Concept: The I/C cost forecast says that, assuming the past level of performance continues, a certain amount of budget will be required for the impediments and constraints that are to come. Add that to the I/C cost already incurred, and the result is the estimated I/C cost for the whole project.
But, what kind of cost is that?
Practice: For an answer, let’s look first at a familiar type of cost—incremental cost.
The cost of rework is an incremental cost. When work is repeated, there is an increase in cost for the same value. The added cost is an increment beyond the original amount. A mathematical model estimates the size of the increment because it is not immediately available for measurement—the (re-) work will actually be done in the future.
By contrast, I/C cost (I/C$) is not an incremental cost. It is not a matter of work being performed again for the same value. It’s a matter of value not being earned in the first place.
Think of it this way. For each task, there’s an option: either the initial delivery of value occurs when it is scheduled, or it does not. In one case, value is earned on time. In the other, value is not earned at all (i.e., in the given time slot—it might be earned at some point in the future).
When value is missing at the scheduled time, it can be viewed as a loss, and such a loss can be considered an opportunity cost. How so?
Consider the following analogy.
Say that you find a free hour in your busy day. You can spend that hour on extra study for an upcoming exam, or you can spend it playing video games. Let’s say you use it to study. The benefit gained is a better grade on the exam. But, you have also lost something: the fun you would have had playing the games. The gain/loss can even be quantified: the effect of 1 hour of your time.
Opportunity cost has been described as a fancy way to say “trade off”. [1] You trade off one option for another, realizing that you’re giving up one benefit for another. So, opportunity cost is associated with a conscious choice of one alternative over others.
In the context of schedule adherence, not producing scheduled value is generally a matter of conscious choice: for example, we choose not to execute a task because information is lacking, and we want to avoid rework.
There might, however, be cases where it’s not so clearly a conscious choice: for instance, an unexpected illness occurs, and work on a task is suspended.
The concept still seems to apply because it always seems possible for us to do something to carry the work forward. We could, for example, assign a different resource to take over the work, even if we choose not to do so in the end.
Ultimately, what’s important is that there are options, and at least one option is exercised while another is not. The one not exercised presumably has value, and its value is being missed. That is the opportunity cost.
So, either value is initially produced, or it is missing. [2] If value is initially produced, the task has a benefit equal to the amount of value earned. If value is not produced, the value missed is the benefit lost, and the lost benefit is the opportunity cost.
As explained in last month’s post, such value does not need to be estimated. It can be measured directly as the difference between the value planned and earned as of ES.
More precisely, it’s calculated as follows. Take a task’s value earned as of AT and subtract the value planned as of ES. [3] If the difference is negative, the task is impeded or constrained. The size of the impediment or constraint is the absolute value of the difference. And, that is the cost associated with not delivering value as scheduled. As its delivery would have been a benefit, the lost value is an opportunity cost.
Given that Rework and I/C are both expressed as costs, there is a consistent, quantitative representation for the two categories (see sidebar) of failed schedule adherence. Thus, we can assess their combined impact and weigh their separate contributions when deciding how to improve schedule performance.
A future post describes how to do so. But, first, one final gap needs to be closed. The previous arguments have assumed that the periodic value of both R- and I/C-tasks is available for calculations. There is, however, a paradox: the value within a period is not the periodic value.
The next post closes this gap.
SideBar: The Many Sources of Failure
The claim that Rework and I/C are the only two categories of schedule adherence failure needs justification. After all, Walt has suggested that, for rework at least, there are “many causes”, including poor planning, defective work, poor requirements management, schedule compression, and over-zealous quality assurance (Lipke, 2011a, p 9).
The distinction between R-tasks and I/C-tasks clarifies the sense in which there are only two categories of SA failure. The R-tasks are ones in which value is earned before it was planned to be earned. The I/C-tasks are ones in which value is earned after it was planned to be earned.
In the first case, the initial value is present before its time. To be precise, initial value is earned after the ES time and as of the Actual Time. In the second case, initial value is present after its time. That is, it is missing as of the ES time and will be earned (if ever), after the Actual Time.
There are many reasons that tasks earn their initial value before or after their planned time, but the result is the same: the initial value is earned out-of-sync with the schedule. Given that initial value must be earned either early, late, or on time, and that initial value earned on time is in sync with the schedule, there are only two ways for initial value to be earned out-of-sync: either it’s before or after the planned time.
Hence, the characteristic failures of schedule adherence fall into just two categories.
Notes:
[1] For an intuitive explanation of opportunity costs, see: https://www.thebalance.com/what-is-opportunity-cost-357200.
[2] Throughout this post, the relevant value is qualified as “initial”. The qualifier avoids an ambiguity in the ascription of early, late, or on time to value that is earned. For R-tasks, value is re-claimed when work is performed again. As rework occurs after the Actual Time, the re-claimed value can be regarded as delivered “late”. It is easy to conflate this sense of “late” with the sense in which I/C-tasks are late. The I/C-tasks are late in the sense that value is missing altogether from the planned time slot. You can think of it this way: for R-tasks, work is done late for the same value. For I/C-tasks, work is not done in the first place. In other words, for I/C-tasks, value is not initially produced as scheduled.
[3] An I/C task has the same earned value at ES as it does at AT. For the rationale, click here (see Note #5 in particular).
References:
Lipke, W. (2012). Schedule Adherence and Rework. CrossTalk, November-December.
Lipke, W. (2011b) Schedule Adherence and Rework. PM World Today, July.
Lipke, W. (2011a) Schedule Adherence and Rework. The Measurable News, Issue 1 (corrected version). |
