This Guest paper was submitted for publication and is copyright to Roger L. Parish, PMP, © 2013.
published here August 2013.
It is an update to the paper, "PMBOK® Guide Fourth Edition - Unraveling Project Reserves", published by the author in March 2010.

PART 1 | Introduction | Adding Time Contingency Reserves
Project Performance (Earned Value) Reporting
A Final Thought for PMI and the PMBOK® Guide | Conclusion

Project Performance (Earned Value) Reporting

The first consideration in establishing how to conduct performance reporting is to identify the audience using the data, and for what purposes. That should establish the necessary measures and metrics to be used as inputs to their decision-making processes. Therefore, the measures we focus on should provide them with the information that will be the most useful in making those decisions. However, the types of decisions project managers need to make differ from those being made by mid-management, and these in turn differ from those being made by senior management. Hence, the way that we construct the measures, and report on progress, may need to be tailored to each audience.

How we calculate performance measures (in this case, earned value measures) is an important consideration in determining how to incorporate time and cost reserves into the project plan. In general an approach that allocates these reserves incrementally over time is generally better than positioning them all at the end of the project. The reason for this has to do with how earned value calculations are made. Firstly, these reserves will get incorporated into the project measurement baseline, or planned value, and inserting them over time avoids skewing the data by either front-end or back-end loading the funds all at once. Secondly, the earned value calculations are derived directly from the planned value, so they must be congruent with how planned value is calculated.

Figure 7 - Setting a baseline that excludes cost and schedule contingency reserves
Figure 7 - Setting a baseline that excludes cost and schedule contingency reserves

Note that one could have a performance measurement baseline that does not incorporate any project reserves (i.e., Performance Measurement Baseline without contingency reserves, as shown in Figure 7). This is what was proposed in the PMBOK® Guide 4th Edition. It is my opinion that the project manager who is trying to manage to realistic estimates should use this approach.

However, a different approach might be used for reporting to senior executives, the customer, or other stakeholders. In this model, one would incorporate the contingency reserves into the performance measurement baseline (Performance Measurement Baseline with contingency reserves, as shown in Figure 8). This makes sense for these audiences because they likely care more about the amount they have actually budgeted for the project.

Figure 8 - Setting a baseline that includes cost contingency reserves
Figure 8 - Setting a baseline that includes cost contingency reserves

Note that this defines the project budget to mean something different than that proposed in the 4th Edition, but is in alignment with the 5th Edition, because the approach proposed here automatically ensures that the contingency reserve is loaded and available for use by the project manager. After all, from a customer perspective, more often than not they care most about the amount they have agreed to pay, which should have taken contingency planning into account.

However, from the project manager's perspective, he or she might want to see both types of baselines. That is, the one based on realistic estimates (i.e., the one without contingency reserves), and the alternative that includes contingency reserves. Performance that fails to conform to the baseline that does not include contingency reserves, but is within the limits of the baseline that does incorporate contingency planning, becomes indicative of how much of the project's contingency reserves have been consumed.

Note that in Figures 7 and 8, we have only taken cost contingency into account. If we take both time and cost contingencies into account, the graph looks like that presented in Figure 9. Using this model, there are two baselines. The project manager manages to the original estimates, but the project sponsor evaluates performance and progress based on the factoring in of contingency allowances for both cost and schedule. For reasons cited earlier (e.g., increasing the probability that one will have allocated enough time and money to actually complete the work), I recommend that the official project budget and schedule include all contingency reserves (as shown in Figure 9), since this is what the project manager will be held accountable for.

Figure 9 - Accounting for both time and cost in reserve planning
Figure 9 - Accounting for both time and cost in reserve planning
Adding Time Contingency Reserves  Adding Time Contingency Reserves

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