Project Management Concepts

Vijay Birsingh

2008 May 28

vbirsingh@gmail.com
 Typical WBS
Information
System
1.

Project Systems Hardware Software Facilities Training

Management Engineering Acquisition Development Modifications Development
1.1 1.2 1.3 1.4 1.5 1.6

Project Product CPU Operating Facility Training

Planning Design Acquisition System Plans Plans
1.1.1 1.2.1 1.3.1 1.4.1 1.5.1 1.6.1

Project Systems Auxiliary Database Facility Training

Control Integration Equipment 1.4.2 Modification Courses
1.1.2 1.2.2 1.3.2 1.5.2 1.6.2

Project Test & Printer Application Facility

Data Evaluation Acquisition Development Installation
1.1.3 1.2.3 1.3.3 1.4.3 1.5.3
 CBS
Project Estimate and
Budget Structure

Design 1.1 1..2 1..3

DEngineering Logistics &
e Support
General
Engineering 1.1.1 1.1.2 1.3.1 1.3.2
Systems
Engr.
OBS

Stress
Engr.
Mech.
Engr.
• WBS roll-up facility – used to roll-up estimates and budgets

House £32000

Civil £13000 Plumbing £8000 Electrical £11000

Foundations Walls/Roof Piping Sewerage Wiring Appliances

£5000 £8000 £6000 £2000 £3000 £8000

“Earned Value Analysis” is an industry standard
way to measure a project’s progress, forecast its
completion date and final cost, and provide
schedule and budget variances along the way.

Based on just 3 data points, it can provide

consistent, numerical indicators with which you
can evaluate and compare projects
 Earned Value provides:
•Work progress status.
• Relationship of planned cost and schedule
to actual accomplishment.
• Valid, timely, auditable data.
• Base for Estimate at Completion (EAC).
• Summaries developed at the lowest
practical WBS and organizational level.
Key Terms

1. BCWP = EV
2. BCWS = PV
3. ACWP = AC
Cost Control

EV Terms
Data Element Term Old Term
Budgeted Cost of
Scheduled Work Planned Value (PV) Work Scheduled (BCWS)
Budgeted Cost of
Work Accomplished Earned Value (EV) Work Performed (BCWP)
Actual Cost of Work Actual Cost of
Actual Costs (AC) Work Performed (ACWP)
Accomplished
Authorized Work Budget at Completion Same
Forecasted Cost Estimate at Completion Same
Work Variance Schedule Variance Same
Cost Variance Cost Variance Same
Completion Variance Variance at Completion Same
Cost Control

Performance Measurement
Baseline (PMB)
Time-Phased Budget
4500
BAC
4000
3500
3000
BCWS $K

2500
2000
1500
1000
500
0
Jan Feb Mar Apr May Jun
Reporting Period
 Budgeted Cost of Work
Scheduled
z Abbreviated BCWS.
z It is the total budgeted cost up to the
analysis date.
z Approximated by the total budget
multiplied by the fraction of total project
duration at the analysis date.
z “How much work should have been done?”
Cost Control

Planned Value (PV)

Work schedule to be accomplished

Performance Measurement Baseline

80000

70000
BAC
PV
60000

CURRENT
JANUARY 0
50000
PV
FEBRUARY 2500
40000 MARCH 8000
30000 APRIL 13000
20000 MAY 42000
10000
JUNE 62000
JULY 70700
0
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY
 Budgeted Cost of Work
Performed
z This is the “Earned Value.”
z Abbreviated as BCWP.
z For completed work, it is the cost originally
budgeted to accomplish that work.
z “How much work was actually done?”
Cost Control

Earned Value
Budgeted value of completed or in-process work
Performance Measurement Baseline

80000

CURRENT
70000

60000 PV EV
JANUARY 0 0
50000
PV
FEBRUARY 2500 3600
MARCH 8000 8000
40000 EV APRIL 13000 10000
MAY 42000 38000
30000
JUNE 62000
JULY 70700
20000

10000

0
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY
 Actual Cost of Work
Performed
z Abbreviated ACWP.
z What it actually cost to accomplish all the
work completed as of the analysis date.
z “What did the work that was actually done
actually cost?”
Cost Control

Actual Costs (AC)

Actual expenditures for completed or in-process work

Performance Measurement Baseline

80000

CURRENT
70000

60000

50000 ACWP
PV EV AC
JANUARY 0 0 0
BCWS
40000 FEBRUARY 2500 3600 6000
BCW
MARCH 8000 8000 8000
30000 APRIL 13000 10000 8000
MAY 42000 38000 48000
20000 JUNE 62000
JULY 70700

10000

0
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY
 Derived Metrics
z Schedule Variance (SV)
z Schedule Performance Index (SPI)
z Cost Variance (CV)
z Cost Performance Index (CPI)
 A Few More Acronyms
z BAC - Budget At Completion
– = Total Original Budgeted Cost
– Same as BCWS at completion
z EAC - Estimate At Completion
– = Cumulative Actuals + Estimate-To-
Complete
z VAC - Variance At Completion
– = Forecast of final cost variance
 Doing The Math
z SV = BCWP - BCWS
z Negative means Behind Schedule

z SPI = BCWP / BCWS

z Less than 1.00 means Behind Schedule

z CV = BCWP - ACWP
z Negative means Over Budget

z CPI = BCWP / ACWP

z Less than 1.00 means Over Budget

z EAC = BAC / CPI

Cost Control

Schedule Variance

„ Comparing the EV, the amount originally

budgeted for the work that has been
completed or is in-process, to the PV, the
amount budgeted for the work that was
planned to have been accomplished

„ SV = EV – PV

„ A negative result means less work has

been performed than was planned
Cost Control

SV Example
„ PV = $42,000
„ EV = $38,000
„ AC = $48,000
„ SV = EV – PV
= $38,000 – $42,000 = -
$4,000

„ SV% = SV / PV
= - $4000 / $42,000 = - 0.095
= - 9.5%
Cost Control

Cost Variance

• Comparing the amount originally

budgeted for the work completed or
in-process, the EV, to the actual
costs of that work, the AC

• CV = EV – AC

• A negative CV means more dollars

were spent to accomplish the work
than was planned
Cost Control

Cost Variance Example

„ PV = $42,000
„ EV = $38,000
„ AC = $48,000
„ CV = EV - AC
= $38,000 – $48,000 = -
$10,000
„ CV% = CV / EV
= - $10,000 / $38,000
= - 26%
Cost Control

Performance Indices
„ Dfn: Cost- and schedule-performance
efficiency calculations; expressed in $
„ Cost Performance Index (CPI)
„ CPI = EV/AC

„ Schedule Performance Index (SPI)

„ SPI = EV/PV
Cost Control

CPI Example

„ PV = $42,000
„ EV = $38,000
„ AC = $48,000
„ CPI = EV / AC
= $38,000 / $48,000 =
0.79
„ $0.79 worth of work was actually
done for each $1.00 spent
Cost Control

SPI Example

„ PV = $42,000
„ EV = $38,000
„ AC = $48,000
„ SPI = EV / PV
= $38,000 / $42,000 = 0.90
„ $0.90 worth of work has been done
for each $1.00 worth of work that was
planned to be done
Cost Control

Estimate at Completion (EAC)

„ Dfn: The management’s assessment of

the cost of the project at completion
„ After variance analysis, the estimated cost
at completion is determined
Cost Control

EAC Example

One methodology:

„ EAC = BAC / CPI

„ BAC = $80,000
„ CPI = 0.79
„ EAC = $80,000 / 0.79 =
$101,265
Cost Control

Variance at Completion
„ BAC = $80,000
„ EAC = $101,265

„ VAC = BAC – EAC

= $80,000 – $101,265
= $21,265
„ Based on past performance, project
will exceed planned budget by
$21,265
Cost Control
To Complete Performance
Index (TCPI)
„ Work Remaining / Cost Remaining

„ TCPI = (BAC – EV) / (EAC – AC)

= ($ 80,000 – $ 38,000) / ($
101,265 – $ 48,000)
= $ 42,000 / $ 53,265
= 1.4
 An Example: Lemonade
z Make 1,000 cups over 50 days
z Steady rate of 20 cups per day
z Budgeted cost per cup is $0.50
z Total project budget is $500
 Lemonade Progress
z Atend of day 10:
z 150 cups have been made
z Total actual cost is $90 (ACWP)
Lemonade Status
„ BCWS = $100
„ 10 days x 20 cups per day x .50/cup

budget
„ BCWP = $75 (Earned Value)
„ 150 cups x .50/cup budget

„ SV = BCWP - BCWS = -$25

„ SPI = BCWP / BCWS = 0.75
„ CV = BCWP - ACWP = $75 - $90 = -$15
„ CPI = BCWP / ACWP = 0.833
Lemonade Forecast
„ EAC = BAC / CPI = $500 / 0.833 =
$600
„ VAC = BAC - EAC = $500 - $600 =
$100 (unfavorable)
„ Schedule at Completion =
50 / SPI =
50 / 0.75 =
66.67 days
 Concept of Value

Satisfaction of Needs
Value =
Use of Resources

„ The concept of value relies on the relationship between the

satisfaction of many differing needs and the resources used in doing
do.
 Value Engineering / Analysis

Value
= Function Worth / Function Cost
 Barriers
Waste
Too
of Time
No Time Expensive

The
The Not
Too Interested
Difficult Barriers
Barriers

Too Don’t I Do It
Complex Want Anyway
Outsiders
 Project Life Cycle

Value Enhancement
Opportunity

Spend

Key Decisions

INITIATION DESIGN IMPLEMENTATION USE Time

PROJECT LIFE-CYCLE
Value is
Performance Resource

Performance includes: Resource includes:

„ Business needs „ Time
„ Quality „ Management
„ Image „ Design costs
„ Social benefits „ Capital costs
„ Revenue generation „ Cost in use
Value is
Offered Expected
Performance Performance

Subjective

¾ Different meanings for different people

Relative

¾ Match customer’s intent and capability

¾ Highest performance with available resources

Value increases when

Perform
ance
Resourc
e

Customer satisfaction increases

and / or
Expenditure of resources diminishes
How to improve Value
Value can be improved by influencing the performance and resources
variables in a number of ways:

• Better targeting the real customer needs and wants P+/R

• Cost reduction while still delivering all requirements P/R-
• Further cost reduction by eliminating unimportant requirements P-/R- -
• Adding modest cost to achieve larger performance benefit P++/R+
• Improving performance and reducing cost simultaneously P+/R-

P = Functional Performance
R = Life Cycle Cost / NPV

Value Management is not about cost cutting, You can improve value
even if you increase project cost !!!!!!
The VM Concepts

The 3 concepts of VM

„ Function based

„ Cross - disciplinary team

„ Structured process
What is a Function?
„ Expression of the need in terms of performances rather than
solutions
„ Link between the need and the product
„ Basis of creative problem solving in VM

Need
FUNCTION

Product
VM as a Structured Process
Thought Processes
Analytical Creative

1 - Analyse information
2 - Brainstorm Functions
3 - Organise Functions
4 - Generate Ideas for
Alternatives
5 - Evaluate Alternatives
6 - Develop Proposals
7 - Appraise Options

8 - Recommend Solutions
The VM Job Plan
The Stages in then VM Job Plan:

„ Information

„ Function Analysis

„ Creative

„ Evaluation

„ Development

„ Implementation
VM Job Plan - Analysis Stage
HOW WHY

Customer FAST ENABLING THE

SOLUTIONS
SECONDARY FUNCTION
Diagram
SECONDARY
FUNCTION
ENABLING THE
SECONDARY FUNCTION

BASIC/HIGHEST
ORDER
FUNCTION
NEEDS

WANTS

SECONDARY ENABLING THE

FUNCTION SECONDARY FUNCTION

PROJECT SCOPE
PROJECT SCOPE

NOT ESSENTIAL TO THE PERFORMANCE

ESSENTIAL TO THE PERFORMANCE OF THE
BUT ESSENTIAL TO THE INCREASE PRODUCT/
TASK FUNCTION
PROJECT ACCEPTABILITY
THEY FULFILL THE BASIC NEEDS OF THE USERS
BY SATIFYING THE WANTS OF THE USER
Timing of VM
Value Opportunity

Value enhancement

Value Improvement Potential

Cost to Implement

Project Life Cycle

Concept Design Construction

Diminishing potential of VM as the design progresses

Projects that benefit from VM

•Costly Projects
• Complex Projects
• Repetitive Projects
• Projects with compressed Programmes
• Projects with Restricted Budgets
• Projects with High Visibility
Classes of Contractual Documents

LOW HIGH
Seller Risk

Buyer Risk
HIGH LOW

CPPC CPFF CPIF FPI FFP

100 0 Variable Sharing Ratio 0 100

Cost Plus Cost Plus Fixed Cost Plus Fixed Price Firm Fixed Price
Percentage of Incentive Fee Incentive (FPI)
Fee (CPFF)
Costs (CPPC) (CPIF)

Spectrum of risk
Planning Controlling
11.1 Risk
Management
Planning 11.4
11.3 Risk 11.5 Risk Risk
Qualitative Response Monitoring
Analysis Planning
11.2 Risk &
Identification 11.4 Risk Control
Quantitative
Analysis
 Quantitative Risk Analysis

Decision Trees
High Demand
Probability =0.3
$ 550,000
Production Successful
Probability = 0.7 Low Demand
Probability = 0.7
Decide to pursue - $100,000

Production Unsuccessful
Expect Value of Pursuing Project A
Probability = 0.3 0.7 x 0.3 x $ 550,000 = $ 115,500
Terminate = - $ 200,000 0.7 x 0.7 x – $ 100,000 = – $ 49,000

0.3 x – $ 200,000 = – $ 60,000

Decide not to pursue
$0 $ 6,500
The expected value of Project A is $6,500. The expected value of
not preceding is $0. Preceding is the lucrative option.
Project Selection – Economic Criteria
„ Discounted Cash Methods
„ Net present value (NPV) method

„ Internal rate of return (IRR) method

„ Payback Method
Project Selection – Economic Criteria
„ Time Value of Money Concept
„ A dollar received today is worth more

than a dollar received at any future

time
„ The interest rate (also called the

discount rate or opportunity cost

rate) expresses the change in the
value of money as it moves forward
or backward in time
Project Selection – Economic Criteria
„ Time Value of Money Concept
FV = PV(1 + k)n
FV = future value of an investment
PV = Present Value
k = Investment interest rate (or cost of capital)
n = number of years
„ Tables and spreadsheets provide the factors
to convert future cash flows into present
values and vice verca
Net Present Value (NPV) Method
„ Calculated using the required rate of return
(RRR), which is the minimum acceptable
rate of return on an investment
„ RRR is the return that the organisation
could expect to receive elsewhere for an
investment of comparable risk
„ Calculates the expected monetary gain or
loss from a project by discounting all
expected future cash inflows and outflows
to the present point in time, using the RRR
Net Present Value (NPV) Method
„ Only projects with zero or positive net
present value are acceptable because the
return from these projects equals or
exceeds the cost of capital (the return
available by investing the capital elsewhere)
„ If all other things are equal, the higher the
NPV, the better
Internal Rate of Return (IRR)
Method
„ Calculates the discount rate at which the present
value of expected cash inflows from a project
equals the present value of the expected cash
outflows
„ That is, the IRR is the discount rate that makes
the NPV = 0
„ A project is accepted only if the IRR equals or
exceeds the required rate of return (RRR)
„ If all things are equal the higher the IRR, the
better
Comparison of NPV and IRR Methods
„ NPV is advantageous as the end result is
expressed in dollars, not a percentage
„ The NPV’s of individual projects can be added to
see the effect of a combination of projects
„ IRR’s of individual projects cannot be added or
averaged to derive the IRR of the combination of
projects
„ The NPV method can be used in situations where
the RRR varies over the life of the project
Payback Method
„ Measures the time it will take to recoup, in
the form of expected future cash flows, the
net initial investment in a project
„ Like NPV and IRR, the payback method
does not distinguish between the origins of
cash flow (operations, purchase or sale of
equipment, or investing in or recovery of
working capital)
 Payback Method - Comparison
„ Advantages
„ Payback method measures liquidity, which is an
important factor in capital budgeting decisions
„ Easy to understand
„ Disadvantages
„ Fails to incorporate the time value of money
„ Does not consider a project’s cash flow after the
payback period – it ignores profitability