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4.4

## Darden School of Business, University of Virginia

Skip to 0 minutes and 1 secondWhat we're going to do now is we're going to look at an example of an update to a project. A status report, if you will. And how we might want to consider how well we're doing in a project given the status update that we received. We're going to look at the type of information that we might want to consider reporting, and what type of analysis we can do in order to determine if we're in trouble or if we're pretty much on, on track. Consider our start up project example. Our small example of a project that includes eight tasks. For this project, we have come up with a set of precedents and with estimates associated with the duration.

Skip to 0 minutes and 40 secondsGiven the analysis that we've conducted we know that we're expecting our project to be completed in 12 weeks. And that we have some cost associated with each task. In total, we expect the project to cost us in the region of $8,500. Specifically, we think that the creative task, identifying the creative features and writing up the creative part of our project will take five weeks and it will cost us$1,000. The strategy, developing a strategy in a business plan for our firm will take us two weeks and will cost us about $500. And coming up with the correct IT system and putting it in place, will take us four weeks and will cost around$3000.

Skip to 1 minute and 21 secondsThe rest of the tasks as, as follows, we have information about them, but let's consider those three tasks and think about what happens at the beginning of this project.

Skip to 1 minute and 32 secondsAssume we started off our project on the 19th of January. We have our gan chart. And we know that our critical tasks include the creative task, the sales, and the financing. Let's assume that two weeks have passed. What happens two weeks later, on February 1st, we call up and we ask our individual who is executing the project, how are things going? And let's assume that we've aggregating the following information. Let's assume that all three tasks, creative, strategy, and IT have indeed started. The progress is as follows. Creative is about 25% complete. There are 75% of the work yet to be done. The strategy is 75% complete. Just a quarter left in order to finish it.

Skip to 2 minutes and 19 secondsAnd in terms of the IT, well here too we're about a quarter of the way. We have three-quarters left of the work to do. We also know that we've actually spent some money. We can see it in our bank account. We've spent $500 on the creative activities. We've spent$300 on the strategy, and we've spent around $1000 in IT in hardware and in software. So where did that put us? Are we in trouble? Are we on track? How can we tell? What are we going to measure in order to tell us what, how well we're doing and what we should do in case there's a problem? Well the first step is to update our plan. Skip to 2 minutes and 55 secondsWe can use many different whichever package you're using but most programs project management software tools out there will allow you to update the progress in the plan. We highlight here how much we've actually completed the percent of the work done. 25% of the creative 75% of strategy, and 25% of the IT. Our Gantt chart can be updated accordingly to show us in a visual way that we are working through these three tasks. That's our blue bar in this picture. And the red line gives us a progress update. It shows us that we see a zig zagging back and forth. It shows us that we should have been further along. Skip to 3 minutes and 39 secondsWe should have been where the green line is and we're actually behind a little bit. And so, what is the next step? How bad is it? We see that we're behind on the creative, which is critical. But we're also behind on the strategy and IT, which are, which neither of which are critical. So overall, how are we doing? Skip to 3 minutes and 59 secondsWell in order to answer those questions, we're going to dig in a little bit deeper and do some calculations. Consider the following calculations. First we know, and we're going to focus just on the creative task. We are 25% complete, and so far we've spent$500. We know that if things were going as planned, we are two weeks into the project. By now we expected to do two weeks of work out of a five week task. We expect it to be about 40% done.

Skip to 4 minutes and 30 secondsWe also know that in terms of the actual work, the progress that was made, we got a report that we're about 25% done.

Skip to 4 minutes and 38 secondsWe had a budgeted cost for the entire task of $1000. So far, if we were progressing as planned, we would have spent, or we would have completed 40% of the work, and therefore, we expect to have spent 40% of the budget, implying that our planned value, what we planned to spend at this time was$400. What we've earned, what our work has earned, what the work that we actually completed has earned us, 25% of the budget would imply that we've earned $250 worth of spending. But our actual spending was$500. And so, there seems to be some variance here. We can identify several sources of variance.

Skip to 5 minutes and 20 secondsWe can identify that we are about 0.75, just under a week behind where we should have been at this point in time. We can also see that we are about $150 behind our scheduled work. And we can also spot, looking at the difference between the 250 and the 500, that we have about$250 worth of variance in terms of the actual spending that we've entailed in our project. Here are two other measures that we can look at, two indices that tell us how we're performing on the schedule side of things and on the cost. From the schedule perspective we're going to be looking at the schedule performing index.

Skip to 6 minutes and 3 secondsWe're going to be looking at how much we've earned for the work that we've done versus what we plan to do in terms of this over this time. So in the two weeks we planned to do 40% of the work we plan to spend $400. But we've actually earned from the work that we've completed$250. And so our scheduled performance index is 0.63, or 63%. As a benchmark, 100% or 1 would have been on track, that means our work was performed on time. And right now there's some indication that we are behind. We haven't completed the amount of work that we thought we would at this point in time.

Skip to 6 minutes and 43 secondsFrom the cost performance perspective, well, here we can also measure a similar component, or a similar index. We can look at our earned value, how much we've actually earned in terms of the work. And what the actual spending was, or what the actual spending that we've reported. And so, 250 of the work that we've actually achieved divided by 500 gives us around a 50% completion rate. Meaning our cost is about 50% over budget. Again, a 100% index would have indicated that we're on budget. And so these two indices are helpful as we track our project and to check all the time, are we working as we planned and progressing on schedule, and are we spending the correct amount of money?

Skip to 7 minutes and 31 secondsWe can look at it visually in a graph over time, and we can identify bands in which we need to raise some flags and alert individuals that are around the organization that we're either running behind in terms of the work or behind in terms of the cost and the spending. And so, if again, an on track measure is a measure of 100%, a ratio that is exactly 1. If we fall beneath the line, the dotted line which is 100%, we want to raise some flags. We are over budget and we are behind in terms of our schedule. The lower that number, the more severe the situation is. The lower the number, the more over budget we may be.

Skip to 8 minutes and 10 secondsOr the later we are and we had not done as much work as we have hoped. But why might we want to flag situations in which our industries shoot up? What happens if we get some report around progressing 120%, meaning that we're ahead of schedule and that we're under budget. Well here, here too we may want to raise some flags. Are we neglecting some component of the scope? Have we missed out some, some critical tasks or some crucial tasks in terms of the functionality that are expected to be delivered at the end of the day? Are we not performing the tasks or executing properly, and are we maybe cutting corners or rushing too quickly?

Skip to 8 minutes and 49 secondsAnd so any deviation from that band of approximately 100% on both of these dimensions might raise some red flags. This framework is used widely in the industry. It was developed by the Department of Defense. And today, in the government in the U.S. in particular, but internationally too. These types of measures are used in an ongoing basis. To report and to collaborate and to monitor the execution of projects. Individuals subcontractors or even within the same organization will typically talk about how well they're doing on the schedule performance index and on the cost performance index.

Skip to 9 minutes and 29 secondsThe software tools that we use are helpful, as well. They will give us the analysis. So, they will do the calculation for us. And we can use the built in functionality to look at how we'll we're doing. We can input the progress, and we can look at our variances and our performance indicators. In this case, just to summarize, we have the three tasks that we've made some progress on, and we see that we can update our schedule to view how the three tasks, Creative, Strategy and IT, are doing in terms of our cost performance index and our schedule performance index. We see here, for instance, that specifically the strategy task. Seem to actually be under budget.

Skip to 10 minutes and 9 secondsSo, so far we haven't spent as much money as we thought we would for the amount of work that we've done. Overall though, are we in trouble? Overall as a project, do we need to make critical changes to our project? To the execution? Do we need to find additional resources to help us get things back on track? Well, using the tools and software packages, we can also update our project plan. We can assume that we're going to continue moving forward in the same pace that we've move so far. Giving us a re-calculation of our project, we can see that our critical path has stayed the same.

Skip to 10 minutes and 46 secondsStill the Creative task, the Sales task and the Finance task are still critical in this Gantt chart. We can see the delay become real. We can see that overall we have an additional, just under 0.75 week added to the expected completion of our project. And given the information that we have so far, we see that we'll be going just a little bit over our budget that we had anticipated. Instead of $8,500, we're looking more like just under$9,000. And so, what is our conclusion? Are we in trouble? Perhaps we can afford to be delayed by just under a week. Do we need to make sure that from now on everything takes place properly and everything is executed as planned?

Skip to 11 minutes and 32 secondsOf course we do. Any additional delays later in the project will just continue to push our deadlines further. And so the fact that we've just started, we are two weeks into our project and we're already a little bit delay, might require some attention. We know that we have an additional \$425 in our expected spending. Perhaps we want to think about how we will find that already at this point in time or maybe find opportunities to save later on in, in the life of our project. But now we have a good idea on how things are progressing and where we stand in terms of our cost and the schedule of our product.

# Earned Value

In this video, Professor Grushka-Cockayne explains how to use Earned Value Analysis to understand how things are progressing on a project. Think about a project you have recently been involved with.

Did you use Earned Value Analysis to determine the progress of the project? Why or why not?

Reflect on what some of the challenges and benefits might be to using this method.

For those of you that are interested in ‘practicing’ what you have learned in this video, we invite you to take free the non-graded quiz on Earned Value Analysis at the end of this week.