Earned Value Formulas in Project Management

Project Cost Management

• Project cost management includes the processes required to ensure that the project is completed within an approved budget.
• Project managers must ensure that projects are well-defined, have accurate time and cost estimates, and have a realistic budget that they were involved in approving.

The Importance of Project Cost Management

• IT/SW projects have a poor track record for meeting budget goals, with cost overruns ranging from 18% to 43% according to CHAOS studies.
• Cost overruns can be as high as 33-34% according to other studies.

Reasons for Cost Overruns

• Many IT professionals lack the skills to prepare accurate cost estimates.
• IT projects often involve new technology, which can lead to risks and untested products.
• Unrealistic project cost estimates and unclear project requirements can lead to cost overruns.
• Many original cost estimates for IT/SW/IS projects are low to begin with.

Basic Principles of Cost Management

• Profits are revenues minus expenses.
• Profit margin is the ratio of revenues to profits.
• Life cycle costing considers the total cost of ownership, including development and support costs.
• Cash flow analysis determines the estimated annual costs and benefits for a project.
• Sunk costs are retrospective costs that have already been incurred and cannot be recovered.
• Reserves (contingency or management) are dollars included in a cost estimate to mitigate cost risk.

Cost of Software Defects

• It is better to spend money to define user requirements and do early testing on IT projects than after implementation.
• The cost of repairing a software defect can be significantly higher in the post-product release phase than in the requirements and analysis phase.

Project Cost Management Processes

• Plan cost management
• Cost estimating
• Cost budgeting
• Cost control

Plan Cost Management

• Plan cost management establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.
• The cost management plan describes how cost variances will be managed on the project.
• Labor costs are often a large percentage of total project costs, so project managers must develop and track estimates for labor.

Cost Estimating

• Cost estimating is the process of developing an estimate of costs or resources needed to complete a project work.
• Cost estimates are important for completing projects within budget constraints.
• There are different types of cost estimates, and it's important to know how to prepare cost estimates, typical problems associated with IT cost estimates, and estimation tools and techniques.

Cost Estimation Tools and Techniques

• Analogous or top-down estimating: uses the actual cost of a previous similar project as the basis for the new estimate.
• Bottom-up estimating: estimates individual work items cost and sums them to get a total estimate.
• Parametric estimating: uses project characteristics (e.g., lines of code) in a mathematical model to estimate costs.

Constructive Cost Model (COCOMO)

• COCOMO is a software development cost estimation model developed by Barry Boehm.
• Parameters include source lines of code or function.
• COCOMO II is a computerized model available on the web.

Typical Problems with Cost Estimates

• Developing an estimate for a large software project is a complex task requiring a significant amount of effort.
• Estimates are done at various stages of the project.
• Many people doing estimates have little experience doing them.
• People have a bias toward underestimation.
• Management wants a number for a bid, not a real estimate.

Cost Budgeting/Determining the Budget

• Cost budgeting involves allocating project cost estimates to individual work items (work package) over time and providing a cost baseline for performance measures.
• The cost management plan, scope baseline, activity cost estimates, basis of estimates, project schedule, resource calendars, risk register, agreements, and organizational process assets are all inputs for determining the budget.

Cost Control

• Cost control means controlling changes in project budget.
• The process of monitoring status of project cost, updating project costs, and managing changes to project cost baseline.
• Earned value management is an important tool for cost control.

Earned Value Management (EVM)

• EVM is a project performance measurement technique that integrates scope, time, and cost data.
• Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals.
• EVM is used to help control project costs.

Earned Value Management Terms

• Planned value (PV) is that portion of the approved total cost estimate planned to be spent on an activity during a given period.
• Actual cost (AC) is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period.
• Earned value (EV) is the percentage of work actually completed multiplied by the planned value.

Earned Value Formulas

• To estimate what it will cost to complete a project or how long it will take based on performance to date, divide the budgeted cost or time by the appropriate index.

Rules of Thumb for EVA Numbers

• Negative numbers (1.0 indicate exceptional performance.
• CPI and SPI < 1.0 indicate poor performance.

Earned Value Chart for Project After Five Months

• The project's earned value chart shows poor performance if the EV line is below the PV line.

Example of Earned Value Calculation

• Earned value can be calculated using the formula: EV = Percent Completed (%) * Actual Budget.
• Planned value can be calculated using the formula: PV = Planned Completion (%) * BAC.
• Cost variance can be calculated using the formula: CV = EV - AC.