Cost Management - Cost Control

The primary purpose of the Cost Control process is to influence the factors that create cost variances and to control changes to the project budget.

One of the most common problems in project management is overrunning the project budget. There are a number of plausible explanations for this. People may be more focused on the technology and making sure that the project requirements are met, literally at the expense of the budget. In other situations, the need to define and observe a budget constraint is not recognized; therefore cost performance is running "open loop," until the sponsor or customer calls attention to the problem.

Project Cost Control includes:

• Influencing the factors that create changes to the cost baseline;
• Ensuring that requested changes are agreed upon;
• Managing the actual changes when they occur;
• Assuring that potential cost overruns do not exceed the authorized funding for a particular phase and the total funding for the project;
• Monitoring cost performance to detect and understand variances from the cost baseline
• Recording all appropriate changes accurately against the cost baseline;  
• Preventing incorrect, inappropriate, or unapproved changes from being included in the reported cost or resource usage;
• Informing appropriate stakeholders of approved changes; and
• Acting to bring expected cost overruns within acceptable limits.

What information you need to implement cost control?

Cost Baseline

The cost baseline, also described as the time-phased budget or S-curve, was created in the Cost Budgeting process. Once established, the baseline serves as a constant reference for measuring and monitoring cost performance on the project.

Project Funding Requirements

Funding requirements are derived from the cost baseline. Fund flow should be positive; it should exceed the cost baseline in every period by an amount that will cover expenditures associated with both early progress and cost overruns. Funding occurs in incremental amounts. Each increment must be sufficient to cover all expenditures in every period between the posting of the first increment and the posting of the next increment.

Funding sources include payments from the customer, revenue from sales, loans from a bank, or appropriations from the organization's financial authority.

Performance Reports

Performance reports organize and summarize information gathered; present the results of any analysis performed; and provide information and the level of detail required by stakeholders.

Common performance report formats include:

• Bar charts;
• S-curves;
• Histograms; and
• Tables.

Performance reports generally should be short documents (one to two pages for a monthly report) that relate the relevant facts of the project performance. Although formats can vary significantly to address different stakeholder needs, many common elements are included in most performance reports; for example:

• Reporting period;
• Work accomplished in reporting period;
• Schedule and cost status and performance;
• Problems experienced or approaching;
• Corrective actions, or plans;
• Summary of accomplishments planned for the next reporting period; and
• Detailed quantitative reports, included as attachments (such as earned value analysis data).

Work Performance Information

Work performance information provides data on the status of project activities, for example, if project deliverables are not being completed on a timely basis and at or below the planned cost. Information includes, but is not limited to:

• Costs authorized and incurred;
• Estimates to complete the schedule activities;
• Activities completed or incomplete, or percent complete of the schedule activities; and
• Deliverables that have been completed and those not yet completed.

Approved Change Requests

Approved change requests from the Integrated Change Control process are documented, authorized changes that can modify terms of the contract, project scope, cost baseline, or cost management plan. Changes are usually implemented by the project team once they have been approved.

Project Management Plan

The project management plan is a document that specifies how the project is executed, monitored and controlled, and closed. The project management plan can be a summary level or detailed document and can contain one or more subsidiary plans or other components. The cost management plan component and other subsidiary plans are considered when performing the Cost Control process.

Cost Control Process

Cost Change Control System

A change control system is a formal documented process that describes when and how project documents may change. It describes the people who are authorized to make the changes and the paperwork needed to make the changes.

Assuming that a variance from the plan has been identified and a course of action has been determined, the change control system is employed to coordinate an integrated change to the project baseline.

Normally the change control system is a single, integrated mechanism for controlling changes. The cost element of that change control system should be just one additional aspect of the overall system. Details on controlling cost changes should be described in the project's cost management plan.

Performance Measurement Analysis

Performance measurement analysis is a mechanism for quantifying the current level of accomplishment of the project management plan. Any deviations from the plan (i.e., over or under budget) are to be reported as variances. Variances exceeding a prescribed threshold must be clearly identified and managed to reduce the impact to an acceptable level. The Earned Value Technique (EVT) is an example of a performance measurement technique, discussed further in its own section.

Forecasting

In assessing current project performance as well as the impact of known variances, forecasting is a technique for extrapolating current performance data to an estimate of future performance. In other words, will the project continue to operate at, under, or over budget and by how wide a variance? Forecasting is one of the functions performed by the EVMS.

Trend analysis is a forecasting technique that involves examining project results over time to determine if performance is improving or deteriorating.

Key functions of trend analysis include:

• Evaluating a project's results over a period of time;
• Identifying a pattern of performance; and
• Showing improvement, stabilization, or decline.

Proper trend analysis requires:

• A controlled baseline;
• Correct and timely data; and
• Comparison of recent and long-term performance.

Trend analysis looks at performance to date and identifies a pattern of results that indicates a trend. The trend is used to forecast future results.

Successful trend analysis depends on:

• Controlled Cost Baseline: The project manager must assess the actual spending and schedule performance against the planned spending during the same schedule period. Without a time-phased cost plan, the project manager cannot compare the burn rate to any comparable baseline;
• Data and timing: If cost and schedule data are based on vague estimates, the trend analysis will be equally vague. If performance reports are scheduled quarterly, they may not be frequent enough to measure trends unless the project is very long-term (several years); and
• Identified trend: The trend is the important element in trend analysis; it may indicate a a pattern toward satisfactory or unsatisfactory performance. The focus is on the long term. Often, project managers focus too much on the current data and immediate needs.

Project Performance Reviews

Project performance reviews are typically formal meetings held to assess the current status of the project in terms of scope, schedule, and budget. The completion of work should be reported with an assessment of the health of both the schedule and budget.

Performance reviews are usually used in conjunction with other performance reporting techniques. For example, the need for corrective and preventive action may be identified in the performance review through the review of the quantitative results from the EVMS. Discrete issues should be identified as part of an issue management process and new risks should also be identified.

Project Management Software

Project management software tools of various types are helpful in creating estimates, assembling budgets, and controlling cost performance. They range from spreadsheets and project scheduling tools to project management tool suites.

Project managers enter cost or labor rate data in the project management software, or into a spreadsheet, to manipulate variables in order to see the results of different options. Other, more advanced statistical analysis tools are also used in some cases.

Variance Management

The cost management plan as discussed previously should contain specific thresholds and descriptions of appropriate corrective actions to be used in response to budget variances.

For example, a relatively minor variance, such as less than 5%, should be reported and noted. The project manager should be aware of the reasons for the variance and should form a strategy for how best to deal with it.

As variances grow to a larger percentage of budget (perhaps 10%), formal reporting using the variance management system should be required. This will call for an analysis and a written corrective action plan.

If the control account variance continues to expand and does not respond to corrective action, it should be escalated to higher levels of attention in the organization. A formal system such as this minimizes surprises to the customer or to senior management. Also, it ensures that more senior management has the opportunity to assess the problem as early as possible.

 Conducting a Performance Measurement Analysis

The first step in performance measurement analysis is to ensure the completion of a project management plan and the establishment of a cost baseline. This baseline becomes known as the planned value (PV) of the project (and is the same as the previously mentioned S-curve). It is represented as a spending curve for each period of the project.

Periodically during execution of the project, usually monthly, but perhaps more frequently, the following steps are performed.

1. Collect performance reports from each control account manager. These should state which planned tasks for the reporting period have been completed.
2. Compute the value of these planned tasks. The total value of completed tasks is known as earned value (EV). These amounts are summed and compared to the planned value (PV).
3. Compute a schedule variance (SV) by subtracting PV from EV.
4. Collect actual cost performance from the finance team. They will calculate the actual cost by summing all paid invoices and labor sheets during the reporting period. This sum is called actual cost (AC).
5. Compute the cost variance (CV) by subtracting AC from EV.

The implementation of performance measurement analysis can generate some confusion, but given a well-defined process and a commitment to the goal of simplicity, it is possible to achieve a practical and quantitative method for measuring project performance.

Earned Value Management System (EVMS)

An EVMS is the most commonly used performance measurement technique for managing projects. An EVMS compares the schedule and cost information at a point in time and avoids using the project manager's subjective interpretation of data.

Earned Value Analysis

The EVMS is based on the technique referred to as earned value analysis, which integrates scope, cost (or resource), and schedule measurements to assess project performance. Earned value provides a determination of whether or not work is being completed as planned.

Earned value analysis is not new. The government has used it for decades in the formal Cost/Schedule Control System (C/SCS). In its current form, the government method describes thirty-five criteria to guide effective performance measurement, and requires formal certification.

Earned value analysis is now broadly accepted as an efficient, quantitative method for assessing project status. Current project management software tools include features that incorporate earned value management techniques into project planning.

Benefits of Using an EVMS

Using an EVMS allows the project manager to integrate both schedule and cost information to gain a more comprehensive understanding of project performance. This gives the project manager a more complete view of project performance; schedule-only or cost-only comparisons do not provide the same data. This missing data could lead to misinterpretations of project performance.

An EVMS compares the scope, schedule, and cost information at a point in time. In a sense, it provides a snapshot of the Triple Constraint triangle, showing the current status of the project. This minimizes the errors and misrepresentations possible with a schedule-only or cost-only comparison. Integrating schedule and cost status lets project managers forecast project status from trend information. An EVMS requires the project management team to correctly establish baselines and to learn earned value management terms.

For an EVMS to be effective, it is important for the project manager to ensure that the project baseline is valid, otherwise the data resulting from the calculations cannot be compared to a standard. An EVMS also allows the project manager to forecast future project performance by identifying trends and calculating results if the trend continues.

Earned Value Management System (EVMS) Terms

An EVMS uses a concept of "dollarizing" the schedule and performance data. A solid understanding of earned value concepts and terms is a prerequisite for the effective use of the associated methods.

Three fundamental EVMS terms include:

• Planned Value (PV): Agreed value of work to be accomplished in a given period;
• Earned Value (EV): Agreed value of work that was actually accomplished; and
• Actual Cost (AC): Real cost of the work performed.

Collecting and Analyzing Planned Value (PV)

Planned Value (PV), previously called budgeted cost of work scheduled (BCWS) in the government system, is the value of work that was scheduled to be completed as of a certain date. The PV is really a curve, or time-phased cost budget.

At the end of the project, the final PV equals the budget at completion (BAC). PV is established by time-phasing the project's budgeted costs.

When the project plan is approved, the PV becomes a fixed standard of reference. When it comes time each status reporting period to update the earned value analysis, the PV value is obtained by consulting the project baseline information for the associated time period.

Collecting and Analyzing Actual Cost (AC)

Actual Cost (AC) is another parameter that must be measured during each status reporting period. This is typically information collected by the organization's cost accounting group, using the company cost accounting system.

The cost accounting group collects all costs against the project work packages and control accounts, including labor accounting sheets, materials invoices, and other direct costs such as travel and contract labor. AC identifies what it really cost the project to operate during the reporting period, independently of what work was actually accomplished.

The AC is reported as both the new costs for the current period and the cumulative cost for the project since inception. The reporting of cost is independent of the project team and represents the expenditure of real money, unlike the earned value discussed further in the course. The only control the project manager has over AC is to ensure that work is performed efficiently, as planned, using the appropriate resources. Inaccurate accounting of labor is a common cause for cost variances.

AC is also referred to in older earned value management systems as the actual cost of work performed (ACWP).

Collecting and Analyzing Earned Value (EV)

EV, the central concept in this technique, is slightly difficult to grasp at first. In very basic terms, every activity or item of work is associated with a dollar value. When you complete a particular activity, you "earn," or receive credit for, that declared value.

A frequent point of confusion is that the actual cost of the job may be different from the earned value. Earned value is the agreed value of the task, not what you actually spend on it. If a contractor submits an invoice for an unforeseen additional amount, the actual cost of the job will be the amount of the invoice, but the earned value remains the original negotiated amount. The difference between the earned value and actual cost will be an indication of cost variance.

 Methods for Computing Earned Value

EV, the method for assigning value earned, is calculated based on one of several predetermined methods. In the simplest concept, the value earned is exactly the planned value of the task. However, determining when or how the value is applied may use different methods.

Keep in mind that the calculation of earned value for a task is different than an individual reporting status against the task. Status reporting and earned value analysis serve different purposes. Earned value analysis allows the project manager to measure and report the overall project health, evaluating project schedule, cost, and work performed. It provides measures to detect variances, and therefore determine the overall ability to meet project objectives.

The information presented below outlines the various methods for computing earned value along with descriptions of how earned value is assigned and their recommended uses.

In practice, a project manager may elect to use only a few of these earned value techniques. They are discussed in more detail on the pages that follow.

0-100 %

How earned value is assigned for this method

No credit for the start of a task, but 100% upon completion

Recommended use of this method

When tasks are scheduled to complete within one accounting period

50-50 %

How earned value is assigned for this method

50% value when the task starts, and 50% upon completion

Recommended use of this method

When tasks are scheduled to complete within two accounting periods

Percent Complete

How earned value is assigned for this method

Value estimated by the person responsible for the task's completion

Recommended use of this method

Not generally recommended, although it may be used for longer work packages in which distinct milestones are not recognized

 Weighted Milestones (WM)

How earned value is assigned for this method

Value given upon milestone completion, where interim milestones mark the completion of a longer task or work package

Recommended use of this method

For longer work packages for which discrete methods do not seem appropriate

Level of Effort (LOE)

How earned value is assigned for this method

Value earned is proportionate to the total budget of the work package and based on elapsed duration

Recommended use of this method

Minimize the use of LOE to less than 10% of the total project budget

Apportioned Effort (AE)

How earned value is assigned for this method

Value is planned and measured in relation to another (non-LOE) task

Recommended use of this method

Not recommended for frequent use but may help in instances where it is difficult to determine the exact value of the work

Percentage Methods for Computing Earned Value

0-100%

The 0/100% method is the simplest and usually the best method for tasks of relatively short duration compared to the standard reporting period length. For example, if the project status data is collected once per month, this method should be used on tasks of less than 30 days duration.

As an example of computing earned value using the 0/100% method, assume that there is a work package to paint a room in your company's headquarters. You approved the painter's estimate totaling $1,000 in labor and materials to perform the job, with a completion date of Friday. When the job is complete, you will credit the EV column with $1,000, the agreed value of the job. This tracks the completion of the SCOPE leg of the triangle. If the painter submits an invoice for an unforeseen additional $50 in materials, the actual cost of the job will be $1,050, but the earned value remains the original negotiated amount of $1000.

Suppose that on Friday the job has not yet been completed, so when the status report is filed, the value earned remains at $0. The difference between the earned value and planned value is an indication of schedule variance. This variance will continue until the work is completed. So, if the job is delayed until Wednesday of the next week, the schedule variance will be negative $1,000 until the completion is recorded, at which time the schedule variance returns to $0. Alternatively, if the painter finished the job early, a positive schedule variance would be posted.

The 0/100% method is the-all-or-nothing approach, in which no credit or value is earned until the task in question is completed. In the above example, the painter earned no value until the room was completely painted (and presumably cleaned up and inspected). This method eliminates the common project management problem of subjective reporting such as "we're almost done" or "97% complete", etc. Instead, the task owner must ensure complete execution, which generally also assures higher quality results.

50-50%

The 50/50% method is a minor adjustment to the 0/100% for tasks of longer duration compared to the reporting period. If project data is collected monthly, but a task is planned to take six weeks, the task owner would be showing a negative variance for the first status report, even though the work may be on track. In fairness, the 50/50% method allows the task owner 50% credit for the work, as long as the work has been started. This reduces the negative variance to a smaller amount, and assuming the job finishes on time, the variance will disappear by the end of the next reporting period.

Other variations on 50/50% may be defined, such as 25/75%, 40/60%, depending on the rules in the organization. These should be established as standards in the project's cost management plan.

Percent Complete

The Percent Complete method is one of the recognized methods, but should not be used as a general practice. The discrete 0/100%, 50/50% or milestone methods are much more effective in controlling the reporting of task completion. The percent complete method is subject to abuse, as task owners may have no objective definition of what "60% complete" actually means. Often this is reported incorrectly as the percent of the time that has elapsed rather then the percent of the work that has been completed.

While not generally recommended, this method can be useful for longer work packages in which distinct milestones are not recognized. If percent complete is allowed as a method, the work package template should provide an objective basis for awarding percent complete.

 For example, if the work package involves testing to ensure 30 test cases pass successfully, one could earn 10% each time 3 more test cases pass. The cost management plan or the specific work package planning template must provide explicit definitions of each milestone.

Milestone and Effort Methods for Computing Earned Value

Weighted Milestone

The Weighted Milestone method is used for longer work packages for which discrete methods do not seem appropriate. Assuming that the process in the work package has clearly understood interim milestones, appropriate credit should be assigned to the accomplishment of each milestone.

Level of Effort  (LOE)

The Level of Effort (LOE) method should be used very sparingly, usually only for the supervisory tasks on the project. The labor costs of the supervisors, such as the project manager and any clerical support staff, must be accounted for in the PV and EV baselines. The problem, however, is identifying exactly what work has been done, or what deliverables have been produced. After all, supervisors have highly unpredictable days, integrating all the other team members' activities, attending meetings, filing reports, and communicating with the stakeholders.

Therefore, one assumes that the supervisors are always on schedule and allows them to earn value proportionate to the total budget of the supervisor's work package. For example, if there are 30 days of supervisory labor planned, the supervisors "earn" 1 day each day of the project.

A general rule of thumb is to minimize the use of LOE to less than 10% of the total project budget. Otherwise, large sums of LOE value will mask or disguise smaller variances in other work packages.

Apportioned Effort Method

The Apportioned Effort Method falls into a category similar to LOE, in that it should not be used often but may help in instances where it is difficult to determine the exact value of the work.

For example, if a quality inspector is needed to monitor the activities of the test group, the quality work package would earn value at a predetermined rate proportional to the test work package. As the testing progresses, the quality work earns a corresponding percentage of work complete.

Analyzing Cost and Schedule Variances

Earned Value Variances and Indices

Once the status has been determined for the project, i.e., the PV, EV, and AC values have been determined for the current period for each work package, what does the data mean and how is it presented in a useful way?

Several earned value calculations allow the project manager to evaluate both schedule performance and cost performance.

A variance is a difference between actual project results and planned or expected results. A positive variance means that a project is ahead of schedule or under budget, while a negative variance indicates that a project is behind schedule or over budget.

An index is a measure used to assess the magnitude of any project variances that do occur. For indices, a value greater than 1.00 is better than planned efficiency, while a value less than 1.00 indicates that efficiency is less than planned.

EVMS Schedule Formulas

• Schedule variance (SV) = EV - PV
• Schedule performance index (SPI) = EV/PV
• Preferred state: SV is positive, and SPI is greater than 1.00
  • This means that the earned value is greater than the planned value. More work has been earned than planned, so the project is on or ahead of schedule.

EVMS Cost Formulas

• Cost variance (CV) = EV - AC
• Cost performance index (CPI) = EV/AC
• Preferred state: CV is positive, and CPI is greater than 1.00
  • This means that the earned value is more than the actual cost. More value has been earned than the actual cost expended, so the project is on or under budget.

Example of EV Components

The example below illustrates these values at a time of status measurement.

EV Component Example

In this example, the project is to build five prefab sections of a house for a total project budget of $500 (BAC). Recall that at the end of the project, the final PV equals the budget at completion (BAC). The task now is to compute the PV at this point in time.

It was expected that $300 worth of tasks were to be completed (PV). In reality, only $200 worth has been completed (EV); but the accounting system collected expenses of $400 (AC) on the project.

EVMS Example

The following EVMS example uses the earned value formulas to calculate the variances and indices.

• PV = 300
• EV = 200
• AC = 400
• SV = EV-PV = 200 - 300 = (100)
• SPI = EV/PV = 200/300 = 0.67
• CV = EV-AC = 200 - 400 = (200)
• CPI = EV/AC = 200/400 = 0.50

The calculations in this example indicate that the project is behind schedule and over budget, with poor schedule and cost efficiency ratios.

• The SPI of 0.67 indicates that the project has accomplished only 67% of the work it was scheduled to accomplish by the status date.
• The CPI of 0.50 indicates that for every $1.00 spent on the project, only $.50 worth of work has been completed.

EVMS Diagram

The results of the EVM analysis are usually graphed to provide a powerful status report for the project. Such a diagram can be tracked at the total project level, and also for each control account. Project management software tools can help present this information.

The EVMS data in the diagram below depicts the values over time for the three key parameters, PV, EV, and AC. The status reporting period during which these parameters were calculated is shown via the Update Now vertical line. At that point in time, the schedule and cost variances are depicted on the graph as the difference between EV and PV (schedule variance) and between EV and AC (cost variance).

Another powerful feature of the diagram is its ability to show the trends in performance from one reporting period to the next. An experienced eye can read these charts quickly and draw conclusions about the project's performance, past, current, and future.

The EVMS diagram also illustrates how EV calculations provide more insight into the overall project health than straight comparisons between the original baselines and actual costs.

If the actual costs are less than the original cost baseline, it may appear that the project is under-spending. However, by comparing EV to AC, a project manager realizes that, in reality, the project is paying too much for the work actually performed.

By comparing EV to PV, it is apparent that less work was accomplished than planned at the point of determining the project's status; therefore, the project is behind schedule.

The key to understanding EV is that the cost or schedule is always compared to the value of the work performed-EV or the earned value.

Forecasting Costs

When the project manager knows the current project cost, he can also predict where the project is going using EV. This requires calculating at-completion and to-completion costs. There are several terms to define in learning and applying these calculations.

Estimating the At-Completion Project Cost (Terms)

Budget at Completion (BAC)

• Total cumulative PV at completion of a schedule activity, work package, control account, or other project component
  • When applied to the entire project, BAC represents the total budget of the project, not including management reserve
  • At project completion, BAC will equal PV

Estimate at Completion (EAC) - also called Latest Revised Estimate (LRE)

• Estimate, or forecast, of the most likely total value based on project performance and risk quantification
  • EAC can be greater than or less than BAC

Estimating the To-Completion Project Cost (Terms)

Estimate to Complete (ETC)

• Estimate for completing the remaining work for a schedule activity, work package, control account, or other project component
  • ETC is the difference between EAC and actual costs to date

Various techniques to calculate EAC and ETC are discussed on the following pages.

Estimating the At-Completion Costs

Examples of Estimating At-Completion Costs

At-completion values of interest to the project manager and stakeholders are calculated using the methods below. These calculations use the same data as the EVMS example of the prefab construction project:

• Total budget, or budget at completion (BAC) = 500
• Planned value (PV) for this stage of project = 300
• Earned value (EV) of project completed at review = 200
• Actual cost (AC) = 400
• Schedule variance (SV) = EV-PV = 200 - 300 = (100)
• Schedule performance index (SPI) = EV/PV = 200/300 = 0.67
• Cost variance (CV) = EV-AC = 200 - 400 = (200)
• Cost performance index (CPI) = EV/AC = 200/400 = 0.50

There are many forecasting techniques to calculate EAC. Each of these approaches can be the correct approach for any given project and will provide the project management team with a signal if the EAC forecasts are not within acceptable tolerances.

Calculating EAC using earned value data

• Using remaining budget: The cumulative actual costs to date plus the budget required to complete the remaining work, which is the budget at completion minus the earned value
  • EAC = AC + (BAC - EV) = 400 + (500 - 200) = 700

• Using CPI: The cumulative actual costs to date plus the budget required to complete the remaining work, which is the BAC minus the EV, modified by a performance factor (often the CPI).
  • EAC = AC + [(BAC - EV)/(CPI)] = 400 + [(500 - 200) / .50] = 1,000

Calculating EAC using ETC (ETC is discussed further on the following page)

• A bottom-up Estimate to Complete (ETC) for the remaining work is provided by the performing organization. Often used when past performance shows that the original estimating assumptions were fundamentally flawed or are no longer relevant due to a change in conditions.
  • EAC = AC + ETC

ETC based on new estimate

The ETC is a manual revised estimate for the remaining work in the control account, as determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete all of the work remaining, and considers the performance or production of the resource(s) to date.

The ETC for the project is calculated by summing the manually revised individual control account estimates.

The decision to manually create a new ETC should be balanced with the time it will take to perform it. If not calculated manually, the ETC can be calculated based on earned value data.

Importance of Early Analysis

Hundreds of studies across many industries have revealed that a pattern of variance from the baseline is usually set early, and the variances only get worse as the project continues. If a project manager's ability to predict the first 20% of the project is poor, his ability to predict the remainder of the project is usually worse.

Early analysis results provide forecasting input. Based on history, after 15% to 20% of a project has been completed, the CPI will not change by more than 10%, and will probably get worse. For example, a CPI of .80 at the 20% point will probably not recover to reach a CPI of over .88.

It is the project manager's responsibility to keep the project on schedule and within the project budget, keeping the at-completion costs as close to the original estimate as possible. It is also the project manager's job to get the project back on track when a variance has been discovered. Historical data indicate that early project analysis has the most potential for impacting the project, if corrective actions are necessary.

The ‘To Complete Performance Index' (TCPI)

The TCPI is a calculation that indicates the cost performance (CPI) needed for the remainder of the project to complete either on budget (BAC) or at an estimated at completion (EAC) value. The denominator of the TCPI formula is adjusted depending upon which parameter is used, BAC or EAC:

• CPI needed to complete on budget: (BAC - EV)/(BAC - AC)
• CPI needed to complete at the EAC value: (BAC - EV)/(EAC - AC)

Other Performance Measurements

Many types of performance measures are available, such as:

• Status of quality measurements;
• Status of risk management plan;
• Status of technical performance measurements; and
• Status against other planned baselines
  • Lines of code
  • Labor hours.

Many different items can be tracked and used as performance measurements. Run charts, statistical process control charts, and other measurements from the quality plan are all performance measurements. Tracking identified risks and mitigating the risks are areas that affect performance as well as cost and schedule.

Technical Performance Measurements (TPMs) are used by some industries to track how well the product is achieving critical performance parameters. Depending on the product, the metric being tracked could be weight, power consumption, fuel consumption, power output, throughput, production price, utilization percentage, capacity, or operational use data

Variance Analysis

Variance analysis involves comparing actual progress results to planned or expected results. The differences between actual project results and planned or expected results (baseline values and current or projected results), becomes the variance. Variance analysis can be used to quickly detect deviations from desired baselines. The comparison can be within the current period or cumulative over several periods.

Variance analysis allows the project manager to identify differences between the work results and the project plan. Identifying these variances from the desired baselines is only the first step in status reporting. Simply knowing the variances will be of little value in ensuring a project's success.

Once a variance is identified, the project manager should determine what caused the variances (root cause) and plan a corrective action. Action must be initiated if the variances are negative or potentially harmful to the project's intended outcome.

In many cases, the corrective actions will require some changes to the project. These must be documented and managed; in many cases, the changes will need to come under configuration control.

Variance Analysis Reports

Once a variance is detected, whether it is in cost, schedule, or scope and quality, it should be corrected. A return to baseline is the desired result of a recovery plan. A completed variance analysis report is a good starting place for the recovery plan.

When completing variance analysis reports, ask these questions:

• What is the variance?
• What caused the variance?
• What is or could be the impact on the project?
• What is the planned corrective action?
  • Specific plan, with milestones
  • Responsible person
  • Milestone completion dates

A solid plan of recovery must be established, as recovery at a later date is nearly impossible. The project manager must ensure that a person is assigned to the task of leading the corrective action, and must make the recovery plan part of the weekly status review.

Problem Resolution Strategies

Problem resolution strategies can be simple to complex, depending upon the problem. Project variables of cost, schedule, and scope and quality can be negotiated with the customer. There is usually one element about which stakeholders may be flexible in accepting changes. This can be exploited to the benefit of the project.

The key to altering the variables is to keep the customer involved in the problem-resolution process. Remember that customer satisfaction is usually one of the quality metrics.

Examples of problem resolution strategies include:

• No action required; accept non-critical variance.
• Schedule variances
  • Alter schedule dependencies to get back on schedule.
  • With cooperation of customer, extend the project to cover slip in schedule.
  • Use the management reserve and assign additional resources.
• Cost variances
  • With cooperation of customer, alter scope and quality or schedule.

Revising the Project Baseline

Once the project status has been analyzed and clear trends have been established over several reporting periods, it may become advisable to revise the baseline.

Such a decision is not reached easily or very often. The point of the baseline is to illuminate areas of performance variance. Changing the baseline to correct variances would be counterproductive.

If, however, attempts to correct the performance problems do not have a significant effect, and if the variances continue to worsen, the project manager should seek concurrence of the sponsor and key stakeholders to revisit the project management plan. This decision should be supported by a clear understanding of the variances and the dynamics of the project that are limiting the effectiveness of the corrective actions.

Usually the decision to rework the project's baseline is accompanied by discussions about renegotiating scope, budget, and schedule expectations.

REFERENCES

PMI, "THE STANDARD FOR PROGRAM MANAGEMENT", PMI, 2008

PMI, "A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE", 4th Edition, PMI 2008

R. Mulcahy, "PMP EXAM PREPARATION", RMC Publications Inc. 2009

PMI, "PRACTICE STANDARD FOR EARNED VALUE MANAGEMENT", PMI 2005

S.J. Amos, "SKILLS & KNOWLEDGE OF COST ENGINEERING", AACEI, 2004

A.Damodaran, "STRATEGIC RISK TAKING", WHARTON School Publishing 2007

W.E. Deming, "OUT OF THE CRISIS", THE MIT PRESS, 1986

M. Imai, "THE KEY TO COMPETITIVE SUCCESS" McGRAW-HILL/Irwin 1986

A.H.Bell, "MANAGEMENT COMMUNICATION", WILEY, 2010

M.Crouhy, R. Mark, D. Galai, "RISK MANAGEMENT", McGRAW-HILL, 2001

M. Effron, M.Goldsmith, "HUMAN RESOURCES IN THE 21st CENTURY", John Wiley & Sons 2003

J.Fitz-enz, "THE ROI OF HUMAN CAPITAL: MEASURING THE ECONOMIC VALUE OF EMPLOYEE PERFORMANCE", AMACOM 2000

NDIA, "EARNED VALUE MANAGEMENT SYSTEMS INTENT GUIDE", NDIA, 2005