Topic 8: Performance management
When discussing the performance measurement baseline (PMB), for management control information to be effective, it must enable: (i) objective measurement of contract work accomplished., (ii) data summaries useful for all levels of management, (iii) early indicators of problems and unfavourable performance trends, (iv) cost impact of technical problems and schedule changes., (v) cost forecasts based on actual performance.
Projects vary from the plan for a vast number of reasons, which can be grouped into three areas:
* an individual who needs counselling/assistance
* a work product problem that needs solving, or
* an organisational problem that needs solving.
Traceability from top to bottom in two dimensions: the work dimension, and the organisational dimension. This capability enables us to more accurately focus on what is the most appropriate corrective action for unsatisfactory performance—resource focused, or work content focused. Without this ability to trace in the two dimensions, all that we would know was that performance related to a particular package of work was outside tolerance.
As we have derived the content—scope—of the control accounts from the WBS, the potential period over which that work might be undertaken could be long. Generally it is difficult to plan in detail work that is going to be done more than six months in advance, we are usually time limited in our planning phase, and will often need to start before we can plan the entire project to the same level of detail, the likelihood of future changes to the approach and tasks may make long-term detailed planning futile. We, therefore, need to break our cost account work down into two parts—work packages and planning packages.
The point of measuring performance is to enable us to identify:
* variances, determine their underlying causes, and where possible correct the problem
* trends and, thus, forecast the end result.
To derive effective performance information, we need the following data:
* Budgeted cost for work scheduled (BCWS, Planned Value, PV): This represents the value of the work the contractor planned to complete by a specific time.
* Budgeted cost for work performed (BCWP, Earned Value, EV): 'Earned value' or the 'planned value of the work accomplished'
* Actual cost of work performed (ACWP, Actual Cost, AC): Comparing BCWP with ACWP indicates whether the work that was performed cost more or less than it was planned to cost.
* Estimated cost at completion (EAC): Usually shortened to 'estimate at completion'.
* Budgeted cost at completion (BAC): Total budget. The end point of the performance management baseline (PMB).
* Cost and schedule variances (CV and SV)
* Traceability: The system should be structured so that significant variance can be quickly and easily traced to their work source via the WBS or their organisational source via the OBS.
A range of methods is used for Earned Value Analysis; Units complete., Milestones., 50/50, 0/100, 20/80, %complete., Level of effort., Apportioned effort. The approach adopted will depend on whether one wants to separately measure the performance of the inspecting organisation.
Usually there are three classes of cost elements defined: labour., material (consumables)., other direct. By default, these costs come to the project as fully absorbed costs. That is, they are the internal charged costs that include any element of overhead or indirect cost. Again, the reason for separating costs in this way is so that when we get a reported variance from the planned performance, we can trace the variance to its real cause.
In summary, if we are to have a system that enables purposeful management action, then we need to make sure that the raw data is unambiguous and 'tagged' as to work type, cost element and source. Further, that data must be traceable to the contract and to the organisation. The data must have the same identity and identification number in the accounts department as it does in the test department.
Variances can be positive or negative, with negative being the most common. There will be schedule variances and cost variances and each will have its own causes and mitigating circumstances. Like all data, we want to summarise the variances so that we can manage by exception. Variance analysis is one the major efforts and products of a performance management system. We do this at the control account level, as that is the level where management responsibility has been assigned and is where corrective action will be taken.
Having identified those variances which are of significance, the responsible project manager determines the reasons for the variance, determines the impact the variance will have on work within the cost account and on other project work, determines the appropriate corrective action, makes an estimate of the remaining work (the Estimate to completion (ETC)) thus arrives at an Estimate at completion (EAC) for the cost account. EAC = ACWP + ETC or EAC = BAC/CPI.
Kerzner (2006) categorises the various status reports as:
Performance reports—which most organisations or programs require in a set format.
Status reports are short versions of a performance report.
Projection reports, as standalone reports, are usually only required when a major change or exception has been raised.
Exception reports. When a problem appears to be occurring, an exception report is raised.
The status, exception and variance analysis reports form the basis of the progress meeting between the project manager and the cost account managers. Included with the variance analysis report must be a new EAC for that cost account. The new EAC, if agreed with the project manager, is not approval to overrun the budget, but is a figure that enables the project to assess how it is performing overall.
If performance analysis was to mean anything, the quality of data had to be assured. The first thing we did to achieve this was to ensure that we defined it as to work type and type of cost element, and that it was uniquely identifiable and traceable to a source. The next thing we need to do is ensure that there is consistency in the way the project and the organisation's financial and administrative system 'books' costs. We must make sure that when we compare actual expenditure against earned value, or earned value against budget, we are using the same conversion factors and comparing 'like with like'.
A realistic performance projections is "to complete performance index" (TCPI) and then compare it with our cost performance index (CPI). We calculate TCPI with the following formula:
TCPI = (BAC ? BCWP)/(EAC ? ACWP )
Thus we can see that TCPI is dependent on our assessment of EAC.
We can say that if TCPI differs from CPI by more than a small percentage (less than 5%), then our EAC is too low and should be increased until the difference between CPI and TCPI is less than 5%.
The estimate at completion (EAC) is so important. Not only does it direct us to the type of corrective action that we need to take, but it also alerts the organisation to additional funding and resource requirements that may not have been allowed for. Also, it alerts management to corrections that may have to be made to the profit result for the project.
Efforts to develop a reasonable estimate must start from a known position and the analysis of prior performance is an integral part of the estimating process. As a minimum, the EAC should take into consideration the following factors:
* Performance to date: the CPI and SPI to date
* Actual costs to date: the ACWP (AC) figure and the rate of expenditure being incurred.
* Projections of future performance
* Estimate of the cost of work remaining: the most commonly used formula is BAC – BCWP.
If an organisation is trying to reduce their price, while retaining their profit margin, then they can reduce the scope. The scope may be reduced in many ways, for example: by reducing documentation and training, by reducing certain testing, by removing certain system functionality, by using less expensive materials. The inviolable rule is that you must not change budget without changing scope, and you must not change scope without changing budget. Once the scope and budget have been renegotiated, the performance measurement baseline is adjusted.
The cornerstone of the performance measurement system is the performance measurement baseline (PMB). If it isn't accurate, then the performance data is meaningless, since BCWS (PV) determines what value can be claimed as BCWP (EV). BCWP (PV) determines both cost variance and schedule variance, thus if BCWS (PV) doesn't reflect the updated work schedule then project progress is unknowable.
The PMB is changed for three reasons:
* Incorporating directed changes. Contract changes affect virtually all aspects of the project's internal planning and control system. Budgets, schedules and work authorisations at the contract, project, cost account, and work package levels must be revised to reflect the change.
* Internal replanning. These are the changes introduced by the 'known unknowns'.
* Reprogramming. This refers to the situation where the project is going to overrun unavoidably.
When replanning, the following rules should be observed: The project may: (a) use management reserve to change cost account budgets., (b) replan unopened work packages within the confines of the cost account budgets., (c) transfer work and associated budget between cost accounts.
The project should not: (a) make retroactive changes to budgets or costs of completed work, (b) transfer work or budget independently of each other, (c) rebudget in process work packages, (d) reopen closed work packages.
Issues and uncertainties
There are four principal areas to be identified:
* the connection between past performance and future performance
* the extreme demands placed on organisational systems in order to produce usable data
* the project manager's role in profit achievement
* project efficiency and organisational efficiency.
There may be a tendency to forget that the cost/schedule elements are just one half of the integrated management 'picture'. The other half is the development of the system and the management of the technical risk.
An earned value view of schedule performance is different from a Gantt chart view. The earned value report is very useful to determine if you have the right number of people, and right efficiency to perform the tasks on time. The Gantt chart is more useful in determining which tasks you should be prioritising, and where to put your people at any time.
The earned value performance reports we analyse take raw data (dollars) at the work package level, accumulate it at the cost account level for analysis and performance reporting, then summarise it to the project level for external reporting purposes. 'Good' and 'bad' are determined by the size of the (dollar) variances.
As all our data are being used to establish baselines and measure progress, we have to ensure that it remains consistent. These techniques depend on
the data being comparable across time. Thus, we need to make sure that the dollar value used to construct the estimates is the same dollar value that we use when we collect actual costs. Similarly, other currency values have to be the same. To achieve this, the contract has to formally identify a 'base date'. The base date can be any date, but is usually a date around the time the tenders were submitted. Achieving this 'normalisation' requires dedicated systems and individual effort. However, unless it is done there will always be a level of error in the data.
At the centre of this subject is the inextricable link between project efficiency and competitiveness, and organisation efficiency and competitiveness. There are three principal areas of relevance:
* management of indirect costs and corporate overhead (G&A)
* project accounting and business accounting
* resource management.