earning value from risk - dtic › dtic › tr › fulltext › u2 › a404330.pdf · earning value...

1999 Carnegie Mellon University

Earning Value FromRisk

Ron Higuera

March 1999

[email protected]

2

Carnegie Mellon UniversityCenter for Information Systems EngineeringCISE


Agenda

Overview Earned Value

Overview Risk Management

Investment Strategy

Summary

3



Presentation Objective

Relate risk management and earned value conceptsto a practical strategy of investment

4



Definitions

Earned value is a management technique thatrelates resource planning to schedules and totechnical performance requirements.

Earned value management (EVM) uses earned valueas the tool for integrating cost, schedule, andtechnical performance management, and riskmanagement.

Source: DSMC www.dsmc.dsm.mil/educdept/evmdept.htm

5



Performance Measurement Baseline

Management Reserve

Undistributed Budget

Distributed Budget

Contract BudgetBase

PerformanceMeasurement

Baseline

… to achieve a realistic, executable contract plan, called the Performance Measurement Baseline (PMB).

6



ESTABLISH THE BASELINE1. DEFINE THE WORK

100

4060

1525

3030

2. SCHEDULE THE WORK

3. ALLOCATE BUDGETS

$$

CONTRACT BUDGET BASE

TIME

Mgmt Reserve

Perfo

rman

ce M

easu

remen

t Bas

eline

Source: USAF www.acq.osd.mil/pm

7



Earned Value Terminology

Data Element Term AcronymScheduled Work Budgeted Cost for Work Scheduled BCWS

Earned Value Budgeted Cost for Work Performed BCWP

Actuals Actual Cost of Work Performed ACWP

Authorized Work Budget At Completion BAC

Forecasted Cost Estimate At Completion EAC

Work Variance Schedule Variance SV

Cost Variance Cost Variance CV

Completion Variance Variance At Completion VAC

Source: MCG www.acq.osd.mil/pm

8



WBS/Organization Integration


OBS DATA SUMMARIZATION

ControlAccount

SoftwareEngineering

WorkPackages

PlanningPackages

SOFTWAREINTEGRATION

PROGRAM

ProductDevelopment

MasterPlanning

AdaProducts

SoftwareTools Standards

CPCI #1MOS

CPCI #2MOLE

CPCI #3MAC

AdaStudy

AdaConversion

AdaApproach

AdaApplications

SecureSystems

LANApplications

Marketing

BCWSBCWPACWPBACEAC

FUNCTIONALORGANIZATION

CWBSEXTENSION

SELECTEDREPORTINGELEMENTS

SELECTEDPSWBS

ELEMENTS

HardwareEngineering

Engineering

Operations

VP/GM

ControlAccount

ControlAccount

ControlAccount

ControlAccount

ControlAccount

WB

S D

ATA

SU

MM

AR

IZATIO

N

9



Control Account Elements

Work PackagesDetailed, short-span tasks, or material

items, required to accomplish the CA

objectives, typically in the near term

Task 1Task 2

Task 4Task 5

Task 3

Work Packages

Planning Packages

Planning PackagesFuture work that has not been

detail planned as work packages.

They are always scheduled to

occur in the future.


10



Earned Value Data Elements

0

1000

2000

3000

4000

5000

6000

Jan Mar May Jul Sep Nov Jan Mar May

ACWPBCWP

BCWS


Time Now

BAC(PMB)

CBB

MR

11




0

1000

2000

3000

4000

5000

6000


Time Now

BAC(PMB)

CBB

MR

ACWPBCWP

BCWS

Schedule Slip

Cost Variance Schedule Variance


12




0

1000

2000

3000

4000

5000

6000


Time Now

ProjectedProgram

Delay

VAC

EAC

BAC(PMB)

CBB

MR

ACWPBCWP

BCWS

ETC

Schedule Slip

Cost Variance Schedule Variance


13



Data Analysis Relationships

Term Formula

Percent Complete

Cost Performance Index or Performance Factor

Checklist ActionsRatio of work accomplished in terms of the total amount of work to do.

Symbol

% Done

CPI or PF

TCPI or VF

BCWPBAC

Estimate To Complete

BCWPACWP

Ratio of work accomplished against money spent (Efficiency Rating: Work Done for Resources Expended)

To CompletePerformance Indexor Verification Factor

BAC - BCWPEAC - ACWP

Ratio of work remaining against money remaining (Efficiency which must be achieved to complete the remaining work with the expected remaining money)

Schedule Performance Index

SPIRatio of work accomplished against what should have been done (Efficiency Rating: Work done as compared to what should have been done)

BCWPBCWS

EACEstimate At Completion

Calculation of the budgeted work remaining against the performance factor


ETC BAC - BCWPCPI

ETC + ACWPCalculation of the estimate to complete plus the money spent

14



Risk Indicators (example)

EVM provides several metricsthat can “flag” potentialproblems (risks) either astrends or thresholds.

CPI: Good = ≥ 1.0

SPI: Good = ≥ 1.0

0.94

0.96

0.98

1

1.02

1.04

1.06

Jan Mar May

CPISPI

15



A Risk Management Process

Anticipatewhat cango wrong

Communicate

Identify

Plan

Track

Control

Decidewhat isimportant

Plan to take action

Correctdeviations

Trackactions

Analyze

16



EV Data

Identification Activities Overview

Statement of riskContext

List of risksGroup/teamuncertainties

Individualuncertainties

Projectdata

• capture statementof risk

• capture context ofrisk

Identify

PRINCIPLES

1. Non-judgmental2. Individual voice3. Multipleperspectives

17



Analysis Activities Overview

Master list of risks

TopN

Risk Risk

Risk

Risk

Risk Risk

Class 3

Risk

Classification

Class 1Class 2

Statement of riskContextImpactProbabilityTimeframeClassificationRank

List of risks

Statement of risk Context

• evaluate• classify• prioritize

Analyze

PRINCIPLES1. Most important2. Vital few3. Leveragerelationships

18



Planning Activities Overview

Risk Risk

Risk

Risk

Risk Risk

Class 3

Risk

ClassificationClass 1Class 2

Action plans

Statement of riskContextImpactProbabilityTimeframeClassificationRankPlan Approach

Project goalsand constraints

Resources

Master listof risks

TopN

Statement of risk*ContextImpactProbabilityTimeframeClassificationRank

• assign responsibility• determine approach• define scope and

actions

Plan

PRINCIPLES

1. Action-oriented2. Ownership3. Accountability

19



Tracking Activities OverviewPRINCIPLES

1. Risk-drivenmeasures2. Know youraudience3. Know whatsuccess looks like

Action plans

Statement of riskContextImpactProbabilityTimeframeClassificationRankPlan Approach

Statement of riskContextImpactProbabilityTimeframeClassificationRankPlan ApproachStatusProject

data

Risk & mitigationplan measure

Status reports

• risks• mitigation

plans

• acquire• compile• report

Track

Resources

20



Control Activities Overview

Status reports

• risks• mitigation plans

Projectdata

Decisions• replan• close• invoke

contingency• continue

tracking

Statement of riskContextImpactProbabilityTimeframeClassificationRankPlan ApproachStatusControl Decision

Statement of riskContextImpactProbabilityTimeframeClassificationRankPlan ApproachStatus

• analyze• decide• execute

Control

PRINCIPLES1. Follow the plan2. Conditionschange

21



EV Data

EV Data EV Data

Risk Management Framework Ex:

ProjectManager

Functional AreaManagers (H/W,S/W, etc.)

Team managers: e.g.,Flight S/W, CM, TestManager

Individuals/Team Members

Identify

Analyze - review - prioritize

- evaluate - classify

Track

Plan - approve plans

- recommend actions - develop plans

Control - integrate across functions - reprioritize - authorize project resources

risks

Top Nrisks

Top Nrisks decisions

assignresponsibility

requiredindicators

trends

riskstatus

Transfer tostaff, etc.

assign non-top N

Control - integrate - reprioritize - authorize functional area resources

13

2

22



Risk Indicators (example)

EVM provides several metricsthat can “flag” potentialproblems (risks) either astrends or thresholds.

CPI: Good = ≥ 1.0

SPI: Good = ≥ 1.0

0.94

0.96

0.98

1

1.02

1.04

1.06

Jan Mar May

CPISPI

23



Management Reserve

Calculate total project management reserverequired based onl statistical modelingl past experience

0

500

1000

1500

2000

2500

3000

3500

4000


BCWS

Management Reserve

ScheduleReserve

BAC

Total Funds

24



Management Reserve Investment Strategy

0

200

400

600

800

1000

1200


Estimate based onrisk evaluationbaseline

Estimate based onstraight-line

25



Project Plan

1B

2B

3B

4B

5B

6B

1A6A

5A

4A

3A

2A

26



1B

2B

3B

4B

5B

6B

1A6A

5A

4A

3A

2A

Risk Mitigation Strategy Tasks

R6

R4

R3

R2

R1 R5

RISK MITIGATION

e.g., Requirements Management

Project Plan

27



Risk Mitigation Strategy

WATCH DOMAIN

RIS

K*

Event #1 2 3 4

PROBLEM DOMAIN

Feb 96 Mar 96 Apr 96Time

5

MITIGATIONDOMAIN

Accept

12

10

8

6

4

2

May 96

1.0 Reprioritize the baselined requirements and reorganize the builds to implementthe high-priority requirements first. The likelihood of their changing will befactored into the prioritization process.

2.0 Estimate the impact to the schedule for builds and requirements based on theprojected completion of the TBD requirements. Verify (as much as possible) thatthe new schedule accounts for the anticipated changes.

3.0 Complete the requirements document for TBD requirements 38-42 and submit achange request.

4.0 Complete the requirements document for TBD requirement 73 and submit achange request.

5.0 Complete the requirements document for TBD requirement 104 and submit achange request.

6.0 Complete the requirements document for TBD requirements 143-149 and submita change request.

ID Task Name Duration1 Reprioritze baseline requirements 10 days

2 Estimate Schedule 10 days

3 TBD Requirements 38-42 30 days

4 TBD Requirement 73 25 days

5 TBD Requirement 104 20 days

6 TBD Requirement 143-149 10 days

2/4 2/11 2/18 2/25 3/3 3/10 3/17 3/24 3/31 4/7 4/14 4/21 4/28 5/5 5/12 5/19February March April May

6

28



Risk Criteria Table

Pro

babi

lity

Impact54321

54321

1211

98

10

6

7

5

51

22

33

4

58

11

1

22

23

3

Attribute: Impact

Level Value Technical Criteria Cost Criteria Schedule Criteria

5 Catastrophic Can’t control the vehicleOR Can’t perform the mission

> $10 Million Slip to level I milestones

4 Critical Loss of mission, butasset recoverable in time

$ 10 M ≤ X < $ 5 Million Slip to level II milestones

3 Moderate Mission degraded belownominal specified

$ 5 M ≤ X < $ 1 Million Slip to level III milestones

2 Marginal Mission performancemargins reduced

$ 1 M ≤ X < $ 100 K Loss of more than onemonth schedule margin

1 Negligible Minimum to no impact Minimum to no impact Minimum to no impact

Attribute: Probability

Level Value Criteria

5 Near certainty Everything points to this becoming a problem, always has

4 Very likely High chance of this becoming a problem

3 Likely (50/50) There is an even chance this may turn into a problem

2 Unlikely Risk like this may turn into a problem once in awhile

1 Improbable Not much chance this will become problem

29



Risk Metrics

WATCH DOMAIN

RIS

K*

Transition Thresholds

PROBLEM DOMAIN

Feb 96 Mar 96 Apr 96

Time

Pessimistic

Expected

Optimistic

MITIGATIONDOMAIN

Accept

12

10

8

6

4

2

Note: *from risk table May 96

Event #1 2 3 4 65

30



Risk-Earned Value

0

1000

2000

3000

4000

5000

6000

Feb Mar Apr May Jun

REWS: Risk Exposure Work Scheduled

Ris

k E

xpo

sure

$$$

31



Risk Exposure “Buy-Down”

0

5000

10000

15000

20000

25000


Time Now

Estimate To Completion

Risk Exposure Variance Schedule Risk Variance

Plan To Completion

Actual to-date

32



0

500

1000

1500

2000

2500

3000

3500

4000


BCWS

Management Reserve

ScheduleReserve

BAC

Total Funds

Delivery

Sch

edu

le

TIME

$$$

4500

negotiated

33



0

500

1000

1500

2000

2500

3000

3500

4000


BCWS

Management Reserve

ScheduleReserve

BAC

Total Funds

Delivery

Sch

edu

le

TIME

$$$

4500

EAC

negotiated

ACWP BCWP

Now

Scheduleslip

Costoverrun

34



Management Reserve Ratio (MMR)

0.8

0.9

1

1.1

1.2

1.3

1.4

Jan Mar

May

MRRCPI

MRR = TFAEAC =

TFABAC * CPI

MRR: Management Reserve RatioTFA: Total Funds Available

Ratio of total funds available against total estimated funds expended at completion

MR = TFA - BAC

35



Risk Data Analysis Relationships

Term Formula

Risk Exposure Performance Index

Checklist ActionsSymbol

REPI ARWPREWP

Ratio of work accomplished against money spent (Efficiency Rating: Work Done for Resources Expended)

Risk Schedule Performance Index

RSPIRatio of work accomplished against what should have been done (Efficiency Rating: Work done as compared to what should have been done)

REWSREWP

ManagementReserve Ratio

MRR

Ratio of total funds available against total estimated funds expended at completion or total funds available against the budgeted cost at completionmultiplied by the cost performance index

TFAEAC

=TFABAC *CPI

=

36



Risk Exposure Tracking

0

5000

10000

15000

20000

25000


Time Now

Estimate To Completion

Risk Exposure Variance Risk Schedule Variance

Plan To Completion

Actual to-date

0.8

0.9

1

1.1

1.2

1.3

1.4

MRR

CPI

Good

Not so Good

37



Summary

Earned Value methods usedl to indicate risksl plan allocation of management reservel track risk exposure “buydown”l track “buydown” investment

Use for “critical” risks

Account for actions that reduce risk

Fixing risks is cheaper than fixing problems

earning value from risk - dtic › dtic › tr › fulltext › u2 › a404330.pdf · earning value...

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