The Personalities of Project Stakeholder Interactions

Project managers often must interact with many different stakeholders on a project.  Not only do the stakeholders have different interests and objectives with respect to the project, they often have very different interaction personalities.  When developing a stakeholder communication plan, a project manager should take these interaction personalities into consideration.  Depending upon the personality type, the method of communication, timing of communication, and the emphasis in the communication should be different.

Let me be clear about one thing, always communicate truth.  With all personalities you must provide a true picture of what is happening on the project and the type of interactions or decisions you need from the stakeholder.  However, in some cases the emphasis will be the facts, in some cases the emphasis will be the team members involved and some cases the emphasis will be the impact and next steps.  Let’s look at the five stakeholder interaction personalities.

Fire-fighter

This individual is focused on action.  They want to know what has happened, what is happening, and what you will do next.  When reporting on project status they want to hear about problems immediately and what you are doing about them.  To them a project communication failure has occurred if they find out about a problem on your project before you tell them.  If there is a major problem on a project, contact them immediately.  You don’t need all the facts or all the answers, but you need to let them know you are aware of the problem and doing something about it.  They will want to be involved in problem solving.  As a fire-fighter, they want to “smell the smoke.”  

Super-hero

This individual is focused on the people on the project team and those assigned to project problems.  They don’t want to know all the details about the problem; they want to know who is working it.  They put a high value on relationship and trust with individuals throughout the organization.  To them a communication failure is when an unknown person (or worse yet someone they don’t trust) is responsible for communicating with them about the project or problem.  You need to build a relationship with this person so that they will trust you.  When working on a project problem, start the communication with a list of who is working on the problem.  They will help you get the right people if you need them.

Data Demon

This individual is focused on facts.  They want facts about the project. They want facts about project problems.  They expect detailed plans, status reports, and analysis.  They would rather that you wait until you have the facts to talk with them than to have you interact quickly with vague or incomplete facts.  To them a communication failure is a project status or conclusion that is not supported by data.  When communicating with these individuals about project status, always have a detailed plan, status, and analysis.  If there is a problem, let them know that a variance has occurred and that you will provide the data about the issue as soon as you are able to collect it and analyse it.  They are not as interested in what you are doing as they are in what you know.

Process Policeman

This individual is focused on processes.  They have faith that if the process is followed, good results will happen and that the biggest business problem is undisciplined people doing unfocused work.  They want to know what process is being followed and on which step the project or project team is working.  When it comes to project status, they want to know that you are following the approved methodology and they expect the project report to be following the approved template.  They consider unapproved deviations from the process to be a major project failure.  If a problem arises on the project, they expect you to follow the problem resolution process.  When meeting with them, ensure that you let them know the process you are using and progress through that process.  If there is no process explain how you will develop one and then follow that.

Brick Wall

This person is not focused on your project, despite your efforts to get their attention.  They don’t come to meetings or conference calls.  They don’t respond to emails and status reports. Communicating with them is like communicating with a brick wall.  You and your project are either an irritant or irrelevant as far as they are concerned.  The key to working with these people will follow one of two paths.  One path is to structure your project so that you minimize the amount of interaction required with these stakeholders.  The second path is to identify something that they are very concerned about and that your project could impact.  Then lead every project communication with a reference to that item. 

Recognizing the interaction personality of your stakeholders and responding accordingly may take a little more effort, but will improve the communication and interaction with stakeholders.  When in the middle of a project issue, this can minimize miscommunication and help to quickly align support for resolution. 

Is It Time To Dump The Gantt Chart?

The most common project scheduling format is the Gantt Chart format.  It is easy to understand.  It is great for visualizing a project plan.  It clearly communicates what activities the project team should be working on each day of the project.  So what is the problem?  There are several.  The Gantt Chart relies on two demonstrably false assumptions with respect to development projects.  Added to that, once a Gantt Chart is in place, it often creates an environment of frustration, obfuscation, and team dysfunction.

Actually the correct title is the Bar Chart.  This chart is in the form of a calendar across the horizontal axis.  The project tasks are placed on the calendar with each task represented by a bar that begins on the task start date and ends on the task completion date.  The length of the bar then represents the length of the task.

Henry Gantt’s Chart

The chart became popular following the publication of a book, “Organizing for Work,” by Henry Gantt in 1919.  Gantt had worked for Fredrick Taylor before becoming an independent consultant and was an advocate of Taylor’s scientific management principles.  The Gantt Chart was developed for use in a manufacturing setting as a means to communicate to the factory supervisor what they should have the men working on next.

This leads to the inappropriate assumptions for a typical project application of the Gantt Chart.  The first assumption is that every activity that is in the project is identified and included on the chart.  This is a valid assumption for a manufacturing environment with defined process steps, well-defined tools and equipment, and the experience of having already done the activity numerous times.  The second assumption in the Gantt Chart is that the estimate for each activity is precisely accurate with little or no uncertainty.  Again, this was a valid assumption for a manufacturing operation that had embraced Taylor’s scientific management philosophy.  An operations manager would be measuring everything, collecting data, and monitoring performance.

Assumption #1: Every Task Is On The Gantt Chart

The assumption that every project task is on the Gantt Chart is invalid for most development projects.  Whether it is product development, system development, software development, or process development, the development environment is a discovery environment.  While experienced stakeholders and team members can forecast the likely chain of events there will inevitably be some activities that are discovered along the way.  These will not be in the Gantt Chart.

Further, a best practice touted by Cooperand Edgett is to use spiral development.  I have used the approach and I love it.  But it cannot be accurately represented on a Gantt Chart.  First, we don’t know how many spirals it will take to get the desired performance.  Even if we do guess right on the number of spirals, the activities in each spiral will change based upon the results of the test and analysis done on the previous spiral.  So the project management has two options.  He or she can guess what activities might be required in each spiral and probably guess some right and some wrong.  Or they just show the spiral with high level summary tasks that provide no useful information on what the team should actually be doing.

Assumption #2: Every Estimate Is Precisely Accurate

The second demonstrably false assumption is that every task duration estimate is precisely accurate.  The task will start precisely on the designated day and end precisely on the designated day.  This assumption is probably valid for some project tasks, but it is definitely not valid for many of the development tasks which have uncertainty embedded in them.  There is uncertainty with respect to the performance of the new technology.  Often there is uncertainty in the duration of the task because of the experience of new team members.  They must learn while doing, which depending upon their learning capacity and the level of instruction available to them, create more uncertainty in task duration. 

Add to this that many of the tasks are linked together either through task completion artifacts or project personnel availability.  As one task is delayed, it creates delays in other tasks and the impact can snowball through the project resulting in a Gantt Chart that is totally inaccurate.

Environment of Frustration, Denial, and Team Dysfunction

The impact of the two invalid assumptions is that a development project  Gantt Chart quickly becomes wrong.   The project manager may try to correct the chart but before he or she is able to incorporate the revisions and update the rest of the project management information, the Gantt Chart has changed again.  Eventually the project manager becomes so frustrated trying to keep it current that they just stop processing the day –to-day changes and wait to do a massive update at a major milestone or gate review.

But this now leads to a problem for team communication and progress reporting.  The team is tracking progress on a Gantt Chart that everyone knows is wrong.  Some of the team members will use the erroneous Gantt Chart as an excuse to ignore or avoid all project management activities and reports.  Others will try to twist what they are actually doing into the context of the erroneous Gantt Chart.  This leads to confusion and obfuscation of what is actually happening.

Finally the team ends up in a situation where the project manager is asking for status against a plan that the whole team knows is wrong.  This undermines the project manager’s credibility with the team.  Some team members refuse to even participate in a schedule status meeting.  They are now viewed as not being team players.  Others are twisting what they are doing into something to fit the erroneous Gantt Chart, but everyone knows that what they are reporting is not what they are doing.  Soon the other team members begin to suspect they may be lying about other aspects of the project.  By this time the team is totally dysfunctional.

The Alternative

So what should we do?  I recommend either switching to Milestone Charts and Network Diagrams or PERT Charts for large system development projects or using a Kanban chart with Milestone Reliease planning for smaller projects.   Milestone Charts can be used for tracking against calendar dates.  The Network Diagram or PERT Chart can be used for tracking activity sequence and monitoring  progress.  Kanban simplifies the project planning and tracking tasks for projects with low project management complexity. 

Constraining Innovation: The Six Sides of the “Box”

A well-accepted principle in innovation is that the innovation team must approach the innovation need with creativity.  The phrase often used is “thinking outside the box.”  But what does that really mean.  What is the “box?”

Well a box has six sides if you include the top and bottom.  And there are six types of constraints that can limit the path of innovation.  Each of these constraints can be broken.  The fewer the constraints on your team, the more likely you are to get meaningful innovation.  Let’s look at each of these six sides of the innovation box.

Technology Constraint. This constraint is the physics (or chemistry or biology) of the product or service. The laws of nature have limits.  Our periodic table has only 118 elements.  Water freezes and ice melts at specific temperatures. Copper conduct electricity and glass does not.

The only way to break this constraint is to change the physics by changing the technology you are using. For instance contractors and plumbers looking for an approach to installing plumbing in a structure that was easy, low cost, and resistant to breaks and cracks in freezing temperatures had to change from copper to PEX (cross-linked polyethylene) pipes.

Application Constraint.  This constraint is the task or use to which the product or service is applied.  Many products and services are designed to work well for a particular application.  Other applications were never considered when the original innovation took place.  Using the product or service in a new application can create new paths for innovation. 

To break this constraint you must consider the conditions and context of a new application.  Examine the assumptions inherent in the original application and those in the new application.  The different assumptions will point to new paths for innovation.  For instance, the original application of a telephone was to communicate between two individuals who were not co-located.  An assumption was that an individual was present at each telephone.  By changing the application to a messaging system, the assumption of the physical presence of an individual on each phone could be removed.  This led to the innovation of voice mail.   

Industry Constraint.  This constraint is the industry regulatory requirements and standards.  Often the standards and regulations are based upon particular technology and product or service embodiment.  These standards constrain the potential innovation paths. An innovative approach using a different technology may not be compatible with the current regulations or standards.

To break this constraint you must convince the regulatory bodies and standards agencies that they are being too restrictive.  This effort is often more about politics and vested interests than it is about technology or product performance.  For instance, for years AT&T and its Bell phone company subsidiaries controlled telephone service.  They had regulations concerning what was allowed and was not allowed on the telephone system.  Once deregulation occurred, the telecommunication industry and cellular communication has exploded with innovation.  

Organization Constraint.  This constraint is the organization systems, procedures and culture in which the potential innovators operate.  This includes the work space, the work authorization process, the risk sensitivity of the organization, and the rewards and recognition system.   Management systems like Lean and Six Sigma which strive to eliminate waste and variation often become innovation suppressors.

To break this constraint you must create a culture that encourages risk taking and creativity.  This is more than just a slogan about being innovative, it includes the business processes that review and approve new ideas.  The organization needs to reward risk taking and creativity which means deviating from tradition and the existing product or process baselines.  Slow bureaucratic processes with numerous reviews and delays waiting for the next budget cycle will kill innovative ideas.  A great example of this is the Department of Defense and the Defense Acquisition Cycle.  By the time many new systems get to the field they are already out of date.

Team Constraint. This constraint is the skills, background, and personalities of those working on the innovation team.  The broader the experiences and more diversity on the team, the more likely the team will have creative ideas.  However, the broader the experiences and more diversity on the team, the harder it is to get the team working together on a common goal.   The team also needs to have someone with the personality to challenge and push the team to make trade-offs and turn the ideas into actual products or services.

This is often the easiest constraint to break but the hardest to sustain.  Through hiring – either full-time or temporary – and training you can quickly break this constraint.  However, a change in team members can result in the resurfacing of this constraint.  Sometimes even the current team can switch from creative and innovative work practices to a sterile and hostile environment due to poor interpersonal skills among team members.  An excellent example is the experience at Apple.  Steve Jobs created a very innovative culture and teams, but at times the atmosphere was harsh and demanding.  Jobs left the company and the innovation pipeline started to dry up.  Jobs came back and there was another explosion of innovation. 

   

Resource Constraint. The sixth constraint is resources – time and money.  This is possibly the easiest constraint to understand.  Innovation often requires multiple iterations of the new product or service as unexpected or unforeseen challenges arise and must be resolved.  The innovation often leads to additional business challenges. Does the innovation now use software? There may be compatibility issues with other systems.  Does the innovation open up new markets?  There are now logistics, tax, and translation problems that we never had before.

To break this constraint the innovator requires time and money.  Large corporations will often have the resources to sustain an innovation effort.  They just need the vision and confidence to see it through.  Small start-up companies must seek angel investors or venture capital to overcome this constraint.  A classic example of this constraint was Thomas Edison’s work to create a commercially viable incandescent light bulb.  It took over 1,000 experiments and two years of testing to find a design that was commercially viable. 

As you plan your innovation efforts, consider breaking the constraints on all sides of the innovation box.  Don’t limit yourself to just one or two sides.  The fewer the constraints on your innovation team, the more likely you are to get a steady stream of high value innovations.

Projects: The Financial System Relief Valve

Your project is going well.  You are mostly on schedule and on budget.  There have been a few minor problems, but your risk plan anticipated them, so you were able to quickly react and recover.  This project is headed for success.  Then the edict comes down.

“No travel between now and the end of the fiscal year.  Delay deliveries of all equipment and supplies until next fiscal year.  Exceptions must be approved by the CFO.”

What are they thinking! You have a major review at a vendor scheduled for next week! If you postpone that, it will set your project back at least a month!!  And your major supplier on the critical path is scheduled to ship in two weeks!!  This will cause havoc with the schedule!!!  It will create extra costs for delays and expedites!!! THOSE IDIOTS!!!!

Stop, take a deep breath. Don’t take this personally. (Unless you backed into the CFO’s car in the parking lot last week – then it might be personal.) In all likelihood the business is doing some “financial engineering” as it prepares to close out the fiscal year.

Transaction: Amount and Timing

Every financial transaction in business has two equally important attributes – the amount and the timing.  The date of the transaction is as important as the amount when it comes to preparing financial reports.

Financial reports are either for a period of time, such as the Earnings Statement which is for a quarter or fiscal year; or for an instant in time, such as the Balance Sheet which is for a specific date.  When the transaction occurs will determine which report the transaction is recorded in. 

It is often much easier change the date of a transaction than it is to change the amount of the transaction.  I have often been asked to delay expenses near the end of a quarter or year.  I have also been asked at times to accelerate expenses into the quarter or year.  In both cases, we are managing the date of the transaction, not the amount of the transaction.

One other point about timing.  The date for a transaction can be set either using the cash basis or accrual basis.  The cash basis sets the date when the money changes hands.  The accrual basis sets the date when the responsibility for what the transaction represents is transferred – such as the product is shipped or the material is received.  Most businesses use the accrual basis.  That way, if cash payments are hung up for some reason, the sales and costs are still recorded and a true reflection of the business activity will be shown in the report.  The differences between the cash and accrual basis can be reconciled by analyzing the Cash Flow Statement.

Projects: The Financial System Relief Valve

Senior management must often forecast what they think will be the profit for the upcoming quarter or year.  If the actual amount is significantly different, the owners and investors begin to worry that management doesn’t know what is happening.  Therefore, senior management carefully considers the forecast they provide and they attempt to manage the business so as to meet the forecast.

But life happens.  Inevitably something occurs to cause the numbers to be different than expected.  There is an unexpected economic downturn.  Competition surprises the market with a new product.  The cost of raw material is higher, or lower, than expected.  

Let’s look at the major elements of the Earnings Statement, which shows the profit earned during a time period.  We want to see what can be done to influence profit as we approach the end of the fiscal year.  We will assume that Finance has done a preliminary analysis and determined that the company may miss its profit forecast and is trying to find a way to increase profit.  Our timing is set using the accrual basis.

• Revenue: This is sales in the marketplace.  A company can increase sales near the year end through a promotion. But that may take time to set up and often results in less profit because of the cost of the promotion or discount. So that doesn’t help to increase profit in the short term.
• COGS: The Cost of Goods Sold is the variable cost associated with the product.  It is the raw material and labor required to make product, or deliver the service.  There are two things that contribute to this cost, volume and design.  With respect to volume, if we sell more we must make more, if we sell less, we don’t need to make as many.  However, in the short term, we must follow the sales orders.  With respect to design, we could redesign for lower material costs or less labor, but that will take time to do the redesign, and if we are one month away from the end of the fiscal year, there is little that can be changed.  So this doesn’t help us increase profit in the short term either.
• Fixed and Overhead Cost:  When we consider the operating expenses of the business, we find that they behave in several ways. One is as fixed and overhead costs.  These are costs that are required to run or sustain the business.  They will not change based upon the day-to-day business activity.  For instance items like rent, insurance, debt payments, or business license are typically based upon contracts or regulations.  And business overhead functions such as the HR department, the IT department, the mail room, or the security guard are required to be at work whenever we open the doors.  These can only be changed through business restructuring, which again cannot be done in the short term.
• Project and Program Cost: Which brings us to the last category, projects and programs.  These are the expenses required to complete project and programs.  These are normally scheduled based upon the project schedule, not the fiscal calendar.  The fiscal calendar is something that management can’t change.  However, a project schedule can be changed with a phone call from the project sponsor to the project manager.  These are the only costs that can be changed in the short term.

So when Finance determines that the company needs more profit to meet its forecast, it is projects that get the call to stop spending.  Projects are the financial relief valve for the business as it nears the end of a fiscal quarter or year.  And if the year is going better than expected, the projects may be asked to accelerate spending.  Yes it impacts the project schedule, but the project is sacrificed for the greater good of the business.

De-mystifying Earned Value – Forecasts

In many cases, tell a project manager they must use earned value analysis on a project and you will hear a groan.  Earned Value Management has been tainted with an aura of overwhelming bureaucracy and incomprehensible numbers and ratios.  While some organizations may have done their best to confuse and confound project managers and project teams with Earned Value Management – it is really a very basic and easy to use set of project analytics.  This blog post will explain the earned value project forecasting analysis and other blog posts will discuss project baselines, variance analysis, and cost account managers.  Or get everything in one ebook that can be ordered below..

Earned Value Management

Earned value management is an analytical approach for determining the current cost and schedule status of a project and for forecasting the final cost of a project.  It combines scope, schedule and resource management into one set of measurements.  When used properly it will simplify and reduce the effort needed to provide effective project management control.

Earned Value Management is based upon the comparison of three different perspectives on a project.  The first perspective is the project planned value (PV) which is the estimated cost of each activity time phased according to the project schedule.  The next baseline is the earned value (EV) which is the estimated cost of the project activities that have been completed.  The final baseline is the actual cost (AC) which is the amount of money spent completing the work that has been done on the project.  These baselines are discussed in more detail in the blog post, “Demystifying Earned Value – theBaselines."

Forecasts

On the one had we could say the original baseline project plan is a forecast.  However, in project management terms, forecasting is normally providing an updated estimate from the original plan.  I recommend that this be done at the beginning of each phase.  It may also be done following a major high risk milestone.  I recommend starting the forecasting when the project is 20% complete.  By that time several significant items should be completed on the project and enough work is done so that a small underrun or overrun is not magnified out of proportion.  Prior to that time, the baseline plan is the forecast.

Throughout the lifecycle of the project, the project manager is often asked to provide a forecast for the final cost of the project which is referred to as the Estimate at Completion (EAC).   As the project gets underway, real costs occur and now actual costs can be used instead of budget estimates for the completed tasks.  The EAC is then the sum of the Actual Costs (AC) plus an estimate of what the costs will be to complete the remainder of the project.  This estimate for the remaining work is the Estimate to Completion (ETC).  This can be expressed with this formula:

EAC = AC + ETC 

The key then to effective forecasting is to be able to calculate a realistic ETC (since AC is already occurred and cannot be affected).

Forecasting Indices with Earned Value

To assist the project manager in the calculation of ETC, the Earned Value Management methodology creates several performance indices.  These indices consider what has happened on the project since its start.  There are two indices, a Cost Performance Index (CPI) and Schedule Performance Index (SPI).  

The CPI is a ratio of the earned value (EV) divided by the actual costs (AC).   Since the EV is the estimated cost of the work completed and the AC is the actual cost, the CPI is a ratio of underrun or overrun for the work completed.  The index can be calculated for the entire project or for a subset of tasks, such as all of Phase 3, or all the tasks performed by the IT organization.  

CPI = EV / AC

The SPI is a ratio of earned value (EV) divided by the planned value (PV).   Since the EV is the estimate for the work completed and the PV is the estimate for the work that was planned to have been completed, it is a ratio of ahead or behind schedule.  Again the index can be calculated for the entire project or a subset of the project tasks.

SPI = EV / PV

Earned Value Forecasting Methods

There are four methods for forecasting the ETC:  

• The first method is to create a new estimate.  In this case, the project manager and core team create a new estimate for all uncompleted work.  This often done if there is a major scope change to the project.  I also will use this approach when near the very end of the project because I normally have an excellent understanding of what is left to be done.  The formula for the project estimate is: EAC = AC + (new estimate for remaining work).


• The second method is to stick with the original estimate. In this case the ETC is the originally budgeted estimate for the remaining work. This is a good approach to use when any underruns or overruns that have occurred were due to unique or isolated events and are not likely to be repeated on the project. This is calculated as the Budget at Completion (BAC) which was the total for the planned value and therefore the original estimate of all work, minus the EV (original estimate of the work that has completed). The formula for the estimate of the remaining work is:  ETC = (BAC – EV).  The formula for the total project estimate is then:  EAC = AC + (BAC – EV).


• The third estimating method is used when established trends on the project will continue. This method requires the use of the CPI performance index. It assumes that any pattern of cost overruns or underruns that has been occurring on the project will continue to occur at the same rate. It can be applied to just a subset of tasks, or the entire project. The estimate created in this method will take the originally estimated value of the remaining work (BAC – EV) and divide that by the CPI. This has the effect of increasing or decreasing that value of the remaining work by the same ratio that it has been increasing or decreasing. The formula for the remaining work is: ETC = (BAC – EV) / CPI. The formula for the total project estimate is then: EAC = AC + (BAC – EV) / CPI.


• The fourth method is used with projects that are behind schedule and must be accelerated. It requires both of the earned value performance indices, CPI and SPI. This method assumes that the underrun or overrun pattern will continue and that an effort will be made to finish the project on the original date, so increased costs will occur to accelerate the remaining work. To create the acceleration effect, the estimated cost of the remaining work (BAC – EV) must be divided by the SPI. The ETC in this case then must include an effect for both cost and schedule. The estimate for the remaining work is: ETC = (BAC – EV) / (SPI * CPI). The estimate for the total project becomes: EAC = AC + (BAC – EV) / (SPI * CPI).

Which method you use will depend upon the project conditions. However, in each case the math is straightforward if you have the earned value metrics.  If you want to learn more about earned value, order my ebook below.

De-mystifying Earned Value – Variance

In many cases, tell a project manager they must use earned value analysis on a project and you will hear a groan.  Earned Value Management has been tainted with an aura of overwhelming bureaucracy and incomprehensible numbers and ratios.  While some organizations may have done their best to confuse and confound project managers and project teams with Earned Value Management – it is really a very basic and easy to use set of project analytics.  This blog post will explain the earned value variance analysis and other blog posts will discuss project baselines, project forecasting, and the role of the cost Account Manager.  Or get everything together in the ebook found at the end of this post.

Earned Value Management

Earned value management is an analytical approach for determining the current cost and schedule status of a project and for forecasting the final cost of a project.  It combines scope, schedule and resource management into one set of measurements.  When used properly it will simplify and reduce the effort needed to provide effective project management control.

Earned Value Management is based upon the comparison of three different perspectives on a project.  The first perspective is the project planned value (PV) which is the estimated cost of each activity time phased according to the project schedule.  The next baseline is the earned value (EV) which is the estimated cost of the project activities that have been completed.  The final baseline is the actual cost (AC) which is the amount of money spent completing the work that has been done on the project.  These baselines are discussed in more detail in the blog post, “Demystifying Earned Value – the Baselines.”

Variance

Projects hardly ever go exactly according to plan (at least I have never had one that went exactly to plan).  Some things go better than expected, some go worse. Some tasks start early, some late, and some are just different. Variance occurs when the actual situation is different from the planned or expected situation.  In projects, variance analysis applies to schedule variance and cost variance.   Variance analysis helps the project team understand why things are different than expected, and more importantly, what they should do about it, if anything.

Variance is always backward looking.  It analyses what has happened.  (We will cover forecasting in another blog.) We typically are concerned with two different time horizons when determining project variance.  One is the variance since the start of the project, known as cumulative variance.  This variance will be focused on trends.  The second is the variance in the current month or week.  This is focused on recent occurrences.  Most earned value reports will show both variances.

Cost Variance

Cost variance is the under-run or over-run of actual costs (AC) as compared to the estimated project costs of the work that has been completed (EV).  When evaluating project cost variance, it is important to exclude the effect of tasks that are ahead or behind schedule, which is why EV is used instead of PV.  The PV has embedded schedule assumptions for which tasks will occur in which months.  If a task is not worked on during a month because of a schedule delay, that could appear to be an under-run to the project for that month if we use PV.  However, if the task is accomplished the following month, it would appear to be an over-run for that month since the cost occurred in that month without any planned cost for that task occurring in that month.  The Earned Value Management approach allows us to eliminate the schedule impact on cost variance by using EV for the baseline cost instead of PV.  The EV represents the planned or budgeted cost for the work that has actually been performed.  The AC is the total costs associated with doing that work. 

Cost variance that is calculated using EV and AC from the beginning of the project is the cumulative variance.  It is an excellent indication of trends and helps to predict what will likely continue on the project unless changes are made.  However, the amount of the cumulative cost variance – either under-run or over-run – is typically unchangeable.  Most of those tasks are completed and the variance cannot be impacted.  The current period cost variance analysis will provide insight as to whether the tasks that are currently underway are over-running or under-running.  These are indications of immediate risks and opportunities that the project manager should investigate.  

The cost variance is calculated as the difference between EV and AC.  A positive cost variance is an under-run and a negative cost variance is an over-run.

Cost Variance = EV – AC

Current period cost variance uses the EV and AC for the current month.  Cumulative cost variance uses the EV and AC since the project has started.

Schedule Variance

Schedule variance is the ahead of schedule or behind schedule position of the project as compared to the schedule found in the project plan (PV).  Normally project managers present schedule variance in terms of time (days or weeks) ahead of or behind schedule.  However, since all earned value analysis baselines are expressed using money; the schedule variance in earned value analysis is also denominated in money.  (Hey – time is money, right?)  

The earned value analysis schedule variance is the estimated cost of the work that has not been done according to the project schedule plan.  For work that is accomplished earlier than scheduled, this would be a positive value representing the estimate of the work accomplished early.  For work that was late this is a negative value representing the estimated cost of the work that was not done when scheduled.  The schedule variance is then the difference between the EV, which is the estimated or budgeted cost of the work that has been performed and the PV which is estimated or budgeted cost of the work that should have been performed according to the project plan.

The primary concern for a project manager is negative schedule variance.  This is cost that will need to occur at some time on the project when those project activities finally occur.  This becomes important near the end of a fiscal year when the business is trying to plan the costs that will occur in both the current year and the following year.  Keep your finance people informed if you have large earned value schedule variances.

Schedule Variance = EV – PV

Just as with cost variance, this can be calculated both for the current month and for the entire project since its start.

Variance analysis is easily calculated using earned value management and the three earned value baselines.  Forecasting using earned value will be discussed in another blog.  If you would like to find out more about earned value management, order this ebook.

De-mystifying Earned Value – the Baselines

In many cases, tell a project manager they must use earned value analysis on a project and you will hear a groan.  Earned Value Management has been tainted with an aura of overwhelming bureaucracy and incomprehensible numbers and ratios.  While some organizations may have done their best to confuse and confound project managers and project teams with Earned Value Management – it is really a very basic and easy to use set of project analytics.  This blog post will explain the earned value baselines and future blog posts will discuss variance analysis, project forecasting, and the role of the cost account manager.  Or you can get everything in one document by ordering the ebook at the end of this post.

Earned Value Management

Earned value management is an analytical approach for determining the current cost and schedule status of a project and for forecasting the final cost of a project.  It combines scope, schedule and resource management into one set of measurements.  When used properly it will simplify and reduce the effort needed to provide effective project management control.

Earned Value Management is based upon the comparison of three different perspectives on a project.  The first perspective is the project plan – to include which tasks will be completed on which dates and how much they are estimated to cost.   Earned Value Management calls this the Planned Value (PV).  The second perspective is the current project schedule achievement – which is an assessment of which tasks are started; which tasks are completed; and the level of progress for those that are underway. Earned Value Management calls this the Earned Value (EV).  The third perspective is the current project spending – which is how much money has been spent on the project since it started.  Earned Value Management calls this the Actual Cost (AC).  The project manager should be managing all three of those perspectives regardless of whether Earned Value Management is being used.  

Earned Value Planning – Setting the PV

The PV is created using the Work Breakdown Structure (WBS), the project schedule, and the task estimates.  Every task in the WBS is assigned a separate account number in the financial system.  The cost estimate for every WBS task is then spread over the time periods (normally months) associated with the project schedule for that WBS task.  Those cost amounts are placed in the WBS account for the appropriate periods to create a time-phased task-level budget estimate.  This is the task PV.  Once all of the task PVs are complete, they can be summed into a project PV.

When spreading the task estimate across multiple time periods, one of two techniques is used.  The cost can be “level loaded.”  This means the costs are spread evenly across the time periods in which the task is scheduled to be accomplished.  The other approach to spreading the cost is “event loaded.”  In this case, the WBS task is planned at a micro-level (daily or weekly) and the cost associated with the work for each micro-time period is assigned to that period and then summed to the time periods used in the financial system (normally monthly). 

PV is expressed either as “Current PV” which is the PV that is planned for a particular month, or “Cumulative PV” which is the PV from the beginning of the project to the point in time under consideration (normally the current date). The final value of PV – that is the total PV for the project – is the Budget at Completion (BAC).

Setting Earned Value (EV)

Earned Value (EV) is a judgement call by the project manager and the project team concerning how much of a task has been completed.  The total possible earned value for a task is based upon the original budget estimate for that task, which is the task Planned Value (PV).  The percentage of a task that is completed is the percentage of value that has been “earned.”  If a task is 50% complete, the task has “earned” 50% of the planned value – regardless of the cost required to get to that point.  Before a task is started, its EV is 0 since none of the planned value has been earned yet.  When a task is complete, it has “earned” all of the value for that task, so the EV = PV.  EV for a task can never exceed the PV for a task, regardless of how much has been spent.  Nor can EV ever be negative.

A risk with earned value is that someone will claim that much of the value for a task has been earned, when in reality very little progress has been made.   To avoid this problem, many organizations adopt rules or practices for how earned value is to be credited.  This list is the most commonly used ones in my experience

• Earned value amount is based upon the number of micro-tasks associated with a task that have been completed.  This requires detailed task planning at the micro-activity level.  This will be the most accurate, but it also takes the most work.  I normally use this approach for tasks that take longer than 2 months to complete.
• 0-100: The earned value amount is zero until the task is complete, then the EV is 100%.of the PV.  This is easy to use and focuses team members on getting things done.  However, they are likely to start and do the easy tasks first and save the long and hard tasks for last.  It is best used with tasks of one week or less duration.
• 30-70:  The earned value is set at 30% of the PV when the task starts and the additional 70% is credited when the task is completed.  This approach is easy to calculate.  It is not quite so harsh as the 0-100 approaches.  I normally use this for tasks that are longer than a week in duration but less than 2 months.

Determining Actual Cost (AC)

The AC element of Earned Value Management is the easiest for the project manager.  The business financial system collects costs.  As long as the project earned value cost accounts are created when the project PV baseline is set and the financial system can record costs by those account numbers, the AC will be automatically collected from the finance system.

With these three project perspectives, PV, EV, and AC, the project manager can determine the underlying causes of cost and schedule variances and forecast project completion.  These topics will be discussed in future blog posts.  If you would like to find out even more about earned value management, purchase this ebook.