Business Skills for Project Managers Tracking Project Budgets

Business Skills for Project Managers Tracking Project Budgets Burn Rate vs. EVM Tom Mc. Greal, PMP

Tracking Project Budgets ¡ Burn Rate l l ¡ Simple, straightforward Based on tracking hours worked vs. allocated Earned Value Management (EVM) l l l Used to track value “earned” at each stage vs. planned budget costs and actual reported costs Requires accurate breakdowns and effort estimations of work tasks to be effective Requires knowledge of cost/hr for each resource type

Burn Rate ¡ Pro: l l ¡ Based on tallying pro-rated hours worked against plan estimates Can assign $$ cost/hour Can pro-rate % of a resource’s time to a project Simple to calculate, good rule of thumb Con: l l l Does not give accurate indication of value created Does not provide an indication of resource productivity Does not allow ‘apples-to-apples’ comparison of cost and schedule variances, hence difficult to determine where the trade-offs should be made.

Earned Value Management (EVM) ¡ Required for US Gov contracts, Do. D, NASA etc. ¡ Pro: l l l ¡ Normalizes and quantifies ‘cost variance’ and ‘schedule variance’; allows meaningful comparisons of the two to determine optimal tradeoffs Provides indication of productivity if actual costs available (e. g. from separate accounting system) Gives indication of “value created” to stakeholders Con: l l Needs accurate estimation of project tasks (Work Breakdown Structure) Productivity calculations only available if accounting/payroll logs charged hours on a per-project basis.

EVM Basics ¡ Metrics all relate to a given date or milestone ¡ Planned Value (PV) l ¡ Actual Cost (AC) l ¡ Value of Work actually accomplished to date (in terms of baseline budget) Schedule Variance (SV) l ¡ Amount of money spent on the project to date as determined from charges to Accounting or Payroll system Earned Value (EV) l ¡ Quantity of work ($) planned to have completed to date (in terms of baseline budget) Planned Value (PV) – Earned Value (EV) Cost Variance (SV) l Actual Cost (AC) – Earned Value (EV)

More EVM metrics…. ¡ ¡ Schedule Performance Index (SPI) l Ratio of EV / PV l Gives an indication of progress – If > 1; then project is ahead of schedule. Cost Performance Index (CPI) l Ratio of EV / AC l Gives an indication of productivity – If > 1; then value is being created with less cost than anticipated. ¡ Example 1 l CPI is > 1 and SPI is < 1 l This implies that the project may be understaffed: Productivity is high, but progress is slow. ¡ Example 2 l CPI < 1 and SPI < 1 l This may imply that there is too much unplanned work (bad estimation) or scope changes have occurred that have not been accounted for in the PV.

Projections based on EVM ¡ Estimate at Completion (EAC) l l l ¡ (Original Budget) / CPI Gives an estimate of the actual cost of completing the project based on current value of CPI. If CPI consistently > 1; then project should finish below budget ($500, 000) / 1. 12 = $446, 429 [~11% under budget] Alternative EAC calculation l l l (Original Budget) / (CPI * SPI) Gives an estimate of the actual cost of completing the project based on current values of both cost and schedule variance (assuming schedule will not be allowed to slip). (S 500, 000) / (0. 9 * 0. 81) = $685, 871 [~37% over budget]

Conclusions… ¡ Burn rate calculations usually sufficient for most smaller, short-term projects. ¡ EVM gives a more accurate picture, but only if the company’s accounting structure supports it. Designed initially for larger projects – Defense, NASA etc ¡ EVM is still worthwhile in smaller projects if accurate data is available, can be easily calculated via spreadsheet.