The integrating earned value management

The integrating earned apprize management3.3 EARNED VALUE PROJECT MANAGEMENT3.3.1 Basics of Earned treasure Project ManagementProject Management is often specify as the integrated management and control of Time, toll, Resources and Quality for the successful on snip and on cypher completion of checks. Traditional approaches to PM ranged from simple Gantt Charts which help in representing the scarper to be done on a clock scale to techniques likes CPM and saucy that maneuveres the needs of deterministic and probabilistic scheduling. All of these techniques t shutting to be utilise primarily for managing time. Cost is often measured independently by the accountants. This separation among court and time is often the ca mathematical function of range failure because the executing team is often unable to detect be overruns until they ar well medieval the vertex where they chiffonier change the outcome of the job.3.3.2 Illustrative Ex blueprintationEarned Value Projec t Management (EVPM) is a concept that helps Project Managers seamless think Time and Cost for more effectual control. Despite the difficult sounding title and the typical jargon associated with EVPM the basic idea is very simple and throne be used effectively in a wide variety of situations. The best way to under vantage point EVPM is to walk through a savour endure, so I am going to take you through a software project. Lets say we are change stateing on the ERMS (enterprise resource management system) that has 10 deliverables/modules each(prenominal) to be completed in one month with a budget of 10 Lac Rupees each. The sum of money project span works out to 10 months at a budget woo of Rs. 100 Lacs (Rs. 1 crore).We are at the end of the first three months and the Project Manager is busy preparing his project report. He starts up by reviewing progress and finds that twain deliverables are to the full complete while the third one is 80% complete. He checks with accounts a nd finds out that that a total of Rs. 28 Lacs go through been spend so far. With this nurture he is ready to assign values to the three basic variables required to perform EVPM. These are as fol scurvys-3.3.2.1 BCWS / Planned Value (PV)Budget Cost for carry Scheduled, also known as Planned Value in the amount of money that should restrain been spent at this point in the life of the project if the project was proceeding as per plan. It is time phased budget baseline (figure). It is the approved budget for accomplishing the activity, work package or project related to the history. It kindle be viewed as the value to be earned as a function of projectWork accomplishments up to a given point in time 12. In our case we had planned to complete three deliverables in three months so we should lose spent Rs. 30 Lac. A word of caution here, most projects dont proceed in a linear fashion (i.e. total budget/total sequence in months). Correct BCWS values can be obtained from a resour ce loaded project plan that takes in account the certainly work to be done in each period. Budget Cost for Work Scheduled is also called Planned Value.3.3.2.2 Budget at Completion (BAC)This is the total budget baseline for the activity, work package or project. It is the highest value of PV as shown in count-1 i.e. 100 Lac.3.3.2.3 ACWP / Actual Cost (AC)This is the cumulative AC spent to a given point in time to accomplish an activity, work-package or project 12. Actual Cost for Work Performed is the amount of money that we dupe actually spent on the project. Accounts oblige told us that we stomach spent Rs. 28 Lac.3.3.2.4 BCWP / Earned Value (EV)This is the cumulative earned value for the work completed up to a point in time. It represents the amount budgeted for performing the work that was accomplished by a given point in time 12. To obtain EV of an item, simply multiply its total budget by its completed proportion. Budget Cost for Work Performed is the sound judgement of t he value of work that we have completed. Think of this as the worth of the work that we have completed, so if we had completed three deliverables we would haveCompleted 30 Lac Rupees worth of work. But we have only fully completed two deliverables so we have Rs. 20 Lac and we have 80% of the third deliverable. Partial completion is a tricky issue, because partial estimates generally vary from person to person depending on how starry-eyed or pessimistic they are. There are rules of the thumb (Heuristics) to deal with this situation. The common ones are 0-100 (give no credit till the business is complete), 20-80 (give 20% credit when the task is underway and the remaining 80% when it is completed), 50-50 (give 50% credit for starting the task and the balance on completion). The selection of method is up to you, but you need to check up on that you lead use the same measure a crabbed the project for all tasks. In our case lets say we go with the 50-50 rule, so well give Rs. 5 Lacs credit for the third deliverable which brings the BCWP to Rs. 25 Lacs (20+5). Note that BCWP is also referred to as the Earned Value (EV).Lets start by calculating the two basic measures of transaction SPI and constitute-of-living index -3.3.2.53.3.2.5 Schedule Performance major poweriness (SPI)Schedule Performance Index is an indicator for accessing our proceeding relative to the plan. SPI = BCWP/BCWS = 25/30 = 0.83. We know we are asshole schedule, what SPI is telling us is that we have only completed 83% of the work that we originally planned to complete.3.3.2.6 Cost Performance Index (CPI)Cost Performance Index shows us how oftentimes value we are getting for each Rupee that we spend on the project. CPI= BCWP/ACWP 25/28 = 0.89. We are over budget because, for producing Rs. 25 Lacs of work we have spent Rs. 28 Lacs. So we are only getting 89 Paisas of value for each Rupee that we spend.Just sounding at SPI and CPI we know that we have a problem in that we are both over b udget and keister schedule. A lot of work has been done on the use of SPI and CPI archaeozoic in the project to predict the final outcome. Most of the work has been done in the US defensive structure industry where researchers have looked at dozens of completed projects and tried to correlate their outcome with the status of their SPI and CPI early on during the project. Most studies show that the value of SPI and CPI when the project is only 20% complete can very accurately predict the final outcome. Using heuristics developed from these studies we can predict the following-project Project Duration = Planned Duration / SPI = 10 / 0.83 = 12 Month. So we are expecting that the project will be completed two month behind schedule,Projected Project Cost = Planned Cost / CPI = 100 / 0.89 = 112 Lacs. We are expecting a Rs. 12 Lacs overrun on the budget.Recovery Cost This is the cost that we will incur if we need to complete the project within the originally specified time by adding ad ditional resource to the project. Projected Project Cost = Planned Cost / CPI*SPI = 100 / 0.89*0.83 = 135 Lacs Rupees. We should be ready to exceed the budget by 35% if we want to complete the project in time.Conventional wisdom says that your ability to change the outcome of a project is maximum at the start or the project and minimum near the end of the project. So it makes good sense to detect problems early and take action when you have room for maneuver. If you think about the 20% point intuitively, youll note that the every estimation errors that are leading to low CPI (i.e. budget overrun) are likely to effect the remaining activities of the project at the same rate, homogeneously the doing of your resources in execution is unlikely to get any better than what they have proven capable of in the first fifth of the project.Given the importance of early detection, think about conventional project management and how little it can tell you from the fact that you have completed t wo deliverables and 80% of the third and spent 28 Lac Rupees, Because of this, problems often evade early detection and by the time someone detects the problem its too late in the project to do much about it i.e. in a stage where the project is controlling the project manger instead of vice versa.3.3.4 Integrating EVM Risk ManagementIn todays incertain business environment there is understandable pressure to improve the quality of decision-making at all levels in the organization. A number of techniques have been developed to address this concern, in an attempt to introduce some thinking(prenominal) framework to the decision-making play. Two of the leading approaches are Earned Value Management (EVM) and Risk Management (RM). These stand out from other decision support techniques because both EVM and RM can and should be applied in an integrated way across the organization. Starting at the project level, both EVM and RM offer powerful insights into factors come uponing project implementation.Another samara similarity between the two techniques lies in the word management. It is attainable to leave Earned Value Analysis and Risk Analysis to expose underlying drivers of performance. But both techniques emphasize the need to move from analysis to management, apply the information to support proactive decision-making.Consequently, both EVM and RM encourage those using the techniques to take appropriate management action based on the results, and not to stop at unpolluted analysis. Since both EVM and RM address the same problem space (performance of projects, programs, portfolios and businesses), and both provide management information to provide a basis for decisions and action, there has been considerable beguile in the possibility of developing a combined approach to shit synergistic benefits.Currently EVM and RM operate as parallel coexisting offshootes without systematic desegregation (although good project managers whitethorn intuitively link th e two in practices). Much of the discussion to date on the relationship between EVM and RM has been rather theoretical, addressing the key principles underlying the two techniques. The objective is to analyze step that can be implemented to combine EVM and RM in enjoin to gain maximum benefit for projects and the organization.3.3.4.1 flunk in EVM and RMThe strength of EVM RM has already been described, as their proponents seek to encourage wider update use. Each technique however has atleast one key weakness which presents a large danger to those relying on the output to support strategic or tactical decision-making.For EVM, one of the main perceived weaknesses is its reliance on a key assumption, that succeeding(a) performance can be predicted based on erstwhile(prenominal) performance. Calculated performance measures (CPI, SPI, CV, SV etc) are used to predict forwards and estimate cost at completion or overall duration.Unfortunately there is no guarantee that the basic EVM assumption will be true, and it is likely that the future will depart from that predicted by simply extrapolating from away performance. The strength of EVM lies in its rigorous examination of what has already occurred on the project, using quantitative metrics to evaluate project past performance. It goes on however to predict future performance by extrapolating from the past. But it is not workable to drive a car by only facial expression in the rear-view mirror. A forward view is also required, and this Is what RM offers.While project planning looks at the next steps which lie immediately ahead, RM has a horizon further into the future, It acts as forward-looking radar, scanning the uncertain and unclear future to identify potential dangers to be head offed, as well as seeking possible additional benefits to be captured. However this undoubted strength of being resolutely and exclusively future- think is also one of the key weaknesses in RM. Any thing which occurred in the past is of little or no interest to the endangerment of exposure operate, since there is no uncertainty associated with past events. RM starts with todays status quo and looks ahead. How the project reached its current position is not relevant to the risk process, unless one is seeking to learn lessons to assist RM on future projects. As a result RM as commonly implemented often lacks a meaningful context within which to interpret identified risks, since it has no means of capturing past performance and feeding this into the decision-making process.If EVM is weakened by assuming that future performance can be predicted from past performance, and if RM is weakened by looking only forwards with no real awareness of the past, a useful synergy might be obtained if a combined EVM-RM approach were able to address these weaknesses. Combining a rear-view mirror with forward-looking radar would use the strengths of complementary approaches to compensate for the weaknesses constitutive(a) in using each alone. Consequently it is possible to produce significant benefits by using RM to provide the forward view required by EVM, and by using EVM to provide the context required for RM.3.3.4.2 Synergies from a Combined ApproachGiven the common aims of EVM and RM to examine and expose drivers of project performance in order to focus management assist on achievement of objectives, and given their differing perspectives towards the past and the future, a number of areas of possible synergy exist between the two techniques. The steps required to implement these synergies are 18Creating the baseline spend planPredicting future outcomesEvaluating risk process effectiveness1. Creating the baseline spend planThe foundation for EVM is the baseline plan of judge spend over time, creating the profile of Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV) against which project performance is measured. This baseline is derived from a costed and resourced project plan, includ ing fixed and variable costs arising from financial and human resources. The BCWS profile is typically presented as a cumulative curve, or S-curve, as in Figure below.The baseline BCWS exists as the benchmark against which project performance will be measured. However one of the first things a project manager learns is that reality will never precisely match the project plan. As soon as work starts, there are variations in productivity, resource and information availability, delivery dates, poppycock costs, celestial orbit etc. This is why a rigorous change control process is vital to successful project management. Although not all changes can be foreseen before the project starts, it is possible to assess the degree of uncertainty in a project plan, in both time and cost dimensions. This is the domain of RM. adept of the first contributions that RM can make to EVM is to make explicit the consideration of uncertainty and risk when constructing the baseline BCWS.By undertaking a f ull risk assessment of the project plan before the project starts, addressing uncertainties in both time and cost, it is possible to evaluate the degree of risk in the baseline project plan. three-figure risk analysis techniques are particularly useful for this, especially the use of Monte Carlo simulation on integrated models which include both time and cost uncertainty. These risk models take account of variability in planned values, also called estimating uncertainty (for example by replacing planned single-point estimates of duration or cost with three-point estimates or other distribution types), and they should also model the effect of separate risks to reflect their assessed probability of occurrence and the subsequent impact on project time and/or cost. Both threats and opportunities should be addressed in the risk model, representing the possibility of exceeding or failing to meet the project plan.The results of the risk analysis stick out the best case project outcome to be determined, representing the cheapest and. quickest way to reach project completion. Similarly a worst case profile can be produced, with highest cost and longest duration. All other possible outcomes are also calculated, allowing the expected outcome within this range to be identified. These can be shown as a set of three related S-curves, as in Figure below, which take account of both estimating uncertainty (variability in planned events) and trenchant risks (both positive opportunities and negative threats).The ellipse at the end of the curves represents all possible calculated projects outcomes (90% confidence limit), with the top-right value showing worst-case (highest cost, longest schedule), the bottom-left giving best-case (cheapest and Quickest), and the centre of gravitational attraction of the ellipse being at the expected outcome of project cost and duration.The existence of this set of possible project outcomes raises the question of where the baseline spends pr ofile for EVM should be set. The recommendation from a combined approach to EVM and RM is to use the expected value cumulative profile from a quantitative time-cost risk analysis as the baseline for BCWS. In other words, the central S-curve in Figure 2 would be used as the baseline instead of the S-curve in Figure 1. This ensures that the EVM baseline fully reflects the risk associated with the project plan (including an appropriate amount for contingency which is automatically incorporated in the risk analysis results), rather than measuring performance against the knifelike all-goes-to-plan plan.2. Predicting future outcomesBoth EVM and RM attempt to predict the future outcome of the project, based on information currently known about the project. For EVM this is achieved using calculated performance indices, with a range of formulae in use for calculating Estimate At Completion (EAC). Most of these formulae start with the Actual Cost of Work Performed to date (ACWP, or Actual Co st AC), and add the remaining budget adjusted to take account of performance to date (usually using the Cost Performance Index CPI, or using a combined Performance Efficiency Factor based on both CPI and SPI). These calculations of the Estimate To Complete (ETC) are used to popularise the ACWP plot for the remainder of the project to estimate where the project might finally end (EAC), as shown In Figure 3 below.RM predicts a range of possible futures by analyzing the combined effect of known risks and unknown uncertainty on the remainder of the project. When an integrated time-cost risk model is used, the result is a set of S-curves similar to Figure 2, but covering the uncompleted portion of the project, as In Figure 4.It is also possible to use risk nalysis results to show the effect of particularized risks(threats or opportunities) on project performance as measured by earned value. Since the risk analysis includes both estimating uncertainty discrete risks, the model can be u sed to perform what-if scenario analysis showing the effect of addressing particular risks.3. Evaluating risk process effectivenessA risk can be defined as any uncertainty that, if it occurs, would have a positive or negative effect on achievement of one or more project objectives. RM aims to address this uncertainty proactively in order to ensure that project objectives are achieved, including completing on time and within budget. As a result, if RM is fully effective, actual project performance should closely match the plan.Since EVM performance indices (CPI, SPI) measure deviation from plan, they can be used to indicate whether the risk process is being effective in addressing uncertainty and controlling its effects on project performance.If CPI and/or SPI are below 1.0 indicating that project performance is falling short of the plan, then one of the most likely underlying causes is that the risk process is failing to keep the project on data track. An Ineffective risk process would fail to avoid adverse risks (threats) proactively, and when threats materialize into problems the project incurs delay and/or additional cost. Either the risk process is not identifying the threats, or it is not preventing them from occurring. In this situation, management attention should be directed to the risk process, to review its effectiveness and consider whether additional resources are required, or whether different techniques should be used.Conversely, if CPI and/or SPI are in a higher place 1.0 indicating that project performance is ahead of plan, the risk process should be focused on exploiting the opportunities created by this situation. Best-practice RM addresses both threats and opportunities, seeking to minimize threats and maximize opportunities. When EVM indicates that opportunities exist, the risk process should explore options to capture them and create additional benefits for the project.It should also be noted that if CPI and/or SPI far exceed 1.0, this may indicate other problems in the project and may not simply be due to the existence of opportunities. Typically, if actual performance is much greater than expected or planned, this could indicate low planning or incorrect scoping when setting up the initial baseline plan. If this highly anomalous behavior continues, a baseline re-planning effort should be considered, which of course will involve the need for further risk management.Similarly if CPI and/or SPI are well below 1.0, this may not simply be due to the impact of unmanaged threats, but may indicate problems with the baseline plan or scope. Figure 5 illustrates the relationship between the values of EVM indices (CPI and/or SPI) and RM process effectiveness.The key to using EVM indices as indicators of RM effectiveness is to determine appropriate thresholds where action is required to refocus the risk process. Clearly some variation of EVM indices is to be expected as the project unfolds, and it would not be wise to modif y the risk process in response to every small change in CPI /or SPI. However if a switch off develops crosses the thresholds of common variance, action should be considered. Figure 6 illustrate this, with the thresholds of common variance for CPI /or SPI set at = 0.9 and =1.25.A further warning threshold is set at 0.75, suggesting that an adverse trend is developing and preparatory steps should be taken. The thresholds of 0.75, 0.9 and 1.25 used in Figure 6 are illustrative only, and organizations may be able to determine more appropriate threshold values by reviewing diachronic trend data for CPl and SPI, and identifying the limits of common variance for their projects.Plotting the trend of CPI and SPI over time against such thresholds also gives useful information on the type of risk exposure faced by the project at any given point. For example Figure 6 Indicates that the project schedule is under pressure (SPI trend is consistently below 1.0), suggesting that the risk process should focus on addressing sources of time risk. The figure also suggests that cost savings are possible which might create opportunities that can be exploited, and the risk process might be able to maximize these. These recommended action types are illustrated in Figure 7, corresponding to the following quaternary situationsBoth CPI and SPI high (top-right quadrant), creating opportunities to be capturedBoth CPI and SPI low (bottom-left quadrant), requiring aggressive action to address threatsHigh SPI but low CPI (top-left quadrant), requiring focused attention to cost risk, with the possibility of spending additional time to addressHigh CPI but low SPI (bottom-right quadrant), where attention should be paid to addressing schedule risk, and cost trade-offs can be consideredFigure 7 also suggests that if either CPI or SPI (or both) remain abnormally high or low, the baseline plan should be re-examined to determine whether the initial scope was correct or whether underlying planning assumptions were unfounded.It is important to note that these action types should be viewed only as beginning(a) options, since other considerations may lead to different actions. For example in projects with high schedule-constraints (e.g. product launch, event management etc), the trade-off between time cost may be prioritized differently than in cost-constrained projects.3.3.4.3 DiscussionBoth Earned Value Management (EVM) and Risk Management (RM) seek to improve decision-making by providing a rational framework based on project performance. EVM examines past performance against clearly-defined quantitative metrics, and uses these to predict the future outcome for the project. RM looks ahead to identify and assess uncertainties with the potential to affect project performance either positively or negatively, and develops responses to address each risk proactively. Both techniques share a focus on project performance, and have the same purpose of developing effective actions to correct unwelcome trends in order to maximize the Likelihood of achieving project objectives. One (EVM) does this by looking keystone at past performance as an indicator of likely future performance. The other (RM) looks ahead at possible influences on future project outcomes. These two approaches are not in conflict or mutually exclusive. Indeed their commonalities imply a powerful synergy, which is available through combining the complementary strengths of each technique and using insights from one to inform the application of the other (as summarized in Table 5).1. Creating the baseline spend plan (BCWS/PV)Develop costed WBS to describe scope of work, without hidden contingencyProduce fully costed and resourced project scheduleAssess estimating uncertainty associated with initial time/cost estimatesPerform risk identification, risk assessment and response developmentQuantify time and cost risk exposure for each risk, taking account of the effect of agreed responsesCreate integr ated time/cost risk model from project schedule, reflecting both estimating uncertainty (via 3-point estimates)Select risk-based profile as baseline spend profile (BCWS/PV) it is most common to use the expected values, although some other confidence level may be selected (say 80%)2. Predicting future outcomes (EAC)Record project progress and actual cost spent to date (ACWP), and calculate earned value (BCWP)Review initial time/cost estimates for activities not completed, to identify changes, including revised estimating uncertaintyUpdate risk identification, assessment and quantification, to identify new risks and reassess existing risksUpdate integrated time/cost risk mode with revised values for estimating uncertainty and discrete risks, taking account of progress to date and agreed risk responsesSelect risk-based calculation as estimate of final project duration and cost (EAC), using either expected values, or some other confidence level (say 80%)Use risk-based profile as updated expected spend from time-now to project completion3. Evaluating risk management process effectivenessDetermine threshold values for CPI and SPI to trigger corrective action in riskprocess (or use default values of 0.75, 0.90 and 1.25)Calculate earned value performance indices (CPI and SPI), plot trends andcompare with thresholdsConsider modifications to risk process if CPI and/or SPI cross thresholds,enhancing the process to tackle opportunities more effectively if CPI and/or SPI arehigh, or refocusing the process on threat reduction if they are lowTake appropriate action either to exploit opportunities (high CPI/SPI), address threats (low CPI/SPI), spend contingency to recover time (high CPI/low SPI), or spend time to reduce cost drivers (high SPI/low CPI)Consider need to review initial baseline, project plan or scope if CPI and/or SPIpersistently have unusually high or low valueTable-5 Summary of steps to integrate EVM and RMhttp//support.sas.com/documentation/cdl/en/orpmug/59678 /HTML/default/evm_sect3.htmhttp//www.tech-archive.net/ file/Project/microsoft.public.project/2007-05/msg00594.htmlhttp//www.allpm.com/index.php?name=Newsfile=articlesid=2184http//www.allpm.com/index.php?name=Newsfile=articlesid=2184theme=Printerhttp//www.freepatentsonline.com/4424121.htmlhttp//www.ustreas.gov/tigta/auditreports/reports/094602fr.htmlhttp//www.ustreas.gov/tigta/auditreports/reports/094602fr.htmlhttp//www.dcma.mil/communicator/spring_summer04/evm.cfmhttp//www.parm.com/index.php?option=com_contenttask=viewid=171Itemid=35http//www.parm.com/index.php?option=com_contenttask=viewid=177Itemid=35http//www.scribd.com/doc/4614499/Project-Performance-Measurementhttp//www.baz.com/kjordan/swse625/htm/tp-py.htmhttp//guidebook.dcma.mil/79/evhelp/what.htmhttp//www.acq.osd.mil/pm/faqs/evbasics.htmhttp//commdocs.house.gov/committees/bank/hba57680.000/hba57680_0.HTMhttp//www.allbusiness.com/management/risk-management/8945762-1.htmlhttp//www.parm.com/index.php?option=com_contenttask=view id=171Itemid=35http//www.bcs.org/server.php?show=ConWebDoc.5912http//www.plannerlife.info/2007/07/what-is-earned-value.htmlhttp//evm.nasa.gov/tutoriala.htmlEarned Value Management (EVM) Tutorialhttp//glossary.tenrox.com/earned-value.htmhttp//support.sas.com/documentation/cdl/en/orpmug/59678/HTML/default/cpm_sect42.htmhttp//www.ombudsman.forces.gc.ca/rep-rap/sr-rs/sf-ts/rep-rap-02-eng.asphttp//www.freepatentsonline.com/6006060.htmlhttp//www.pmi.org/Search/GenieRedirector.aspx?genieID=6685iss=1http//www.pmi-cpm.org/pages/events/IPM06/Practice_Symposia.htmlhttp//edgar.sec.gov/about/oig/audit/337fin.htmhttp//www.scribd.com/doc/4614499/Project-Performance-Measurementhttp//www.acq.osd.mil/pm/faqs/evbasics.htmhttp//www.baz.com/kjordan/swse625/htm/tp-py.htmhttp//www.parm.com/index.php?option=com_contenttask=viewid=177Itemid=35http//www.dcma.mil/communicator/spring_summer04/evm.cfmhttp//guidebook.dcma.mil/79/evhelp/what.htm