Exercise on Value Integration in Project Management

This morning I posted on LinkedIn about the discussion that Kendall Lott, Mike Hannan, Sergiy Potapov and I taped last week for Kendall's PMIWDC PM Point Of View Podcast Series ( https://lnkd.in/ewaWNxAU ), “Value Integration in Project Management", #104 in the series, due out in a couple of weeks.

?In the thread following that post ( https://www.dhirubhai.net/feed/update/urn:li:activity:6995387162779082752/ ) Mike Hannan asked if I was going to post a “brain teaser” exercise illustrating the metrics & techniques in the post. So here goes! It’s not simplistic—but experienced PMs who understand critical path networks should have no trouble understanding it.

As I mentioned in that other post, the new techniques that are needed to plan and manage project value are:

1. An estimate of the expected monetary value (EMV) of the project if completed with specific scope on a specific date. This SHOULD be an input field in EVERY PM software package, but ISN’T.

In Figure 1 shown at the top of this article, the estimated expected project value is $400K if the project takes 55 days and includes all the planned scope.

2. An estimate of acceleration premium/delay cost, which is the expected change in EMV per unit of time if the finish date is EITHER accelerated OR delayed. (NOT in most software!)

In Figure 1 above, the project’s expected value will INCREASE by $10K for every day earlier than 55D and DECREASE by $25K for every day later than 55D.

3. A value breakdown structure (VBS) ( https://lnkd.in/ddPkEjy ) which estimates the value-added of optional scope. MANDATORY activities are worth the value of the entire project, whereas an OPTIONAL activity is worth the value it is adding to the project (i.e., the difference in the project’s expected value (EMV) with each particular activity INCLUDED vs. EXCLUDED). (NOT in most software.)

In Figure 1 above, the output from a VBS shows that the MANDATORY activities are A, B, F, G and I. The OPTIONAL activities are C, D, E and H, adding respectively 50%, 40%, 80% and 20% to the project’s expected value. For example, if Activity C were omitted, the project’s value would decrease by 50%, ?from $400K to $200K (if still completed on Day 55).

4. Critical path drag & drag cost ( https://lnkd.in/dQHYcAU )! Critical path drag (which, as far as I know, is never mentioned in the PMBOK Guide and is computed only by Spider Project & Asta Powerproject PM software packages) is the most critical scheduling metric, as it tells the user how much time each critical path activity is ADDING to the project duration. Whereas total float is always OFF the critical path, drag is always ON the critical path and therefore costs time and money (i.e., delay cost!). (For more information on how to compute drag “manually”, check the Wikipedia page linked above or read my books Managing Projects as Investments and Total Project Control: A Practitioner’s Guide to Managing Projects as Investments.)

In Figure 2, the drag and drag cost for each of the critical activities A, B, E, G, and I have been computed. ?E has drag of 4 days. This means that E is adding 4 days to the project duration. If E were shortened by 4 (or more!) days, the project duration would be reduced to 51 days and the expected project value would be increased by 4 X $10K, or $40K. Therefore Figure 2 shows that in the current network, A, B, F, G and I have drag costs of $100K (10D X $10K), $50K, $40K, $20K and $50K respectively. The activities that are NOT critical (C, D, F and H) have total float and ZERO drag, thus zero drag cost Since they are not on the critical path, they are adding no time to the project duration and the project finish date will not change even if you eliminate them!

5. True Cost is a calculated metric, based on the other user-input values listed above. EVERY PM software package should compute this for all activities (especially the OPTIONAL ones!). The True Cost of doing an activity on a project’s critical path is NOT just the cost of its resources (or budget, or cost estimate-to-complete), but also its drag cost! (Mike Hannan points out that the drag cost is usually MUCH bigger than the cost of resources, making it often quite easy to reduce the True Cost by adding resources to reduce the drag cost by more. (But this idea requires inputting the value/cost of time up front, which is hardly ever done!) Ultimately, the true cost is the sum of an activity’s resource cost and its drag cost (TC = Budget + drag cost).

Figure 2 shows, for example, that Activity A has a True Cost of $120K, the sum of its budget of $20K and its drag cost of $100K.

6. Net Value-Added is, like True Cost, a calculated metric, based on the other user-input values listed above. Again, EVERY PM software package should compute the Net Value-Added of each activity and send the user an alert whenever there is an activity that has a negative Net Value-Added—because such an activity is costing our project more than the value of its work! Such an activity should either be performed differently (e.g., with reduced True Cost so that its Net Value-Added is positive) or it should be jettisoned if it’s optional!

Figure 3 shows the Net Value-Added (NVA) for each activity. Notice that, as we start this project, every activity has a positive NVA. For example, Activity H has a value-added of 20% of the project’s EMV of $400K, or $80K. But since it is not on the critical path, it has no drag nor drag cost, so its True Cost is just its budget of $30K, leaving it with a healthy NVA of $50K. (But it may be important to keep an eye on Activity H during project performance!)

The truth is that projects are completed every day, throughout the world, that include work that costs more than it’s worth! And it all happens invisibly, because the above techniques and metrics are not being used!

The most dangerous occurrence (a frequent one, as experienced PMs know!) is when the critical path changes! Not only does the project’s duration (usually!) increase, but new activities suddenly are critical! And have drag! And have drag cost! And have higher (often, MUCH higher!) True Cost! Yet rarely does anyone say: “Y’know, our customer would be better off getting rid of this functionality because now it’s gonna delay project completion by X days and that’s worth more than the activity is!”

Figure 4 shows us that the project has started. Activities A, B and C are all finished—but C took 7 days longer than planned, 20 days rather than 13. C used to be OFF the critical path with 5 days of total float. But the 7 days of delay on Activity C has used up that float PLUS 2 days! That 2 days is now critical path drag! The critical path has changed and is now going through F, H and I, and the end of the project has been pushed from Day 55 to Day 57, at a delay cost of $25K per day, or $50K. The project’s EMV is now down from $400K to $350K.

Activity H is an optional activity with 2 days of drag and thus drag cost of $50K. Its True Cost is therefore $50K plus its budget of $30K, or $80K. Its value-added is 20% of the reduced EMV of $350K, or $70K. Thus its Net Value-Added = $70K MINUS $80K, or -$10K. We need either to change how we perform Activity H, or to jettison it.

?And this happens ALL THE TIME, because these techniques are not being used!

Happy to respond to any questions!

Fraternally in project management,

Steve "the Bajan" Devaux