PMBOK defines these – but not well enough to do any good.
PURPOSE: The purpose of Earned and Planned Value are to compare how a project is performing against the budget and the schedule.
FUNDAMENTAL ISSUE – Components of a Budget:
- WBS (Work Breakdown Structure). The rolled up costs of all activities, work packages and milestones determine the cost of doing the actual work. All planned personnel related expenses including training, recruitment and incentives, procurements, etc. should be included.
- Risk Reserve. The EMV (Expected Monetary Value) of risk at baseline. This is calculated as the impact of each risk should they happen multiplied by the percentage likelihood of those risks occurring.
- Project Management Cost. This should be calculated as the weekly project manager cost multiplied by the number of weeks in the critical path plus time for closing activities.
- Initiating and Planning Cost. At baseline, all costs incurred to that point should be added to the project as initiating and planning costs.
In order to understand the role Earned Value plays in comparisons between how the project is performing against the budget, it is necessary to understand the following formula:
At the end of a perfectly planned project – TOTAL Earned Value would equal the Total Budget (meaning all costs).
That means Earned Value is derived from Risk, Initiating and Planning and Project Manager expenses.
PMBOK does not define how to do this very well at all. I will take a stab at it here.
WBS Component: YOU EARNED the ESTIMATED cost of all each activity or work package when that activity or work package is completed. SO – if you estimated an activity cost would be $200. When completed, you earn $200, regardless of what it actually cost.
Initiating and Planning Component: At the point of baseline, all costs to that point are EARNED.
Project Manager Component: The weekly project manager costs are EARNED in total each week of the project – regardless of whether the project manager even shows up for work.
Risk Component: The EMV of risk changes throughout a project as new risks are identified, triggers pass without the risk occurring and mitigation strategies are performed. Projects can become riskier or less risky – and that must be reflected in the comparisons.
The difference between the EMV of risk for the present period from the previous period is EARNED VALUE for that period. SO, if the risk of a project with an EMV of $10,000 passes without being realized, the $10,000 would be EARNED VALUE for that period.
Planned Value could be very complex if one determined if there are large swings in the quantity of resources from week to week.
If there is little changes in the quantity of resources, then the easiest way to determine Planned Value is as follows:
For each week, it would be Planned Value = (BUDGET – Procurements)/weeks in Critical Path
EXCEPT – for the weeks procurements will be performed which is where the Planned Value above would also include the total amount of the procurement planned for it.
SO – a late procurement could have a profound, but temporary impact on Planned Value