As you recall in the last lesson, we set up our resource learning curves and begin a statistician for a hypothetical project. In this lesson, we will learn the steps to set up an Earned Value Management System and how to calculate earned value. We will add these to the earned value to our curves to start to get a picture of the true performance on a project. Finally, we will compare our earned values to our planned values to understand our performance on the project. To set up an Earned Value Management System it takes three steps. The first step is to set up our baseline cost to resource estimate, a work breakdown structure work package. This will allow us to understand the planned value of each work package and what work corresponds to that value. This should have been completed when we prepared the project cost estimate and set up the project cost baseline. The next step is to decide the appropriate level of control for your project. This might be based on your organization's culture or standards or it may be something that you can decide for yourself. The last step in setting up your Earned Value Management System is to determine your method for calculating earned value. So what is the appropriate level of control for the project? How do we set up the control account plan? There are several considerations in setting up the control account plan. First, it should have well-defined scope boundaries so that we know if an activity or deliverable is within that boundary. Second, each control plan should sit inside a single branch of your work breakdown structure. Each control package should be managed by a single individual who is responsible for it. An individual may oversee more than one package but more than one individual should not oversee a single control package. Each control package should be of a manageable size. So how do we make these decisions? Our first question we might ask ourselves is, do we want to manage the whole budget as a whole? This might be workable for smaller projects where the project manager oversees all the details. The key question becomes, is this project small enough for me to oversee without asking others to be accountable for their parts? If the answer is, "no one else has responsibility for delivery of the project. " Then we can control it at the project level. More often the answer is, "others will have responsibility for delivering a segment of the project." This may be a physical area or a system. It may be a functional area such as mechanical engineering, or procurement, or construction. If this is the case then it makes sense to set up multiple controller accounts. In this section, the scope of the work to follow these delivery areas. Many times, the best approach is to set up these accounts to correspond to the responsibilities of your direct reports. And other times, you may decide to subdivide these areas further at lower levels with one or more control accounts corresponding to each track report. The key is to divide the project into manageable areas where someone has a reasonable span of control and only one person is responsible for that scope of work. My philosophy is, "If I'm going to hold that person responsible for delivering the projects segment on time, within cost, and at the agreed scope, then I want to set up a control account to allow them to see the information they need to monitor and control their segment." Having your own control account to manage is a great way to practice your project management skills. It is good training for when you have to keep your own project. Keep this in mind as you set up your accounts in order to help train your future leaders. Now to calculate earned value for the project. The basic approach to Earned Value is first, estimate a percent complete reached WBS Work Package. Second, multiply the percent complete times the value of the work package in terms of cost or man hour resources to calculate the Earned Value for that package. And then third, sum up the work package earned value to calculate the Earned Value of the control account and ultimately the project. So how do we estimate the percent complete for a work packet? There are six methods commonly used to make a percent complete estimate. The simplest method is called Percent Complete. This is a good approach for simple projects that are small. In this method, we estimate the percent complete of each work package based on our experience. It is particularly appropriate for studies and evaluations. It is a subjective measure. The downside to this approach is it is subjective and is easy to manipulate the result or be overoptimistic to get the results you want. In this case, we will show we were further along than we might actually be. The next method is the Fixed Formula method. We would typically use this method where we have some history with the activities and develop the formula for the percent complete based on a certain stage of the activity. The work packages should be detailed and short spanned. In this case, percent complete is awarded on a fixed formula set up in advance. For instance, if we're preparing to draw in a report, we might want to give ourselves 10 percent when we start, then 70 percent complete when we have finished the draft or internal review, and finally, 100 percent when it's complete. Or the project might be X percent complete when we reach a certain level of assembling, Y percent complete which reaches the next stage and so forth. The weighted milestone method is one where the work package is subdivided into smaller packages and each, a percentage of the overall. As we complete one part of the package, we are awarded that percent of the total. The approach can be good for engineering, each activity or work package is given a weight. If we're preparing a series of drawings for instance, we may assign each drawing a fixed number of man hours. Each time you complete one of these drawings you get the full value of that drawing. No partial credits allowed. These milestones and the value should be based on the organization's experience on similar projects. The Percent Complete with Milestone Gates combines the percent complete method with the weighted milestone method. It allows you to make a subjective determination between milestones but prevents you from taking more than the full milestone value till you've completed that portion of the work. Some organizations even combine the fixed formula approach with a milestone gates to calculate percent complete. In this case, you should award partial credit based on a set of fixed rules. In the Earned Standards approach, you're in a pre-determined amount each time you complete a repeating task. For instance, if you're going to create 100 units for an item, then each time you finish a unit, you might earn 10 hours. After 50 units, you've earned 500 hours. No matter how long it takes to actually do the work. This is a good method where you have a very repetitive task that involves multiple cycles of the same activity. In some ways, it's similar to a weighted milestone approach but is more focused on an assembly line production. Equivalent Units is similar to Earned Standards. In it, you earn a percentage of the total value of the task based on completing a percentage of the task. The example provided in the book is 5 miles of freeway is worth 15 million dollars. Therefore, you earn three million dollars for each mile that is completed no matter how long it takes, what it actually costs. These last two methods tend to be used in unit rate contracts whre you can agree that the contractor earns a fixed amount of money for whatever is produced. These methods are covered in more detail in Chapter 10 of the course text, "Project Management Toolbox: Tools and Techniques for Practicing Project Manager.". The next step in our Earned Value calculation is to multiply the percent complete for each work package times its resource value. This total is known as the Earned Value for that package. The Earned Value for each work package in a control account is summed up to give the Earned Value for the control account and then, the values for each control account are summed up for the Total Project Earned Value. In this graph, we can see the results of this calculation plotted as an incremental value reached time period. And then, there is a cumulative value over the time period covered. Here, the blue line represents our cost baseline plan, the green line represents the actual cost to date and the orange line represents the earned value that we calculated today. To answer this question, we're going to calculate schedule indices and cost indices to give us an indication of the project status. In the next lesson, we will look at these simple calculations and how to complete them.
