only gradations that we use under that circumstance as well. Again, we're trying to get away from having too many finite means by which we can set this up. We may use a percent complete rule. Now be careful. Percent complete rule can work in certain projects and in certain situations. I think back, for example, to construction. If I have very deterministic estimates, if I have a good sense of how long a project is gonna take and I'm the project manager on site or I'm the builder, I can feel very comfortable telling the eventual buyer of this house that we are 70% done or we are 80% done because I can look at my project schedule and I can see that I have actually completed all the critical steps to that point in time. There's no ambiguity. Nobody's going to argue really over, is it 70? Is it 80? It's fairly straightforward and so therefore, it's relatively easy to claim a specific. I tend personally to like to avoid getting too heavily into percent completes. So for those of you who are contemplating using earned value, I prefer to come up with a rule, a decision rule, that every member of the organization is going to abide by. You have to decide in your own circumstance what that rule is for your activities and how you're gonna measure percentage complete. Is a 0, 50, 100 make sense? Does a 0, 33 67, 100% complete rule make sense? You have to decide. For some of you, you can use multiple rules. If, for example, going back to my situation there. If I've got some activities that are relatively short duration, maybe just use the 0/100 rule. Even if it's mostly complete but it's not totally complete, put a zero down. In it's a small activity, so overall, it's probably not gonna skew the results all that much. So what we wanna recognize is our goal with earned value is to provide more accurate feedback. And that can only come about if we've recognized that we have to do it in such a way that we're going to get the accurate information from the folks when we're our calculating value. You come up with a rule. Make sure that everybody adheres to it. And make sure that when you go in and do occasional checks here and there, everyone maintains the rule. If you do that, you'll be in good shape with earned value.