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.]      

Disable de Sirens — But Put Out de Critical Path Fires, Too!

I share, with many others of the anglophone Caribbean culture, a propensity for exaggerated over-the-top hyperbole. And no, I’m not being redundant – any one, or even two, of those three terms would often be insufficient to describe the extended lengths to which we will sometimes go to draw attention to the point we’re trying to make.

As an illustration, there is the old story of the Bajan visiting London who is trying to describe the wonders of his home isle.

“In Barbados, we have mountains of sugar, rivers of rum, and fish that fly!”

To which, of course, the Englishman replies: “I might believe in the mountains of sugar and the rivers of rum, but I’m damned if I’ll believe in fish that fly!”

Slide1

So in my previous article, “Whaddya Do When the Critical Path Changes?”, I resorted to a little (for a Bajan!) hyperbole. I wrote that when the critical path changes, “sirens should wail.” And I was, quite properly, taken to task by a couple of people, including Shelley Horowitz in the Comments following that article, for suggesting the need for a state of alarm or danger due to such a change. And the criticism is quite correct. A half century spent in US cities, where sirens are an everyday occurrence, has perhaps combined with my West Indian exaggerations to dull me to the fact that, for many people in the world, sirens really do represent danger and appropriate panic: fire, tornadoes, tsunamis…

So I am taking this opportunity first to apologize, and then to explain in greater depth exactly what I meant.

The exact sentence in that previous article was:

“What should happen immediately is that sirens should wail, warning the project manager that Activity H, with a value-added of just 20% of $350K, or $70K, now has a negative NVA due to the fact that it now also has drag of 2 days and thus drag cost of $50K.”

So let’s eliminate the need for sirens. What I was suggesting is that a change in critical path during project execution can have a major impact on the future project plan. Work that made sense to perform in a certain way may now be a significant drag (!) on our project investment, requiring new analysis.

Figure 4 full network diagram after slippage

Notice, the key event as described in the quoted sentence above is NOT that the critical path changed — it is that this change caused specific activities to now have a negative impact on the project’s expected value! The project would now be better off without the optional Activity H, because its true cost is now greater than its value-added. And this is a potential hazard any time that the critical path changes.

But the problem is that such an event, as described in the linked article, would most probably not even be recognized. Or if it were, it would only be after a great deal of “manual” analysis. Even on a schedule of 100 activities (never mind a medium-sized project of 2000+ activities!), the chance of the scheduler or project manager noticing that one or more activities are suddenly costing more than they are worth is vanishingly small. Why? Because few of the techniques that would allow such a negative anomaly to be noticed are being used:

  1. Projects are not being defined as investments, so that expected monetary value (EMV, or NPV or ROI or any other investment value term you like) and its changes are not being incorporated into the PM software and tracked and optimized either upfront or during performance. The vast majority of commercial software packages do not provide a project-level field for attaching quantified investment value to a project, nor the functionality to manage and track changes that might affect it.
  2. The value-added of specific work packages is not being estimated and assembled into a value breakdown structure (VBS), so that in the diagram from the previous article the value-added of Activity H would be unknown.
  3. The value/cost of time, which usually has significant impact on project EMV, is not being estimated or tracked on most projects, and certainly not in the software. This in turn makes it impossible to compute either the drag cost or the true cost of an activity.
  4. Even on that small minority of projects where the value/cost of time is estimated, critical path drag and drag cost are not being computed. This means that the true cost of Activity H, and the fact that the slippage it is now making the net value-added (NVA) of Activity H negative, is therefore completely unknowable!

Notwithstanding my previous remark, what should happen when such an event occurs is not wailing sirens. Rather, the user’s PM software (MS Project, Primavera, or whatever) should take the info that was entered up front regarding the VBS and the value/cost of time, compute the new drag, drag cost and true cost totals for each new activity on the new CP and kick out an exception report, calling attention to Activity H, perhaps by highlighting it in red (preferably, fire engine red!). And now the team/PM can reassess and amend the plan.

But first, the team has to recognize the issue. And currently, none of that can happen because with the exception of one software package (Spider Project), none of the others (not MS Project, not Primavera, not Asta, not PlanView, not Safron, NONE!) is even computing critical path drag, far less supporting a VBS or drag cost, true cost, and net value-added computation! (And they should, because every project has a critical path, and critical path items have drag and drag cost!)

And that’s why projects are being performed all the time that generate less expected project profit (EPP) than they might because they include work whose true cost after a critical path change outweighs the value that it adds.

If you want to learn more about assembling a VBS and the other techniques mentioned above, they are explored in much greater detail in the new (2015) edition of my first book, Total Project Control: A Practitioner’s Guide to Managing Projects as Investments.

Again, thank so much to those who criticized my “siren” hyperbole and for making it clear that I need to post another article pointing out the implications (and cures!) listed above.

Fraternally in project management,

Steve the Bajan

The Benefits of Recognizing Projects as Investments: “And yet, it moves!”

One of the great afflictions of mankind throughout history has been the stubborn refusal of certain figures who see themselves as ”authorities” to alter their views in light of new ideas and evidence.

In the 17th and18th centuries, combustion was explained as the escape of a substance called phlogiston from a material. This theory was staunchly defended even after it was shown that magnesium gained mass when it burned. Finally, Antoine-Laurent Lavoisier proved conclusively that combustion was the combining of a material with oxygen. This new explanation led to giant steps forward in both physics and chemistry.

Galileo

Some of the most stubborn ideas are those that come with the imprimatur of sacred scripture. Thus the heliocentrism ideas of Copernicus, Kepler and Galileo were banned by the Vatican as conflicting with the Bible and the teachings of the Council of Trent. Galileo was threatened with burning as a heretic, placed under house arrest, and left only able to mutter about our planet: “Eppur si muove.”

Yesterday I had a discussion on a LinkedIn group in which I tried to explain that, in fact, all projects are investments and that recognizing them as such could have great benefit both for the development of better management techniques and metrics and for the greater esteem for our discipline. Alas, I ran into an individual who refused to accept any definitions or techniques beyond the pages of the Fifth Edition of the PMBOK® Guide.

Make no mistake – I regard the Guide as a very valuable book. But both I and PMI also regard it as a guide, and not as the entire body of knowledge of project management! It is also an evolving document, or there would be no need for new editions.

There are techniques and tools and metrics and, yes, definitions that are being used within our discipline that have not yet made it into the PMBOK® Guide. Undoubtedly many will some year. Critical path drag is an example – every project, however scheduled, has a longest path of activities and other delaying factors, and the amount that each item on that path delays completion is its drag. And drag is always there, and has been since the pharaohs’ projects, whether we and our software compute it or not! And this metric is enormously helpful whenever we are seeking places to compress our schedule! (Many clients have employed me over the years to use this technique to recover schedule.)

So what about the definition of a project that I use in my books?

“A project is an investment in work to create a product, service or result.”

First, is there anyone (apart from the gentleman from the LinkedIn group) who would argue that projects are not investments?

  • Investment: “1 The action or process of investing money for profit or material result;.. 1.2 An act of devoting time, effort, or energy to a particular undertaking with the expectation of a worthwhile result.”

http://www.oxforddictionaries.com/us/definition/american_english/investment

I believe we would all agree that every project is undertaken only if its probability-weighted value is expected to be greater than the cost (i.e., the invested amount). If we need a definition for value, the very first definition from the same source seems applicable:

Value: “1 The regard that something is held to deserve; the importance, worth, or usefulness of something”

http://www.oxforddictionaries.com/us/definition/american_english/value

A project’s value may be:

  • Revenues from a new product or service;
  • Future cost savings;
  • The opportunity to keep a plant open instead of being forced by the government to close it;
  • Avoiding fines;
  • Garnering votes;
  • Prosecuting criminals;
  • Saving lives; or
  • Any other of dozens of efforts intended to create a valuable result.

So every project is definitely an investment. But what might be the benefits of staring to recognize them as such?

  1. Project management would start to focus on the quantified aspects of those things that impact the value of the investment: the Golden Triangle of the integrated value/cost of scope, time and resource usage.
  2. Project managers would work harder to align the scope of the project with the benefits wanted by the sponsor/customer through the collaborative development and implementation of a value breakdown structure (VBS) and other techniques. (The failure to actually deliver the benefits for which a project is undertaken is a big issue in many circles, and this would help to solve the problem.)
  3. The value/cost of time on a project, which is currently almost always left as an unquantified externality and therefore rarely managed in terms of its actual impact on the investment, would suddenly be recognized for its importance. Many scheduling techniques that experienced PMs have mastered, like critical path analysis and resource leveling, would therefore suddenly be fully appreciated.
  4. Both drag cost and the true cost of work could be easily computed, meaning that activities on the critical path would be evaluated not only on the basis of their resource costs, but also their drag costs in terms of how much their drags are reducing the value of the investment. (True cost = resource costs plus drag cost.)
  5. Decisions across the Golden Triangle would be quantified in terms of investment value. Should we employ an additional resource costing $10,000 on a critical path activity? Well, will it reduce the drag cost by more than $10,000? Or would we be better off jettisoning that activity because its true cost will be greater than its value-added?
  6. We will be able to track each project during performance not just on the basis of earned value cost and schedule metrics, but on the basis of investment metrics: the expected project profit (EPP) of the project as tracked through the DIPP and the DIPP Progress Index.

All of these are just a sample of the benefits that would accrue if we start dealing with projects as investments. I believe that practitioners would rapidly develop new metrics and techniques to do an even better job of measuring and ensuring greater project investment value.

But perhaps the most important benefit would be for our profession: the value of project managers and project management techniques and contributions would become clearly measurable in value/cost terms. Instead of being looked upon as “overhead on cost centers” project managers would become valuable contributors to the organization’s bottom line.

Surely this would only help PMI to market its ideas and techniques to senior managers who know little about projects, but who care a great deal about investments!

Fraternally in project management,

Steve the Bajan

Weekend Puzzler: Earned Value & the DIPP Exercise

Most project management people are familiar with the basics of earned value. But as I plan to blog about this topic in the next few weeks, I thought I’d introduce it with some fairly simple multiple choice questions for the weekend. (These are the sorts of questions my graduate students are asked on tests.)

You can see the answers by scrolling down beyond the test.

Have a great weekend!

Fraternally in project management,

Steve the Bajan

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For Project Steel Donkey, the budget is $12 million and the expected monetary value (EMV) is $20 million if completed in 50 weeks, generating and expected project profit (EPP)of $8 million. Every week or part thereof later will reduce the EMV by $500,000 and every full week earlier will increase the EMV by $200,000.

At the end of Month 6, the planned value (PV or BCWS) is $5.0 million. The earned value (EV or BCWP) is $4.5 million. The actual cost (AC or ACWP) is $5.5 million.

  1. What is the schedule variance (SV)? (a) – $1.0M (b) – $0.5M (c) $0.5M (d) $1.0M (e) None of the above
  2. What is the simple schedule performance index (SPI)? (a) .80 (b) .82 (c) .85 (d) .90 (e) None of the above
  3. What is the cost variance (CV)? (a) – $1.0M (b) – $0.5M (c) $0.5M (d) $1.0M (e) None of the above
  4. What is the cost performance index (CPI)? (a) .80 (b) .82 (c) .85 (d) .90 (e) None of the above
  5. What is the critical ratio CPI (CRCPI)? (a) .72 (b) .74 (c) .76 (d) .90 (e) .91
  6. Assuming the SPI is accurate, what is our current estimated schedule overrun? (a) 2.3 weeks (b) 3.4 weeks (c) 4.5 weeks (d) 5.6 weeks (e) 6.7 weeks
  7. Assuming the SPI is accurate, what is our current estimated delay cost? (a) $1.5M (b) $3.0M (c) $4.5M (d) $6M (e) None of the above
  8. Assuming the simple CPI is accurate, what is our current cost estimate-at-completion (EAC)? (a) $12.0M (b) $12.6M (c) $13.5M (d) $14.6M (e) None of the above
  9. Assuming the simple CPI is accurate, what is our current cost estimate-to-complete (ETC)? (a) $6.5M (b) $7.1M (c) $8.0M (d) $9.0M (e) None of the above
  10. Assuming the critical ratio CPI is accurate, what is our current cost EAC? (a) $15.2M (b) $16.2M (c) $17.2M (d) $18.2M (e) None of the above
  11. Assuming the critical ratio CPI is accurate, what is our current cost ETC? (a) $9.7M (b) $10.2M (c) $10.7M (d) $11.2M (e) None of the above
  12. Assuming the simple CPI and SPI are accurate, what is our expected project profit (EPP) at completion? (a) $2.4M (b) $2.6M (c) $2.8M (d) – $2.8M (e) None of the above
  13. Assuming critical ratio CPI and SPI are accurate, what is our expected project profit (EPP) at completion? (a) – $.08M (b) – $0.4M (c) $0.4M (d) $0.8M (e) None of the above
  14. What is our planned DIPP (DIPP = [$EMV plus or minus $acceleration premium or delay cost] divided by $Cost ETC) at the end of Month 6? (a) 1.80 (b) 2.0 (c) 2.40 (d) 2.80 (e) None of the above
  15. What is our Actual DIPP at this point based on the CPI and SPI? (a) 1.80 (b) 1.87 (c) 1.97 (d) 2.07 (e) None of the above
  16. What is our DIPP Progress Index (DPI) at 6 months (DPI = Actual DIPP divided by Planned DIPP)? (a) .65 (b) .75 (c) .85 (d) .95 (e) None of the above

If we identify an activity in our project where spending an extra $1.0M would erase 4 weeks of critical path drag

  1. What would our expected project profit become using the simple CPI and SPI? (a) $0.4M (b) $1.4M (c) $2.4M (d) $3.4M (e) None of the above
  2. What would our expected project profit become using the critical ration CPI and SPI? (a) $1.4M (b) $1.8M (c) $2.2M (d) $2.6M (e) None of the above
  3. What would our current DIPP become using the simple CPI and SPI? (a) 1.68 (b) 1.78 (c) 1.88 (d) 1.98 (e) None of the above
  4. What would our DPI be using the simple CPI and SPI? (a) 0.66 (b) 0.76 (c) 0.86 (d) 0.96 (e) None of the above

SCROLL DOWN FOR ANSWERS

ANSWERS

  1. What is the schedule variance (SV)? (a) – $1.0M (b) – $0.5M (c) $0.5M (d) $1.0M (e) None of the above ($4.5 – $5.0M = – $0.5M)
  2. What is the simple schedule performance index (SPI)? (a) .80 (b) .82 (c) .85 (d) .90 (e) None of the above ($4.5 divided by $5.0M = .90)
  3. What is the cost variance (CV)? (a) – $1.0M (b) – $0.5M (c) $0.5M (d) $1.0M (e) None of the above ($4.5 – $5.5M = – $1.0M)
  4. What is the cost performance index (CPI)? (a) .80 (b) .82 (c) .85 (d) .90 (e) None of the above ($4.5 divided by $5.5M = .82)
  5. What is the critical ratio CPI (CRCPI)? (a) .72 (b) .74 (c) .76 (d) .90 (e) .91 (.90 * .82 = .74)
  6. Assuming the SPI is accurate, what is our current estimated schedule overrun? (a) 2.3 weeks (b) 3.4 weeks (c) 4.5 weeks (d) 5.6 weeks (e) 6.7 weeks (50 weeks divided by .90 – 50 weeks = 5.6 weeks)
  7. Assuming the SPI is accurate, what is our current estimated delay cost? (a) $1.5M (b) $3.0M (c) $4.5M (d) $6M (e) None of the above (6 * $500,000 = $3.0M)
  8. Assuming the simple CPI is accurate, what is our current cost estimate-at-completion (EAC)? (a) $12.0M (b) $12.6M (c) $13.5M (d) $14.6M (e) None of the above ($12M divided by .82 = $14.6M)
  9. Assuming the simple CPI is accurate, what is our current cost estimate-to-complete (ETC)? (a) $6.5M (b) $7.1M (c) $8.0M (d) $9.0M (e) None of the above ($14.6M – $5.5M = $9.1M)
  10. Assuming the critical ratio CPI is accurate, what is our current cost EAC? (a) $15.2M (b) $16.2M (c) $17.2M (d) $18.2M (e) None of the above ($12.0M divided by 0.74 = $16.2M)
  11. Assuming the critical ratio CPI is accurate, what is our current cost ETC? (a) $9.7M (b) $10.2M (c) $10.7M (d) $11.2M (e) None of the above ($16.2M – $5.5M = $10.7M)
  12. Assuming the simple CPI and SPI are accurate, what is our expected project profit (EPP) at completion? (a) $2.4M (b) $2.6M (c) $2.8M (d) – $2.8M (e) None of the above ($17.0M – $14.6M = $2.4M)
  13. Assuming critical ratio CPI and SPI are accurate, what is our expected project profit (EPP) at completion? (a) – $.08M (b) – $0.4M (c) $0.4M (d) $0.8M (e) None of the above ($17.0M – $16.2M = $0.8M)
  14. What is our planned DIPP (DIPP = [$EMV plus or minus $acceleration premium or delay cost] divided by $Cost ETC) at the end of Month 6? (a) 1.80 (b) 2.0 (c) 2.40 (d) 2.80 (e) None of the above ($20M divided by $7M = 2.88)
  15. What is our Actual DIPP at this point based on the simple CPI and SPI? (a) 1.80 (b) 1.87 (c) 1.97 (d) 2.07 (e) None of the above ($17.0M divided by $9.1M = 1.87)
  16. What is our DIPP Progress Index (DPI) at 6 months (DPI = Actual DIPP divided by Planned DIPP)? (a) .65 (b) .75 (c) .85 (d) .95 (e) None of the above (1.87 divided by 2.88 = .65)

If we identify an activity in our project where spending an extra $1.0M would erase 4 weeks of critical path drag…

  1. What would our expected project profit become using the simple CPI and SPI? (a) $0.4M (b) $1.4M (c) $2.4M (d) $3.4M (e) None of the above  ($19.0M – $15.6M = $3.4M)
  2. What would our expected project profit become using the critical ration CPI and SPI? (a) $1.4M (b) $1.8M (c) $2.2M (d) $2.6M (e) None of the above ($19.0M – $17.2M = $1.8M)
  3. What would our current DIPP become using the simple CPI and SPI? (a) 1.68 (b) 1.78 (c) 1.88 (d) 1.98 (e) None of the above ($19.0M divided by $10.1M = 1.88)
  4. What would be our DPI using the simple CPI and SPI? (a) 0.66 (b) 0.76 (c) 0.86 (d) 0.96 (e) None of the above (1.88 divided by 2.88 = .66)

What is the DIPP? (Warning! Some wonky stuff)

There is a comment by Keith Burns at the end of the Why Do We Plan Projects? article:

“I see a term here that I have not seen previously. DIPP tracking. what is it and where can i learn more about it?”

First, Keith, thanks for following this blog and for taking the time to post a comment.

Insofar as I have become known in the project management world, it’s been for adding to scheduling metrics the concept of critical path drag and how to compute it. That’s largely my fault — drag is so important to scheduling, as well as glaringly obvious once one thinks about it, that it is the concept I have tried hardest to disseminate.

But I’d like to think that, over the course of the past quarter century, I have added some other concepts and metrics. In my opinion (and I admit that some may disagree), my most important contributions have been:

  1. The idea that projects are investments; and
  2. A metric called the DIPP for planning and tracking expected project profit (or, if you prefer, expected ROI).

Keith, honestly, the best place to get information on the DIPP (and, indeed, most of my other concepts including the value breakdown structure [VBS], the cost of leveling with unresolved bottleneck [the CLUB], the doubled resource estimated duration [the DRED], the ALAP schedule performance index, and several others) is my books. The new one especially, Managing Projects as Investments: Earned Value to Business Value, covers most of the above concepts in what I flatter myself is relatively painless to read.

The DIPP was my first idea in project management, and is the basis for my 1992 article “When the DIPP Dips: a P&L Index for Project Decisions” in Project Management Journal. If you are a PMI member, you can get the article for free. Also, it was reprinted by PMI in 1999 as a featured chapter in the book Essentials of Project Control. It’s an interesting book even apart from my article, and I believe used copies are available.

Or you can get several articles that discuss the DIPP and other stuff in a six-part series I did for ProjectsAtWork on-line magazine. Just do a search on the site under my name. The site is free, but requires registration.

Finally, to describe it in a nutshell, the DIPP was originally an index for determining when to cancel a project and when to keep funding it (a poorly understood concept). But it ultimately evolved into being a planning and tracking index that integrates all three sides of the Golden Triangle.

  1. Scope is measured as the expected monetary value (EMV) of the project if completed on a certain date;
  2. Schedule is a plus or minus dollar amount based on acceleration or delay; and
  3. Cost is the cost of resources and overhead.
  • The DIPP = ($EMV + or – $accel premium or delay cost) / $cost estimate-to-complete.

The DIPP can be planned as a baseline across the schedule, with the cost ETC as the complement of the planned value (PV or BCWS). This supports an index that allows tracking of the project’s expected project profit (EPP): the DIPP Progress Index (DPI), which is Actual DIPP divided by Planned DIPP.

Any change in scope, schedule, cost or risk from what was planned would be reflected in this index, including improvement of EPP. And this extends project tracking beyond the cost/schedule realm of earned value.

Finally, Dr. Tomoichi Sato of Tokyo University has done some work extending the DIPP into areas of risk management. This paper by him, Risk-based project value analysis – contributed value and procurement cost was published in 2006.

Keith (and anyone else who was wondering about the DIPP), I hope this helps. The DIPP is a complex topic and it really takes a book to cover all of its implications and potential benefits.

Fraternally in project management,

Steve the Bajan