By Ryan Burke, PMP, RMP
In a previous blog, the importance of accurate cost estimating for a project was stated. Once a cost baseline has been established, the continuous monitoring piece comes into play and is just as, if not more important than establishing an accurate baseline. Keeping track of a project’s cost, schedule and risks can go a long way in increasing the ability of that project to complete on time and on budget. By utilizing a proactive risk management and earned value management solution, a project’s cost performance can be accurately estimated from the beginning and tracked throughout its lifecycle to greatly increase the chances that the project achieves its goals and objectives.
Once a cost baseline has been established for your project, it is highly recommended that a reserve is developed to cover the project in the event that costs increase as the result of unforeseen circumstances. One way to develop this reserve is through the use of expected monetary value (EMV). This method requires a detailed look at the risks and opportunities of a project and the potential impact they may have on the overall cost. The goal with expected monetary value is to identify as many risks as possible that may impact the project. These risks can be developed through schedule and goal analysis, subject matter expertise, lessons learned from similar projects, and a number of other methods. Once a detailed list of risks has been developed, the impacts of those risks will need to be monetized in order to obtain the dollar value impact to the project. After you have monetized the impacts of each risk, you will need to multiply the dollar value by the percentage of likelihood of occurrence in order to obtain the EMV of that risk. Expected monetary value analysis should be done early and often to ensure that the impact of risk on project cost is continuously monitored.
If I have a risk that my schedule could be delayed by one month in order to hire a new developer due to a current contract dispute, I first need to breakdown the cost impact of hiring a new developer and the cost of delaying my project by one month. Once an analysis has been completed, I have identified that this cost impact is approximately $230,000. Upon review, I determine that the likelihood of this risk occurring is roughly 40%. When I multiply a $230,000 cost impact by 40% likelihood of risk occurrence, I determine that the EMV of this risk is $92,000. As a Project Manager, I now know that I will need to have at least $92,000 in reserve budget to cover this risk, should it occur.
Throughout the lifecycle of the project, earned value management should be used to track schedule performance (schedule performance index) and cost performance (cost performance index) on a monthly basis. The risk EMV data should be rolled into earned value management as a way of estimating the best case, worst case and most likely scenarios for the project (if all of the risks occur vs. none of them). Proper earned value management will allow a Project Manager to document whether the project is on schedule and on budget, and the level of effort that will be needed to finish the project as originally planned (to complete performance index). By using earned value management and expected monetary value of risks throughout the lifecycle of the project, a project manager should greatly increase their ability of completing the project on time and on budget.
To learn more about the Evans human-centered approach to earned value management and risk management, visit us at EvansIncorporated.com and be sure to fill out our contact form to learn more about our services.