The Bicycle Project Example

As a simple example to illustrate the principles explained so far, let us assume the following project situation. The project is to deliver a bicycle to the project sponsor. Let us say that the sponsor has placed a value on the bicycle of $1,000 (PV = $1,000). Within the $1,000 value, we must deliver a complete and functioning bicycle that conforms to the usual understanding of a bicycle: frame, wheels, tires, seat, brakes, handlebars, chains and gears, pedals and crank, all assembled and finished appropriately.

Ordinarily, the project manager will spread the $1,000 of PV to all of the bicycle work packages in the WBS. The sum of all the PV of each individual work package then equals the PV for the whole project. We call the distributing of PV into the WBS the PMB. For simplicity, we will skip that step in this example.

What happens if at the end of the schedule period all is available as prescribed except the pedals? Because of the missing pedals, the project is only expensed $900 (AC = $900). How would we report to the project sponsor? By the usual reckoning, we are okay since we have not overspent the budget; in fact, we are $100 under budget (Variance to budget = $1,000 -$900 = $100). The variance to budget is "favorable." If we have not run out of time, and the bicycle is not needed right away, perhaps we could get away with such a report.

In point of fact, we have spent $900 and have no value to show for it! If the pedals never show up, we are not $100 under budget; we are $900 out of luck with nothing to show for it. A bicycle without pedals is functionally useless and without value. We should report the EV as $0, PV as $1,000, and the AC as $900. Our variances for the first period are then:

Cost variancei = EVi - ACi = $0 - $900 = -$900 (unfavorable) Value variance1 = EV1 - PV1 = $0 - $1,000 = -$1,000 (unfavorable)

Now here is an interesting idea: the value variance has the same functional effect as a schedule variance. That is to say, the value variance is the difference between the value expected in the period and the value earned in the period. So, in the case cited above, the project has not completed $1,000 of planned work and thus is behind schedule in completing that work. We say in the earned value management system that the project is behind schedule by $1,000 of work planned and not accomplished in the time allowed.

$Schedule variance = $Value variance = EV - PV $SV = EV - PV

What is the reporting if in the next period the pedals are delivered, the project is expensed $100 for the pedals, and the assembly of the bicycle is complete in all respects? The good news is that the project manager can take credit for earning the value of the bicycle. The EV is $1,000 in the second period. The PV for the second period is $0; baselines do not change just because there is a late-performing work package. We did not intend to have any work in the second period, so the PV for the second period is $0. The project AC in the second period is $100. We calculate our variances as follows:

Cost variance2 = EV2 - AC2 = $1,000 - $100 = $900 (favorable) Value variance2 = EV2 - PV2 = $1,000 - $0 = $1,000 (favorable) Schedule variance2 = EV2 - PV2 = $1,000 - $0 = $1,000 (favorable)

As a memory jogger, note the pattern in the equations. The EV is always farthest to the left, and both the AC and the PV are subtracted from EV.

Now, let's take a close look at this second period. The second period was never in the plan, so the PV for this period is $0. However, any value earned in an unplanned period always creates a positive value or schedule variance in that period. The cost variance does not have a temporal dependency like the PV. The cost variance is simply the difference between the claimed value and the cost to produce it. The cost variance in an unplanned period might be positive or negative. Overall, the project at completion, considering Period 1 and 2 in tandem, has the following variances:

Project variances = S (All period variances) Value (schedule) variance = -$1,000i + $1,0002 = $0 Cost variance = -$9001 + $9002 = $0

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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