Tag Archives: Earned Value Management

Earned Value Management and cash preservation

A few weeks ago I attended a 2-day training course titled “Finance for non financiers”. I found it too basic. However, I wanted to comment on one exercise we were proposed almost at the end of the course.

We had just reviewed some notions of Earned Value Management with its main concepts: Planned Value (or Budgeted Cost of Work Scheduled (BCWS)), Actual Cost (or Actual Cost of Work Performed (ACWP)), Earned Value (or Budgeted Cost of Work Performed (BCWP)), Schedule Performance Index (SPI=Earned Value / Planned Value), Cost Performance Index (CPI=Earned Value / Actual Cost), etc., when the teacher posed the following question:

From a cash management (preservation) point of view rate the following sets of EVM indicators from best to worst:

1) SPI=1.2, CPI=1.2,

2) SPI=1.2, CPI=0.8,

3) SPI=0.8, CPI=1.2,

4) SPI=0.8, CPI=0.8.

Any EVM practitioner or person with some notions of EVM will know that in EVM SPI and CPI above 1 means good, and below 1 means bad. Therefore, from the previous exercise we would be able to immediately say that the best case is 1) (both indicators above 1) and the worst case is 4) (both indicators below one). The tricky situation would be how to value cases 2) and 3) where one of the indices is positive and the other negative.

I remember that in the class I quickly thought “if we want to preserve cash, a positive SPI means we advance faster and if it is coupled with a negative CPI that means we are burning cash at a higher than planned rate, therefore it is better the case 3) where we advance at a slower rate but always below planned budget”.

I was surpised when other colleagues started diverting with thoughts like “if you take the case 3) and are behind schedule you would not receive cash inflows so it would be worse” (?). However, the question from the exercise did not give any hint of whether cash inflows are linked to planned value, earned value or you just start with a pile of cash to be used. It just asked about cash preservation.

In my first year of university studies in aerospace engineering I very well learnt the lesson of not guiding oneself responses by the first intuition that you may have but to apply the knowledge acquired to the question at hand. In relation to this case, it would be as easy as to depict the typical EVM curves for the 4 cases and see which one is burning cash at a higher rate.

In each of the 4 graphics below you will see a black curve which represents the Planned Value, a green curve which represents the Earned Value and a red curve which represents the Actual Cost. In absence of information of whether the cost in the exercise is equal to cash outflows, we can assume that it is. Therefore, the best case for preserving cash (other things being equal) would be that with the lower Actual Cost curve (red curve). See the different curves below:

EVM case 1: SPI=1.2, CPI=1.2

EVM case 1: SPI=1.2, CPI=1.2

EVM case 2: SPI=1.2, CPI=0.8

EVM case 2: SPI=1.2, CPI=0.8

EVM case 3: SPI=0.8, CPI=1.2

EVM case 3: SPI=0.8, CPI=1.2

EVM case 4: SPI=0.8, CPI=0.8

EVM case 4: SPI=0.8, CPI=0.8

The first interesting point is that both cases 1 and 4 are burning cash at the same rate, however case 1 is ahead of schedule and case 4 is behind schedule. Therefore, case 1 is preferable, because in the end with case 4 we would arrive at the 12th month having consumed all the planned resources but not having completed the project.

Between the tricky cases, 2 and 3, we can immediately see that case 2 has burned more than twice the cash than case 3 at any given point! We can therefore infer that case 2 is indeed the worst case among the two.

Even if you think along the lines of some of my colleagues, i.e. assuming that cash inflows are linked to earned value (1), you will see that in case 2 the actual costs are always above earned value, whereas in case 3 the actual costs are below! So even following their way of thinking, had they done the math, they would have arrived to the same conclusion!

See in the graphic below how the case 2 burns much more cash than the case 3.

However, if the question had asked about what case is preferred from a schedule point of view the answer would have been different: as in the case 2 the project would have been completed by the 9th month (no matter the cost), whereas in the case 3 by the end of the year only a 80% of the project would have been completed (despite of the savings).

EVM cases 2 and 3.

EVM cases 2 and 3.

Finally, see below a table the detailed calculations for all 4 examples through the 8th month.

EVM calculations for the 4 cases.

EVM calculations for the 4 cases.

(1) Even in the absence of such information.

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Personal mid-year review

At the beginning of the year I wrote a post about New Year’s resolutions and how this year I was going to take a more structured approach with them. I also explained who and how influenced me to do that.

About 3 weeks ago I started what would be my personal mid-year review and then I shared in Twitter the thought of sharing my approach with you. This is what I want to do in this post.

During some days in January, I brainstormed about what could be my objectives and the approach to be followed. In the end I selected 10 main objectives (“Become a frequent runner again”, “Read over 15 books / become eReader”, “Toastmasters: become ACB & Pres Dis AG”…). Then each of those objectives were split then in about 8-12 milestones to be achieved, each milestone driving me towards meeting the bigger goal.

For example, regarding the running, the first milestones were moderately easy ones as seen today (“Run 3 days before mid January”, “Measure several tracks where to run in TLS”, “Run 8-10 days in January”…) but they meant a great deal of breaking habits or creating new habits.

Once I had the complete list of goals and smaller milestones, I gave a weight to each of them (delivering the 7th speech towards ACB in Toastmasters was worth 12% of the “Toastmasters” goal) and a due date. If I missed the due date but met the milestone afterwards I deducted some amount out of the initial value (that means, I’ll never reach 100% at the end of the year, but if I’m close enough I’ll be more than glad!).

Spreadsheet with goals, milestones, weights, due dates...

Then I set up a kind of earned value management system to track my performance in respect to those goals. This enabled me to see how I was advancing and how I was supposed to be advancing (sure, I said a kind of as there is nothing related to the cost I incurred in achieving those goals, while the value would be assimilated to the weight).

Finally, I not only had this in written but I shared my goals with Luca. This helps in making myself more accountable with those objectives. Sure, you won’t necessarily want that everybody knows your personal objectives, neither do I. But just showing them to someone may help. To me it worked!

Every now and then I get a question from her like “When did you say you would sign up for the French course?”, “Have you already contracted the cleaning services company?”. Those reminders, together with the due dates help me a great deal in catching up with all those milestones that I keep postponing.

Of course, with some objectives I am way more advanced than with others. But let me tell you that the overall result is making me quite happy with the approach, even tough by the end of June I was way behind the schedule!

Goals achievement vs. plan (end June).

Another outcome of the mid-year review has been that I started brainstorming again with myself in order to add new milestones to previous goals (e.g. more running milestones, new trips, more speeches) and adding entirely new goals.

My humble advice: try something similar that fits you, force yourself a little bit, fight the resistance and reap the benefits down the road. See you at the year-end review!


Filed under Personal development & HR

EVM in 40 minutes

Two years ago, I found an excellent free online 40-minute course about Earned Value Management. It was in the website of the UK Ministry of Defence (MOD) Acquisition Operating Framework (AOF).

Some days ago, I wanted to check it again and it was still available. If you are interested in the topic, check it.

Earned Value Management course at UK MoD AOF.

I have never seen an EVM course as good as this one, no matter how beautiful the name the consultancy training company gives it.

Some time ago I also read a well-structured book on project management, “Guide to Project Management“, by Paul Roberts. I recommend this one too.

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Filed under Aerospace & Defence, Education, Personal development & HR