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Topics: Cost Management, Earned Value Management
Should job margin be included in Planned Value when using EVM?
I am putting together an EVM to train my PMO PMs. As I am putting this together I'm not sure if I ought to include our margin markup in this, or leave it out. To my way of thinking, PV is what I plan on spending - margin is what I plan on keeping, consequently, it seems as though any margin ought to be left out of the PV.
Would like your thoughts/practice on this, please.
Many thanks.
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It really depends on how transparent you wish to be with your stakeholders. If you don't mind them seeing your true actual costs of delivery (as opposed to the marked up actual costs), then strip the margin out of all AC/EV/PV calculations however this might make it tough for the stakeholders to rationalize payment milestone amounts with the EV data.

In general, if a client wishes to receive EV data, I'd keep the margins in...

Kiron
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1 reply by Daniel Arnold
Dec 31, 2020 10:04 AM
Daniel Arnold
...
Good observation, Kiron. I guess I should mention that at this point, we would be using EVM for internal tracking, etc.. thus the basis for my question. Certainly if we have a client requesting full disclosure we would provide as much.
Stripping the margin out provides a cleaner, more accurate picture of what we are spending and potentially where we are losing money in terms of efficiency. I am tying the EVM snapshots to take place at the end of our various phases (processes) anticipating that the data will give us a good sense of phase (process) efficiency.
Dec 31, 2020 9:27 AM
Replying to Kiron Bondale
...
It really depends on how transparent you wish to be with your stakeholders. If you don't mind them seeing your true actual costs of delivery (as opposed to the marked up actual costs), then strip the margin out of all AC/EV/PV calculations however this might make it tough for the stakeholders to rationalize payment milestone amounts with the EV data.

In general, if a client wishes to receive EV data, I'd keep the margins in...

Kiron
Good observation, Kiron. I guess I should mention that at this point, we would be using EVM for internal tracking, etc.. thus the basis for my question. Certainly if we have a client requesting full disclosure we would provide as much.
Stripping the margin out provides a cleaner, more accurate picture of what we are spending and potentially where we are losing money in terms of efficiency. I am tying the EVM snapshots to take place at the end of our various phases (processes) anticipating that the data will give us a good sense of phase (process) efficiency.
I typically track costs (and all other project-related aspects) according to cost excluding margin / markup. But I typically work on fixed-price contracts / projects and reporting for costs is internal only so it really only makes sense to track by cost, as a PM the margin doesn't enter into it.

I could see some circumstances (for example where projects are charged by the hour and not fixed-price) where margin might be included/reported, but I would make this uniform throughout the project. For example then I would keep track of labor costs as the labor sales price, and I would include margin in all of the material costs for both project forecasts and reporting.

If you use MS Project and need to get fancy because of multiple audiences, you could use one of the formula-based columns to include a calculated margin and just display (with a customized view) whichever one is appropriate for your audience (i.e. internal management versus external client) at the time.

So the answer, as almost always, is "it depends". And for all of my audiences the answer is to ignore margin, but YMMV.

-Bob C.
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1 reply by Daniel Arnold
Dec 31, 2020 2:22 PM
Daniel Arnold
...
Bob, thank you for your input - it makes sense to me. We usually work with fixed price contracts, and as I stated earlier, at this time I want to use EVM as an internal metric.
As I've monkeyed around with an EVM spreadsheet that I've created for a dummy job, I realize that it makes better sense to use the actual estimated costs.
Profit margin, like contingency funds are something you don't plan to spend. EVM is planned spending and progress over time.

If you keep it in, the team will spend your margin. I sometimes joke, "The project can't be over yet. We still have budget left." It will also mess up your progress calculations, because if you are actually on plan, you will always show you are behind on your spending profile.

In many companies, PMs don't even know what the margin is. We are given the spending budget and probably not the reserve. PMs plans the work. Business management holds the money we plan to keep.
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1 reply by Daniel Arnold
Dec 31, 2020 1:56 PM
Daniel Arnold
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Keith, thanks for the thoughts. I chuckled at your comment, "the project can't be over yet...we still have budget left."

Relative to your comment about PMs not knowing what margin they need to hold - that makes me sad. I operate a different level and give my PMs the full picture and full authority over a project. Of course I keep close tabs on things (Trust, But Verify) but typically they appreciate the confidence and do really well. All of this stems from my commitment to invest, train and develop Project Managers.
Dec 31, 2020 11:13 AM
Replying to Keith Novak
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Profit margin, like contingency funds are something you don't plan to spend. EVM is planned spending and progress over time.

If you keep it in, the team will spend your margin. I sometimes joke, "The project can't be over yet. We still have budget left." It will also mess up your progress calculations, because if you are actually on plan, you will always show you are behind on your spending profile.

In many companies, PMs don't even know what the margin is. We are given the spending budget and probably not the reserve. PMs plans the work. Business management holds the money we plan to keep.
Keith, thanks for the thoughts. I chuckled at your comment, "the project can't be over yet...we still have budget left."

Relative to your comment about PMs not knowing what margin they need to hold - that makes me sad. I operate a different level and give my PMs the full picture and full authority over a project. Of course I keep close tabs on things (Trust, But Verify) but typically they appreciate the confidence and do really well. All of this stems from my commitment to invest, train and develop Project Managers.
...
1 reply by Keith Novak
Jan 02, 2021 2:14 PM
Keith Novak
...
We sometimes lament that we don't have better cost data to make fully educated business decisions, but sometimes that is for very sound business reasons.

In addition to the security factor, such as at a large publicly traded company, cost data can be expensive. My employer has several multi-billion dollar programs, each consuming millions of parts, purchased from thousands of suppliers. Vendor contracts often span many programs as one giant package. Breaking that down in more detail requires significant overhead. On government contracts by contrast, the accounting rules are much more precise, but that is far more expensive. It becomes a trade-off. How much information do you need to manage costs, vs. the cost of that information itself.

I've even managed "cost savings" projects where we learned after launch have a negative ROI, because it was less expensive to complete the project, than to change the vendor contract. The rationale there is our cost savings project turned into cost avoidance.
Dec 31, 2020 10:18 AM
Replying to Bob Cunningham
...
I typically track costs (and all other project-related aspects) according to cost excluding margin / markup. But I typically work on fixed-price contracts / projects and reporting for costs is internal only so it really only makes sense to track by cost, as a PM the margin doesn't enter into it.

I could see some circumstances (for example where projects are charged by the hour and not fixed-price) where margin might be included/reported, but I would make this uniform throughout the project. For example then I would keep track of labor costs as the labor sales price, and I would include margin in all of the material costs for both project forecasts and reporting.

If you use MS Project and need to get fancy because of multiple audiences, you could use one of the formula-based columns to include a calculated margin and just display (with a customized view) whichever one is appropriate for your audience (i.e. internal management versus external client) at the time.

So the answer, as almost always, is "it depends". And for all of my audiences the answer is to ignore margin, but YMMV.

-Bob C.
Bob, thank you for your input - it makes sense to me. We usually work with fixed price contracts, and as I stated earlier, at this time I want to use EVM as an internal metric.
As I've monkeyed around with an EVM spreadsheet that I've created for a dummy job, I realize that it makes better sense to use the actual estimated costs.
As a follow-up question to this: Do you incorporate anticipated Subcontractor/Vendor contract costs in your PV spread?
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1 reply by Kiron Bondale
Dec 31, 2020 4:22 PM
Kiron Bondale
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Daniel -

I would in aggregate, but I'd also look at having separate EV calculations for our work vs theirs.

Kiron
Dec 31, 2020 2:29 PM
Replying to Daniel Arnold
...
As a follow-up question to this: Do you incorporate anticipated Subcontractor/Vendor contract costs in your PV spread?
Daniel -

I would in aggregate, but I'd also look at having separate EV calculations for our work vs theirs.

Kiron
Well, there are great comments above. Just trying to add something related to comments above: 1-the information created to use EVM could be splitted in two classes: the internal information and the information that will be published to your customer. 2-in my personal experience EVM is about project cost only. All the other things like profit is maintained out of EVM mainly because in my personal experience is the best way to manage some kind of unplanned contingencies.
...
1 reply by Daniel Arnold
Jan 01, 2021 4:48 PM
Daniel Arnold
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Sergio, many thanks for your thoughts. They seem to align with the thoughts shared by others, and my findings.
Jan 01, 2021 8:57 AM
Replying to Sergio Luis Conte
...
Well, there are great comments above. Just trying to add something related to comments above: 1-the information created to use EVM could be splitted in two classes: the internal information and the information that will be published to your customer. 2-in my personal experience EVM is about project cost only. All the other things like profit is maintained out of EVM mainly because in my personal experience is the best way to manage some kind of unplanned contingencies.
Sergio, many thanks for your thoughts. They seem to align with the thoughts shared by others, and my findings.
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