How to Determine the Expected Value of Those Crucial Enabler Projects!

Every investment decision – stock purchase, real estate development, commodity options, new product development, poker hand – must be based on analysis that estimates the value that the investment will generate at some specified point in the future. That is one reason why the redefinition of projects as “investments in work” is so important. As most project and program professionals are keenly aware, a key area of disappointment with the way that projects are currently executed is their frequent failure to produce benefits. Defining them as investments will enforce renewed emphasis on the expected benefits—not just by listing them but also by:

  1. Estimating the expected value of such benefits if delivered on a specific date;
  2. Estimating how a change in that delivery date, later or earlier, might change that expected value;
  3. Tying those benefits to specific items of product and project scope (via the value breakdown structure, or VBS);
  4. Tying the items of project scope to the project duration and budget through critical path drag, drag cost and true cost (TC of a critical path activity = resource costs + drag cost); and
  5. Making every project and program decision with the impact on expected value (and the DIPP) in view.

One of the crucial types of projects to deal with as an investment is the sort that in my book Managing Projects as Investments: Earned Value to Business Value is referred to as an enabler project.

  • An enabler project is usually part of a larger overall program.
  • Its value comes from its role in increasing the value of the overall program by enabling the other projects (and perhaps non-project work) in the program.
  • In that role, its value is enlarged by the value of the projects it enables.
  • Its acceleration or delay value/cost is therefore also often increased because of its impact in delaying or accelerating the schedules and value generation of the other projects.

There are many, many examples of this type of enabler project. But a concrete example is that of the development of a luxury vacation resort:

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Paradise Island

Paradise Island Luxury Resort will provide luxury vacation time for the whole family!

  • Five-star hotels and restaurants, as well as boutiques for the rich-and-famous. These are expected to generate an average of $2 million per week above operating costs, or $520M over 5 years after the Grand Opening.
  • A championship-quality golf course, where the greens fees are expected to generate $1 million per week above operating costs, or $260M over 5 years after the Grand Opening.
  • A marina for luxury yachts, expected to generate $0.5 million per week above operating costs, or $130M over 5 years after the Grand Opening.

One of the great attractions of the resort is its guaranteed privacy. This is due to the fact that it is located on Paradise Island. Although only a short distance from land, the cliffs that comprise the island’s perimeter make it completely inaccessible. We therefore have to build the Garden of Eden Bridge to the island in order to:

  • Transport the heavy construction equipment and materials needed for the development, and
  • To allow the guests to reach the island once the resort is opened.

It is planned to take 52 weeks to make the bridge ready for the transportation of equipment and materials. Only after that point can work start on the hotels, restaurants, boutiques, golf course and marina. The Grand Opening of the entire resort with all its features is intended for 104 weeks after transportation across the bridge becomes possible.

When the resort opens, a tollbooth will be placed on the bridge. It is expected that tolls will amount to $1,000 per week above operating costs, or $260,000 over five years.

QUESTIONS:

  1. What is the expected value of the entire resort over five years?
  2. What is the expected value of Garden of Eden Bridge over five years?
  3. What is the value/cost of time on the Garden of Eden Bridge project?
  4. Based on the information above, how much would it be worth if we could shorten the bridge project by six weeks?
  5. If the Garden of Eden Bridge is being built by a contractor on a fixed price contract, what should the customer insert into the contract?

Scroll down for the answers.

ANSWERS:

  1. What is the expected value of the entire resort over five years? Combined, the Paradise Island Resort is expected to generate $3.5M per week above operating expenses, or $910M over five years, plus $260,000 in tolls from the Garden of Eden Bridge.
  2. What is the expected value of Garden of Eden Bridge over five years? $910.2M over five years! There is no value unless we build the bridge – it enables the entire project! So the value-added of the bridge project is equal to the value of the entire luxury development program.
  3. What is the value/cost of time on the Garden of Eden Bridge project? Any delays on the bridge delay all the other projects, and the resort opening, on a one-to-one basis. Therefore the value/cost of time on the bridge project is $3.5M per week (+ $1,000 per week for the bridge tolls). In other words, that is the drag cost per week for every activity on the bridge project’s critical path.
  4. Based on the information above, how much would it be worth if we could shorten the bridge project by six weeks? Each week that we can shorten the bridge project is worth $3.5M per week + $1,000. That means that the expense for additional resources that cost up to $21M (+$6,000 for the bridge tolls!) would be justified.
  5. If the Garden of Eden Bridge is being built by a contractor on a fixed price contract, what should the customer insert into the contract? Substantial monetary incentives for each week earlier that the contractor completes the bridge. Unless the contractor is incentivized, he likely will not even seek opportunities to accelerate the schedule, costing the customer $3.5M per week for every opportunity overlooked. And if the customer doesn’t do this but the contractor recognizes the project as an enabler project, the contractor should:
  • Approach the customer;
  • Explain the situation;
  • Point out that he might be able to accelerate the schedule by spending more money; and
  • Suggest amending the contract to include time-based incentives that would maximize the customer’s value.

This is a very simple — but easy to understand — example of an enabler project and the importance of identifying it as such and of computing its multiplied value/cost of time. What are some other examples of enabler projects in the real world? Have you worked on any? Were their unique value aspects, as shown in this example, understood and exploited? If you have other examples from your experience, please describe them in this website’s Discussion FORUM here.

Fraternally in project management,

Steve the Bajan

PMBOK® Guide Sixth Edition: What Would You Like to See Added?

Sometime in 2016, the next edition of the PMBOK® Guide should be published by the Project Management Institute. We could wait until too late and then complain about how the hard-working folks who author the “bible” haven’t seen fit to include our pet terms, techniques, metrics and ideas. Or we could start now by developing a list of items that we feel it should include, and perhaps either someone will notice it or we can summarize it and email it to PMI for consideration.

Toward this goal, I am starting a “PMBOK® Guide Sixth Edition Wish List” thread in the Discussion FORUM attached to this blog. I hope that readers will weigh in with their own suggestions/nominations, as well as comment on the suggestions of others. And periodically I will compile a summary of them.

For starters, here are ten items that I personally think should be included in the next edition, listed in descending order of how valuable I feel the inclusion of each would be. I will follow each with a brief explanation or descriptive link and a five-scale rating, running from VL (for Very Likely) to L to M to U to VU (for Very Unlikely), of my estimate of the probability of each being included.

  1. Change in the definition of “project” to eliminate the weasel word ”endeavor” and replace it with “investment in work”. My preferred redefinition would be: “An investment in work to create a unique product, service or result.” (No need for “temporary” either, until someone can show me something that isn’t temporary!) [U, even though this would have great benefit for the project management profession by recognizing our important role in utilizing the resources and funds with which we are entrusted to maximize value and ROI.)
  2. Expand the section on “Business Value” that was introduced in the 5th edition and that currently occupies most of pages 15-16, as well as being mentioned in the Glossary. The current description starts: “Business value is a concept that is unique to each organization.” That is indisputable. But it is also such a crucial concept (the raison d’etre of every project and/or program!) that surely it needs to be expanded to far more than two pages. Deserving of exploration are:
  • What are the commonalities of business value across any and all organizations?
  • How should it be measured? (Value is usually measured in monetary units.)
  • What generates the business value? (Answer: the product scope, with occasional contribution from the project scope if just doing the work adds value {e.g., a more experienced workforce}.)
  • What project documentation/technique should be used to define the business value? (Answer: the value breakdown structure (VBS) – which should definitely be included, and I think will be!)
  • How should business value be used to manage the other aspects of the project? (Through optimizing it in integration with schedule and cost, and using it to justify additional resources where their cost is less than the value they add.)

[VL. Business value is an obvious concept that lots of people have been writing about for a while. Whether any of the information mentioned above is included in the expanded treatment of the topic is much more doubtful. But almost any expansion would be useful.]

  1. Change the EVM term from planned value (PV) to planned cost (PC). It is cost, as the original earned value terms (that are still used in US Department of Defense contracting) BCWS, BCWP and ACWP emphasized: notice the “C” as the second letter in each of those. Yes, using two letters instead of four for each term made the metrics more accessible, and PMI has done a great job in spreading the use of the technique. However, the word “value” instead of “cost” in PV and (and in EV!) confuses people over the concept of business value. (For a great illustration of this, read Mike Hannon’s review of my book Managing Projects as Investment: Earned Value to Business Value.) [U. Okay, maybe I’m too optimistic and it should be VU. But if PMI wants (as it should!) to expand the concept of business value, it has to start clearly distinguishing between cost and value.]
  2. Include critical path drag as a scheduling metric. Wikipedia definition here. Every item on the critical path of a project or program has drag (unless two parallel paths are both critical, in which case neither has either drag or float but both, in combination, have drag compared to the next longest path). Why does the PMBOK® Guide include the non-critical float (slack) metrics but not the always-critical drag that costs the project time and money? Knowledgeable project managers are now computing drag “manually” – but drag analysis would be done so much more routinely if all the software did the calculation. That will happen someday – but much faster if the next PMBOK® Guide recognizes it. Besides, it’ll stimulate a lot of additional opportunity for PMP Exam questions! [L. Again, maybe I’m being overly optimistic — but it’s just hard to see how knowledgeable people could think that drag doesn’t belong in the Time Management section.]
  3. Stress the importance of a clear estimate of the value/cost of time as part of the charter or project business case or other initiation documentation. [U. It’s an obvious idea which would help tie PMBOK® Guide methods to the shutdown and turnaround discipline, where such estimates are standard and hugely important. I think it will happen eventually, but probably not in the 6th Edition]
  4. Include drag cost as either a Time Management or Integration Management metric, or both. Wikipedia definition here. On more than 98% of projects (by my estimation) extra duration (i.e., time on the critical path) reduces the expected value-over-cost (expected project profit (EPP?) of a project. And on those few exceptions, it’s important to know that they are exceptions! If critical path drag is included, it would be hard to understand a rationale for not mentioning drag cost. [M. Less likely to be included than plain naked drag, but still a good chance. If it is included, it would increase the chances for inclusion of #5, stressing the importance of a clear estimate of the value/cost of time.  But #5, recognition and quantification of the value/cost of time, is more important than just the act of tying it to an activity’s drag.]
  5. Mention and discuss the DIPP formula (DIPP = {$EMV of Scope ± $Acceleration or $Delay} ÷ Cost ETC} for planning, optimization and tracking. [VU. A rephrasing of the definition of “project” to include the word “investment” (see #1) would obviously make this more likely. But the “enabler” (see below) has to be recognition of projects as investments. Maybe this important metric will be included in the 7th or 8th]
  6. Recognize and discuss the multiplier effect on the value of “enabler” projects within a program, as well as the multiplier effect on an enabler’s acceleration premium and/or delay cost. The failure to recognize the special nature of enabler projects and to designate them as such leads to many bad decisions in terms of resource targeting. [U. Again, it’s an obvious and important concept. Some of the PMBOK® Guide authors are very smart people, so I hold out some hope.]
  7. Discuss/mention the doubled resource estimated duration (the DRED) as a technique for estimating the resource elasticity of an activity’s duration in response to additional resources. The DRED is an estimate of what an activity’s duration would become (shorter, longer or stay the same) if its assigned resources were doubled. [VU. Too bad, it’s a useful little tool for identifying where additional budget would help the most.]
  8. Discuss/explore the cost of leveling with unresolved bottlenecks (the CLUB). We know that resource insufficiencies cause delays. If we start measuring the value/cost of time, we will be able to quantify that cost and attach it to the specific bottleneck causing the delay. This metric is extremely valuable on a single project basis, and even more when compiled for an entire resource type or functional department across all the projects it supports – in other words, this is a toll that can move us toward right-sized staffing levels. [VU. But the CLUB is SO valuable to project and functional managers! I’m allowed to dream, ain’t I?]

Well, here are ten to start the ball rolling. C’mon, now, you must have some ideas too, don’t you? CCPM folks? Agile expansion suggestions? Add them to the list.

Fraternally in project management,

Steve the Bajan

New Weekend Puzzler: Earned Value and DIPP Analysis on the Phlogiston Mining Project

After a cold spring, weather in Boston is finally nice and so I’ve decided to offer readers another little Weekend Puzzler, this time on earned value and DIPP analysis.

But before I explain the puzzle, I want to mention that I was interviewed on Blog Talk Radio by Elaine Jackson (a fellow Bajan!) of Holistic Consulting Project Management. The topic, which you can listen to here, was “Financial Success of Projects Using the Critical Path Drag Method.” It runs about half an hour.

Earned Value and DIPP Puzzler

First, let me say that, as a teacher, it has always been my belief that every exercise, quiz and test should teach as well as evaluate. So that is how this Puzzler is intended.

Next, here are the earned value and DIPP terms and their formulas that you will need in answering the questions.

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PV (also known as BCWS) is Planned Value and is the earned value baseline (and should be called PC for planned cost). It is the cumulative budgets for the activities as scheduled.

EV (also known as BCWP) is Earned Value, the cumulative budgets for the activities that have been performed at any given point of project progress.

AC (also known as ACWP) is Actual Cost, what it actually cost to perform the work that has been performed.

CPI is the Cost Performance Index or EV ÷ AC, the ratio between the budgets and the actual cost for work performed. It is used for trend analysis in estimating the project’s Cost Estimate-at-Completion (Cost EAC).

Cost EAC is Cost Estimate-at-Completion, or what the project will cost if current spending trends continue. It is calculated using the formula: Cost EAC = Budget at completion ÷ CPI.

Cost ETC is Cost Estimate-to-Complete, or how much more the project will cost from any given point onwards, subtracting sunk costs. It is calculated using the formula: Cost EAC = (Budget at completion ÷ CPI) – AC.

SPI is the Schedule Performance Index or EV ÷ PV, the ratio between the budgets for the work actually performed so far and the budgets for the work scheduled to have been performed to this point. It is used for trend analysis in forecasting the project’s Estimated Duration. (NOTE: The way SPI is currently used, it is often distorted due to float and other factors. These, along with corrective procedures are described in detail in my book Managing Projects as Investments: Earned Value to Business Value. But for purposes of this Puzzler, we will assume the SPI to be an accurate index.)

EMV is the expected monetary value of the project if completed on a specific date.

Acceleration premium is increase in EMV if a project is completed early.

Delay cost is the reduction in EMV if a project is completed late.

The Planned DIPP (DIPP stands for Devaux’s Index of Project Performance) is the baseline for the ratio between a project’s EMV and its Cost ETC (ignoring sunk costs). It is calculated using the formula: Planned DIPP = $EMV ÷ Planned Cost ETC.

Actual DIPP is the project EMV plus or minus an Acceleration Premium of Delay Cost if it is ahead or behind schedule (usually generated through the SPI), all divided by the Actual Cost ETC (usually generated through the SPI). It is calculated using the formula: DIPP = ($EMV ± $Acceleration Premium OR Delay Cost) ÷ Planned Cost ETC.

DPI stands for DIPP Progress Index. It is the ratio between the actual expected profitability of a project at any given point of progress (taking into account schedule acceleration or delay, but factoring out sunk costs) and the planned expected profitability at that point. It is calculated using the formula: DPI = Actual DIPP ÷ Planned DIPP.

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The Phlogiston Mining Project

Our geologists have just discovered that beneath a piece of real estate that we happen to own lies a rich pocket of phlogiston. They have performed tests which show that we should be able to recover 10,000 kilograms of the substance.

Phlogiston

Our commodities analysts have informed us phlogiston is currently selling for $10,000 per kilogram on world markets. However, that price is currently trending down at an average rate of $100 each week. Additionally, the Tierra del Fuego Megamine is due to start producing in 50 weeks. That is expected to so increase the availability of phlogiston for industrial use that starting at Week 51, the price of phlogiston is estimated to start falling at $200 per week.

We begin a 50-week project, with a budget of $10 million, to recover the phlogiston and sell it.

Q1.      What is the expected value of the 20,000 kg. of phlogiston if we could get it right now?

Q2.      What is the EMV of the project with its 50-week schedule?

Q3.      What is the EPP of the project with its 50-week schedule and $10M budget?

Q4.      What is the Starting DIPP of the project?

Q5.      What would be the acceleration premium for each week less than 50 if we could speed up the project?

Q6.      What would be the delay cost for every week more than 50 if the project takes longer?

We are now 20 weeks into the project and we have had some problems. We receive the following earned value report:

PV= $4M

EV = $3M

AC = $5M

Q7.      What is our current CPI?

Q8.      What is our current Cost EAC based on the CPI?

Q9.      What is our current Cost ETC based on the CPI and AC?

Q10.    What is our current SPI?

Q11.    What is our current Estimated Duration based on the SPI?

Q12.    What is our current estimated schedule delay based on the SPI?

Q13.    What is our current expected delay cost based on the SPI?

Q14.    What was our project’s Week 20 Planned DIPP?

Q14.    What is our project’s Week 20 Actual DIPP?

Q15.    What is our project’s current DPI?

Q16.    What is our project’s current EPP?

Q17.    If we have all this data (including EMV and the value/cost of time!), what are some of the things we might do to improve the situation?

Q18. If there is nothing we can do to pull in the schedule, but there are also no other issues such as opportunity costs, project termination costs, salvage value, etc., should we terminate the project at Week 20?

Scroll down below my sig for the answers.

Fraternally in project management,

Steve the Bajan

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ANSWERS

Q1.      What is the value of the 20,000 kg. phlogiston if we could get it right now? [$10,000 * 10,000kg. = $100M]

Q2.      What is the EMV of the project with its 50-week schedule? [$100M – (10,000kg * 50W * $100) = $100M – $50M = $50M]

Q3.      What is the EPP of the project with its 50-week schedule and $10M budget? [$50M – $10M = $40M]

Q4.      What is the Starting DIPP of the project? [$50M ÷ $10M = 5.00]

Q5.      What would be the acceleration premium for each week less than 50 if we could speed up the project? [10,000kg * $100 = $1M]

Q6.      What would be the delay cost for every week more than 50 if the project takes longer? [10,000kg * $200 = $2M]

We are now 20 weeks into the project and we have had some problems. We receive the following earned value report:

PV= $4M

EV = $3M

AC = $5M

Q7.      What is our current CPI? [$3M ÷ $5M = .60]

Q8.      What is our current Cost EAC based on the CPI? [$10M ÷ .60 = $16.67M]

Q9.      What is our current Cost ETC based on the CPI and AC? [$16.67M – $5M = $11.67M]

Q10.    What is our current SPI? [$3M ÷ $4M = .75]

Q11.    What is our current Estimated Duration based on the SPI? [50W ÷ .75 = 66.67W]

Q12.    What is our current estimated schedule delay based on the SPI? [66.67W – 50W = 16.67W]

Q13.    What is our current expected delay cost based on the SPI? [16.67W * ($200 * 20,000kg) = 16.67W * $2M = $33.33M]

Q14.    What was our project’s Week 20 Planned DIPP? [$50M ÷ ($10M – $4M) = $50M ÷ $6M = 8.33]

Q14.    What is our project’s Week 20 Actual DIPP? [$16.67M ÷ $11.67M = 1.43]

Q15.    What is our project’s current DPI? [1.43 ÷ 8.33 = .17]

Q16.    What is our project’s current EPP? [$50M – $33.33M – $16.67M = $0]

Q17.    If we have all this data (including EMV and the value/cost of time!), what are some of the things we might do to improve the situation? [A. Crash or fast track activities with lots of drag to pull in the schedule and gain $2M/week. B. Prune optional activities with low value-added and lots of drag and gain $2M/week. As the critical path migrates through other activities, repeat this process until the DIPP is as high as you can get it.]

Q18. If there is nothing we can do to pull in the schedule, but there are also no other issues such as opportunity costs, project termination costs, salvage value, etc., should we terminate the project at Week 20? [NO! Our project investment has gone very badly, as the DPI of 17% of expectations at this point tells us. However, the $5M of actual cost we have already spent is GONE, sunk, no matter what. This project now requires investment of $11.67M more with an EMV of $16.67M. If we finish the project, we will be $5M better off than if we cancel it. What this means is that any time the Actual DIPP is well above 1.00 (and it’s currently 1.43), we are better off finishing it than cancelling it UNLESS there are other factors that would offset a DIPP that suggests a return of 43% in 30 weeks on every future dollar invested.]