You will need to talk with financial guys, so I spend a section on higher mathematics… Remember Dick? He was part of the budget to program some application: he was supposed to spend 5 days, with a total cost of $5000.

Suppose we schedule Dick to start on Monday and is planned to finish after five days on Friday. If you want to monitor the cost for Dicks' endeavor you just need to monitor the value of the budget: $5000, which is what is originally estimated. By the way, a complete budget, which is agreed upon by the customer is called a baseline. The budget might change due to discussions and new insight, however, the baseline can only chance after a signature of the customer. On Wednesday, Dick spend 3 days working on the stupid thing, so at that time the cost in reality are $1000 * 3 = $3000. This is the actual project cost.

Dicks' manager could yell now: "the job is 60% completed!" However, the correct phrase should be "we have used now 60% of what we originally thought (budget)". Looking at the bits Dick produced, reveals that he has only done 25% of the application. So, actually the cost should be 25% of $5000 (total budget of Dick) = $1250. This value is called in "advanced project management lingo" the earned value.

What is the progress? Well, 25% of the total work to be done. Used 60% of the budget and estimated time. The question that has to be answered is "how much will it cost in the end?", "when is it actually finished?" Dick will say, he will work harder, he will make up in time. He probably will. But, not so much that the difference between budget and actual project cost will vanish.

Enter the "Estimate at Completion" (EAC). This is a forecast of total project costs based upon how the project is currently doing, the project performance. It's something you have to calculate. Preferably with a computer. EAC is calculated by taking the total budget and divided by a performance factor (the cost performance index, which is Earned value / Actual cost ). This assumes that the percentage the project has overrun today is going to be the same percentage that it overruns at completion.

So, for Dick on this Wednesday, the following overview holds: actual project cost $3000; total budget $5000; earned value $1250; cost performance index 0.417.

Which brings us to an EAC of: $5000 / 0.417 = $11,990.41.

Dick's in trouble.

This entry was posted on Saturday, August 4th, 2007 at 12:43 pm and is filed under Progress.