To keep the portfolio execution on track, e.g. versus a defined portfolio budget, it is paramount to have several KPI’s in place to identify which projects are executing well and which ones need special attention.
The Earned Value Analysis described in my other article about cost management is already delivering a couple of useful KPIs such as the Cost Performance Index (CPI) and Schedule Performance Index (SPI), but the EVA is not easy to implement and creates an overhead as you need to have Work Break Down Structure in place that is implemented in the financial accounting system.
I want to give here an overview of some KPIs that are also very useful, but can be incorporated much easier. You only need a couple of financial figures that should be normally known.
Budget (Bud): The budget is the amount of money a certain project got for its execution. Usually the budget is a rough estimate and contains a significant portion of uncertainty, hence the budgets are in most of the cases higher than the effective project costs later.
Project-Budget (pBud): After the project was planned through and went through the approval process it gets a certain amount of funds for the execution. This is our first KPI.
Usually this amount should be lower as more information was gathered through the planning and so we would see an IBud that is less than 100%. If it is not or the project even asks for more money than budgeted, you as portfolio manager should become suspicious and investigate why. My experience here is that the root cause is a top-down cost planning approach starting with the budget rather than a bottom-up, where all activities and costs are zero-based reviewed and estimated. The second approach of cause needs more time but will result in a higher quality cost plan. As mentioned already in other articles to high project budgets are the number one reason for project underspending.
Forecast (FC): The forecast is a repetitive estimation of the project spending in the coming periods and should be made on a monthly maximum quarterly basis.
Actual (Act): The monthly expenses of the project. Together with the forecast we get some interesting KPIs. The first is the Estimate at Completion (EAC) that we already know from the Earned Value Analysis. But here the EAC is not basing on a cost performance index that is basing on the project history but on the estimation by the project managers that is looking into the future.
Where t is the current period of the project and end the last period when the project will finish.
To keep the project also on track in the yearly portfolio budget there is another KPI called Estimate at Year End (EYE) and is defined as
Both EAC and EYE need to be measured and kept under control so that they are not exceeding the annual budget (EYE) respectively the overall project Budget (EAC)
The range where the both indices should be in is defined by your company rules. I am using a range of 80% to 110% for assigning the project a red cost status and 90% to 103% for yellow.
If you only want to show one Cost Red/Yellow/Green (RYG) then choose the worse of the two.
The monthly forecast and spending are used to detect project anomalies in the project execution. The Monthly Spending Indicator MSI is simply a comparison of the forecast made in the previous month and the actuals spending.
or as pecentage
A negative indicator points to underspending. I am using a ranked list of all projects to identify the worst performers during one month and discuss with the corresponding project managers the root causes. Often the missed monthly targets are costs that have been booked too late and so will show up in the next month. The forecast needs then to include these carry-over costs as well. Other reasons can be more serious and lead to deeper discussions.