Friday, June 19, 2020

Agile Asanas: Bus Factor, Broken-Comb Skills and Cross-Functional Teams



Imagine this situation. You are managing a critical project for organization and the constraints for the project are quite tight. During execution, one of the key team members left the project. This team member was working on a very important component! 
  • If you have managed many projects over years, you would have faced such a situation. Do you remember the feeling?
  • Do you remember how frantic the next few days were?

Resource churn is very likely to happen in projects. New people will join the project, existing people will leave or may be transferred to another project. 

People may suddenly fall sick, may take forced leave due personal emergencies or team members may be reduced due to cost related measures or other constraints. These things - some or all - will happen. You can never stop it.

[ To read all posts in Agile Asanas series, use this link. ]



But then, how do you manage such situations?  

This leads us to a concept called bus factor. Let's understand this concept first.


Bus Factor

The bus factor is a numeric number. This number equals the number of team members, who if were to be hit by a bus and hence, will put the project in a serious situation. 

Simplifying, you can say it’s the number of people in a project team who have to be hit by a bus before the project is in a dire situation. 

Let’s say your bus factor is numeric “1”.  It means if just one team member is hit by a bus (just a way of saying, not actually being hit by a bus!), then the project is in trouble. If just one of your team members leaves the project or transfers or takes off, your project will come to a stand-still. 

In other words, with a low bus factor, your project is not really protected. On the other hand, with a high bus factor your project is relatively better. Because with a higher bus factor, your project can survive in spite of multiple team members leaving (or the proverbial being hit by the bus). 

Hence, you can say:
The higher the bus factor for a project, the better.The ideal bus factor equals the number of members in the project team.

There are other names for bus factor, such as lorry factor, truck factor, etc. However, the concept remains the same.

 A team with a bus factor of value “5” is better than a team with a bus factor of value “2”. The bus factor cannot be negative. Hence, for your project, you should try to have a high bus factor. 

Related to bus factor, we have another concept called broken-comb skills. With such skilled team members, you can have a high bus factor.


Broken-Comb Skills

The team members in an Agile project should be Generalizing-Specialists, i.e., specialists in a particular skill, but have other skills as well, possibly to a lesser extent.

Team members tend to be highly specialized in waterfall organization, but in agile development, the team size is kept to be reasonable – sometimes just three people. Because of a small team size, you need to have "generalizing specialists". The concept of generalizing specialist translates to a skillset known as T-shaped skills.

Team members should be encouraged to build a T-shaped skill. The vertical side of T (one of the alphabets) represents specialization. The horizontal side of T represents generalization, i.e., have also other skills spread across other areas.

Developers should be encouraged to test, testers should be encouraged to do release activities; however, the specialization for an individual team member is there.

Agile teams should have members with T-shaped skills, rather than I-shaped skills. People with I-shaped skills have deep specialization in one domain, but lack expertise (or interest) in other domains. This is represented in the figure below.


Image Source: Book - I Want To Be An ACP, 2nd Edition

As shown, T-shaped people have deeper understanding in one area or specialists in one area, but have less experience in many others. However, this may not be sufficient in small teams with rapid changes. Hence, in such cases, we need broken-comb skills. With broken-comb skilled people, you have deeper experiences across various disciplines, not just one discipline. In other words, broken-comb people will have various specialization areas, not just one specialization area. This is shown below.


Image Source: Book - I Want To Be An ACP, 2nd Edition

Because they have a large range of skills, you can use them effectively and efficiently compared to T-shaped skills who have very low skill in the generalization area. The other name of it is paint-drip skills.


Cross-Functional Teams
If you have worked in Agile projects, you would be knowing that the team is strongly encouraged to be cross-functional. 

A cross-functional team means that the Team has all the skills needed to get the work done. A cross-functional team means that the development team is no longer made up solely of programmers.

The agile development team consists of all the key players needed to create an increment of working code: coders, testers, analysts, architects, technical writers, and so on. It doesn’t mean that everyone in the team has all the needed skills, but the team - collectively - has the needed skills to get the work done. 

A team member is brought in with a particular skill set. But as the team matures, each one learns more about other tasks and responsibilities. It is possible that the team, initially, may not expertise in some areas and in such cases, but over time, the team should strive to be generalizing specialists


Bringing All Three Together
In fact, to be a good cross-functional team as noted before, the team must consist of people who are generalizing specialists. 

The broken-comb or paint-drip skills add-up to be a better cross-functional team. Because with these skills, the team members are not specialists in one area and generalists in another, but the team members have specializations in multiple areas. 

So, what does it have to do with the Bus Factor that we understood earlier?

Imagine having a cross-functional team with generalizing specialists and broken-comb skills. What will be the bus factor for this team?

If not the ideal value, it will be close to that. Of course, when a team member working on a critical component leaves, there will be some impact, but the feeling won’t be like that of “being hit by a bus” and frantically trying to recover. The team and project will recover very quickly. 

In fact, I would conclude by saying: 
A cross-functional team with team members having paint-drip or broken-comb skills will have high team resiliency and also high project resiliency. This is because the bus factor is near perfect for the team.


References:

[1] Book: I Want To Be A PMI-ACP: The Plain and Simple Way, 2nd Edition, by Satya Narayan Dash

[2] Agile Practice Guide, by Project Management Institute (PMI)



Agile Asanas Series:




Tuesday, June 09, 2020

RMP Success Story: Risk Management - Essential for Professional and Personal Success

By John P S Oliver, RMP, PBA, PMP



Introduction
Being a Supply Chain Management professional handling various stakeholders in a highly regulated industry with strict compliance rules and involved in process improvement projects, risk management is one of the core areas of focus for my function and managing risks is one of the key objectives for my role. 

While I gained knowledge on Risk Management processes as part of my preparation for PMP certification, I wanted to further improve my knowledge of Risk Management and decided to go for the PMI-RMP® certification.

My earlier PMP exam experience: 
PMP Live Lessons Was Instrumental in Getting My PMP Credential


Own Study
Once I decided to take the PMI-RMP certification, I scouted for the PMI-RMP training class that would provide me with the mandatory 30 hours of risk management education.


I reached out to Satya Sir since he was my coach for the PMP certification. However, I found out that he was not conducting any class room training session for RMP in the near future. I also came to know that he had just published the second edition of his book - I Want To Be A RMP targeting aspirants for PMI-RMP exam. I then enrolled for the PMI-RMP online training session with a provider, completed it and earned the mandatory 30 PDUs. I then submitted my PMI-RMP application on 21-Oct-2019 and it was accepted by PMI on 28-Oct-2019.

Once my application was accepted, I bought Satya Sir’s Book I Want To Be A RMP, 2nd Edition. I also referenced 3 other books from PMI®, Practice Standard for Project Risk Management, The Standard for Risk Management in Portfolios, Programs and Projects and PMBOK® Guide – 6th Edition.

I began my preparation for the exam in the 1st week of February and completed reading Satya Sir’s Book fully once, taking up the chapter end questions as soon as I completed each chapter. I then referenced the 3 books from PMI mentioned above.

I then took up the two full question sets from Satya Sir’s RMP book. This gave me a good perspective of the areas for improvement. Next, I started my revision of Satya Sir’s Book.

Once I completed the revision, I again attempted all the chapter end questions as well as the two full set questions. I could see a marked improvement in my scores over my previous score. I also attempted Udemy’s simulation questions for PMI-RMP to improve my knowledge.

RMP Exam Experience
After the revision of Satya Sir’s Book, I scheduled my PMI-RMP exam for 23-Mar-2020 at the Pearson Professional Center at Chennai. However, my exam was cancelled by Pearson Vue due to the COVID-19 lockdown and I was asked to reschedule the exam to a later date.

I then rescheduled my exam multiple times for 7-Apr-2020, 8-May-2020, 11-May-2020, 18-May-2020, 27-May-2020 however the exams for these dates were cancelled by Pearson Vue due to the extension of COVID-19 lockdown in Chennai. Finally, I rescheduled the exam for 5-Jun-2020 at 9:00 AM, since Pearson Vue center at Chennai started functioning again from 03-Jun-2020.

I reached Pearson Vue Center by 7:45 AM on 05-Jun-2020 and completed my formalities including the screening and declaration procedures with regards to COVID-19 precautions. Due to COVID-19 precautions, I had to wear mask and gloves for the entire duration of the exam.

I was allowed to start my exam by 8:15 AM and completed the exam in one go without any breaks with 12 minutes of spare time. I reviewed 6 questions that I had marked for review.

Questions Faced:
  • Most of the questions were situational.
  • There were few mathematical questions such as Monte Carlo Analysis, Sensitivity Analysis. 
  • I’ve also received questions on Contingency Reserve and Expected Monetary Value (EMV).
  • There were questions on Latin Hypercube Simulation (LHS). 

Book Review - I Want To Be A RMP, 2nd Edition
As soon as I decided to go for the PMI-RMP certification, I reached out to Satya Sir since he was my coach for the PMP certification. It was at the same time that he had released the 2nd edition of his popular book: I Want To Be A RMP

I had already known about his popular book for PMP aspirants, I Want To Be A PMP and had used his PMP Live Lessons which was in videos. Hence it was a no brainer and I decided to buy his book for RMP preparation.

The book is organized by chapters and it is easy to follow. In addition to ITTOs and the explanation of why it is an ITTO for the particular process, it has additional yogic vision and revision tips which make sure we do not miss the key concepts.

The fascinating aspect of the book is that Satya Sir uses real life situations and examples to drive home the risk management concepts. This helps us to easily understand and remember the concepts.

The book has a separate chapter for mathematical questions along with flash card for mathematical formulas. This helped in my preparation for the mathematical questions which are easy to score.

The book also covers Sensitivity Analysis, Decision Tree analysis, Contingency reserves, Simulations like Monte Carlo, LHS along with examples which is very important from the exam point of view.


Suggestions for RMP Aspirants
Dos:
  • Plan and schedule your exam well in advance.
  • Prepare a realistic study schedule and follow it rigorously.
  • In addition to PMI reference books, go for another study resource like “I Want To Be A RMP” or other published books to aid you in your studies. 
  • Review your answers both the right and the wrong ones to understand the reasoning and logic behind the answers. This will help you to get familiarized with the pattern behind the questions and answers.
  • Spend at least 30% of your overall schedule to attempt practice questions.
Don’ts:
  • Do not attempt questions before you completely study the resources at least once.
  • Do not use more than 2 or 3 study resources (PMI reference books + 1) – That may end up confusing you as well as take your time which can be spent on practicing Questions & Answers.
  • Don’t panic during the exam if you do not know the answer for a particular question - mark it for review and go the next one – You can always come back to the marked question later.

Conclusion
I would like to thank the Almighty for his blessings, my reporting manager for his approval to take up this certification and Satya Sir for his book: I Want To Be A RMP. I am confident that with the knowledge gained, I would be able to apply the concept of risk management more effectively in my day to day operations and projects.

Brief Profile: 
Name: John P S Oliver
Current Role: Supply Chain Manager
Experience: 22+ years of experience in Operations, Vendor Management and Project Management in ITES across SCM, Healthcare, Banking and Financial services, Telecom and Retail verticals.





New Book Available for RMP Exam:
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Sunday, June 07, 2020

PMP Prep: Range of Incentive Effectiveness (RIE) - How to Derive the Formulas?




We have understood the Range of Incentive Effectiveness (RIE) with the basics and the associated formulas in the earlier article

Now, let’s go a bit deeper and see how RIE is represented graphically in the cost-profit curve. This you need to know, before we derive the formulas for RIE. This will give you a better understanding.


The content of this article has been taken from: PMP Live Lessons – Guaranteed Pass

You can read the previous article on RIE here: 
Range of Incentive Effectiveness in Procurement Management


Cost-Profit Curve in CPIF Contracts
The cost-profit curve is widely used by Contract Administrators or Procurement Managers. This is a two-dimensional (2D) graph and pictorially shows:
  • RIE (min) point,
  • RIE (max) point,
  • Profit or Fee (max) point,
  • Profit or Fee (min) point, and of course,
  • Range of Incentive Effectiveness (RIE).

The cost-profit curve for a Cost Plust Incentive Fee (CPIF) contact is depicted in the below figure. 


Range of Incentive Effectiveness (RIE): Cost-Profit Curve

As shown above, in the X-axis we have cost, whereas profit is shown in the Y-axis. At RIE (minimum) cost point, the profit is maximum or it’s Fee (max). At RIE (maximum) cost point, the profit is minimum or it’s Fee (min). These are shown in red dotted lines.

Finally, RIE – the range in which the incentive is effective – is the range between RIE (min) and RIE (max). 

The target cost is shown with blue dotted line and target cost/profit point is shown with a blue circle.The blue dotted lines are projected to X-axis giving you the target cost (TC) value and projected to Y-axis giving you the target profit (TF) value. 

Below are few key points to note by looking at the above graph:
  • At RIE (min), the profit is maximum or Fee (max).
    RIE (min) in cost curve = Fee (max) in profit curve
  • At RIE (max), the profit is minimum or Fee (min).
    RIE (max) in cost curve = Fee (min) in profit curve
  • Target Profit or Target Fee (TF) is less than the Fee (max), but more than Fee (min).
    TF < Fee (max); TF > Fee (min)
  • Target Cost (TC) is less than RIE (max), but more than the RIE (min).
    TC < RIE (max); TC > RIE (min)

With these key points, let’s derive the formulas.

Deriving RIE Formulas
First, we will check upon the formula for RIE (min).

I. Formula for RIE (min) – Cost Underrun
RIE (min) will be during cost underrun. During cost underrun, the actual cost (AC) will be less than the target cost (TC). This is obvious. Hence:

Cost Underrun is the subtraction of actual cost from target cost, i.e.,
Cost Overrun = Target Cost (TC) - Actual Cost (AC)

Now, the actual fee (AF) will be an addition to the target (TF), along with the seller’s share of cost gain because of cost underrun. This is added, because the seller performed well from cost perspective and seller is entitled to gets it extra share. 

But do note: the total fee given to the seller can NOT be more than the Fee (max).

Hence, from the seller’s perspective: 
Actual Fee (AF) = Target Fee (TF) + (Cost Underrun) × SSR
= Target Fee (TF) + [Target Cost (TC) – Actual Cost (AC)] × SSR …. [1]

We already know at RIE (min) point from the earlier graph, the fee is at maximum or it is Fee (max). This is when you project the profit it into the Y-axis of the above graph. In an equation:

Actual Fee (AF) = Fee (max) …. [2]

Also, we know at this stage actual cost (AC) is in fact the RIE (min). This is when you project the cost it into the X-axis of the above graph. In an equation:

Actual Cost (AC) = RIE (min) …. [3]

Hence, considering equation [2] and equation [3] and putting these values in equation [1], we will have:

Fee (max) = Target Fee (TF) + [Target Cost (TC) – RIE (min)] × SSR
=> Fee (max) = TF + [TC- RIE (min)] × SSR
=> Fee (max) - TF = [TC- RIE (min)] × SSR
=> [ Fee (max) – TF ] / SSR = TC- RIE (min)
=> RIE (min) = TC – ( [ Fee (max) – TF ] / SSR )

This what I mentioned in earlier piece of RIE as the formula for cost underrun.




Next, we will derive the formula for RIE (max).

II. Formula for RIE (max) – Cost Overrun 
RIE (max) will be during cost overrun. During cost overrun, the actual cost (AC) will be more than the target cost (TC). This is also obvious. Hence:

Cost Overrun is the subtraction of target cost from actual cost, i.e.,
Cost Overrun = Actual Cost (AC) - Target Cost (TC)

For the actual fee (AF), we have to subtract seller’s share ratio of cost overrun from the target fee (TF). This is subtracted, because the seller performed badly from cost perspective and seller will have to pay its share. 

But do note: the total fee given to the seller can NOT be less than the Fee (min).

Hence, from the seller’s perspective: 

Actual Fee (AF) = Target Fee (TF) – (Cost Overrun) × SSR
= Target Fee (TF) - [Actual Cost (AC) - Target Cost (TC)] × SSR …. [4]

We already know at RIE (max) point from the earlier graph, the fee is at minimum or it is Fee (min). This is when you project the profit it into the Y-axis of the above graph. In an equation:

Actual Fee (AF) = Fee (min) …. [5]

Also, we know at this stage actual cost (AC) is in fact the RIE (max). This is when you project the cost it into the X-axis of the above graph. In the equation:

Actual Cost (AC) = RIE (max) …. [6]

Hence, considering equation [5] and equation [6] and putting these values in equation [4], we will have:

Fee (min) = Target Fee (TF) - [Actual Cost (AC) - Target Cost (TC)] × SSR
=> Fee (min) = TF - [RIE (max) - TC] × SSR
=> [RIE (max) - TC] × SSR = TF – Fee (min)
=> RIE (max) - TC = [ TF - Fee (min) ] / SSR
=> RIE (max) = TC + [ (TF - Fee (min)] / SSR ] 

This what I mentioned in earlier piece of RIE (max) as the formula for cost overrun.



III. Formula for RIE

Finally, the formula for RIE will be:



Conclusion
As noted in earlier part for RIE, questions on PTA have been coming in the PMP exam for quite some time. A related concept to know is Range of Incentive Effectiveness (RIE), which is used in CPIF contracts. 

I don’t expect many questions on Range of Incentive Effectiveness (RIE) in the PMP exam. Like the concept of Point of Total Assumption (PTA), questions will be very few, if it comes. However, it is an excellent one to know and understand Procurement Management better.


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Thursday, June 04, 2020

PMP Prep: Range of Incentive Effectiveness in Procurement Management




Recently, I wrote an article on Point of Total Assumption (PTA), which is used in Fixed Price with Incentive Fee (FPI/FPIF) contracts. 

One of the biggest misconceptions I’ve seen – PTA can surely be used in Cost Plus Incentive Fee (CPIF) – has been dispelled in the article. I’ve mentioned the reason for it. I’ve also mentioned that Range of Incentive Effectiveness (RIE) is used in Cost Plus Incentive Fee (CPIF) contracts.

Article: Point of Total Assumption in Procurement Management


Questions on PTA have been coming in the PMP exam. In a recent success story, a successful PMP mentioned questions are there on PTA in the exam. In other success stories also, PMPs have mentioned on PTA questions. Another candidate recently asked on the Range of Effectiveness (RIE). As questions on PTA (at most one or two) come, I believe it’s good to know on the RIE concept as well. If you understand PTA well, you can easily understand RIE.

Hence, this post. In this article, we will know more about RIE.


RIE Definition 
The range of incentive effectiveness in a CPIF contract can be defined as follows:

“Range of incentive effectiveness is simply the range of costs in which the incentive is effective. Below this range or above this range, the contract behaves like a Cost Plus Fixed Fee (CPFF) contract.”

In other words, below this range of incentive effectiveness (RIE), after paying a fixed fee to the seller, the buyer share is 100% and sellers share is 0%, i.e., the sharing ratio between buyer and seller is 100%:0%. Similarly, above RIE, after paying a fixed fee to the seller, the sharing ratio between buyer and seller is 100%:0%.

The fee is paid to the seller, because the contract behaves as a CPFF contract, as the previous definition informs. Also, when the CPIF contract becomes a CPFF contract, the fee for the seller becomes fixed.

If there is profit below the RIE, then this profit is taken up by the buyer, after paying the fixed fee to the seller. Similarly, if there is a loss above the RIE, then the loss is also taken by the buyer, after paying the fixed fee to the seller. This concept of RIE is displayed in the below figure.


RIE - Simplified Image, One-Dimentional (Cost)

As shown above, the RIE is basically the cost range – from a minimum RIE cost point to a maximum RIE cost point. You see, in the name itself we have the term “range”!

In case of cost underrun, the buyer takes all the share after the fixed fee of the seller is given. Similarly, during cost overrun, a fixed fee is given to the seller and the buyer has to take all the share. Remember outside RIE zone, the CPIF contract behaves as a CPFF contract!

Hence, beyond RIE, incentive has no effectiveness.

We will understand more of it with an example shortly, but first let’s understand the terms related to RIE in CPIF contracts.

I’ll also strongly recommend that you read the concepts of cost, profit, fee and incentive in the article earlier mentioned. It’s under section: “Price, Cost, Profit, Incentives”.


Terms Related to RIE
When I say terms related to RIE, I mean terms related to CPIF contracts. As noted earlier, RIE is usually the case in CPIF contracts. The terms are:
  • Target Cost (TC): The amount taken by a seller to create or develop an item.
  • Target Fee (TF): It is the profit taken by the seller on top of cost. It is also known as margin or fee.
  • Target Price (TP): Target Price is a combination Target Cost and Target Fee. The formula for TP is Target Price (TP) = Target Cost (TC) + Target Fee (TF).
  • Share Ratio (SR): This is the sharing ratio between buyer and seller, e.g., 80:20. The first percentage is for the buyer, and the second is for the seller. It means for every $1 cost overrun; 80 cents will be paid by the buyer and 20 cents by the seller.
  • Buyer Share Ratio (BSR): This is the share ratio for the buyer. In the above case, the buyer share is 80%. It means for every $1 cost overrun; 80 cents will be paid by buyer. Also, for every $1 cost underrun; 80 cents will be taken by the buyer.
  • Seller Share Ratio (SSR): This is obviously the difference from 100%. In the above case of 80:20, the seller share ratio is 20%. It means for every $1 cost overrun; 20 cents will be paid by seller. Also, for every $1 cost underrun; 20 cents will be taken by the seller.

As you would have noticed the terms are very similar to the ones used in Fixed Price with Incentive Fee (FPIF) contracts. Now, I’ll introduce four more related terms to understand RIE. These are particularly applicable to CPIF contracts.
  • Maximum Fee or Fee (max): In CPIF contract, the fee is incentivized and the maximum fee informs the maximum amount that can be taken as a profit or fee. It is typically be +3% or +4% above the target fee (TF).
  • Minimum Fee or Fee (min): The minimum fee informs the minimum amount that can be taken as a profit or fee. It is typically be -3% or -4% below the target fee (TF).

Both maximum and minimum fee limit is set by the buyer for the seller.
  • RIE (max): This is the cost at minimum fee or Fee (min). In the range of incentive effectiveness, the cost is at its maximum point; hence simply named as RIE (max). This cost point is reached in the cost-profit curve, when the profit or fee is minimum.
  • RIE (min): This is the cost at maximum fee or Fee (max). In the range of incentive effectiveness, the cost is at its minimum point; hence simply named as RIE (min). This cost point is reached in the cost-profit curve, when the profit or fee is maximum.
Do note again: in the profit-cost curve, we have the following key points.
  • When cost is at RIE (min), we have Fee (max).
  • When cost is at RIE (max), we have Fee (min).

With this understanding, I’ve expanded the previous figure, and showing only the cost part, in one-dimensional (1D) format.


RIE - Explanatory Image, One-Dimentional (Cost)

As shown in the above figure:
  • At RIE (min), the fee is maximum. In other words, when the Fee is maximum, in the range of effectiveness, we are at RIE (minimum) cost point.
  • At RIE (max), the fee is minimum. In other words, when the Fee is minimum, in the range of effectiveness, we are at RIE (maximum) cost point.

Also, the figure informs that the target cost (TC) is somewhere between the RIE (min) and RIE (max) cost points.


RIE Formulas
Now we have two RIE points – RIE (min) and RIE (max). And at RIE (min), the fee is maximum and at RIE (max), the fee is minimum.

It’s obvious that when the fee/profit is maximum, then there is cost underrun, whereas when the fee/profit is minimum, there is cost overrun.

Hence, there will be two formulas for RIE.

RIE (min) Formula – Cost Underrun
RIE (min) will be during cost underrun. The formula for RIE (min) is depicted below.



RIE (max) Formula – Cost Overrun
RIE (max) will be during cost overrun. The formula for RIE (max) is noted in the below figure.



RIE Formula
As the Range of Incentive Effectiveness (RIE) is the cost range between RIE (min) and RIE (max), obviously, the formula for RIE will be the one shown below.



Example
Let’s take an example to understand. I’ll reuse the same example given in PTA for FPIF contracts. This will make your understanding easier and also easy to solve.
An Example of RIE

Question: In a CPIF contract, the buyer and seller agreed to a cost of $300,000 and a fee (or profit) of $30,000, which is 10% of the cost. Because it’s a CPIF contract, the maximum fee is set at 13% and the minimum fee is set at 7% of the cost. The share ratio between the buyer and seller will be 60%:40%. Determine the RIE (max) and RIE (min) values, along with the range of incentive effectiveness (RIE).

Solution:
From this example, let’s find out the values.
  • Target Cost (TC): $300,000
  • Target Fee (TF): $30,000
  • Target Price (TP): $300,000 + $30,000 = $330,000
  • Sharing Ratio (SR): 60:40
  • Buyer Sharer Ratio (BSR): 60% or 0.6
  • Seller Sharer Ratio (SSR): 40% or 0.4
  • Maximum fee or Fee (max): 13% of TC, i.e., 13% of $300,000
    Fee (max): $39,000
  • Minimum fee or Fee (min): 7% of TC, i.e., 7% of $300,000
    Fee (min): $21,000

We will first calculate the case for RIE (min), which is for cost underrun.

Calculation for RIE (min)
RIE (min) = TC - [ Fee (max) – TF ] / SSR
=> RIE (min) = $300,000 – [($39,000 - $30,000)] / 0.4           40% is 0.4
= $300,000 – [$9,000]/0.4
= $300,000 – $22,500
= $277,500

Next, let’s calculate the case for RIE (max), which is for cost overrun.

Calculation for RIE (max)
RIE (max) = TC + [ (TF - Fee (min)] / SSR ]
=> RIE (max) = $300,000 + [($30,000 - $21,000)] / 0.4           40% is 0.4
= $300,000 + [$9,000]/0.4
= $300,000 + $22,500
= $322,500

Calculation for Final RIE
Hence RIE = RIE (max) – RIE (min) = $322,500 - $277,500
RIE = $45,000


Conclusion
In this range of incentive effectiveness, i.e., $45,000, the CPIF contract is effective. Beyond this range – above RIE (max) of $322,500 or below RIE (min) of $277,500 – the CPIF contract no longer behaves like an incentivized contract. Rather, it behaves like a CPFF contract.

For the PMP exam, you need to know these basics to answer questions. The questions are most likely to be direct in nature for RIE and for that you need to just remember the formulas. Sometimes the questions can be a bit tricky, e.g., it might give you just the Fee (max) and Fee (min) values and you will be asked to calculate RIE.