You are planning some major renovations around the house and having discussed your plans with a local building consultant you realize that renovating each of your 10(!) rooms house will cost you $20,000 and the work in its entirety will take 10 weeks to complete. Your friends warn you to be vigilant with your building contractors and so you request the renovation manager to report back to you, at the end of each week, with a report outlining the status of the project.
One week into the renovation your renovation manager provides you with a report advising you that costs to-date have reached $19,000 while the 1st room is 80% complete.
Armed with this information you ponder whether or not the renovation is progressing as planned. The good news is that total spend for the week has been lower than expected ($19,000 actual spend vs. $20,000 of planned spend). But there’s also bad news. According to the initial plans it was expected that by now work on the 1st room will be complete but according to the contractor’s report only 80% has actually been achieved. Having come from a fairly analytical project management background you contemplate the following points:
- Prior to embarking on you building journey you’ve expected to complete 1 room each week, in which case the total value of the work planned (aka Planned Value (PV)) would have come up to 1 x $20,000 = $20,000.
- According the builder’s report, they have only been able to complete 80% of one room, so the value of the work output, using as a calculation baseline the initial budgeted cost of each room, is only 80% x $20,000 = $16,000. In Earned Value ‘speak’ this value is called the Earned Value (EV) as it is a representation of the tangible value, to the end user (which is you) of the work performed.
- The actual cost (Actual Cost (AC)) incurred was $19,000
Having realised the above you are now armed with the basic, yet necessary, information required to perform some further analysis:
- You are looking for an indicator that will provide you with an efficiency indication to the level of return you’ve received for every dollar invested in your renovation so far. You know how much you’ve spend to-date (your Actual Costs) and you also know what was the value of the work produced so far (your Earned Value). If you divide the Earned Value by the Actual Cost you will get this measure, which in Earned Value ‘speak’ is called the Cost Performance Index (CPI) and is calculated as EV/AC = $16,000/$19,000 = $0.84. This figure tells you that each $1 of renovations investment has only earned you $0.84 of renovation value.
This is obviously disappointing and you are just about to pick up the phone and contact the building contractor when you realise that your anger might be a bit pre-mature. It is true that your return on the investment, to-date, has been negative, but perhaps work is progressing faster than expected, in which case, although the total cost of work might be higher than expected, the total time for completing the work will be shorter than the 10 weeks planned for this activity.
- You are now looking for an indicator that will provide you with an efficiency indication to the pace in which work is progressing. You know how much was planned to be spent during each week ($20,000 per week, as per the original plan) and you also know the value of the work actually done. You figure out that if the value of the work actually done exceeds the value of the work planned then this could be used as an indication that work is performed faster than planned, in which case there is a good indication that the total work will finish earlier than planned. If however, the value of the work actually done is lower than the value of the work planned, that would be an indication that the total work is behind schedule and is likely to finish late. In Earned Value ‘speak’ this indicator is called the Schedule Performance Index (SPI) and is calculated as EV/PV = $16,000/$20,000 = 0.80. This figure tells you that work is progressing at a rate of 80% of its original plan.
In part 2 we will continue our story through the renovation work and explore some of the other Earned Value tools, more specifically the ability to utilize past performance and project future work parameters.
Until next time.