One of the difficult things for Project Managers and students attending PMP® exam preparation courses to understand is Earned Value Management. While the mathematics involved is pretty basic, getting a conceptual understanding is hard. This is because we seem to be using one measure – Earned Value – to track both time (schedule) and cost (budget). However, realizing that, in business, time is money, helps a lot.
On this page:
- Equating Time and Cost
- Identifying Deviations and Revising Estimates
- The To-Complete Performance Index (TCPI)
- Interpreting Performance Indices
- Velopi’s Project Management Courses
Equating Time and Cost
For instance, suppose we are paying a contractor €50 an hour and we want this person to perform a specific task. The Project Manager agrees an estimated duration for this task of forty hours. This means that the Planned Value for this particular task is forty hours. However, another way of looking at this is that the Planned Value is worth €2,000 (€50 x 40).
So the contractor comes in on Monday morning and starts work. On Friday evening, s/he presents the finished product and everyone is happy. The Project Manager records an Earned Value equal to the Planned Value of €2,000. However, when the Project Manager asks the contractor how many hours went into completing the task, the contractor reports that s/he actually spent 10 hours a day working on this. In other words, the Actual Cost of this work is 50 hours, or €2,500. In other words, the task was completed on schedule but was actually 25% over budget.
Identifying Deviations and Revising Estimates
In this way, Project Managers can identify situations where estimates are off, but where the schedule is unaffected. If this is happening consistently, the Project Manager should revise the estimates, as meeting the schedule is putting the project team members under undue pressure.
Being able to see how a project is fairing against both schedule and budget is extremely helpful to a Project Manager. However, when reporting drifts from the plan, the Project Manager needs to present senior management with hard-hitting figures, especially if s/he wants to request extra resources for the remainder of the project.
The To-Complete Performance Index (TCPI)
Earned Value Management provides some interesting forecasting tools, including one that is so significant, the Guide to the Project Management Body of Knowledge (PMBOK® Guide) lists it separately from “Forecasting” in the Control Costs list of tools and techniques. I’m referring here to the To-Complete Performance Index.
Basic Earned Value Management introduced us to the Schedule Performance Index (Earned Value / Planning Value) and the Cost Performance Index (Earned Value / Actual Cost), but the To-Complete Performance Index (TCPI) tells us the rate of work we have to achieve if we are going to meet our original budget figures. Essentially the TCPI is:
The work that remains to be done is the original total amount of work less the work that has been done so far. The total amount of work is known as the BAC (Budget at Completion). This is not a very helpful name, so it might be better to consider this the original budget. Remember that time is money, so we can include the number of hours the team is expected to work multiplied by their fully-costed hourly rates in this figure. So the work remaining is calculated by subtracting the current Earned Value from the original budget (BAC – EV).
The remaining funds can be slightly more difficult to calculate. If our original budget is still viable – i.e. we have not had to re-baseline our schedule or budget – then the funds remaining are calculated by subtracting the Actual Cost from the original budget (BAC – AC). However, if a new budget (or EAC – Estimate at Completion) is being used, then you should use this in calculating the funds remaining (EAC – AC).
Interpreting Performance Indices
While tracking the project, Project Managers like to see their cost and schedule performance indices at 1 or above. A CPI (Cost Performance Index) below 1 means that we are over budget; an SPI (Schedule Performance Index) below 1 means we are behind schedule. In contrast, Project Managers want to see the TCPI at or below one. If the TCPI is above one, we basically have more work to do than we have budgeted for.
It is important to understand why a TCPI is greater than one. Have you been overspending or are you behind schedule? The CPI and TPI figures will show this. However, Project Managers may have difficulty highlighting schedule issues, particularly if the team members are not paid overtime. If they have to work longer hours to retrieve the schedule, their extra effort will not appear as an extra cost. For this reason, Project Managers should consider separating the schedule and cost calculations. The Earned Value, Planned Value and Actual Cost for the schedule should be measured in hours, while the costing information should track expenses planned in the budget, in monetary units.