Earned value calculations using PRINCE2 7
Earned value calculations – harnessing their power
Although earned value calculations are not a topic that would come up in the foundation or practitioner exam, any project manager using the PRINCE2 method is missing a trick if they don’t harness the power of earned value.
When tailoring PRINCE2 within your organization, it seems that a PRINCE2 project is precisely what earned value calculations were designed for in the first place!
My intent here is not to teach earned value calculations but to consider how it could be applied and give the project manager almost total control during their project.
Earned value calculations play an essential part in keeping the project on track.
First, consider that earned value is defined as the actual percentage complete multiplied by the budget.
Also, remember that earned value calculations remove the ambiguity of just measuring cost and time deviations from the plan by considering:
- The cost value of the work delivered (and here we are talking about the products)
- The actual spend for those products
- Calculating the time variance from the plan
- Calculating the cost variance from the plan
With these four elements of earned value calculations at our fingertips, we can determine actual spend and forecast spend, current schedule progress and forecast schedule expectations.
Further, consider these aspects within our PRINCE2 project:
- Earned value calculations at the project level (helpful for inclusion within the regular highlight report destined for the project board)
- Earned value calculations at stage level (used by the project manager to determine actual, plan variance, and forecast metrics to determine if corrective action or escalation is needed)
- Earned value calculations at the work package level (helpful for inclusion within the regular checkpoint report to ascertain real progress or otherwise in the are the creation of work package products)
- Earned value calculations at the product level (helpful to determine real progress of the product deliverable)
- Earned value calculations at activity level (traditionally, this is the ‘normal’ use of earned value and will need care when requesting or calculating actual percentage complete, as any errors here will negate the benefits of using earned value calculations in the first place)
Any calculations should be determined ‘ bottom-up ‘ when using earned value calculations for the above levels. For this short article, let us consider using earned value at the product level.
Considering the generic PRINCE2 steps in the creation (I am ignoring for now, those activities that would be involved in planning) of a typical product, the activities or tasks may look similar to this:
- Design or build the product
- Test the product functionality.
- Draft product ready (a milestone)
- Product quality check (this may be a formal review or some other method carried out by those independent of the product creators)
- Product approval (This may be as simple as a signature or email response but is often an independent check by the user, customer, or assigned individual. As such, it is an activity rather than a milestone)
- Product complete (a milestone)
This provides us with four basic activities leading to the milestone of ‘product complete’ as an example shown below:
- Create product 5 days
- Test product 3 days
- draft product ready 0 days (milestone)
- Quality check two days
- Approval 1 day
- Product Complete 0 days (milestone)
Whenever I teach estimating, I encourage my students to assess the work effort within each activity first. Only then do they have a reasonable chance of estimating the activity duration based on the resources that are either needed or available? This strategy will help significantly in harnessing your earned value calculations.
Once work effort is known for the activities leading to a complete product, then the earned value calculations, in particular, planned spending all budget for that product, can be calculated. This would be called ‘budget at completion’ or BAC.
You may recall from the theory of earned value calculations that fixed costs should be added after earned value calculations have occurred. The reason for this is apparent: the actual costs refer to human resource effort only. If fixed costs are included within this metric, it will skew the earned value calculations to such an extent that they will become meaningless.
Now comes the creative part, and for this, I need to take you back to the planning step (whether this was at the work package, stage, or project level).
For earned value calculations to work within a PRINCE2 project, there must be agreement on determining the percentage completion of a product in a realistic, accurate, measurable, and honest manner!
If the product is a document, it could be broken down into chapters or sections, and an estimate of how much effort would be needed to complete each chapter or section.
Taken as a percentage of the total work effort to create the document (remember to include estimates of reviewing the document, rework, checking and approval), each chapter or section can be assigned a percentage complete.
When the specialist team or team manager reports progress back to the project manager via the regular checkpoint report, an accurate percentage complete figure can be given to the project manager. This can then be used to calculate the various earned value calculations.
However, it is often the case that products require more effort to apportion the complete percentage. The work effort into software development is relatively easy to estimate, and therefore, it is also difficult to assign a percentage complete figure.
But would you agree that involving users and specialist teams during the PRINCE2 planning activities will significantly increase the potential for brainstorming and ultimately deciding a realistic yardstick against which to report percentage complete progress and the other earned value calculations?
An earned value Real World Example.
Using the simple example above, let me assign some nominal values and use these to carry out some of the earned value calculations. Assume I am the team manager using earned value calculations to determine progress.
Earned value calculations
Let’s assume these tasks are one after the other, including weekend work, giving us ten elapsed days. For this exercise, I will assume that the team works 5 hours a day, and one person is assigned the task at a charge rate of $100/hour.
The planned cost, or BAC, will be 55 hours at $100/hour = $5,500.
Let us imagine that we are five days into the creation of this product. The team manager asks the team to advise of their progress, and here are their numbers:
Labor costs so far = $3,000
Percentage complete = 35%
Planned spend = $2,500
Let’s go through the math (plug the earned value calculations numbers in and use the formulas):
BAC = $5,500
Planned Value PV (planned % complete x BAC) = 45% x $5,500 = $2,475
Earned Value EV (Actual % complete x BAC) = 35% x $5,500 = $1,925
Actual Cost AC = $3,000
Cost Variance CV (EV – AC) = $1,925 – $3,000 = – $1,075. A negative variance already shows us that we are overspending)
Schedule Variance SV (EV – PV) = $1,925 – $2,475 = – $550 A negative variance shows us we are behind schedule – but how much in time terms?
Cost performance Index CPI (EV / AC) = 1,925/3000 = 0.64 rounded. Note that ratios are independent of the currency used.
Schedule Performance Index SPI (EV / PV) = 1,925/2475 = 0.77 rounded.
Estimate At Completion EAC (BAC / CPI) = $5,500/0.64 = $8,593 rounded. This shows us that at the current rate of progress, we will blow our budget and need an extra $3,093. Here is where the team manager needs to do their job and take corrective action to either get back on track in spending or at least minimize the predicted overspending.
Estimate To Completion ETC ( EAC – AC) = $8,593 – $3,000 = $5,593. This predicts how much more spending we can expect from this point forward (unless we take corrective action!)
Variance At Completion VAC (BAC – EAC) = $5,500 – $8,593 = – $3,093 This is the difference between what we actually budgeted in the first place and what we now expect to spend.
Earned value calculation summary.
We are going to come in late and overspend!
Okay, so I deliberately chose an example that proved lousy news – because now the team manager in the above example has a set of robust and reliable progress data and an accurate forecast.
Our team manager at least knows now that corrective action is needed and can use the above data to re-plan (or, if no change is possible, report the news and set expectations!) – thanks to their earned value calculations!
For those of you new to earned value calculations, the jargon above may be rather daunting, but do not be put off as the twin benefits of using PRINCE2 (plus product-based planning) AND harnessing the power of earned value calculations- can make YOU a better project manager, and ensure your organization and customers get successful project delivery along with gaining end-product acceptance…
Have You used Earned Schedule?
Read how this new approach helps you better plot real-time progress here!
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