Earned Value and Contingency

April was a crazy month for me, as I was completing two projects and getting ready for a national ballroom dance competition in LA. Now that the madness is over, blogging can regain its spot under the sun again.

Rather than talking about something as abstract as my thoughts on Harvard Business Review, I would like to add to the subject of Earned Value today.

When you plan a project, you always account for some sort of a contingency or buffer (if you don't, you should!). Depending on the complexity and size of the project and the specific approach chosen by the project manager, the contingency could be applied to the entire project or could be calculated against individual summary tasks or even work packages. Either way, at any moment in time you should be able to calculate Earned and Planned value pre- and post-contingency.

All of the Earned Value charts I've shared so far showed a single Earned Value line. In this post, I would like to show you a chart that shows the pre- and post-contingency. Why is this important for both the Project Manager and the client? The contingency is essentially an indicator of how much risk the project can handle. For example, if your pre-contingency Planned Value is $120,000 and the post-contingency Planned Value is $150,000, the $30K delta is what you count on to address any expected or unexpected risks or changes that come up throughout the course of the project. The closer your Actual Cost to the Pre-Contingency Planned Value, the greater you ability to handle risk and changes. As you move closer to the Post-Contingency, you are using up your reserve, and your position weakens.

Showing both pre- and post-contingency Planned Value lines on your reporting chart is a quick way to relay the project risk to the stakeholders.

Here's how you can do this using the Excel spreadsheet I showed you in previous posts.

1. Rather than having a single Earned Value row for the chart data, replace them with a Pre-Contingency and Post-Contingency Earned Value rows:

2. Add the Pre- and Post-Contingency lines to the chart:

Please note that this version of the chart no longer has the Budget line. I am still deciding whether it is useful or not so please feel free to comment on it.

3. Track your actual costs as usual. Ideally, they should be between the blue and the green lines:

Earned Value as a Survival Technique for T&M and Maintenance Projects

The Earned Value calculations rely on the assumption that you have created a Work Breakdown Structure and estimated the work for each work package. Works great when you know what you are going to be doing, but what about T&M or maintenance projects with requirements and tasks to be defined as the project progresses? Is Earned Value dead for those? Not so fast. Keep on reading, and you will learn how you can proactively identify budget issues when the WBS doesn't exist.

If you've watched one of my favorite TV shows, Survivorman, you know how it starts for Les Stroud. He looks at scarce things he has available and talks about what he can use them for in a survival situation. In our less dramatic situation, we normally have the following things available to us:

1. Budget. Even though the project may be T&M, more often than not you have the target in front of you.
   


2. Timeline. Even though you don't know what exactly you'll be doing, you should at least know how long the project will last.

This gives us plenty to work with. Below I'll show you two examples of how I survive with only these 2 numbers handy.

Example I - The client told you how much money they have to spend

For the sake of this example, let's say that your budget is $40,000, and the duration of the contract is 20 weeks. You will be providing status updates every other week so your reporting period is 2 weeks. This is a site maintenance contract so you have no clue as to what might come your way.

Step 1 - Calculate the average projected burn per reporting period.

Average Project Burn = Total Budget / # of reporting periods

In our example, Average Project Burn = $4,000

Step 2 - Put these numbers into a spreadsheet.



Step 3 - Build a chart based on this data.



If you need assistance with building this chart, you can refer to one of my earlier posts.

Step 4 - Start tracking.

At the end of every reporting period, I update the spreadsheet with the actual cost incurred during that period. After a few updates, your chart might look as follows:



This is important to you, because the chart provides you the visibility into a potential budget overrun way before the overrun becomes a problem. In this example, you see that for the last 3 periods, the project's actual burn consistenly exceeded the proejcted spend, and if all things stay equal, the project will end up costing more money than originally expected. If you include this chart into your status report, the client will become aware the issue now, with enough time for you and them to figure out an approach to either curtail the scope, improve the team's productivity, or increase the budget. Happy client = No suprises

Example II - Your estimates are resource- and time-based

In this example, you don't know the scope either, but you estimate the project spend based on the expected utilization, rates, and number of resources. So instead of dividing your total budget by the number of reporting periods, you estimate the spend using the following formula:

Spend for Period 1 = # of hours for Resource 1 * Resource 1's rate + # of hours for Resource 2 * Resource 2's rate + ....

To create a chart for this example, you can follow the technique I described in the earlier post and just replace the WBS work packages with reporting periods:

How I Calculate Earned Value for Status Reporting

If you've seen my earlier post on Status reports, I showed you an Earned Value chart that I include on my status reports. This post talks about how I create that chart.

Step 1

Create you work breakdown structure. I bet this term was made up by an engineer. I have a lot of respect for engineers - after inventing the wheel back in the old days, they did many other good things for humanity; some of them invented the wheel again, while others built machines, computers, bridges, and space aircraft. The fella who invented the term definitely falls in the latter category; however, he must have slept through his arts classes during his undergrad, because otherwise he would've come up with a sexier or at least a more common name for a list of work packages. Now, work package is a unique animal in its own class. I am sure the fella's English teacher cried when he heard the term. Don't get me wrong - I've tried hard to use the term, but I keep getting blank looks from everybody on it. Even some PMs! (different story here). I stick to Task. It is something people understand, and everybody knows what a task is.

So, in plain English, get a list of what you are going to do on your project and break high-level tasks into more granular tasks as needed.

Step 2

Enter the tasks into MS Project, Excel, some fancy EPM software, or carve them in stone (the transfer to Excel later on will require some retyping on this one). I use Excel because it is easy, and I know a lot of really good PMs who use Excel.

You'll want to have your tasks as row headings; x-axis is where you'd want to put your time periods (I wanted to say dates, but them remembered that that's part of my dating blog - don't mix pleasure with business). It'll looks something like this:

Step 3

Make estimates. Earned value requires that you convince yourself that you know how much effort or money each task will take. There is a whole bunch of estimating techniques out there so making good estimates is a different topic. However, if there was only one thing you should know about estimating is that you need to get the numbers from people who will actually be doing the work. There are exceptions to this rule, but I would say it stands in 80% of the cases.

Once you make the estimates, you can calculate the budget for each task and add this information to the spreadsheet:

Step 4

Take a break - you deserve it.

Step 5

Add formulas to calculate the Earned Value for every period as the project progresses. The formula I am using in Excel is SUMPRODUCT - it allows you to multiple the values in one column by corresponding values in another column and then calculate the total sum. You'll also notice I use a formula for calculating the ending date of the time periods.

If you were doing these calculations on paper, the Total Earned Value for a given period would look as follows:

(Task 1 % Complete * Task 1 Budget) + ( Task 2 % Complete * Task 2 Budget) + ...

The % complete for every task goes into the cross cells of the table. I use the 0%-50%-100% approach for % complete, because for all intensive purposes, most tasks have little value until they are completed, and calculating a more accurate number in the middle is not worth the effort, unless you have some automated time tracking software.

Step 6

Add rows for Actual Cost and Budget. These will be used on the Earned Value chart so you can visually compare your actual cost with earned value and have a budget line. You already know the budget so you can enter it into the Budget line:

Step 7

Create a chart. I use a Line with Markers chart, but feel free to be more creative. Just remember that this chart type should not be cumulative. For the data, I use the Earned Value, Actual Cost, and Budget rows, and for the X-axis labels, I use the Date row.

Some formatting tips:

1. Pick custom colors for the trend lines and marker, as the default palette doesn't work so well.
2. You might want to tweak the increment on the Y- and/or X-axis to optimize the chart's look.

Step 8

Start tracking. Every week, I update the % complete values for each task, enter the actual cost incurred during that week, and Excel does the rest for me:

In addition to the chart, my status report includes a copy of the table with % complete numbers into my status report. This spares me the effort of writing a section on the work completed and planned.

Simple and easy, kids!

Using charts in status reports

A few months ago, I started including an Earned Value chart into my status report and have had very positive feedback about it from every single client. People love it, as charts can provide a quick visual representation of where the project is at a given point of time and can also show a trend.




The chart I am using is very straightforward and looks something like this:


















The chart compares the actual spend on the project vs. the Earned Value - the budgeted cost of the work completed.

In the example above, you see that the Earned Value consistently exceeded the actual cost. My job as a PM is to be able to explain as to what's causing the difference, as many factors are in play here. Here are some examples:

1. We may have overestimated the effort and/or scope. On a fixed price project, that's actually your profit. On T&M engagements, this creates an additional buffer for you. This actually happened on one of my projects; we communicated the delta to the client on a weekly basis and were able to use the buffer to significantly enhance the visual design of the application.
2. We used a cheaper resource to complete the work. When a cheaper resource is used, and your cost is lower, it is possible that the quality of work is lower too. If this is the reason for the delta, it is obviously something the client needs to be aware of and agree to.

I create these charts in Excel. MS Project could work too, but I find Excel easier to deal with; it also gives me more options visually. You can build your own template for this type of chart in 15 minutes, and then for every project, you just plug in your WBS and update the timeline.