FIGURE 15-10. Project variance projection.



MAIN 16,000 HRS. 1,285,600 6 MOS HISTORY +5% +2% FIGURE 15-11. Methodology to variance.

If CPI = 1.0, we have perfect performance. If CPI > 1.0, we have exceptional performance. If CPI < 1.0, we have poor performance. The same analysis can be applied to the SPI.

The cost and schedule performance index is most often used for trend analysis as shown in Figure 15-12. Companies use either three-month, four-month, or six-month moving averages to predict trends. Trend analysis provides an early warning system and allows managers to take corrective action. Unfortunately, its use may be restricted to long-term projects because of the time needed to correct the situation.

Figure 15-13 shows an integrated cost/schedule system. The figure identifies a performance slippage to date. This might not be a bad situation if the costs are proportionately underrun. However, from the upper portion of Figure 15-13, we find that costs are overrun (in comparison to budget costs), thus adding to the severity of the situation.

Also shown in Figure 15-13 is the management reserve. This is identified as the difference between the contracted cost for projected performance to date and the budgeted cost. Management reserves are the contingency funds established by the program manager to counteract unavoidable delays that can affect the project's critical path. Management reserves cover unforeseen events within a defined project scope, but are not used for unlikely major events or changes in scope. These changes are funded separately, perhaps through management-established contingency funds. Actually, there is a difference between management reserves (which come from project budgets) and contingency funds (which come from external sources) although most people do not differentiate. It is a natural tendency for a functional manager (and some project managers) to substantially inflate estimates to protect the particular organization and provide a certain amount of cushion. Furthermore, if the inflated budget is approved, managers will undoubtedly use all of the allocated funds, including reserves. According to Parkinson4:

• The work at hand expands to fill the time available.

• Expenditures rise to meet budget.

Managers must identify all such reserves for contingency plans, in time, cost, and performance (i.e., PERT slack time).

The line indicated as actual cost in Figure 15-13 shows a cost overrun compared to the budget. However, costs are still within the contractual requirement if we consider the management reserve. Therefore, things may not be as bad as they seem.

4. C. N. Parkinson, Parkinson's Law (Boston: Houghton Mifflin, 1957).

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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