Moving to the Cost Management Knowledge Area in July and August – had us focusing on Earned Value. Specifically we answered the question Is there Value in Earned Value?
Joanne and Al began the session with an icebreaker; name 2 true things and 1 false thing about yourself and have your neighbor guess which was which. The purpose was to get everyone talking and warmed up. Al had an interesting truth – being married to a spy and Joanne was acquainted with a very notorious person (but you all guessed it as the ‘truth’!).
After the fun Joanne presented the group with some True/False questions on Earned Value. Let’s see what you remember:
1) True or False: EV is more relevant for those projects where cost needs to be monitored closely.
2) True or False: EV Value is more relevant to applications where there is a tangible product, such as a building, or a road, to earn or measure.
3) True or False: EV is only relevant when compared against your baseline.
4) True or False: EV is used primarily to ascertain a status of what has been accomplished so far.
Answers at the bottom!
Once we made it through the pop quiz Joanne gave the group (virtually everyone had taken the exam testing the 3rd edition which meant it was at least 16 months ago!) a refresher on the various equations. If we brushed away the cobwebs we could all remember the main ones; Schedule Variance, Schedule Performance Index, Cost Variance, Cost Performance Index, EAC (Estimate at Completion), ETC (Estimate to Completion), etc.
However no one had heard of the new equation (new to the 4th edition) which is TCPI: To Complete Performance Index. The equation is:
TCPI = ( Total Budget – EV ) / ( Total Budget – AC )
This represents what efficiency your project team needs to be performing at in order to get back on plan with respect to your budget. If you currently have a CPI of 0.5, then you are earning only 50 cents back for every dollar you’re spending. Intuitively we could conclude that in order to get back to a CPI of 1 that we’d need to work twice as hard in order to get back on course. Intuitively we’d need a TCPI of 2.0, so that we’d be twice as efficient as before, in order to get back to a CPI of 1. Algebraically you can solve for TCPI through the equation above.
We also discussed a couple of the learning points from the July newsletter’s podcast of the month which was on earned value. Tip #3 of the podcast was to set a variance tolerance at the start of the project. This tolerance determines WHEN you will take action. For example if you have a CPI tolerance of 0.4 (which I wouldn’t recommend by the way), then it means you would not as a project manager take corrective action to get your costs back in line unless your variance got as large as 0.39 (you’re earning 39 cents back for every dollar you spend). In reality your tolerances should be much tighter, perhaps 15-20% off budget (and schedule too by the way). Much of it depends on how predictable the project is. If it’s a common project, where you’ve done many similar ones, then you should set a very tight tolerance, perhaps 10%). If it’s brand new and difficult to estimate, then you can live with a larger one, perhaps 30%.
Lastly Al handed out a problem from the Finance for PM seminar that he teaches where given a case study, you need to solve for the various EV equations. The class teamed up in pairs and then Al reviewed the answers at the end.
Hopefully you all left the Forum with the answer YES. That is that there IS value in Earned Value!
Answers to T/F:
1) F – EV addresses all 3 sides of the Triple Constraint
2) F – EV can measure the status and predict future status on ANY project
3) T – EV requires a baseline and actuals for the numbers to be meaningful
4) F – EV is used as a predictor as well as a current status health check
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