Summary of Important Points

Summary of Important Points

Table 6-8 provides the highlights of this chapter.

Table 6-8: Summary of Important Points

Point of Discussion

Summary of Ideas Presented

The expense (P&L) statement

  • The two measures of budget and actual expenditures taken together as one pair of financial metrics do not provide a measure of value obtained and delivered for the actual expenditures.

  • The P&L expense statement is one of the three most important financial statements that the controller will provide to the project manager.

  • The other two financial statements useful to project managers are the cash flow statement and the balance sheet.

  • The WBS can also serve as an important financial document, connecting as it does to the chart of accounts.

  • Many expenses of the company are present whether or not there is a project; expenses such as these are called "indirect" or "overhead" expenses.

  • Expenses can also be categorized as fixed or variable. Fixed expenses are not subject to the volume of work being done. Variable expenses track the workload: more work, more expense.

  • There is one more way to show costs on the expense statement: record and manage to standard costs rather than actual costs. Simply put, standard costs are average costs.

Lean thinking

  • Lean thinking applied to project cost management has many potential benefits. If the cost to initiate the batch work could be made negligible, whether painting or writing software, project managers would plan the project exclusively around the requirements for deliverables and not around the deliverables as influenced by the requirements of the process itself.

Managing with three-point estimates

  • The P&L statement is deterministic. The P&L statement is a cproduct of the business accounting department. The P&L is not based on statistics.

  • When doing the cost estimates leading up to the summarized project cost, three-point estimates and distributions should be applied to the WBS.

  • The ultimate cost summarization at the "top" of the WBS will be Normal regardless of the distributions applied within the WBS.

Earned value concept

  • The earned value concept is about focusing on accomplishment, called earnings or performance, and the variance between the dollar value of those accomplishments and the dollar cost of those accomplishments.

  • The variance of "accomplishment less cost < $0" is always reported as an unfavorable status.

  • Earned value also provides a means to forecast performance. The history measures by and large involve variances. Forecasts require performance indexes.

  • Three measures are needed to construct an earned value system of performance evaluation: (1) Planned value (PV): PV is the dollar value planned and assigned to the work or the deliverable in the WBS. (2) Actual cost (AC): The actual cost is the cost of performance to accomplish the work or provide the deliverable on the WBS. (3) Earned value (EV): Earned value is a measure of the project value actually obtained by the work package effort.

  • $Schedule variance = $Value variance = EV - PV.

  • Cost variance = EV - AC.

Dollar-sizing the cost accounts

  • The larger the account, the greater is the pessimistic-optimistic distance and the greater is the amount at stake in dollars.

  • Rolling wave planning simply means that the detail down to the cost account is done in "waves" or stages when the project activities, facilities, tools, staffing, risks, and approach become more known.

Time-centric earned value

  • The main idea behind the time-centric earned value system is to set a PMB based on planned work package starts and finishes over the course of the project.

  • The total collection of starts and finishes, if executed completely, does represent the total scope of the project.

  • Instead of earning a dollar value, what is earned is a start or a finish. The PMB is a set of planned starts and planned finishes.

  • As with the traditional earned value system, the most valuable contribution of the calculations is to stimulate the project team to take action necessary to deliver the value to the project sponsor as defined on the project balance sheet and specified in the project charter.