Measurement of Project Performance
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Measurement of Project Performance
In todays increasingly resource constrained world, demands for new developments and projects far exceed available resources. Unfortunately, in reality, more often than not, public projects tend to overshoot both their budgets and timeframes while often falling short on benefits and scope. It is this challenge that is encouraging to review and reform existing management practices to improve ability to successfully complete projects.
Flaws in using Financial Progress as a Project Performance Measure
We will start by looking at the conceptual hazards of measuring projects purely on the basis of financial progress. This method entails a number of basic flaws that are often overlooked by its users.
Project progress is measured relative to its budgeted cost which is frozen as a base line during the initiation stage (PC-1). According to AACE the accuracy of Initial estimates Can vary between +50% and -30% because less than 5% of the design work is in place. Therefore the very reference point used to measure progress is in itself an unreliable benchmark.
Physical progress is assumed to equal financial progress. In reality this is very rare because it requires that all project expenses should be exactly as budgeted. In real project environments, variations occur due to work efficiency, inflation, changes, rework, etc. Lets say we have a project that costs 100 Million. The first component of this project was supposed to cost 12 Million but actually ended up costing 14 Million. To those who are monitoring financial progress this project would appear to be 14% complete while in reality it is 12% complete and over-budget.
Financial progress monitoring does not necessitate the creation of a resource-loaded project schedule. Cash flows are typically forecast using an assumption of uniform expense over the life span of the project for the whole project or for individual components. This leads to problems both in planning and monitoring. During planning, it is difficult to accurately forecast the needs of the project. While during the monitoring stage it is difficult to assess achievements against a realistic baseline. The proceeding points demonstrate the conceptual flaws in using financial progress as a basis for measuring project performance.
We expect a project to be complete when 100% of the physical work has been completed. However, we see in this report that a project can still be allocated funds when the project has reached the 100% point. Therefore we can no longer assume that a project that is showing 100% physical progress on this report is actually complete.
It is possible that some projects will get completed using fewer funds than were originally estimated. For example a project has a budget of 10 Million but was completed in 8 Million; this report would show this project to be 80% complete while in reality it would be 100% complete
There is no information that can give us an idea of the health of the projects – are they ahead/on/behind schedule; are they within/over/under budget. This information would have been essential to ascertain the overall health of the development plan itself.
Earned Value as a Performance Measure
There are three dimensions in a project; Cost, Schedule and Scope. Financial progress fails as a performance measure because it ignores the Schedule and Scope dimensions. A true understanding of project performance can only arise from the integration of the three project dimensions. Earned Value is a system that fits this bill – and its a system that has been around since the 60s. Earned Value Project Management is often defined as the integrated management and control of Time, Cost, Resources and Quality for the successful on time and on budget completion of projects
The term Earned Value (EV) comes from a fundamental rule that you earn value the same way as it was budgeted. So if a project component was budgeted to cost Rupees 1 Million then the progress recorded when the component is completed will be Rupees 1 Million regardless of whether it took Rupees 0.5 or 1.5 Million to complete it. Accordingly a project is considered to have been completed when all of its components have been completed and it has attained unearned Value which is equal to its planned budget. This rule helps to resolve the confusion on project status created by financial progress because the earned value (physical progress) of project is 100% at completion regardless of the actual expense. With this we will proceed to look at Earned Value Project Management as the most promising alternative to the status quo. We will look at how Earned Value can provide definitive answers to the seven key project management questions.
Parameter Calculation
Examining each one of these questions will illustrate the integration points between Cost, Schedule and Scope.
How much work has been completed? Total work completed is calculated on the basis of the components completed and the budgeted value of these components; Earned Value (EV)
How much should have been completed? Planned work is the work that should have been completed by a specific point in time Planned Value (PV)
How much has been spent? This is the financial progress of the project. It is the actual amount of money that has been spent on the project; Actual Cost (AC)
How much should have been spent? The amount that should have been spent is equal tithe value of work completed; Earned Value (EV)
When will we finish? Expected finish date is the calculated using the project schedule. In project terms work is referred to as scope. Scope contains all the deliverables that define the total project.
What was the project supposed to cost?