Overview

The EVM metrics like the One of the questions facing the project managers (or product managers) is answering the "so what?" question for the sponsor (or the steering committee or the management team) to make further decisions. These decisions are based on how much more time, funds, or both are required to get the project to the finish line. These are called forecasting and brings a flavor of both the science and art side of project management principles. Such forecasting indicators are called leading indicators and these are also part of the advanced module of earned value management. 

Introduction to EVM - Leading Indicators 

EVM uses three metrics for determining this forecast. These include the Estimate to Complete (ETC), Estimate At Completion (EAC), and To-Complete-Performance-Index (TCPI).

When a project starts, a definite amount of budget is set aside.  This budget is determined by either top-down or bottom-up estimation approaches and may involve analogous estimation, parametric estimation, triangular estimation, etc. In adaptive approaches, a lean budget may be set aside which will be used in releases or iterations (or Sprints in Scrum) as the teams engage in estimation using affinity estimation or relative sizing. While the details behind these estimation techniques is outside of our discussion, all these approaches involve risk management principles to include contingency reserves as part of the required funds to deliver on the project scope. This total fund comprised of project based costs and the contingency reserves is called the budget at completion (BAC) and measured over the project milestones as the planned value (PV) or the budgeted cost of work scheduled (BCWP).

 The EVM measures schedule variance (SV, or schedule performance index - SPI) and cost variance (CV, or cost performance index - CPI). Four critical scenarios face the project manager when finding out that the SV or CV is not favorable to the project (e.g.: SV is negative indicating behind schedule or CV is negative indicating over budget). We are not exploring the details behind these results but only forecasting here.

Use Case 1: Delivery Performance is behind schedule and requires additional time for team to complete. Frequent causes include inaccurate estimate, delayed start, etc. This represents schedule risk.

Use Case 2: This scenario assumes that estimates were not flawed and the team started fine. There is no grave concern on the team's ability to deliver. However, there were some issues that prevented the team to deliver early on. Some causes include delayed availability of critical resources, team's lack of capability on the new technology or new ways of working, delayed environment setup, etc. This represents risks with talent, staffing, procurement, technical, business, schedule, and cost risks. 

Use Case 3: More than the performance of the team, there were some unanticipated increase in costs (market fluctuations, currency risks, funding issues, etc. This represents higher level of external risks impacting the business, technical, and financial areas of the company requiring readjustment to the project baseline.

Use Case 4: Here, there is some concerns from both the schedule and cost fronts. Both the team's performance or ability to deliver is a concern and is further compounded by external risks impacting financial issues (e.g.: inability to raise additional funds) for the business. 

Depending upon the use case that caused the unfavorable EVM lagging indicators, the project manager or the product manager is faced with supporting the management decision making question.

  • Should we continue this project? 
  • If so, how much more time or fund is required?

EVM Equations for Leading Indicators

In the Use Case 1, the project manager estimates based on work remaining and the rate the team delivers to estimate how much more time is required. Converting this time unit into funds (applying blended rate or taking a best guess), the estimate to complete (ETC) is determined. In this case, the additional funds required is the sum of actual costs (AC), which is also called as sunk cost in financial terms and the new ETC.

EAC = AC + ETC

In the Use Case 2, since the team's ability to deliver is not an issue but additional time is required due to risks that impacted the schedule, the team has to determine the how much more is required besides the actual costs (AC) incurred based on what has been recognized (BAC - EV).

EAC = AC + BAC - EV

In the Use Case 3, market influences are impacting the cost and so based on the current cost performance index (CPI), an additional amount  is required. This is determined by dividing the original BAC by the current CPI. 

EAC = BAC / CPI

In the Use Case 4, we bring both the use cases 2 and 3 as both are at play here by incorporating both the CPI and SPI on the work remaining.

EAC = AC + (BAC - EV) / (SPI *CPI)

Why EAC and TCPI are required?

When ETC is projected and EAC is already computed by one of the four scenarios above, why is the TCPI required?  Isn't EAC enough? Well, it depends! The EAC is a best guess forecast. The inherent assumption is that the management will decide that this additional time and fund will bring the project back on track. But, this is still a best guess estimate because we assume that the CPI and SPI will remain flat.  There is no guarantee that the market or business risk will further deteriorate. This is why we project the EAC furthermore instead of relying only on ETC. 

Similar to how SPI and CPI are computed as a ratio instead of a variance, the forecasting approaches create the leading indicator metric To Complete Performance Index (TCPI) which is a ratio of work remaining (BAC - EV) and fund remaining (BAC - AC). It indicates a measure of confidence for the management team to decide whether the project should be continued given the project's projected health among the other opportunities considered. These decision-making take into consider the risk appetite of the organization, risk threshold for the project, and the risk tolerance of stakeholders. Now, discussing that is yet another risk driven planning expertise.

Spira Support

In the previous EVM articles, we have given queries that already include most of the information at the project release level. Depending on the scenario that an organization faces, these queries can be customized with additional custom properties to compute these leading indicators. 

Talk to us through your account manager if you would like more information!