AND
OPERATION
MANAGEMENT
ON
PROJECT
ASSIGNMENT
Group 6
1.
2.
3.
4.
AKSHAT ATRAY
2K12/ME/21
AKSHAY AGGARWAL
2K12/ME/22
AKSHAY KUMAR
2K12/ME/23
AKSHAY MALIK
2K12/ME/24
MANAGEMENT
Contents
1. Introduction
2. Project Planning
2.1.Why Planning is necessary
2.2.Planning Pitfalls to avoid
2.3.How to use key Planning tools
3. Project Scheduling
3.1.Gantt Chart
3.2.CPM/PERT
3.3.Network Diagram
3.4.Activity Scheduling
3.5.Probabilistic Time Estimation
3.6.Time cost Trade off and Project Crashing
4. Project Control
4.1.Time management
4.2.Quality management
4.3.Cost management
4.4.Communication
4.5.Performance management
4.6.Earned Value Analysis
5. Reference
Contribution
Akshat Atray
2k12/ME/21
Akshay
Aggarwal
Akshay Kumar
2K12/ME/22
Akshay Malik
2K12/ME/24
2K12/ME/23
Project
Planning and
Gantt chart
CPM/PERT
Time Cost
Tradeoff and
Project Crashing
Probabilistic
Time Estimation
and Project
Control
1. Introduction
Managers typically oversee a variety of operations. Some of these involve routine, repetitive
activities, but others involve non routine activities. Under the latter heading are projects
unique, one-time operations designed to accomplish a set of objectives in a limited time
frame. Other examples of projects include constructing a shopping complex, merging two
companies, putting on a play, and designing and running a political campaign. Examples of
projects within business organizations include designing new products or services, designing
advertising campaigns, designing information systems, reengineering a process, designing
databases, software development, and designing Web pages.
Projects may involve considerable cost. Some have a long time horizon, and some involve a
large number of activities that must be carefully planned and coordinated. Most are expected
to be completed based on time, cost, and performance targets. To accomplish this, goals must
be established and priorities set. Tasks must be identified and time estimates made. Resource
requirements also must be projected and budgets prepared. Once under way, progress must
be monitored to assure that project goals and objectives will be achieved.
The project approach enables an organization to focus attention and concentrate efforts on
accomplishing a narrow set of performance objectives within a limited time and budget
framework. This can produce significant benefits compared with other approaches that might
be considered. Even so, projects present managers with a host of problems that differ in many
respects from those encountered with more routine activities. The problems of planning and
coordinating project activities can be formidable for large projects, which typically have
thousands of activities that must be carefully planned and monitored if the project is to
proceed according to schedule and at a reasonable cost.
Projects can have strategic importance for organizations. For example, good project
management can be instrumental in successfully implementing an enterprise resource
planning (ERP) system or converting a traditional operation to a lean operation.
The management of project involves three phases:
1. Planning: This phase includes goal setting, defining the project and team organization.
2. Scheduling: This phase relates people, money and supplies to specific activities and
relates activities o each other.
3. Controlling: Here the firm monitors resources, costs, quality and budgets. It also revises
or changes plans and shifts resources to meet time and cost demands.
2. Project Planning
Projects can be defined as a series of related tasks directed toward a major output. In some
firms a project organization is developed to make sure existing programs continue to run
smoothly on a day to day basis while new projects are successfully implemented.
2.1 WHY PLANNING IS NECESSARY
There are times when a project manager is instructed by the project sponsor to skip the
planning process of a new project since, it wastes time. Here are some reasons why
planning is vitally necessary.
Greshams Law: If initial planning is done poorly, the rise of daily problems
will eventually prevent adequate replanning.
10/10 Rule: In order to complete the project within 10% of the estimated cost, 10% of
the total estimated cost must be allocated to planning.
required deliverables.
A Work Breakdown Structure is a fundamental project management technique for defining and
organizing the total scope of a project, using a hierarchical tree structure. The first two levels
of the WBS (the root node and Level 2) define a set of planned outcomes that collectively and
exclusively represent 100% of the project scope. At each subsequent level, the children of a
parent node collectively and exclusively represent 100% of the scope of their parent node.
Complex projects can be overwhelming to the project manager. Instinctively, many project
managers will take a multifaceted project and break it down into smaller, more manageable
parts. This process is called decomposing the project.
The tool most often used to accomplish this is the Project Work Breakdown Structure. The
WBS is nothing more than a hierarchical diagram that shows the various elements of the
project in pictorial form.
Large, complex projects are organized and comprehended by breaking them into
progressively smaller pieces until they are a collection of defined "work packages" that may
include a number of tasks. A $1,000,000,000 project is simply a lot of $50,000 projects joined
together. The Work Breakdown Structure (WBS) is used to provide the framework for
organizing and managing the work.
If the WBS designer attempts to capture any action-oriented details in the WBS, he/she will
likely include either too many actions or too few actions. Too many actions will exceed 100%
of the parent's scope and too few will fall short of 100% of the parent's scope. The best way to
adhere to the 100% Rule is to define WBS elements in terms of outcomes or results. This also
ensures that the WBS is not overly prescriptive of methods, allowing for greater ingenuity and
creative thinking on the part of the project participants. For new product development
projects, the most common technique to assure an outcome-oriented WBS is to use a product
breakdown structure (PBS).
Feature-driven software projects may use a similar technique which is to employ a feature
breakdown structure. When a project provides professional services, a common technique is
to capture all planned deliverables to create a deliverable-oriented WBS. Work breakdown
structures that subdivide work by project phases (e.g. Preliminary Design Phase, Critical
Design Phase) must ensure that phases are clearly separated by a deliverable (e.g. an
approved Preliminary Design Review document, or an approved Critical Design Review
document).
Of all the levels on a WBS, Level-2 is often the most important because it determines how
actual costs and schedule data are grouped for future project cost and schedule estimating. A
project manager may find it useful to know how much it took to design (major work element)
a product after it had been completed so that the data can be used for future analogous
estimating. In other cases, the project manager may want to know how much a major part of
the product actually cost after the project was completed. For this a PBS would be used. Level2 is therefore used to capture actual from a project for future estimating purposes.
When completed, each WBS element should contain the following four items:
Likewise, such overlap is likely to cause confusion regarding project cost accounting. If the
WBS element names are ambiguous, a WBS dictionary can help clarify the distinctions
between WBS elements.
Example of WBS with 100% rule:
The
above
WBS
diagram also
illustrates the 100%
Rule. These
percentages are usually based on the estimated costs, or estimated
effort (direct labor hours). At the beginning of the decomposition
process, the project manager assigns 100% to the total scope of this
project. At WBS Level 2, the 100% is subdivided into five elements at
Level-2. The number of points allocated to each is an estimate based on the relative effort
involved. Level 2 elements are further subdivided to Level 3, and so forth.
Tool #2: Organization Breakdown Structure (OBS)
Like the WBS, the OBS is a hierarchical diagram. It typically depicts the overall organization of
the project members, usually with the project manager at the top, the team leaders at Level
2, and the individual team members below Level 2. Staff members may also be included.
The OBS shows clear lines of responsibility and reporting within the project. As a rule of
thumb, there should be no more than about six people reporting directly to the project
manager.
While RAMs can alleviate many forms of project role confusion they can also create confusion
if not constructed properly. Three rules must be followed when constructing RAMs.
Rule No. 1: Every row must contain only one 1. To have more than this would result in
having more than one individual with primary responsibility. Each individual might assume
that the other is taking the responsibility and thus no one will fulfill this role, or the two
individuals may be in conflict with each other, each wanting to meet the responsibility their
way.
Rule No. 2: Every column must contain at least one 1.
If an individual plays a key role on
the project yet has no primary responsibility assigned it may mean that either a responsibility
has been omitted from the RAM, or the individual has only a supportive role to the project.
Rule No. 3: Support functions must be included (2, 3, 4, etc.). To omit all supportive functions
will destroy needed project synergy. Individuals will see only their primary responsibility and
will be, in effect, licensed to ignore other vital supportive roles.
Tool #4: Network Diagrams
A project network diagram is a flow chart depicting the sequence in which a project's nonsummary activities (terminal elements) are to be completed, showing all their
dependencies.
The network diagram is excellent for planning and replanning project activities sequencing,
and it also identifies the projects critical path. Upon completing the construction of the
network diagram, the activities which represent the longest path from project start to project
end, are identified. That means if any of these critical path activities slip, so does the project
completion date.
3. PROJECT SCHEDULING
It is typically the most critical element in the project management process, especially during
the implementation phase (i.e., the actual project work), and it is the source of most conflict
and problems. One reason is that frequently the single most important criterion for the
success of a project is that it be finished on time. If a stadium is supposed to be finished in
time for the first game of the season and its not, there will be a lot of angry ticket holders; if
a school building is not completed by the time the school year starts, there will be a lot of
angry parents; if a shopping mall is not completed on time, there will be a lot of angry
tenants; if a new product is not completed by the scheduled launch date, millions of dollars
can be lost; and if a new military weapon is not completed on time, it could affect national
security. Time is also a measure of progress that is very visible. It is an absolute with little
flexibility; you can spend less money or use fewer people, but you cannot slow down or stop
the passage of time.
Developing a schedule encompasses the following basic steps. First, define the activities that
must be performed to complete the project; second, sequence the activities in the order in
which they must be completed; next, estimate the time required to complete each activity;
and finally, develop the schedule based on this sequencing and time estimates of the
activities.
Because scheduling involves a quantifiable measure, time, several quantitative techniques,
including the Gantt chart and CPM/PERT networks, are available that can be used to develop a
project schedule.
3.1 Gantt Chart
The Gantt chart is a popular visual tool for planning and scheduling simple projects. It enables
a manager to initially schedule project activities and then to monitor progress over time by
comparing planned progress to actual progress. Figure below illustrates a Gantt chart for a
bank's plan to establish a new direct marketing department. To prepare the chart, the vice
president in charge of the project had to first identify the major activities that would be
required. Next, time estimates for each activity were made, and the sequence of activities
was determined. Once completed, the chart indicated which activities were to occur, their
planned duration, and when they were to occur. Then, as the project progressed, the manager
was able to see which activities were on schedule and which were behind schedule. However,
Gantt charts fail to reveal certain relationships among activities that can be crucial to
effective project management. For instance, if one of the early activities in a project suffers a
delay, it would be important for the manager to be able to easily determine which later
activities would result in a delay. Conversely, some activities may safely be delayed without
affecting the overall project schedule. The Gantt chart does not directly reveal this.
3.2 CPM (CRITICAL PATH METHOD) / PERT (PROGRAM EVALUATION AND REVIEW
TECHNIQUE)
Critical Path Method (CPM) is a means to forecast the shortest possible time a project will
take. Basically the Critical Path runs along tasks that are dependent on one another and
cannot be moved. Therefore logically, this is the shortest path through the project. The CPM
method is concerned with making the optimum tradeoff between project completion time and
project cost. Like the PERT method, CPM can only be applied if we have some information
about the activities making up the project.
PERT (Program, Evaluation and Review Technique) is used to determine how long a project
should take to complete, and which steps in the project planning are most critical -- that is,
which steps would act as bottlenecks if delayed. To apply the method, certain information is
needed in advance: it must be possible to analyze the project into activities, the dependency
relationships between the activities must be known, and the time taken for each activity must
be known or at least estimable. Some cases are too simple for PERT -- cases where we've
performed very similar projects many times before, and know that the current project will take
the same time as they did, plus or minus a few per cent. Other cases are too complex -- for
example, the Manhattan project, where the individual activities making up the project are
themselves so novel that we don't know whether they're feasible at all, let alone how long
they can be expected to take.
PERT and CPM are both methods for predicting the cost and completion time of projects. PERT
is usually concerned just with the time taken, while CPM looks at cost/time tradeoffs.
PERT and CPM belong within Network Theory, a variety of mathematical analysis originating in
electrical engineering, but applicable to problems in many other areas. PERT was first used by
the U.S. Department of the Navy in planning and carrying out the development of the Polaris
submarine-launched missile program. It is now used for project planning in many industries.
While CPM is just a method, PERT takes the form of a network diagram displaying each of the
activities in a project. It's more usual to work with projects in the form of a list (known as a
Work Breakdown Structure, or WBS), or Gantt Chart.
Typically we describe dependencies as being one of the following:
SS - start to start:
FF - finish to finish
represent the activities' starting and finishing points, which are called events The starting
and finishing of activities, designated by nodes in the AOA convention . Events are
points in time. Unlike activities, they consume neither resources nor time. The nodes in an
AON diagram represent activities.
Both conventions are illustrated in figure below, using the bank example that was depicted in
the Gantt chart in figure before. In the AOA diagram, the arrows represent activities and they
show the sequence in which certain activities must be performed (e.g., Interview precedes
Hire and train); in the AON diagram, the arrows show only the sequence in which certain
activities must be performed while the nodes represent the activities. Activities in AOA
networks can be referred to in either of two ways. One is by their endpoints (e.g., activity 2-4)
and the other is by a letter assigned to an arrow (e.g., activity c). Activities in AON networks
are referred to by a letter (or number) assigned to a node. Although these two approaches are
slightly different, they both show sequential relationshipssomething Gantt charts don't. Note
that the AON diagram has a starting node, S, which is actually not an activity but is added in
order to have a single starting node.
A dummy activity is inserted into the network to show a precedence relationship, but it does
not represent any actual passage of time.
Another important aspect of paths is the length of a path: How long will a particular
sequence of activities take to complete? The length (of time) of any path can be determined
by summing the expected times of the activities on that path. The path with the longest time
is of particular interest because it governs project completion time. In other words, expected
project duration equals the expected time of the longest path. Moreover, if there are any
delays along the longest path, there will be corresponding delays in project completion time.
Attempts to shorten project completion must focus on the longest sequence of activities.
Because of its influence on project completion time, the longest path is referred to as
the critical path and its activities are referred to as critical activities.
3.4 Activity Scheduling
Forward Pass
Start at the beginning of CPM/PERT network to determine the earliest activity times
Earliest Start Time (ES)
earliest time an activity can start
ES = maximum EF of immediate predecessors
Earliest finish time (EF)
earliest time an activity can finish
earliest start time plus activity time
EF= ES + t
Backward Pass
Determines latest activity times by starting at the end of CPM/PERT network and
working forward
Latest Start Time (LS)
Latest time an activity can start without delaying critical path time
LS= LF - t
Latest finish time (LF)
latest time an activity can be completed without delaying critical path time
LS = minimum LS of immediate predecessors
Slack: amount of time an activity can be delayed without delaying the project
activity slack = LS - ES = LF EF
1. Optimistic time: The length of time required under optimum conditions; represented
by to.
2. Pessimistic time: The length of time required under the worst conditions; represented
by tp.
3. Most likely time: The most probable amount of time required; represented by tm.
Managers or others with knowledge about the project can make these time estimates.
The beta distribution is generally used to describe the inherent variability in time
estimates (see Figure). Although there is no real theoretical justification for using the beta
distribution, it has certain features that make it attractive in practice: The distribution can be
symmetrical or skewed to either the right or the left according to the nature of a particular
activity; the mean and variance of the distribution can be readily obtained from the three time
estimates listed above; and the distribution is unimodal with a high concentration of
probability surrounding the most likely time estimate.
Of special interest in network analysis are the average or expected time for each activity, te,
and the variance of each activity time,
average of the three time estimates:
p. 762
The expected duration of a path (i.e., the path mean) is equal to the sum of the expected
times of the activities on that path:
The standard deviation of each activity's time is estimated as one-sixth of the difference
between the pessimistic and optimistic time estimates. (Analogously, nearly all of the area
under a normal distribution lies within three standard deviations of the mean, which is a range
of six standard deviations.) We find the variance by squaring the standard deviation. Thus,
The size of the variance reflects the degree of uncertainty associated with an activity's time:
The larger the variance, the greater the uncertainty.
It is also desirable to compute the standard deviation of the expected time for each
path. We can do this by summing the variances of the activities on a path and then taking the
square root of that number; that is,
Solution:
b. The path that has the longest expected duration is the critical path. Because path d-e-f has
Knowledge of the expected path times and their standard deviations enables a manager to
compute probabilistic estimates of the project completion time, such as these:
The probability that the project will be completed by a specified time.
The probability that the project will take longer than its scheduled completion time.
These estimates can be derived from the probability that various paths will be completed by
the specified time. This involves the use of the normal distribution. Although activity times are
represented by a beta distribution, the path distribution is represented by a normal
distribution. The central limit theorem tells us that the summing of activity times (random
variables) results in a normal distribution. This is illustrated in Figure 17.9. The rationale for
using a normal distribution is that sums of random variables (activity times) will tend to be
normally distributed, regardless of the distributions of the variables. The normal tendency
improves as the number of random variables increases. However, even when the number of
items being summed is fairly small, the normal approximation provides a reasonable
approximation to the actual distribution.
FIGURE 17.9
Activity distributions and the path distribution
Shortening the duration on an activity will normally increase its direct cost
which comprises: the cost of labour, equipment, and material. It should never be assumed
that the quantity of resources deployed and the task duration are inversely related. Thus
one should never automatically assume that the work that can be done by one man in 16
weeks can actually be done by 16 men in one week.
normal cost (minimum cost), and the corresponding duration is called the normal duration. The shortest
possible duration required for completing the activity is called the crash duration, and the corresponding cost is
called the crash cost. Normally, a planner start his/her estimation and scheduling process by assuming the least
costly option
Crew
size
(men)
Crew formation
166
204
230
Consider the following rates: Labour LE96/day; carpenter LE128/day; foreman LE144/day and scaffolding
LE60/day. Determine the direct cost of this activity considering different crews formation.
Solution
The duration for installing the metal scaffold can be determined by dividing the total quantity by the estimated
daily production. The cost can be determined by summing up the daily cost of each crew and then multiply it
by the duration of using that crew. The
calculations are shown in the following table.
Crew size
Duration (days)
Cost (LE)
This example illustrates the options which the planner develops as he/she establishes the normal duration for an
activity by choosing the least cost alternative. The time-cost relationship for this example is shown in Figure
8.4. The cost slop for this activity can be calculates as follow:
Cost slope 1 (between points 1 and 2) = (33936 33252) / (51 42) = 76.22 LE/day
Cost slope 2 (between points 2 and 3) = (34632 33936) / (42 37) = 139.2 LE/day
34800
34400
34200
34000
33800
Cost (LE)
34600
33600
33400
33200
33000
30
35
40
45
50
55
Duration (days)
As the direct cost for the project equals the sum of the direct costs of its activities, then the project direct cost
will increase by decreasing its duration. On the other hand, the indirect cost will decrease by decreasing the
project duration, as the indirect cost are almost a linear function with the project duration.
Project cost
Project duration
Figure 8.5: Project time-cost relationship
The project total time-cost relationship can be determined by adding up the direct cost and indirect cost
values together. The optimum project duration can be determined as the project duration that results in the least
project total cost.
Shortening Project Duration
The minimum time to complete a project is called the project-crash time. This minimum completion time can be
found by applying critical path scheduling with all activity durations set to their minimum values. This minimum
completion time for the project can then be used to determine the project-crash cost. Since there are some
activities not on the critical path that can be assigned longer duration without delaying the project, it is
advantageous to change the all-crash schedule and thereby reduce costs.
Heuristic approaches are used to solve the time/cost trade off problem such as the cost- lope method used in
this chapter. In particular, a simple approach is to first apply critical path scheduling with all activity durations
assumed to be at minimum cost. Next, the planner can examine activities on the critical path and reduce the
scheduled duration of activities which have the lowest resulting increase in costs. In essence, the planner
develops a list of activities on the critical path ranked with their cost slopes. The heuristic solution proceeds by
shortening activities in the order of their lowest cost slopes. As the duration of activities on the shortest path
are shortened, the project duration is also reduced. Eventually, another path becomes critical, and a new
list of activities on the critical path must be prepared. Using this way, good but not necessarily optimal
schedules can be identified.
The procedure for shortening project duration can be summarized in the following steps:
1. Draw the project network.
2. Perform CPM calculations and identify the critical path, use normal durations and costs for all activities.
3. Compute the cost slope for each activity from the following equation:
cost slope = crash cost normal cost / normal duration crash duration
4. Start by shortening the activity duration on the critical path which has the least cost slope and not been
shortened to its crash duration.
5. Reduce the duration of the critical activities with least cost slope until its crash duration is reached or until
the critical path changes.
6. When multiple critical paths are involved, the activity(ies) to shorten is determined by comparing the cost
slope of the activity which lies on all critical paths (if any), with the sum of cost slope for a group of
activities, each one of them lies on one of the critical paths.
7. Having shortened a critical path, you should adjust activities timings, and floats.
8. The cost increase due to activity shortening is calculated as the cost slope multiplied by the time of
time units shortened.
9. Continue until no further shortening is possible, and then the crash point is reached.
10. The results may be represented graphically by plotting project completion time against cumulative cost increase.
This is the project direct-cost / time relationship. By adding the project indirect cost to this curve to obtain the
project time / cost curve. This curve gives the optimum duration and the corresponding minimum cost.
4.
PROJECT CONTROL
Project control is the process of making sure the project progresses toward a successful
completion.
It requires that the project be monitored and progress be measured so that any deviations
from the project plan, and particularly the project schedule, are minimized. If the project is
found to be deviating from the planthat is, it is not on schedule, cost overruns are occurring,
activity results are not as expected, and so onthen corrective action must be taken. In the
rest of this section we will describe several key elements of project control, including time
management, quality control, performance monitoring, and communication.
4.1 TIME MANAGEMENT
Time management is the process of making sure the project schedule does not slip and it is
on time. This requires the monitoring of individual activity schedules and frequent updates. If
the schedule is being delayed to an extent that jeopardizes the project success, then the
project manager may have to shift resources to accelerate critical activities. Some activities
may have slack time, and resources can be shifted from them to activities that are not on
schedule. This is referred to as timecost tradeof. However, this can also push the project
cost above budget. In some cases, the work may need to be corrected or made more efficient.
In other cases, original activity time estimates upon implementation may prove to be
unrealistic, with the result that the schedule must be changed and the repercussions of such
changes on project success evaluated.
4.2 COST MANAGEMENT
Cost management is often closely tied to time management because of the timecost tradeoff
occurrences that we mentioned previously. If the schedule is delayed, costs tend to increase in
order to get the project back on schedule. Also, as the project progresses, some cost
estimates may prove to be unrealistic or erroneous. As such, it will be necessary to revise cost
estimates and develop budget updates. If cost overruns are excessive, then corrective actions
must be taken.
4.3 QUALITY MANAGEMENT
Quality management and control are an integral part of the project management process. The
process requires that project work be monitored for quality and that improvements be made
as the project progresses just the same as in a normal production or manufacturing operation.
Tasks and activities must be monitored to make sure that work is done correctly and that
activities are completed correctly according to plan. If the work on an activity or task is
flawed, subsequent activities may be affected, requiring rework, delaying the project, and
threatening project success. Poor-quality work increases the risk of project failure, just as a
defective part can result in a defective final product if not corrected. As such, the principles of
quality management and many of the same techniques for statistical analysis and statistical
process control discussed in earlier chapters for traditional production processes can also be
applied to the project management process.
4.4 COMMUNICATION
Communication needs for project and program management control in todays global
business environment tend to be substantial and complex. The distribution of design
documents, budget and cost documents, plans, status reports, schedules, and schedule
changes in a timely manner is often critical to project success. As a result, more and more
companies are using the Internet to communicate project information, and are using company
intranet project Web sites to provide a single location for team members to access project
information. Internet communication and software combined with faxing, videoconferencing
systems, phones, handheld computers, and jet travel are enabling transnational companies to
engage in global project management.
4.5 PERFORMANCE MANAGEMENT
Performance management is the process of monitoring a project and developing timed (i.e.,
daily, weekly, monthly) status reports to make sure that goals are being met and the plan is
being followed. It compares planned target dates for events, milestones, and work completion
with dates actually achieved to determine whether the project is on schedule or behind
schedule. Key measures of performance include deviation from the schedule, resource usage,
and cost overruns. These reports are developed by the project manager and by individuals
and organizational units with performance responsibility.
than 1.0 indicates work is accomplished for less cost than what was planned or budgeted.
CPI less than 1.0 indicates the project is facing cost overrun.
Schedule Performance Index (SPI) The ratio of work accomplished (BCWP) versus work
planned (BCWS), for a specific time period. SPI indicates the rate at which the project is
progressing.
Estimate At Completion (EAC) It is a forecast of most likely total project costs based on
project performance and risk quantification. At the start of the project BAC and EAC will be
equal. EAC will vary from BAC only when actual costs (ACWP) vary from the planned costs
(BCWP). Most common forecasting techniques are some variations of:
1. EAC = Actual to date plus a new estimate for all remaining work. This approach is most
often used when past performance shows that the original estimating assumptions
were fundamentally flawed, or they are no longer relevant to a change in conditions.
2. EAC = Actual to date plus remaining budget. This approach is most often used when
current variances are seen as atypical and the project management team expectations
are that similar variances will not occur in the future.
3. EAC = Actual to date plus the remaining budget modified by a performance factor, often
the cumulative cost performance index (CPI). This approach is most often used when
current variances are seen as typical of future variances.
4. EAC = Budget At Completion (BAC) modified by a performance factor, cumulative cost
performance index (CPI). This approach is most often used when no variances from BAC
have occurred.
Estimate To Complete (ETC) The difference between Estimate At Completion (EAC) and the
Actual Cost (AC). This is the estimated additional cost to complete the project from any
given time.
Variance At Completion (VAC) The difference between Budget At Completion and Estimate
At Completion (EAC). This is the dollar value by which the project will be over or under
budget.
As of first quarter of year 2002 there is a shift in using the terms Planned Value (PV), Earned
Value (EV) and Actual Cost (AC) instead of Budgeted Cost of Work Scheduled (BCWS),
Budgeted Cost of Work Performed (BCWP) and Actual Cost of Work Performed (ACWP) .
Illustrative example of Earned Value
In the following four periods we expect to complete $100 of work:
1
2
3
4
Work
25
25
25
25
scheduled($)
[Planned Value]
Total
100
As time progresses, we can see what was actually spent in each period:
Work Scheduled ($)
Planned Value
Actual Cost($)
Variance
1
25
2
25
3
25
4
25
Total
100
22
20
25
25
92
From an accounting sense it appears that this project is experiencing an underun of 8%. It
was expected to cost $100 and has actually cost $92. What is missing from this equation is
the value of how much work actually was completed or performed.
Work Scheduled($)
(Planned Value)
Accomplished
Value($)
(Earned Value)
Actual Cost ($)
Schedule
Variance(SV)
(SV=EV-PV)
Cost Variance(CV)
(CV=EV-AC)
1
25
2
25
3
25
4
25
Total
100
20
20
20
20
20
22
-5
20
-5
25
-5
25
-5
92
-20
i.e 20%
-2
-5
-5
-12
i.e 12%
We now have a clear picture of the actual status of the work. We currently have a schedule
variance of -$20. We were scheduled to complete $100 of work, and have only completed
$80. In addition the work that was completed ($80) has cost more than we planned ($92)
creating a cost variance of $12. The actual cost variance is not 8% as calculated by the
traditional approach but is 15% which is more accurate as it also consider the work
accomplished.
References:
1. Principles of Operation Management, Heizer and Render
2. Operations Management, Roberta Russell and Bernard Taylor
3. Production/ Operations Management, William J Stevenson