Making More Money : Using Value Analysis

Time Value of Money and Opportunity Cost
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So in this case, high input costs do not necessarily mean that the programme could be run in a more cost-efficient manner: they would simply reflect different operating conditions. It results that a VFM analysis should consider all contextual elements for the programme: it is essential to gather as much information as possible on the operating conditions for the programme, its operating modalities and approaches. Therefore, we strongly recommend that a VFM analysis be considered as a tool to be added to the essential toolbox of programme managers and evaluators rather than being considered as a stand-alone piece of analysis.

Figure 1. The WASH results chain. A VFM analysis starts by defining the scope for the analysis: which programme, across which territory, over which period.

Microsoft Project 2013 Tutorial - Using Earn Value Analysis Tools in MS Project

The VFM analyst can then compute the data to generate a set of standard VFM indicators, which can be compared across programmes in the same country or internationally. These results can then be used by managers to identify strengths and weaknesses in their programmes and understand what might drive the indicators through qualitative analysis combined with regional and temporal comparisons. The WASH results chain is composed of seven main elements: 1. Or is the team behind schedule? The point is: this curve does not provide sufficient information to communicate how the project is going!

This paper will explain the terminology, formulas, and key metrics to monitor when using earned value analysis. In addition, the different techniques commonly used to evaluate progress will be described, along with the top ten items needed on projects when implementing earned value. Let's start out by clarifying the terminology associated with earned value, because many people incorrectly use the terms below interchangeably, and they are distinct.

The terms are Lukas, , p. The point is that you can do earned value analysis calculations on any project, but unless you have complete earned value management in use on your project, it will be extremely unlikely to obtain correct results. In order to easily use EVM, your organization really needs to have an earned value management system in place.

Earned value analysis uses three key pieces of project information: the planned value, actual cost, and earned value, which are shown in Exhibit 2 below. The first two terms are not new, they are the plan spend curve and the actual cost expenditures curve many project teams have been using for years.

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Planned Value PV is the budgeted cost for the work scheduled to be done. This is the portion of the project budget planned to be spent at any given point in time. This is also known as the budgeted cost of work scheduled BCWS. Actual Costs AC is simply the money spent for the work accomplished. This is also known as the actual cost of work performed ACWP. Earned Value EV is the percent of the total budget actually completed at a point in time.

This is also known as the budgeted cost of work performed BCWP. EV is calculated by multiplying the budget for an activity or work package by the percentage progress:. With the terms PV, EV, and AC defined, along with how to determine progress, some key calculations can easily be done, which provide important information on how the project is doing.

What is the Time Value of Money?

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The formulas for earned value calculations are:. A CPI value of 0. A SPI value of 1. You can accomplish more work than planned by working on non-critical path Work Packages. You need to look at the critical path to determine whether you are ahead, on or behind schedule. An uneducated observer is likely to conclude the project team is accomplishing the planned work and doing it for less money. However, analyzing the project using earned value gives a different picture. This means the project team has overspent for the work done. The bottom line Earned Value Analysis clearly demonstrates this project is in trouble!

On projects, determining realistic progress for Work Packages WP can be difficult, but is essential for ensuring the earned value analysis is accurate and meaningful. So, how much work was accomplished? This is a common question project managers ask team members. Too often, progress is reported in a qualitative manner.

Making More Money: Using Value Analysis

Quantitative techniques are obviously much better than qualitative subjective techniques for measuring project progress. One thing to keep in mind when measuring project progress is that it's an estimate! Many people spend too much time trying to generate a very exact number, especially when using quantitative techniques. Focus your efforts on the larger value Work Packages. Remember that measuring progress is an estimate, and that the inherent errors on each Work Package will tend to cancel out as you roll up the progress numbers to the project level.

Since the types of Work Packages on a project vary, no single progress reporting method is suitable. The seven most common methods for reporting project progress are described below Lukas, , pp 2—3. Two other progressing techniques commonly used are listed below. The techniques are:.

How to make earned value work on your project

Exhibit 5 shows a useful graph, which is a plot of the project SPI versus time. A SPI greater than 1. You need to be careful when using SPI, because you really can't determine the project health without knowing how the team is doing against the critical path in the project schedule. You need to look at the project float to determine the complete schedule performance for the project. Exhibit 5 is from an actual project Lukas, , p. A SPI of less than 1. However, if the SPI does not move toward 1. The Cost Performance Index is an excellent indicator of the cost efficiency for completed work.

One main use of CPI is forecasting the final project cost. Before listing the common formulas used, a few terms need to be defined PMI, , p. Most techniques for forecasting EAC include some adjustment of the original cost estimate based on project performance to date. The three common formulas are:. Note that the project cost contingency is not spread as part of the Planned Value curve.

The TCPI calculation can look at either the current authorized budget or the current estimate-at-completion.

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Of the two formulas, looking at the CPI required to complete the project based on the estimate-at-completion is probably more meaningful. For example, if the project CPI is 0.

PMBOK® Guide

There are many project maturity models in use today and many use a five-level format, where level 1 is chaos, level 2 is some rudimentary project management techniques in use, but inconsistently across projects, and level 3 is having a process and procedures in use across all projects. If your organization is not at least at maturity level 3, you should not attempt implementing earned value across the organization. Here is an analogy. If you are just learning to dive, you would dive off a board close to the water surface to learn the basics.

If you're new to diving, you would not start with the meter diving height unless you are looking to fail!

What is Customer Lifetime Value?

Properly used, earned value is a flexible process that provides timely information on the project's health. Related Content. If you know the present amount of money you have in an investment, its rate of return, and how many years you would like to hold that investment, you can calculate the future value FV of that amount. Exhibit 9 — The WBS is the cornerstone for a complete project plan. At an interest rate of 4.

The same applies to the use of earned value analysis. If you don't have a project organization with a maturity level of 3 or higher, trying to apply EVA will only lead to failure. Cerasis friend and experienced engineer and 3PL consultant, Chuck Intrieri, whom you can connect to on LinkedIn , is featured again as a guest blogger. This time he offers a two part series on a value analysis technique you can employ in any industry to gather ideas to better your company, but more specifically in the process of creating new products to manufacture in order to lower costs of goods and increase your bottom line.

It is an orderly and creative method to increase the value of an item. Value Analysis, also called Functional Analysis was created by L.

Inflation and Opportunity Cost

Miles of General electric Company…. The value of an item is how well the item does its function divided by the cost of the item In value analysis value is not just another word for cost :. The value analyst should always be aware of functions, not of products, shapes, or processes. The main function is what the item does, is that which somebody wanted to archive by creating the item.

Making More Money

Express this function if possible with just two words, a verb and a noun. If the item is composed of various parts, it is useful to ask for the function of each part, and how they contribute to the main function of the item. These were functions added since it was economical or easy to do so. They have no relationship with the main function.

Find the main function and the secondary functions of an item. Get the cost of realizing each function. The first action of the group should be to gather all the information about the item.