EVM Example Part 3 - Forecasting ETC and EAC

Now, let's find the ETC and EAC.

From part 1:
PV = $450,000 USD
EV = $420,000 USD
AC = $415,000 USD
BAC = $2,000,000 USD

From part 2:
CV = $5,000 USD
CPI = 1.01
SV = -$30,000 USD
SPI = 0.93


We'll use the formula for ETC for typical variance, meaning that we expect progress to continue the way it has in the past.

ETC = (BAC - EV) / CPI
ETC = ($2,000,000 USD - $420,000 USD) / 1.01
ETC = $1,564,356 USD

Now for the final cost estimate based on our EVM metrics:

EAC = AC + ETC
EAC = $415,000 USD + $1,564,356 USD = $1,979,356 USD

So according to our EVM forecast, this project should come in around $20,000 under budget.

What about the schedule? I have never used EVM in practice. I can see it's merit in terms of cost control especially. For schedule however, I think I would use the SPI and SV merely as extra information when controlling the schedule. My first focus would be the critical path, and an SPI lower than 1 would tell me that perhaps I need to start looking at other tasks as well, before they become risks to the flow of the critical path. I'm sure you could take your 10 months and divide it by 0.93 to get around 10.75 months as your projected TAC (Time At Completion, did I just make that up?), but I wouldn't use that as a reliable estimate of completion time. I'm sure there are more advanced EVM metrics geared towards schedule control. If they don't take the critical path into consideration though, they are treating all tasks as equal, which they are not in terms of schedule.

Go Back: EVM Example Part 2 - Finding CV, SV, CPI, and SPI

EVM Example Part 2 - Finding CV, SV, CPI, and SPI

Next, you need to find your CV, SV, CPI, and SPI.

From part 1:
PV = $450,000 USD
EV = $420,000 USD
AC = $415,000 USD


Just plug in the numbers

CV = EV - AC
CV = $420,000 USD - $415,000 USD = $5,000 USD

CPI = EV / AC
CPI = $420,000 USD / $415,000 USD = 1.01

SV = EV - PV
CV = $420,000 USD - $450,000 USD = -$30,000 USD

SPI = EV / PV
CV = $420,000 USD - $450,000 USD = 0.93

Go Back: EVM Example Part 1 - Finding PV, EV, and AC
Up Next: EVM Example Part 3 - Forecasting ETC and EAC

EVM Example Part 1 - Finding PV, EV, and AC

You are the project manager working on building the first prototype of a new whiz-bang gadget. You are about 2 months into the project, which was projected to be 10 months long in the beginning, with a budget of $2,000,000 USD.

Let's take a look at your project with EVM with the goal of making a forecast as to when the project will be done and what the total cost will be.

To start with, you take a look at your project schedule. You count the tasks that should have been done at this time, which comes to 25. Add up the total budgeted cost for those 25 work packages, and you get $450,000 USD. What is your PV, or BCWS?

PV = $450,000 USD.

Now, you see that you are actually finished with only 23 work packages. (Personally, I wouldn't give any earned value unless a task is fully finished) Add up the total budgeted cost for those 23 work packages you actually did, and you get $420,000 USD. What is your EV, or BCWP?

EV = $420,000 USD.

Finally, add up the actual cost for those 23 work packages you actually did, and you get $415,000 USD. What is your AC, or ACWP?

AC = $415,000 USD.

Go Back: EVM Forecasting
Up Next: EVM Example Part 2 - Finding CV, SV, CPI, and SPI

EVM Forecasting

EVM is meant to be used during project execution to monitor progress and hopefully find problems early so that adjustments can be made. Forecasting is an important part of finding out how big of a deal your CPI or SPI is at this point in the project.

We'll use the same numbers from the last post, so:

• PV = $100k
• EV = $90k
• AC = $85k
• CPI = 1.06
• SPI = 0.90
  

BAC - Budget at Completion

• This is the total planned budget for the project (no EVM calculations)
• Let's say we estimated the total cost for this project to be $200k.
  

ETC - Estimate To Complete

• How much is it going to cost to finish this project?
  
• 3 ways to get this (choose the best one for your situation):
• New estimate - go and re-estimate the work remaining. Most accurate, most time-consuming.
• EVM based on atypical variances - past performance is expected to change, use ETC = BAC - EV (or ETC = BAC - BCWP) $200k - $90k = $110k
• EVM based on typical variance - past performance is expected to continue, use ETC = (BAC - EV) / CPI (or ETC = (BAC - BCWP) / CPI) ($200k - $90k) / 1.06 = $103.8k

EAC - Estimate At Completion

• This is simply what the total project is expected to cost given what you know right now
• Use the ETC from whatever method you chose to use.
• EAC = AC + ETC (or EAC = ACWP + ETC)
• So for atypical, we would say $85k + $110k = $195k
• For typical, we would say $85k + $103.8k = $188.8k

Go Back: EVM Variances and Indexes
Up Next: EVM Example Part 1 - Finding PV, EV, and AC

EVM Variances and Indexes

I'd like to first discuss calculating variances and indexes from those fundamental EVM numbers I discussed in my last post.

Variances

Variances are always expressed in currency. They are just what they sound like, the difference between where you are at and where you had planned to be.

CV - Cost Variance

• CV = EV - AC (or CV = BCWP - ACWP)
• Tasks 1-20 are done. You planned on that costing $90,000, but it actually cost you $85,000. $90k - $85k = $5k
  

SV - Schedule Variance

• SV = EV - PV (or SV = BCWP - BCWS)
• Tasks 1-20 are done, but you planned on getting 1-23 done. 1-20 was planned to be $90,000, and 1-23 was planned to be $100,000. $90k - $100k = -$10k

Indexes

Indexes are used to measure performance on a ratio basis which could actually be compared across projects regardless of their comparative sizes. If you are working perfectly to plan, your indexes will both be 1.00. Greater than 1.00 means you are doing better than planned, less than 1.00 means you are doing worse than planned.

CPI - Cost Performance Index

• CPI = EV / AC (or CPI = BCWP/ACWP)
• Using the numbers above, $90k / $85 = 1.06

SPI - Schedule Performance Index

• SPI = EV / PV (or SPI = BCWP / BCWS)
• Using the numbers above, $90k / $100k = 0.90

So, looking at these variances and indexes, you can see in the example above that we are behind schedule, although it looks like we've managed to keep our costs down so we are actually below budget too.

Go Back: EVM Basics
Next up: EVM Forecasting

EVM Basics

I would like to start my foray into EVM by doing some definitions and basic formulas. I'll give my paraphrased descriptions as to what's what and why.

No formulas today, just the 3 core inputs necessary to do all the EVM calculations we'll get to later.


PV - Planned Value AKA BCWS - Budgeted Cost of Work Scheduled

• This is a time-specific estimate only. What was planned to be spent at this time if the schedule was perfect?

EV - Earned Value AKA BCWP - Budgeted Cost of Work Performed

• This is a task-specific estimate only. What was planned to be spent on tasks actually completed right now?

AC - Actual Cost AKA ACWP - Actual Cost of Work Performed

• This is reality. What did you actually spend? Make sure the method for auditing cost matches up with how you made the original plans (did you include indirect costs, or just direct, etc?)

Go Back: Itchy for Earned Value
Next up: EVM Variances and Indexes

Itchy for Earned Value

When I originally started this blog, it was because I wanted to explore ways of making Earned Value Management (EVM) work with Critical Chain project management. I still believe that is a worthwhile goal. I have been doing a lot of brushing up on EVM lately, and am ready to dig in again. Since I am already very familiar with the theory behind Critical Chain and buffer management, I am going to focus on EVM for awhile and then try to meld Simple EVM in the terms described by Joel Koppleman and Quentin Flemming to Critical Chain.

Why EVM?

EVM at it's core is a way to measure performance in terms of cost, schedule, and technical performance. One of the key benefits I have heard cited regularly is that with EVM, you can tell early on whether or not a project is at risk. Quentin Flemming said in an interview on The PM Podcast that there is strong evidence that poor EVM performance at the 20% done mark in a project is very unlikely to be made up unless more resources are added, more funds are appropriated, or the scope gets trimmed.

Another benefit of EVM is objectivity. It measures performance compared with an original baseline schedule and budget. The performance indexes in EVM allow comparisons between projects even when their actual budgets and schedules are very different. You can compare a 6 month project to a 6 year project in the same terms. Because of the objective and universal measure, it also can help make project performance visible to all levels of stakeholders.

Why Not EVM?

There are a few criticisms of EVM I have heard that I would like to discuss. First, full-blown EVM is simply too much overhead for small projects. Simple EVM was introduced for this very reason, and I believe it could be a suitable replacement for smaller projects.

Another thing to keep in mind is that EVM does not take the critical path into consideration. It treats all work equally, which works really well for cost performance but not so well for schedule performance. At first blush, it seems to me that in addition to the SPI (schedule performance index) which I will detail in later posts, there should be an index that tracks progress along the critical path. This could be done by simply tracking schedule performance on the critical path against the original baseline. In this way, the SPI relates more to the amount of work done than the timeliness of the project. They are different but related ways of looking at project schedule performance.

Up Next: EVM Basics

Management Dilemmas - Part Two

I've made a very little amount of headway on the book I'm reading now, Management Dilemmas: The Theory of Constraints Approach to Problem Identification and Solutions. Time has been tight with work, school, and family but I'm trudging through slowly.


The case studies continued in the chapters I've read since the first post about this book. One concerns a situation with a purchasing manager who is trying to deal with a complete product change that has an uncertain implementation date. There are constraints around how much can/should be ordered, and the premiums required for smaller batches. The problem here is to not fall short of materials for production of the old product, and at the same time not have a huge amount of waste after the change, because all the existing materials will be obsolete when the change occurs. Upper management is incenting conflicting actions, and traditionally the purchasing manager has to try and 'balance' them. I like the TOC approach.

Another chapter goes into a scenario where a company founder split his company into profit centers in order to incent his managers to perform. The case study analyzes the situation and some of the resulting problems that have come to light over a period of two years. The plants have fixed transfer costs built into their outputs when they are provided to the other plants, and again this is a question of whether or not the right things are being incented, in the right way. The TOC solution presented resolves the conflict and acheives the founder's original vision.

I will do another post on this book when I've completed it. Cheers!

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Management Dilemmas - Part One

I'm about half way through the book I'm reading now, Management Dilemmas: The Theory of Constraints Approach to Problem Identification and Solutions. It was difficult to get into it at first, perhaps because the author made an appropriate introductory section going into the conceptual aspects of the TOC thinking processes, the Throughput world versus the Cost world, etc. which I've already read extensively about. Overall, good content in the beginning but a little slow and university textbook-like reading.

Then it gets good.

The author continues with several case studies to highlight various management problems in different industries, and very different causes and circumstances. In the first section a case study is used too, but plays a minor role in the content. These later chapters dive into the scenarios presented and I'm finding myself quite engaged with them. It's as if you are playing the part of a consultant, and need to correctly diagnose the core problems that are causing the evident symptoms. It's like detective work and I'm working through my own TOC diagrams to practice after I read the case, and see if I come up with the answer the author does. My diagnoses have been similar thus far.

The case studies so far have included problems in a hotel, office supply company, a high-end desk lamp manufacturer, the Army's Central Communications Laboratory, and a hospital. It's been great for showing examples of using TOC to solve problems in this eclectic mix of situations, and giving me practice at the TOC concepts. I hope as I internalize more about TOC, CCPM, and EVM I will be better suited to figure out the CCEVM solution.

I will do another post on this book when I've completed it. Cheers!

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CCEVM Evaporating Cloud Diagram

A Goldratt technique came in handy to map out where I see the conflict between CCPM and EVM that I referred to in my last post. Please excuse it's sloppiness, I will try to make a cleaner computer-generated version later on, but I think I may be refining this later on anyway.

I've never seen an evaporating cloud with more than 1 requirement for each of the prerequisites, but I found it necessary to have a requirement which stems from both CCPM and EVM. The conflict indicated between employing Critical Chain and EVM stems from different behaviors being driven by the two. Critical Chain supports behaviors that focus on efficiency with tasks on the Critical Chain , thus improving the outcome of the project. EVM supports behaviors that make it appear overall cost efficiencies are good, even if those efficiencies are being achieved on tasks that aren't critical to the completion time of the project. Project managers might decide to work on some easier non-critical tasks if their EVM is going to fall short and get a short-term EVM win, but if that happens it throws EVM's predictive power regarding schedule out the window.



















The resulting direction from this is to modify the budgeting and cost control tools in the Critical Chain body of knowledge. It needs to use buffer management methods for cost, to control the project that is implemented in such a way to make it compatible with existing EVM metrics. There would be a single project cost buffer which is already part of the CCBOK. Cost buffer management would be used for controlling project costs, in addition to an accurate EVM translation based on cost buffer utilization compared to planned utilization.

Note: from a cost perspective, all tasks are on the Cost Critical Chain (CCC) because cost over run in any task will make the project over budget unless other tasks have under runs. It makes no difference if they are on the schedule's critical chain. That's why there's only 1 cost buffer, the project cost buffer.

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Critical Chain Earned Value Management (CCEVM)

I had a discussion tonight with my great friend Chad that got my brain spinning again about Critical Chain and EVM. My notes are not available right now for me to reference, but I wanted to throw out some of the major concepts and challenges I've run into thus far.

First, the question is why bother? Well, I really believe in Critical Chain and TOC concepts, but I think there's too much entrenched thinking out there for it to be adopted by any organizations other than those who are very innovative and have a culture that embraces positive change. For instance, I've heard that most government contracts require EVM reporting, and many private organizations also require it. That kills a lot of possible change to CCPM right there.

I believe that most CCPM enthusiasts are trying to introduce it as necessitating the discard of existing paradigms completely and immediately. (EVM for example) Such a dramatic shift is next to impossible for any organization with a critical mass of bureaucracy, and subsequent lack of innovative capacity. I suggest that a more gradual shift for these entities is the appropriate course of action. I'm not saying it can't be done the other way, I know of several examples where it seems to me the entity was very bureaucratic, but since I don't have personal experience with those companies/agencies I can only speculate.

My goal is to figure out a way to use CCPM to run a project while still using EVM metrics in a useful way, without having to go back and re-baseline the schedule using a traditional critical path approach. Some software packages do exactly this, but I would argue the results of this EVM analysis are not linked to the way the project is managed. The pitfall here is that if traditional EVM is the reporting framework the project is measured on, it will become the driver of how the project is managed. My problem with that is that a project team can work on non-critical tasks when they really should be focusing on critical chain tasks instead, just so they can meet their EVM numbers and pretend they are on schedule. This directly conflicts with the whole concept of CCPM.

So, some rough requirements off the top of my head:
1. Use CCPM methods to schedule and manage the project
2. Modify CCPM methods to incorporate cost buffer management.
3. Use CCPM cost and schedule buffer utilization to formulate meaningful metrics for schedule and cost performance that are EVM in language and intent, and tied directly to Critical Path performance.
4. Ensure CCEVM reporting is useful not only for external project stakeholders, but also adds clear value for the project manager and team. It's crucial that CCEVM makes sense for all parties.
5. CCEVM must be formulated in such a way that organizations who require EVM on projects are able to accept CCEVM metrics after a reasonable evaluation effort.

Some of the paths I can already see:
1. I've created some formulas to calculate feeder and project buffer sizes for schedule and cost based on some specific new information that will be required from the risk management phase.
2. I can see how adding some more statistical information to the CCEVM metrics will help make the data more useful, showing how the aggregate uncertainty decreases as a project progresses.
3. Modification of the traditional CCPM fever chart analysis to incorporate the aggregate uncertainty for various stages throughout a project.

Last but not least, I need to figure out a way to do all this without creating analysis paralysis and having to hire someone extra just to sort all this out!!!

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EVM and Critical Chain Presentation courtesy of Larry Leach

I contacted Larry Leach of www.advanced-projects.com to ask his permission to post a great presentation he did at a NASA project management conference in 2005. He graciously gave his blessing. If you don't know Larry's work, he wrote a book with great reviews called Critical Chain Project Management. I haven't read it yet but hope to soon.


The presentation is regarding how EVM and Critical Chain Project Management (CCPM) can be complimentary, and gives pros/cons of both, etc.

Check it out here.

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Critical Chain EVM?

A while back I sent in a question to The Project Management Podcast and Controlling Chaos regarding how Critical Chain scheduling and Earned Value Management had ever been used together. Cornelius brought on Allan Elder in Episode 57 of the PM Podcast and addressed the question, however the answer was as I suspected, and I wasn't happy with it. Basically using them together is really just keeping a different set of books, one to manage the project (CC buffer management) and one to report the project to external stakeholders who want to see EVM metrics.

I've started throwing some ideas down on paper regarding how the methodology I like (Critical Chain) can be used in a more streamlined way with earned value. I've got a lot of research left to do on both in order to get something somewhat coherent, but I think I've got the basic concept down and I've even got some formulas already. It's basically a way to use the Critical Chain buffer utilization to directly yield EVM metrics without having to go back and re-baseline the schedule in the traditional Critical Path format. From what I understand the software packages that do this conversion go about it that way. I really don't know if those outputs are useful or not however. A Critical Chain project is run in a fundamentally different way than a traditional critical path project, and if you don't take those differences into account the EVM outputs won't be very useful.

My goal is to provide a method to calculate real-time EVM metrics in a way that is useful to both external stakeholders and the project team. EVM is so entrenched, and one of the major reasons (in my opinion) that Critical Chain meets with resistance is because EVM doesn't make any sense with it. Automatically, you're left with a huge percentage of projects that can't use Critical Chain.

As I research and come up with new ideas, I'll keep this blog updated.

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