Chapter 7: Project Evaluation and Control

Importance of Project Evaluating

Three important metrics can be used to define the size of a project: project completion time (PCT), budget, and workload. Project completion time is the difference between the latest finish date of the last activity and the earliest start date of the first activity of a project. Budget means the total cost to be spent for the whole project. Finally, workload means the total amount of man-hours to be used in the project according to the baseline plan. For example, a project that has 10 days PCT and another project that has 1,000 days PCT are quite different. Additionally, budget and workload are good evaluating metrics to comprehend work amount in a project. For example, a project that has 1,000,000 man hours workload means it is quite a big project. Since management of a project is a dynamic process, no matter how well it is planned, facing with deviations in terms of cost and workload is unavoidable.

In general, the situation of more spending and less work occurs in a project. Then, a question appears: How can a project be evaluated especially in terms of budget and workload? For doing this, we have some techniques such as Earned Value Analysis (EVA), tracking Gantt chart, and Control chart. In fact, EVA is more effective than others since it is able to demonstrate the situation of project numerically. In order to evaluate and control a project, you should follow these four steps: 1. Setting a baseline plan 2. Measuring progress and performance 3. Comparing plan with the actual 4. Taking action.

Fundamental Terminology of Earned Value Analysis

There are two basic indicators to evaluate a project in terms of cost and workload. The first one is the cost performance index (CPI) and the other one is the schedule performance index (SPI). These values are positive, and if they equal to one, that means the project in on the way. For example, CPI is equal to one at the status date, that means actual spending has been realized in accordance with the baseline plan. If CPI is less than one, that means there is much spending according to the baseline plan, and vice versa if CPI is greater than one. Similarly, if SPI is equal to one, actual workload has been realized in accordance with the baseline plan by the status date. If SPI is less than one, it means that less work has been done according to the baseline plan (schedule), and vice versa if SPI is greater than one. Shortly, values of CPI and SPI greater than 1.0 indicate that work is ahead of schedule and under budget, respectively. Values less than 1.0 indicate the opposite. In other words, you can think that obtaining less than one for CPI and SPI is not good, and it means more spending, less work. Besides, the greater deviation for CPI and SPI we get, the more discordance between the actual situation at the status date and the baseline plan it means. As a result, these two values are the most important indicators that reveal the performance of the project. In order to calculate these two performance indicators, some other values should be calculated firstly.

Example 7.1

Duration of activity A in a project is 2 weeks. In order to realize this activity, 2 workers, a machine, and 10 kg raw materials are needed. Costs are given as 10 ? /hour for a worker, 500 ? /one usage, and 20 ? /kg for raw material, and additionally, ? 100 for raw material transportation. Calculate budget and workload of activity A.

Solution 7.1

Since one week is equal to five workdays, and one workday is equal to eight hours in the standard calendar, the duration of activity A is 2*5*8=80 hours. Let wA show the workload and BACA show the budget of activity A. Please be careful that working duration of machine is added to workload amount. Therefore, wA=80*2+80*1=240 man-hours. This value means, two workers and one machine will work along 80 hours, and the total workload is 240 man-hours. BACA=160*10+500+20*10+100= ? 2400. Important Setup cost means the money spent for any kind of setup. It may be transportation cost, warming or cooling of a machine cost, amortization cost, per usage cost of a machine, and so on. On the other hand, fixed cost means the money spent to do a job. For example, if you need a special machine to do a job and if you buy this machine, the cost of machine is a fixed cost. 156 Project Evaluation and Control That means, ? 1600 will be paid to workers for 80 hours performance. Cost of machine is ? 500. Since it is per usage cost, it does not depend on the duration of the activity. Additionally, there are ? 200 for raw material and ? 100 for setup cost. Total cost (budget) is equal to ? 2400.

Example 7.2

At the end of the planning phase, the following values are obtained for a project: PCT is 100 days, the total workload is 5,000 man-hours and the budget is ? 20,000. After starting the project, at the end of the 50th day, performed workload is calculated as 2,300 man-hours. What are the planned and earned values for the whole project at the status date? Interpret these values.

Solution 7.2

At the end of the 50th day means that half of the project has passed. Then, PCp is equal to 50%. Therefore, BCWS=0.5*20,000= ? 10,000. On the other hand, since performed workload is equal to 2,300 man hours, PCa=2300/5000=0.46. Then, BCWP=0.46*20,000= ? 9200. That means ? 10,000 value of work has been planned, however, ? 9200 value of work has been realized yet, by the status date (end of the 50th day). In earned value analysis, making an evaluation only for the whole project or only for an activity can be misleading. Evaluation should be done for each activity and the whole project. Please check the following examples in order to understand calculations in detail.

Example 7.3

In the following table, duration and resource requirements are given for a project having 3 activities. Standard calendar will be used and there exist enough resources. Costs of resources are given like that: ? 10/ hour for a worker, 50 ? /hour for an engineer, 20 ? /kg for raw material, and ? 500 per usage for a machine. Calculate the cost and workloads for each activity. What is the project budget and the total workload? (Hint: The values in the parentheses for resources show the resource amount to be used for this activity. For instance, workers (300%) means three workers will be used for activity A.)

Solution 7.3

Let’s define;
I={A, B, C} set of activities
wi: workload of ith activity.
BACi: Budget (cost) of ith activity.
WA=4*8*3=96 man-hours
WB=2*5*8*(1+2)=240 man-hours
WC=20*(1+1)=40 man-hours

Total workload of project=96+240+40=376 man-hours

BACA=96*10=¨960
BACB=80*50+80*2*10=¨5600
BACC=20*10+500+20*20=¨1100
Project budget=¨7660

Subsidiary Indicators for Project Evaluation

Subsidiary indicators are side indicators that derive from fundamental indicators. However, they are useful to obtain information about projects quickly in monetary value. They are given in the following entries based on the book Project Management written by Burke (2001).

1. EAC (Estimate at Completion): Predicted budget. In other words, budget to be obtained at Project finish date if the speed of project remains like that.

EAC=BAC*(ACWP/BCWP) = (BAC*ACWP) / PCa*BAC) = ACWP/PCa

Referring back to Example 7.1 in Page 4, let’s assume that the actual cost is equal to ? 1300 by the end of the 5th day. What is the predicted budget for activity A?

ACWP= ? 1300, then

EAC=1300/0.4= ? 3250

That means, if spending remains like that, the finish budget of activity A will be ? 3250.

2. BV (Budget Variance): Budget deviation. This value may be negative. If so, that means there is a budget exceed and it requires additional money. The opposite means the budget gives surplus.

BV=BAC-EAC

In example 7.1, since BAC was equal to ? 2400,

BV=2400-3250=-850 (Extra ? 850 is required to complete activity A)

3. CV (Cost Variance): Cost deviation. If this value is negative, that means value for work has not been earned as spent actually.

CV=BCWP-ACWP

In example 7.1,

CV=960-1300=-340 (Spent extra ? 340 against work performed)

4. CVI (Cost Variance Index): Percentage of cost deviation.

CVI=CV/BCWP

In example 7.1,

CVI=-340/960=-35.41%

5. SV (Schedule Variance): Schedule deviation as a monetary value. If SV is negative, that means the project is behind the plan against work performed. The opposite means the schedule is ahead of time.

SV=BCWP-BCWS

In example 7.1,

SV=960-1200=-240 (Earned value less than ? 240 against work performed)

6. SVI (Schedule Variance Index): Percentage of schedule deviation as monetary value.

SVI=SV/BCWS

In example 7.1,

SVI=-240/1200=-20%

Example 7.6

For a project, indicators achieved in the middle of the project duration are given below. (Cost values are in T). PCT is 100 days. Draw the cumulative cost-time diagram for this project.

ISL358U-PROJECT MANAGEMENT Chapter 7: Project Evaluation and Control 3 BCWP=1,800; BCWS=2,000; ACWP=2,500; BAC=3,500; EAC=4,000.

Solution 7.6

By using these values, we can calculate subsidiary indicators.

BV=BAC-EAC=3,500-4,000=-500

CV=BCWP-ACWP=1800-2,500=-700

SV=BCWP-BCWS=1800-2,000=-200

The cumulative cost-time diagram is given in Figure 7.3