An earlier posting described the concept of Earned Value—the idea that accomplished work has value, even if the work is incomplete. There are a number of formulas and acronyms to know when applying Earned Value Management (EVM). A couple more will be introduced here. Actual Cost (AC) and Budget at Completion (BAC) are two basic concepts to understand. AC is how much money you’ve actually spent at this point in time (not planned to spend, meant to spend, wanted to spent, but really and truly actually have spent). BAC is how much money has been budgeted for the entire project. So if Benjamin is part-way through managing a project that has been allotted ten thousand dollars, and as of today he’s spent seven thousand on the project, the BAC is ten thousand dollars and the AC is seven thousand dollars. The term AC is used in formulas to calculate whether a project is on-budget, how much value is being obtained for the cost, and how much more the project will cost. The term BAC is used in formulas to calculate how much the total project will cost, how much more the project will cost, and the difference in how much the project was supposed to cost compared to what it actually will cost.
March 2, 2009
February 26, 2009
Earned Value Management – Step 1
There is much to understand and a number of formulas to know in order to apply Earned Value Management (EVM). It’s often the most difficult concept for project managers to learn when they are studying for their PMP exam if they have not applied it in their work. The very first step is gaining a conceptual understanding of what this thing is that we called Earned Value. Earned Value is the idea that even though we have not completed the work, there is value to the amount of work we have accomplished. How do we define value? It’s usually by money, such as in dollars, but it could be by hours of labor also. Here is the basic earned value formula: BAC * (work completed / total work). BAC stands for Budget at Completion, which it the total budget for the project. This is multiplied by the percentage of work completed.
Now for the examples—if Patty’s budget for her party is $1000, and the work is half done, what is her earned value? It’s $500, because half the work is done and half the budget is $500.
If Carl’s car re-design project has a budget of $4 million dollars, and he is one-fourth done, what is his earned value? It’s $1 million, because 25% of the work is done, and 25% of the budget is $1 million.
In this example, you aren’t told the percentage of work completed—that must be calculated. Shelly has $20, and wants to use it to find 10 seashell souvenirs to buy. So far, she’s bought 2 seashells. What is her earned value? It’s $4. BAC * (work completed / total work) = $20 * (2 seashells/10 seashells) = $4. The project work is to buy 10 seashells, so far she’s bought 2, so the work is 20% complete. 20% of $20 is $4.
February 6, 2009
PMP Exam – PERT Formula
The Program Evaluation and Review Technique (PERT) formula is a simple and useful tool for project managers, and those who are planning to take their PMP Exam should have it memorized. There is much more to PERT as a project scheduling and planning technique than this formula, but here we’ll focus just on the formula. The PERT formula is mentioned in the 4th edition PMBOK® as a tool and technique of two processes—Estimate Activity Durations and Estimate Costs. The formula provides a weighted estimate—and the formula doesn’t care if the numbers you use represent time or money—so that’s why it’s in both the PMBOK’s Time and Cost knowledge areas.
To use this formula, we need three estimates—Optimistic (best-case scenario), Most Likely (realistic), and Pessimistic (worst-case scenario). We then find the average, but we first weight the Most Likely estimate by 4. The formula is (O + (4*ML) + P) / 6. We must divide by six because we in effect have six different estimates (although three of these estimates are the same number). We are averaging (O + ML + ML + ML + ML + P) / 6.
Here’s an example. The Estemitte family is driving home. They guess they are most likely 10 minutes from home, so that is their Most Likely estimate. If all the lights turn green, they guess it may take just 7 minutes to get home, so that is their Optimistic estimate. If it starts raining hard, they guess it may take them 12 minutes to get home, so that is their Pessimistic estimate. We simply put these numbers into the formula: (7 + 10 + 10 + 10 + 10 + 12) / 6 = 9.83 minutes.
This formula is most useful in estimating time or cost of activities for projects that are especially unique, such as in research and development where there are many unknowns. For projects that are similar to previous projects and there is good historical data and expert experience, the formula is less useful.
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