"Those who forget the lessons of history are doomed to repeat it." - George Santayana
Many organizations execute projects that fail because they look at the wrong data indicators and then are doomed to repeat their failures. This happens because if they retain any historical data, it is usually the same data that led them to their poor decisions in the first place. It is like getting wrong directions from Mapquest and, even after getting lost, using them every time you go to that same location. What data should organizations use? Which indicators will aid the project manager in executing the project and also provide an historical record of past performance?
There is a subset of project management called earned value, which was developed by the U.S. Department of Defense in the 1960s. It is considered to be the best method for tracking and controlling the performance of a project. Earned value provides leading indicators of future problems as well as the magnitude and significance of performance issues in current and past periods. Project managers who use earned value are able to see trends over time and the impacts of their decisions on project cost, schedule and risk. This method provides project managers with rich historical information, detailed current information and accurate forecasting information to enable better decision-making and increase project success. In addition, specific relative indicators can be used across projects to rank the performance of projects against each other, regardless of the projects' size or duration.
The premise for earned value is simple: compare planned spend and actual spend to the actual value of what has been produced. While simple, it is counter to the way many organizations track their projects. Let's consider a basic example.
You are building a million-dollar home. Because the contractor is billing you monthly, you tell him that you want to see a monthly budget in advance so you can see if you are going over budget. He provides you with the 10-month budget in Figure 1.
Figure 1: 10-Month Budget
Every month he sends an invoice. You compare the invoices to the budget (see Figure 2). How are you doing? Are you on budget? On schedule? The reality is, you don't know. Until you visit the construction site and see what was actually completed and the quality of the work, these numbers are meaningless. Comparing planned to actual costs is useful for cash flow, but not for measuring or forecasting project performance.
Figure 2: Monthly Invoices Compared to 10-Month Budget
Using this method of traditional accounting, the first time you will see that you are over budget or late is not until you are already late, over budget and beyond the ability to recover (see Figure 3).
Figure 3: Late and Over Budget
Earned value would have provided the early warning indicator that there was a problem. With an earned value method, the original budget would be created based on the costs of materials and labor for certain activities and phases of the project. The estimate for each major activity would then be baselined and become the budget or assigned value for that piece of the project. When that activity is completed, the contractor will earn the agreed-upon value of that item. If the contractor has not started, he receives no value for that item. If he is partially complete with the item, he will receive part of the item's value. Applying this method can produce a view into the project's performance as shown in Figure 4, which reveals that the contractor is running about 10 percent behind schedule and about 10 percent over budget. By comparing earned to budget, we see schedule information and that the contractor is not producing as much as planned. By comparing earned to actual, we see that the contractor is spending $100k to produce $90k worth of house. If we need to spend a dollar to earn 90 cents, we need to spend more than a dollar to earn a dollar. At this rate, it will cost us more than our million to build the million-dollar home - about 10 percent more.
Figure 4: Applying Earned Value to a Budget
The ability to compare planned and actual spend to the value of what was produced is critical for determining the performance of an individual project. By dividing these numbers, we get relative indices called cost performance index (CPI = earned value/actual costs) and schedule performance index (SPI = earned value/planned value). These indices provide simple yet powerful trending information and can guide the project manager in decision-making and analysis.
With SPI and CPI, any value less than one is behind schedule or over budget. The degree to which the value is below one is proportional to the project's budget and schedule variance. Therefore, an SPI of 0.8 is worse than an SPI of 0.9. Similarly, an SPI or CPI greater than one is good, and the greater the value above one, the better.
Control limits can be set to define acceptable and unacceptable performance ranges. Triggers can be established at these control limits to execute specific management interventions. Managers can also see the effects of corrective actions or recovery efforts and adjust their strategies accordingly. This helps managers avoid micromanaging and taking actions when the project is performing at an acceptable level. It prevents managers from overreacting to minor variances that are still within the control limits. Last, by providing this performance feedback and trending information, it keeps managers from changing strategies that are working when they see the indices begin to trend back up.
Not only can this trending information provide vital, real-time decision support, but it is also valuable forensic information when doing a postmortem after the project is completed or terminated. The EKG-like chart shown in Figure 5 provides a history that can be traced throughout the life of the project. Because the SPI and CPI are calculated based on the planned and actual schedule, we can see the exact moment in the CPI chart that our cost performance begins to dip and correlate that to the specific tasks that were being performed at that time - the ones that were going over budget, who was working on those tasks, the issues that were open/active on the issues log, management actions that were being taken as recorded in the project status reports, changes that were being proposed or implemented throughout the change control process as documented in the change control logs. Reviewing project history in this format can provide valuable lessons for current and future projects.
Figure 5: CPI and SPI Reveal Trends Over Time
Lastly, SPI and CPI are relative indicators, which make them the perfect metrics to compare performance across projects regardless of project size. If two projects are both over budget by $100k, the absolute dollar value of that variance does not indicate the severity and impact of that overage on each project. If one was a million-dollar project and the other a $200k project, one would be more significant than the other (see Figure 6). Using CPI would demonstrate the relative severity across these two projects and alert management to take immediate action.
Figure 6: CPI Will Vary Based on Project Size
If you had the ability to see a time-phased record of the past performance of your project, determine the true health of your project as of today, accurately forecast projected schedule and cost overruns, see the effectiveness of your management decisions on project performance, compare your project's performance to others and analyze the successes and failures of past projects, all by calculating two indices and watching one graph, you would, wouldn't you? This is project nirvana for most organizations, yet many never get to this point. Fear of change and visibility into real project performance can be issues. Lack of training and consistent process may also impact adoption. Lack of tools and systems to manage and report the data can be another stumbling block.
Implementing earned value management requires an integrated approach for re-engineering processes, training staff and deploying new technology. Yet this investment is small compared to the savings that can be gained from the increased intelligence and control over projects.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access