Chaos and Complexity #13: Earned Value versus Sunk Cost

by Gary Monti on December 7, 2010

“How stable is the schedule?” is a question that came to mind when preparing to be interviewed by Carl Pritchard for Project Manager Today (based in the United Kingdom) regarding scheduling packages and the benefits and obstacles end-users experience.  (The path to complexity, chaos, and game theory began when introducing distributed project management systems via LANs and WANs.)

The deeper question is, “Can credible earned value calculations be performed?” Earned value is one of the most elegant concepts to come out of project management. The core comprises two simple equations:

Cost Variance = Earned Value (what’s installed) – Actual Cost (what was paid)

Schedule Variance = Earned Value (what’s installed) – Planned Value (what was supposed to be installed by end-of-day today)

So what role do chaos and complexity play when working with schedules? The answer is, “A large one.” Some background will help.

Schedule Stability, Chaos, and Complexity

One thing clients and students will always hear is:

All good schedules sit on a solid foundation the building blocks of which come from quality- and risk management.

Combining this with the earlier question, “Can credible earned value calculations be performed?” leads to an interesting approach for determining if earned value is possible. The approach determines where a project sits on a series of sliding scales. The rule governing the scales is: the more the project and environment are to the left the better the odds of creating a credible schedule. Here is a sampling of the scales:

  1. Closed scope — R&D project
  2. Formal project — Ad hoc, tactical approach with excessive number of workarounds
  3. Stable environment — Dancing terrain
  4. Sufficient resources — Insufficient, multitasking
  5. Risk neutral — shame-based environment with high level of fear and frustration
  6. Synergistic relationships — win-lose relationships
  7. Realistic expectations — greed
  8. Clear reporting — “spin” reporting
  9. High quality, defined acceptance test — disconnected wish-list

Earned Value versus Sunk Cost

With projects solidly to the left of each scale traditional project management tools can be applied. If one is lucky a definitive estimate can be created leaving everyone with a clear understanding how deliverables will be created along with the associated time and budget. Earned value can be calculated.

This begs, almost screams, another question, “What about projects that slide towards the right?” The more movement to the right, the greater the chaos, the more the project crumbles. A hard reality takes shape. Earned value is less and less viable and the team enters the world of sunk cost.

Sunk cost is making an investment without assurances the desired outcome will be reached. It is a gamble.

The inverse of the previous quote regarding good schedules becomes true.

As quality- and risk management suffer, uncertainty increases creating the potential for increased variances. The variances can eventually exceed the initial baseline.

The ability to forecast disappears and deciding what to do with the project becomes a crap shoot.

The point of all this?

Simple. Avoid confusing intention with reality. Wanting to do well and having the ability to do so are two different things. Pay attention to both the strategic components and the tactical nuts and bolts. Have a clear audit trail top-to-bottom and back up. The devil and success sit side-by-side in the details. To the extent you can neutralize the former and amplify the latter earned value can be realized.

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