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Lecturer: DR ZALINA ZAHID

PROJECT 1ourse Code: QMT 754

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This paper was produced - two new metrics that combine Earned

Value Management (EVM) and Project Risk Management for projectcontrolling and monitoring.

EVM cost and schedule variances were compare with the deviationthe project should have under the risk analysis expected conditions.

The Cost Control Index and the Schedule Control Index were

presented in this paper as new monitoring indexes.

These two indexes allow project managers:-

to analyse whether the project over-runs are within expectedvariability or;

there are structural and systemic changes over the project life cycle.

Introduction

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There are 2 objective emphasized in this paper:

i. To describe trends for the future project totalcost and finishing date (based on theperformance)

ii. To extend EVM to integrate project variabilityand risk analysis into the earned valuemanagement framework

Objective

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Project Management

Risk Management is a proactive attempt to recognize and manage

internal events and external threats that affect thelikelihood of a project’s success.

Earned Value Management is a management technique for project performance

monitoring.

Scope

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The two new monitoring indexes which are Cost

Control Index and Schedule Control Index allow

project managers to analyze whether the projectover-runs are within expected variability or there arestructural and systemic changes over the project lifecycle.

Benefit of this paper

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This paper were use:-

i. Using CrystalBall version 7.2 to performed MonteCarlo Analysis

Research Element

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Project Manager (PM)

PM should not wait until the end of the project to knowwhether over-runs are within the probabilistic expectedlevels or not.

At every time during project life cycle, PM need to beconfident whether over-runs are within expectedvariability.

PM can detect deviations from plan, by means ofmonitoring the evolution of these indexes over the projectlife cycle, so that they can take early corrective actions.

PM have to make efforts to reduce the risk of activitiesexhibiting higher levels of cruciality.

Stakeholder

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First this paper summaries' the main features of EVM and

its relationship with risk analysis.

Next section, this paper provides an explanation ofmethodological proposal to integrate EVM and residualrisk (the project uncertainty in terms of its parametersvariability).

Finally, this paper shows the application of these

measures to a simple and theoretical case study whichgives the reader the opportunity to replicate the results.

At the end, this paper close with the main conclusions ofwriter research.

Outline Of This Paper

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EARNED VALUE MANAGEMENT (EVM)

is a management technique for project performance monitoring.

It integrates scope, cost and schedule control under the sameframework.

It provides performance variances and indexes which allowmanagers to detect over-costs and delays.

But the performance variances and indexes do not inform

whether the over-runs are within the bounds of the projectexpected variability.

It also gives new estimates about project cost and finishing datewhich depend on the assumptions concerning the futureevolution of the project.

Literature Review

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EVM is based on three measures:

Planned Value (PV) or budgeted cost of work scheduled(BCWS);

Actual Cost (AC) of work actually performed (ACWP);

Earned Value (EV), or planned cost/budget cost of thework actually performed (BCWP).

Earned Schedule (ES) is the date when the current earnedvalue should have been achieved.

EVM continue

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VARIANCES Cost Variance (CV=EV-AC); A comparison of the budgeted cost of

work performed with actual cost.

Schedule Variances (SV=EV-PV); A comparison of amount of workperformed during a given period of time to what was scheduled tobe performed.

CV<0 : project has over budget;CV>0 : project is under budget;CV=0 : project is on cost budget

SV<0 : project delays/ behind schedule;SV>0 : project is ahead of schedule;

SV=0 : project is on schedule or timely

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PERFORMANCE INDEXES Cost Performance Index (CPI=EV / AC);

Schedule Performance Index (SPI=EV / PV);

Cost and schedule performance indexes and variances tell uswhether the project is delayed and/or has over-cost.

But these measures do not alert about structural changes within theproject beyond the “expected variability”, that is, structural changes

which contribute to put the project out of control.

CPI<1 : project has over budget;CPI>1 : project is under budget;CPI=1 : project is on cost budget

SPI<1 : project has behind schedule;SPI>1 : project is ahead of schedule;

SPI=1 : project is on schedule or timely

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In Fig. above show the evolution of cumulative values of AC, EV and PV overtime.

As most of the project effort is usually performed in the middle of its life cycle,commonly, the curves are S-shaped.

PV line is the project cost baseline, that is, the expected accumulated cost if the

project is performed as planned. When the project is close to its end, all the planned activities will be nearly

finished, so the budgeted cost of scheduled work will equal to the planned cost ofperformed work.

EV will tend to PV, and as a consequence, SV will converge to zero and SPI willtend to 1, even if the project has serious delays from planned schedule.

It means that SV and SPI cannot give relevant information at the late stages of the

project.

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EARNED SCHEDULE (ES)

is the date when the current earned value should

have been achieved. To compute ES (see Fig above) at time (tAT), we first

calculate the earned value. We use this value on thePV line (cost baseline) to compute the date when EV

equals PV. This date is the Earned Schedule (ES).

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RISK BASELINE

represents the residual risk (uncertainty) to fulfill theremaining activities of the project.

to evaluate new performance indexes whichintegrate the triple scope/schedule/cost with projectrisk.

These new measures facilitate project managers theearly adoption of corrective actions.

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COST PROJECT BUFFER (CPB) & SCHEDULE PROJECT BUFFER (SPB):

Buffers were proposed because of cost and schedule performance indexcan not alert about the structural changes within the project expectedvariability which contribute to put the project out of control.

This both buffer are computed taking into account the statisticalproperties of the probability distributions of project cost and schedule.

Cost project buffer (CPB) : is the difference between the maximum costat a confidence level (ccl%)—the probability of the project cost to belower than this maximum cost is ccl%

—and the cost mean value.

Schedule Project Buffer (SPB) : is the difference between themaximum duration at a confidence level (scl%) and the duration meanvalue.

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In this paper, it adopt the concept of risk baseline and

buffers to integrating EVM and risk management.

PERT: the expected project duration and its variance are

computed as the sum of durations and variances of theactivities belonging to the critical path (being the activitiesstatistically independent).

this simple approach could give us misleading estimationof durations and costs, because in practice critical pathchanges over time on real duration of activities.

Methodology

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MONTE CARLO SIMULATION:

is a powerful methodology to deal with project

uncertainty. After estimating probability distributions of costs

and activity durations, the project is simulated fordifferent values of activity costs and durations.

It provides the probability distribution of projecttotal cost and schedule.

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CRITICAL PATH: Depending on activity durations and the real evolution of

the project, the critical path could be different in differentruns of the project.

Criticality- is the probability of an activity to belong to the critical

path.- Special effort should be made in order to reduce the

duration of activities with high criticality numbers, as we

will be decreasing the project total duration (in aprobabilistic sense). Cruciality- Is the correlation between the duration of an activity and

the duration of the total project.

- Delays in very crucial activities will induce delays in thetotal project schedule.

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1) introduce the concept of Project Risk Baseline.2) propose new performance indexes for monitoring how far the

project is executed from this baseline.

3) Project managers compute measures of project risk (variances,impact, probabilities, etc.) before the project start-up.

4) But, once the project is running, it is also convenient to re-compute the remaining risk.

5) For instance, at any time during project execution, Monte Carlosimulation can be use again to compute the statistical

properties of cost and duration of the pending project.6) Alternatively, project team could re-estimate probabilities and

impact of major remaining cost and duration, so that newmeasures of project risk could be obtained.

How To Integrate Project Uncertainty In Terms Of Its ParametersVariability Within The EVM Framework To Improve Project Control.

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1) Both (cost project buffer & schedule project buffer) are computed taking intoaccount the statistical properties of the probability distributions of projectcost and schedule.

2) The PM decides the (cost confident level, ccl%) and the (schedule confident

level, scl%) he/she requires to the project (for instance, in relationship withthe contingency allowances).

3) Then, split these cost and schedule buffers (CPB and SPB) among all timeintervals.

- To split those buffers, we use weights (weight cost, wc and weight schedule, ws) that areproportional to the expected risk reduction in every interval, that is, the difference betweentwo adjacent points along the risk baseline:

Two Buffers were proposed to alert structural changeswithin the project

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4) Therefore we could estimate how much cost and schedule would deviate per

unit of time from planned values.

5) These cumulative values should be compared with the earned valuevariances, as the variances show us the extra costs and delays over plannedvalues. Here the schedule control index (SCoI) and Cost Control Index

(CCoI) as:

- where SV(t) is the earned schedule variance.- whenever the project is delayed, the schedule variancewill

be negative, so in practice, Eq. above compares thecumulativebuffer with the delay in the actual time (AT).-If the cumulative delay (−SV(t)) is higher than thecumulative buffer then SCoI would be negative.- This means that the schedule deviations are higher than“normal”, alerting us about structural and systemicchanges in the project.

- a negative CCoI alerts about extra-changes over thenormal and planned variability.- When the project is performing better than expected

(SV(t) and/or CV are positive), these indexes will bepositive too.- Therefore, no corrective actions should be taken.

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The data analysis has 4

which are a1, a2, a3,and a4.

All the data informationhas been given likeprecedent relations, minvalue, max value, meanvalue, planned cost

value, real duration time,and real cost value.

From the precedentrelations,; a AONdiagram has been drawlike in the figure on the

right side.

Data Analysis

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Cost variance (CV) is always negative and Cost Performance

Index (CPI) is below 1; indeed both indexes are lower as theproject advances.

This means that there are always over-costs, but we do notknow whether the over-costs are under normal probabilisticlevels or some structural changes are taking place.

Schedule variance (SV) is also negative and SchedulePerformance Index (SPI) is also below 1; indeed the project is

close to the end.

However, Earned Schedule Variance SV(t) is more realistic, as itis always below 0, and it decreases until reaching the real twoweeks of delay.

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Results

From here, it show both the project cost and scheduledistributions.

If ccl% and scl% both fit at 90% the percentiles are 10.94

weeks and 5371.26 m.u., whereas the mean values are 9.29weeks and 4801.20 m.u. respectively.

Cost Project Buffer at ccl% = 90%: CPBf = 5371.26 − 4801.20=570.06

Schedule Project Buffer at scl%=90%: SPBf=10.94 − 9.29=1.65

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Activity a3 is the most crucial and its risk is ofparticular relevance for the project.

Of course, a1 and a4 are always critical.

Beyond that, a3 is specially critical and crucial, sowe should make efforts to reduce its duration andrisk.

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•In Fig. above we show the Cost Risk Baseline (CRB) and ScheduleRisk Baseline (SRB) and also weights of weight cost (wc) and weightschedule (ws) respectively.•Of course, both curves are decreasing but their slopes give us

information about how the project is reducing risk over time.

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- Although cost variances and performanceindexes are below 0 and 1 respectively, we see

in Fig. above, that CCoI values are higher thanzero after week 3.

- This means that although there are over-costsin the project, these values lay within theexpected project variability.

- For this reason, project over-costs do notexceed the tolerance level of the 90% percentile.

- SCoI is negative most of the time.- This means that the actual delays are higher

than the expected delays.

- Maybe the initial project estimations werewrong, or maybe some extraordinary events orsystemic effects have changed the internalstructure of the project.

- The negative value of SCoI indicates thatcorrective actions should be taken.

- Otherwise the project would be finished twoweeks delayed (beyond the 1.65 weeks of 90% of

probability).

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We have introduced two new metrics for integrating EVM and Project

Risk Management methodologies: Cost Control Index and ScheduleControl Index.

• This both indexes:-

compare EVM measures with the maximum values that the projectshould exhibit if the project was running under the risk analysishypothesis.

alert project managers about systemic and structural changes

affecting the project risk, cost and schedule for a determinedconfidence level of cost and schedule

• If both cost accounting and risk analysis are performed, the newindexes give us rich information without additional effort.

• As long as we understand, any extension of the EVM methodologyshould keep it as simple as it was initially designed, so that projectprofessionals could adopt it.

Conclusion

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Relevant Opinion

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THANK

YOU

END

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