Sunday, March 16, 2008

Cost Management in Project Management...

I can only pity at people who ask project Managers to remember these earned value formula through some "Tricks of the Trade". May be, "complicating simple stuffs" is the sustainable revenue model these days...:-)

The reason being it's such a common sense concept and aboslutely no effort is required to learn/understand this . So, here I go trying to simplify the so called complex earned value concept. After reading through this post you decide as to how complex it is...

Let's assume that we hire a carpenter to do 2 windows and 1 door. We ask him for a effort estimate and a schedule plan. And here's his plan:

Effort: 30 days for completing 2 windows and 1 door (with 8 hrs a day)

Schedule: 2 windows will be completed in the 1st 15 days and the door in the next 15 days

And after say 15 days you make a visit to the carpenter to check the progress. Your expectation at this point in time is that the 2 windows whould have been complete..

Planned work for 15 days (or BCWS) : 15 days * 8 hrs = 120 hrs

Burned (Actual) work for 15 days ( or ACWP): 15 days * 10 hrs = 150 hrs
(assuming 2 hrs OT everyday)

Earned work for 15 days ( or BCWP): 75% of 120 hrs = 90 hrs

As a customer you have budgeted to pay only 1200 Rs ( 10 Rs. per hour)
Now, how much will you be ready to pay for ( 90hrs *10 rs ph= 900 Rs , isn't it?)

Let's say what the carpenter has to say, He will keep complaining that he has overworked everyday..So, you are most likely to respond back to him saying "thats not my problem, you do not know how to complete your work on time" And other than that you will also tell him that all your plans are in a mess because the carepenter has delayed the making of the doors and windows...

Sounds like a usual scenarion in software projects. isn't it?

Ok, now with this plan, burn and earn values let's look at how to compute the variance, Index

Now the cost variance/performance index from a project perspective is:

CV = Earned - Burned = Rs 900 - Rs 1500 = - 600
CPI = Earned/ Burned = Rs. 900/Rs. 1500 = 0.6

Note: A negative variance is bad and a index less than 1 is bad.

SV = Earned - Planned = Rs. 1200 - Rs 1500 = -300
SPI = Earned /Planned = Rs. 1200/ Rs. 1500 = 0.8

Sounds simple now..ain't it?

Now the next logical question for which we would like to have an ansswer is " When do you think that this would be complete? ". Also, Let's look at some of the primary causes for this variance in the next installment of this series..