Six months into a one-year major project, and half the budget has already been spent? What does that indicate? It can mean anything, actually. Without a "cost baseline" that aggregates a budget for the planned work per month, and information about the real work performed to date, no conclusion can be reached on whether the project is over or under budget.
This is a major problem with the traditional way of handling project finances. A budget is allocated at a high level, without any breakdown. No allocations are worked out to meet specific work items or certain tasks. Consequently, it is not easy to assess the project health during project progression. Only at the end of the project, an organisation is able to find out whether the project has been carried out, under, or right on budget. At the end of the project, however, it is usually too late to take any corrective, let alone, preventive actions to support the project finish within budget.
The Earned Value Analysis is a project management technique used for monitoring and controlling project cost. The technique helps assess project cost performance while still in progress, based on the value of the work performed rather than the amount of money already spent. This is the only way to determine whether a project is over or under budget while still in progress.
Performing Earned Value Analysis does not have to be complicated. However, a structured method for planning and controlling cost is required to provide valuable information.
To be able to use the Earned Value technique in controlling a project, project managers must take care of cost related planning processes. They have to make sure that the budget is based on an as accurate as possible estimate of the actual project work.
Sometimes project stakeholders put financial constraints on the budget, based on available funding or sometimes their own wishes of how much they want the project to cost. While this may suffice for a high level approximation of project cost, it is not sufficient for proper planning and project control.
The next step is for the project manager to add a project cost buffer to the total estimate to account for uncertainties associated with the cost estimates, as well as other risks that may occur on the project.
Based on the estimate of the total project cost and the buffer, the project manager can work with stakeholders, mainly management, to negotiate the budget. Once the project budget is set, certain allocations must be computed to work out the needs of specific project activities or work packages. Based on these allocations, a project manager can figure out how much money will be spent each month and during each stage.
Once the planning part of cost management is taken care of, controlling project cost becomes easier. Now, at any given tome, the project manager can compare the actual cost of the work performed with the budget allocation for that same work, and find out whether the project is over or under budget. This assessment can help the project manager forecast the final cost of the project, if project cost performance continues at the same rate.
For Earned Value Analysis to work, it must be based on proper cost estimating and budgeting techniques, as shown above. Without them, these calculations cannot be performed. Also, for Earned Value to be calculated, it is important to gather work performance information to assess actual progress and its value, compared to the budget.
By Ammar W. Mango
© Jordan Times 2006
