Saturday, February 07, 2015

To Complete Performance Index (TCPI) and Cost Performance Index (CPI) - Part 2




To Complete Performance Index (TCPI) and Cost Performance Index (CPI), as noted in the earlier post, are a set of two powerful indices in Earned Value Measurement (EVM). In this post, I'll take a project-portfolio management software - MS Project 2013/2010 - to show how they work.  

Previous Example:

You have 2 tasks each taking 2 days and executed by two resources - R1 and R2.  For each day, you are paying $100 to the resources. After 1 day, you are checking the status. This is what you found:
Status For Task - 1:
-  R1 needs 2 more days to complete. So the total duration now becomes 3 days.
Status For Task - 2:
- R2 needs 0.75 day more. So, the total duration becomes 1.75 days. 

We will follow a series of steps, which you would do while performing Earned Value Measurement.
  • Step - 1: Plan for it (Initial Case)
  • Step - 2: Switch to an EVM Table to check on the date
  • Step - 3: Baseline the Project and check the EVM data
  • Step - 4: Execution Start/Progress; Status Date Setting
  • Step - 5: Data Interpretation
These actually you would be doing very quickly - in a matter of minutes - with the MS Project tool. However, I have segregated them into 5 easy steps for easy understanding.

Step - 1: Initial Case (Planning):

Let us put our example in MS Project 2013. It will look as shown below.

Figure - 1: Two Resources working on 2 Tasks of 2 days
As shown above, we have 2 tasks executed by 2 resources (R1 and R2) with a rate of $100/day. 

Step - 2: Switch to an EVM Table:

Let us switch to one of the Earned Value tables  - the "Earned Value Cost Indicators" - to check on the EVM related data/metrics. 

Figure - 2: Before Baseline - TCPI and CPI values
As you can see in the above figure, there is no baseline yet. Hence both "To-Complete Performance Index" (TCPI) and "Cost Performance Index (CPI)" are set to "0". Also Budget At Completion (CPI) is also "0", as no baseline yet. But the Estimate At Completion (EAC) is $200 as 2 resources, R1 and R2, will take $200 each at the end of completions of Task 1 and Task 2, respectively.

Step - 3: Perform Baseline:

Now, let me baseline the project and set the status date to end of day 1 - here end of Monday. Remember you are still in planning mode.


Figure - 3: TCPI and CPI values after baseline and status date setting
This is where some interesting things happened. In the above figure, after baseline, the CPI is 0, but TCPI is 1. Why? Because your Earned Value is zero, hence CPI is zero. Now BAC field has been populated post baseline and it is matching that of EAC, i.e., $200.  Actual Cost is also 0, as no cost has been incurred yet - the resources have not yet started working. But you have a value for BAC. Hence TCPI is 1 as TCPI = (BAC - EV)/(BAC-AC) = (200 - 0)/(200-0) = 1.

Step - 4: Execution/Progress; Setting the Status Date:

So, we have initially entered the tasks and then baselined it and saw the result. Next, the execution on the tasks, Task -1 and Task - 2, are started by the resources, R1 and R2, respectively.

Now, at the end of 1st day, I set the status date and this is what happened. To measure, you have to set the status date.
  

Figure - 4: TCPI and CPI post status update
As seen above, the Planned Value (PV) now has been populated and showing $100 for both the tasks. Because on status date, 1 day worth of work should have been done. This data is irrespective of baseline, as you can the same data in Figure - 3. Also, as seen in Figure - 3, both Actual Cost (AC) and Earned Value (EV) fields are set to $0.00 as I have not entered the actual completion percentage of work done by the resources. 

Now, on the status date, after checking with the resources, I entered the %  complete of work for the two tasks. 


As noted in the beginning, Task - 1 will now take 2 days more, where as Task - 2 will take 0.75 day more. When I entered these data, it will look as seen in Figure - 4Here, both TCPI and CPI, have respective calculated values by MS Project.


Step 5 - Data Interpretation:

Let us interpret the data as shown above:
For Task - 1:
  • CPI is set to 0.67 - matches our calculation as in the last post 
  • TCPI is set to 1.33. It matches the 1st one as we calculated in the last, but does not match our calculation as calculated in the last post.  Why? Because MS Project takes BAC as the baseline. Remember when you first baselined - BAC came to be $200.00.  So, TCPI is above is 1.33. It uses the first formula on TCPI, i.e., [(BAC - EV) / (BAC - AC)] 
But, how to to get 0.67 as seen in the last post?  You have to set your new baseline to EAC, which now is $300. 

Tool wont do it automatically for you. You have to set it after discussing with your governance board or project management office. Once approved, in the tool, the new baseline can be set and while calculating the new baseline has also to be set for EVM calculation. This is done in the Backstage View of MS Project.  As EAC is not the approved one right now, hence TCPI is showing as 1.33 - based on BAC. When the EAC becomes the new approved one, then the formula for EAC will be taken up, i.e., [(BAC - EV) / (EAC - AC)], will be used.


For Task - 2:

Am I saying that two different baselines needed for two different tasks? No. In real life, you actually take the cumulative CPI, which I briefly talked in the previous post. Cumulative CPI is the rolled up CPI for the entire project. 

Note: Also, For MS Project, while calculating the EVM, you have to check what you are measuring - "% Complete or "Physical % Complete". Like baseline setting, this also can be in the Backstage View. In this case, I am using the default % Complete as our example is like that.


The example that we used is  a very simple one. But it covers the fundamentals. In real projects, you will be working on 100s or 1000s of activities. However, these same concepts apply.

How does it happen for MS Project 2010?

It is very similar to what we just saw for Project 2013. All the fields - BAC, EV, PV, AC, CPI, TCPI, EAC - are available in MS Project 2010. The screens almost remain same. You can set the Baseline and "% calculation or work complete" calculation from the Backstage view in similar fashion. To know more on it: Practical PMP with MS Project. In this program, a case study driven project is taken and worked upon.

How does it happen in Oracle Primavera P6?

Fundamental concepts remains same. Primavera P6 also calculates the TCPI in similar way - the way discussed in these two posts. To know more on it: Practical PMP with Primavera P6In it, a case study driven project is taken and worked upon.

Now I hope, you got a sound understanding on TCPI and CPI. So, in summary you have to understand and remember the followings (including your PMP exam).


Summary:

  • CPI < 1 means Over Budget
    CPI > 1 means Under Budget
    CPI = 1 means On Budget 
  • TCPI < 1 means Easier to Complete
    TCPI > 1 means Harder to  Complete
    TCPI = 0 means Same to Complete
  • CPI is about past performance and TCPI is about future performance
  • Formula for CPI = "Work Done"/"Funds Spent" = (EV/AC)
  • Formula for TCPI = "Work Remaining"/"Funds Remaining" = [( BAC- EV) / (BAC - AC)]
  • When CPI (or cumulative CPI) falls below the baseline, then the formula for TCPI changes, i.e.,
    TCPI = [ ( BAC- EV) / (EAC - AC)], here EAC becomes the new financial goal once approved
  • Both TCPI and CPI can be 0 or 1 as we saw 

An Interesting Scenario:
Is it possible to have TCPI to have an weird value? Say some infinite number? Yes! Here is a case. Imagine if BAC and AC are same and you have been still asked to complete the project.

TCPI = "Work Remaining"/"Funds Remaining" = (Certain Value) / 0 = An Infinite Value


So, what would you do for TCPI if it throws such a value?More importantly - how would you complete the project? Think about it!



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Thursday, February 05, 2015

To Complete Performance Index (TCPI) and Cost Performance Index (CPI) - Part 1



Last month in a PMP session, on "To Complete Performance Index (TCPI)", a number of questions came forward. Some of them are: 
  • What exactly is TCPI?
  • When will be the Budget At Completion (BAC) be used and/or when will be the Estimate At Completion (EAC) will be used?
  • Is it that when TCPI is less than 1, it means good and vice versa?
  • What is its relationship with Cost Performance Index (CPI) in performance measurement? 
  • What it has got to do with other calculations such as Net Present Value (NPV), Internal Rate of Return (IRR) etc.?
These were all discussed in the session. Here in addition, I'll share some more insight into TCPI and CPI. I'll also show with a simple example how a software (MS Project 2013) handles CPI and TCPI. 

1. The Fundamentals - TCPI and CPI:


To Complete Performance Index (TCPI) is used in Earned Value Measurement (EVM). It is one of the common indices used along with Schedule Performance Index (SPI) and Cost Performance Index (CPI) in EVM. To understand very quickly on SPI and CPI, I have given a simple example, which is available here (What is the Health of Your Project.)


Simply put, TCPI is a a future performance measurement for your project based on your past performance, whereas CPI is current performance measurement based on the project's past performance.  TCPI is a forecasting technique, where as CPI is a budgetary measurement or cost efficiency measurement technique. 


With CPI you can ask: Is my project within budget or is my project over budget? How is the project doing with respect to spent cost so far? With TCPI, you can ask: What performance level has to be achieved on the remaining work in order to meet the financial commitment - going forward? Both TCPI and CPI are used in EVM. When used together they are indeed very powerful in project-portfolio management. 


Note: Earned Value Measurement (EVM) is with respect to your defined baseline and your status date. Without baseline, you are not measuring anything. And in EVM, your measurement is "now" - on the status date. Re-read the just completed para again - it is important!


Mathematically put:

TCPI =  "Work Remaining"/"Funds Remaining",
 whereas, 

CPI = "Work Done"/"Funds Spent"

Now, Work Remaining = Total Work Planned - Work Donewhere work done is as on the status date.
Similarly, Funds Remaining = Total Budget Planned - Funds Spent, where funds spent is again on the status date.

Total Work Planned = Budget At Completion (BAC)
Work Done = Earned Value (EV)
Hence, work remaining = BAC - EV

Total Budget/Funds Planned = Budget At Completion (BAC)
Funds Spent = Actual Cost (AC)
Hence, funds remaining = BAC - AC

Considering these, the formula for TCPI comes as: 

TCPI = (Budget At Completion - Earned Value) / (Budget At Completion - Actual Cost) 
           = (BAC - EV)/ (BAC - AC)
CPI    = (Earned Value) / (Actual Cost) 
           = (EV) / (AC) 

Both CPI and TCPI are Indices, and hence the values will be one of these - "1" or "< 1" or "> 1".


Cost Performance Index is a measure of the value of work completed compared to the actual cost incurred. It is the cost efficiency of the project till date, i.e., with respect to the status date - the day on which you are measuring.


For CPI:

 - If less than one means bad. (i.e., You are over budget)
 - If more than one means good. (i.e., You are under budget)
 - If equal to one means you are on budget. (i.e., Your funds spent is perfectly alright or you are on budget)

It is depicted in the figure below.



Figure - Cost Performance Index 

CPI at a project level becomes cumulative CPI, which in plain terms is the add-up values of CPI for individual activities or work packages that you are measuring fully at a project level. 


For TCPI:

 - If less than one means good. (i.e., It is easier to complete)
 - If more than one means bad. (i.e., It is harder to complete)
 - If equal to one means it is perfectly alright. (i.e., It is same to complete)

Mark the words - for CPI while I am saying over or under budget; for TCPI, I am saying it is easier or harder to complete. 


So, how and where TCPI and CPI help? Here it is. 

Say you have a cumulative CPI of 0.5 and TCPI is coming at 1.5. It means based on your past performance, you are getting 50 cents for every $1 spent. But going forward, to meet the financial commitment, you need to have $1.5 in return for every $1 spent.  Now, that is highly unlikely. At best you can have 80 or 90 cents return, going forward. It means  you need to have a index of value 0.8 or 0.9 to meet your goal. 

This is also where the formula for TCPI changes - when your cumulative CPI has fallen below the baseline. Now your BAC (the budget that has been planned, authorized and baselined), as shown in the above data, is not going to help you, as your project's current cost performance (CPI) is low.  And as we saw, the predicted TCPI is difficult to achieve. Hence, EAC - the Estimate At Completion - is the new viable one. Once it is approved, EAC becomes the cost performance goal  in place of BAC. Simply put, EAC is your new baseline, once approved. 


Here, the formula for TCPI will be:

TCPI = (Work remaining) / (Funds Remaining) = (BAC - EV) / (EAC - AC)

It is depicted in the figure below.



Figure - To Complete Performance Index
(Reference Source: PMI-PMBOK Guide 5th Edition)



2. An Example:

Let me take a simple example. You have 2 tasks each taking 2 days and executed by two resources - say R1 and R2. For each day, you are paying $100 to the resources. After 1 day, you are checking the status. As you are measuring at the end of 1 day, it is your status date. This is what you found:

Status For Task - 1:

- 1 day over. But R1 needs 2 more days.
- So the total duration now becomes 3 days. There is an increase of 1 day. 
Status For Task - 2:
- 1 day over. But R2 needs 0.75 day more.
- So, the total duration becomes 1.75 days. There is a reduction of .25 day.

Now quickly, let us check the EVM related metrics. 


TCPI and CPI For Task -1:
  • BAC = Budget At Completion (This is what you planned when you started) = 2 days * $100 = $200
  • EAC = Estimate At Completion (This is going to be your new estimate) = $300 (as resource R1 is now taking 1 day more)
  • PV = Planned Value (when you started off, what you have planned by end of 1 day) =  % Planned Complete * BAC = 1/2 * $200 = $100
  • AC = Actual Cost (what is the money spent as on today) = $100
  • EV = Earned Value (what you have actually done till end of 1st day) = % Actual Complete * BAC = 1/3 * BAC = 1/3 * $200 = $66.67 
What is the value of CPI?
CPI = Earned Value/Actual Cost = EV/AC = 0.67

What is the value of TCPI?

TCPI = (BAC - EV)/ (BAC-AC) = ($200 - $66.67) / ($200 - $100) = 1.33

But this TCPI value is no longer to be used, as CPI has fallen below the baseline. In other words, going from 0.67 to 1.33, as explained earlier, is going to be a tough one - harder to complete.  So, EAC has to be new approved one and on that we will calculate the TCPI.


So the TCPI, for this over budget task will be:

TCPI = (BAC-EV)/(EAC-AC) = ($200 - $66.67) / ($300 - $100) = 0.67

So, for the first time, TCPI and CPI will match. And it must be noted that TCPI is not the inverse of CPI, i.e., 1/CPI. Also, TCPI is not (1-CPI).


TCPI and CPI For Task -2:
  • BAC = Budget At Completion (This is what you planned when you started) = 2 days * $100 = $200
  • EAC = Estimate At Completion (This is going to be your new estimate) = $175 (as resource R2 is now taking 1.75 days in total)
  • PV = Planned Value (when you started off, what you have planned by end of 1 day) =  % Planned Complete * BAC = 1/2 * $200 = $100
  • AC = Actual Cost (what is the money spent as on today) = $100
  • EV = Earned Value (what you have actually done till end of 1st day) = % Actual Complete * BAC = 1/1.75 * BAC = 1/1.75 * $200 =  $114.28 
What is the value of CPI?
CPI=Earned value/Actual Cost = EV/AC = 1.14

What is the value of TCPI?

TCPI = (BAC - EV)/ (BAC-AC) = ($200 - $114.28) / ($200 - $100) = 0.86

Here, for Task-2, the first formula of TCPI with BAC is used, unlike for Task-1 where the EAC related formula is used.


3. A Set of Questions and Answers:

When I started  this post, I noted on certain questions. Let me address the answers here, now that it has been discussed:

  1. Can TCPI be 0? Yes it can be. When you have not baselined, the value will be 0.
  2. Can TCPI be 1? Yes it can. When you baseline first time and before tracking, the value is 1. At this point, the BAC and EAC are same.
  3. Is TCPI the reverse of CPI? No. We have seen that.
  4. Is TCPI the value is -> 1-CPI? No. We have seen that. 
  5. Has TCPI anything to do while we measure NPV or IRR? No. TCPI is a performance measurement or forecasting technique based on money you have to spend, where as NPV or IRR drives investment decisions, based on the value you are going to get. 

Next with a software tool, which you will use in real life as a project or portfolio manager.

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