Harnessing Earned Value in PRINCE2
Although earned value calculations is not a topic that that would come up in either the foundation or practitioner exam, any project manager that uses the PRINCE2 method is missing a trick if they don’t harness the power of earned value.
In fact, I’d go even further to say that when tailoring PRINCE2 within your organisation, it seems to me that a PRINCE2 project is exactly what earned value calculations was designed for in the first place!
It is not my intent here to teach earned value calculations, but to consider how it could easily be applied and give the project manager almost total control during their project.
Earned value calculations play an important part in keeping the project on track.
First, consider that earned value is defined as 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 just 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 at:
- Earned value calculations at project level (useful 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 work package level (useful 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 product level (useful 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 real percentage complete; as any errors here will totally negate the benefits of using earned value calculations in the first place)
It is fairly obvious when using earned value calculations for the above levels, then any calculations should be determined ‘bottom up’. For purpose of 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 a simple as a signature or email response, but often is in the form of 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 2 days
- Approval 1 day
- Product Complete 0 days (milestone)
Whenever I teach estimating, I encourage my students to estimate 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, are available. This strategy will help greatly 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 spend 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 in after earned value calculations have taken place. The reason for this is fairly obvious, in that the actual costs refer to human resource effort only, and 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 work package, stage, or project level).
In order for earned value calculations to work within a PRINCE2 project, there must be agreement of how to determine the percentage complete of a product in a realistic, accurate, measurable, and honest manner!
If the product is a document, it could be broken down into its chapters or sections, and an estimate made 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 (don’t forget to include estimates of reviewing the document, rework, checking and approval), then 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, then 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 are more difficult to apportion percentage complete. The work effort into the development of software is notoriously difficult to estimate, and therefore also difficult to assign a percentage complete figure.
But would you agree with me, that involving users and specialist teams during the various PRINCE2 planning activities will greatly increase the potential for brainstorming and ultimately agreeing a realistic yardstick against which to report percentage complete progress and the other earned value calculations?
A Real World Example.
Using the simple example given above, let me assign some nominal values and use these to carry out some of the earned value calculations. Assume that I am the team manager using earned value calculations to determine progress.
Earned value calculations
Let’s assume that these tasks or per one after the other and that includes weekend working, giving us a duration of 10 elapsed days. For the purpose of this exercise I will assume that the team work 5 hours a day, and the one person is assigned the task at a charge rate of $100/hour.
The planned cost or BAC, will therefore 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 (just 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 ratio’s are independent from 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 NOW to either get back on track in terms of spend or at least to minimise the predicted overspend.
Estimate To Completion ETC ( EAC – AC) = $8,593 – $3,000 = $5,593. This predicts how much more spend we expect from this point forward (unless we take some form of 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 bad news – because now the team manager in the above example has a set of strong 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, to report the news and set expectations!) – and all 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 harness 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…
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