CHAPTER

19

EARNED VALUE MANAGEMENT

Federal Acquisition Regulation (FAR) 34.2 discusses earned value management (EVM) and the implementation of OMB Circular A-11 as a way to help the government assess the value that is being provided on a project. EVM is a response to the ambiguity that can sometimes occur in status reports. The government can mandate the use of EVM on federal contracts; many commercial entities are requiring the use of EVM as well. Using EVM enables an organization to achieve greater project performance, because it collects metrics that can be used for continuous process improvement.

    What is the purpose of earned value management?

A project is defined as a unique, temporary activity designed to meet a particular need. It has a defined scope, start date, and end date. EVM is designed to communicate project progress by looking at three typical failure points of a project—schedule, cost, and scope—to determine whether the project is delivering the expected value at any point in time.

    What is the starting point for obtaining EVM metrics?

EVM uses the work breakdown structure (WBS) to delineate the authorized scope of a project’s work elements into identifiable pieces. A work package is a deliverable at the lowest level of the WBS structure and describes a work unit or one element of work in the project. During project planning, the project team defines the scope, schedule, budget, and quality measures for each work package. Once the project plan is approved, the project team commences work.

During project performance, project managers measure the following for each work package to understand how well the project team is meeting the estimates (i.e., the plan) for the project:

•   Progress in time (schedule)

•   Cost (budget)

•   Scope (requirements)

•   Quality.

These measurements allow the project team to develop corrective actions for if and when the project goes off track. EVM measurements also enable the team to predict when the end of the project will occur.

    How does EVM work with PMOs?

A PMO develops an enterprise strategy to manage projects collectively across the organization. EVM can be used to assess performance on an individual project; alternatively, metrics can be collected across multiple projects and at the project management office (PMO) level. Perceptions of EVMS by PMOs vary across organizations, depending on how much control the PMO exerts over projects. PMO highlights the needs of the most strategic projects to get critical resources, because it assesses requirements across all projects. Thus, selection, prioritization, and termination of projects are important PMO functions. PMOs use tools like risk vs. benefit analyses to make these resource decisions.

    What are the earned value metrics?

To fully implement EVM, 32 criteria must be met. These criteria are divided into five sections: (1) organization, (2) planning and budgeting, (3) accounting considerations, (4) analysis and management reports, and (5) revisions and data maintenance:

1.   Organization

•   Define the work with a work breakdown structure.

•   Identify organizational structures.

•   Provide for integration of company processes and program structure.

•   Identify the function for controlling overhead.

•   Provide integration that permits performance measurement from the WBS and the organizational structure.

2.   Planning and Budgeting

•   Schedule the work with task sequence and interdependence.

•   Identify indicators of measurable progress.

•   Establish and maintain a time-phased budget baseline at the control account level.

•   Establish budgets with identification of significant cost elements.

•   Identify and establish budgets in discrete work packages within control accounts and identify far-term work in larger planning packages.

•   Ensure that the sum of the work package budgets and planning package budgets within a control account equals the control account budget.

•   Identify and control any work defined as level of effort.

•   Establish overhead budgets.

•   Identify management reserves and undistributed budget.

•   Ensure that the project’s target cost equals the sum of all budgets and reserves.

3.   Accounting Considerations

•   Record direct costs in a formal system.

•   Summarize direct costs from control accounts to the work breakdown elements.

•   Summarize direct costs from control accounts into the contractor’s organizational elements.

•   Record all indirect costs.

•   Identify unit costs.

•   Provide accountability for a material accounting system.

4.   Analysis and Management Reports

•   Generate management control information at the control account level.

•   Identify and explain differences between actual and planned schedule and cost performance.

•   Identify budgeted and applied indirect costs.

•   Summarize data and variances through program organization or work breakdown structures.

•   Implement managerial actions.

•   Revise estimates of cost at completion based on performance to date.

5.   Revisions and Data Maintenance

•   Incorporate authorized changes.

•   Reconcile budgets to prior budgets.

•   Control retroactive changes to records.

•   Prevent unauthorized revisions to the program budget.

•   Document changes to the performance management baseline.

Forty percent of the 32 EVM criteria establish organizational structure, project planning, and change control requirements. Sixty percent involve accounting for costs via budgeting, reporting, and forecasting.

    Does an organization have to implement the full 32 EVM criteria?

Some companies choose to use a subset of the criteria as a way to collect metrics and improve their overall project success. Commonly, four main metrics are used. (Industry uses different names from the more traditional ones used by the government; industry names will be given first and then the government names.)

Total Value (TV) or Budget at Completion (BAC)

This measure is prepared in the planning stage, before the project has begun. TV can be thought of as total cost or as total budget. It is developed by examining all the work to be accomplished on the project and the estimated cost of each portion of work. The budget and project schedule then become the baseline against which project progress is measured.

As work on the project progresses, three periodic status reports are required:

1.   Planned value (PV) or budgeted cost of work scheduled (BCWS), representing the budgeted cost for the work scheduled to have been completed

2.   Earned value (EV) or budgeted cost of work performed (BCWP), representing the budgeted cost for the work actually completed

3.   Actual cost (AC) or actual cost of work performed (ACWP), representing the actual cost of the work actually completed or performed.

The first two periodic status reports are based on budgeted costs (PV and EV). The last is based on actual costs (AC). PV represents scheduled work while EV and AC are used for completed work.

Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS)

At each status reporting time, the portion of the project’s planned value or BAC corresponding to the elapsed time from the beginning of the project to the status date details both the work that should have been completed and the costs that should have been incurred. To put it another way, the BCWS or PV is the dollar value of the work that was scheduled for completion by a certain point of the project’s schedule. Basically it answers these questions: How much work should we have gotten done so far, based on the schedule? How much should we have spent by this point in the schedule?

Earned value (EV) or budgeted cost of work performed (BCWP) is a periodic measurement that shows the original estimated costs for work actually completed. It is a somewhat confusing metric, because it uses both an actual measurement and a budgeted measurement. It is a measure of the work actually performed during the status period, but its planned (budgeted) amount, not its actual cost. So it basically represents a cumulative-to-date amount.

Actual cost (AC) or actual cost of work performed (ACWP) is the actual cost incurred from the beginning of the project, in effect a running total. Keep in mind that costs incurred (direct or indirect costs used on the project) are not necessarily the same as costs paid in cash. This is also a cumulative amount.

Once these numbers are calculated, they can be used to calculate other metrics that are used for reporting or for comparison.

Cost variance (CV) is the difference between the budgeted cost of work actually performed (EV) and the actual cost of that work (AC):

CV = EV – AC (using industry terms) or

CV = BCWP – ACWP (using government terms)

Schedule variance (SV) is the difference between the budgeted cost of the work actually completed (EV) and the budgeted cost of work scheduled for completion (PV):

SV = EV – PV (using industry terms) or

SV = BCWP – BCWS (using government terms)

It is important to note that in all of these formulas, a positive amount represents favorable performance and a negative amount signals unfavorable performance. Although these metrics don’t pinpoint the exact nature of the unfavorable project performance, they do act as an early indicator that there is a potential problem. Understanding and using these metrics routinely helps a project manager become aware of a potential problem and realize that an intervention may be necessary.

    How does a company use EVM to compare projects across a company to determine how each is doing in comparison to the others?

Earned value management uses ratios to determine how a specific project is doing. For EVM to provide useful data across a spectrum of projects, variances are converted into cost and schedule ratios to standardize them across multiple projects. Converting the cost and schedule variances (CV and SV) into schedule and cost ratios standardizes them. The cost performance index (CPI) and the schedule performance index (SPI) are relative measures that can be used to compare different projects.

CPI is a ratio used to determine how one project is doing compared to other projects with regard to cost:

CPI = EV/AC (using industry terms)

CPI = BCWP/ACWP (using government terms)

SPI is a ratio used to determine how one project is doing compared to other projects with regard to schedule:

SPI = EV/PV (using industry terms)

SPI = BCWP/BCWS (using government terms)

SPI shows schedule completion (EV) on the measurement date relative to planned completion by that date:

•   When the ratio is 1, it indicates EV = PV or that the project is right on track.

•   A ratio of > 1 indicates favorable performance or that the project is ahead of schedule.

•   A ratio of < 1 indicates unfavorable performance or that the project is behind schedule.

These metrics all show the current status of the project.

    Are there any EVM metrics that help a project manager forecast any potential problem areas?

Yes, EVM also has forecasting metrics. These metrics use present calculations to project future calculations.

Estimate to complete (ETC) shows how much cost or schedule time it will take to finish the project:

ETC = (TV – EV)/ CPI

or

ETC = (TV – EV)/CPI*SPI

Estimate at completion (EAC) shows how much it will cost to have completed the project:

EAC = AC + ETC

To-Complete Performance Index (TCI)

TCI = Budget for remaining work or TC EV

Estimated cost of remaining work or EAC AC.

    How are the measurements used?

Calculating the metrics is only a small part of managing an EVM-based project. The key is what a project manager does with the metrics collected. Meeting schedule targets is usually critical to the client, so PMs must meet SPI targets. Meeting cost targets is usually critical to the company, so PMs must meet CPI targets. To demonstrate a successful project, a PM wants to have favorable metrics on both schedule and cost metrics. Unfortunately, a PM can’t net the two metrics together. PMs are expected to expend the necessary resources to meet SPI targets while at the same time feel strong pressure to use as few resources as are necessary to meet CPI targets. When a PM adds more resources to fix an SPI issue, the CPI becomes less favorable. Reducing resources to fix a CPI issue tends to cause an SPI issue.

It is also important to remember that EVM metrics give the PM a “snapshot in time.” As informational measurements, they are used primarily for the information they convey. As motivational measurements, they are explicitly intended to affect behavior.

Informational measurements should be used to improve decisions but not to change behavior. EV metrics may inadvertently affect the behavior of the project team members attempting to perform to those metrics. EVM doesn’t take into account all aspects of a project; making project decisions on the basis of a system that does not measure all critical dimensions of project performance is detrimental to ongoing project process improvement, possibly to project completion, and certainly to project success.

EVM metrics must not be used to determine how work should proceed. Instead, project decisions must be based on sound project management practices. A PM’s message to the team should be “to complete the project as quickly as possible and at the lowest cost” rather than to improve the CPI or SPI. Daily project management decisions must be made using real-time data. EVM data are based on historical data (or on the impact on data to be reported in the future), not real-time data.

    If we have these EVM metrics, why do we need an EVM system?

An EVM system (EVMS) is tool used to provide dependable, valuable, and objective information to make business decisions in the context of the importance of critical projects, the ever-increasing speed required for project completion, and notorious past failures in project management.

EVM encompasses both performance measurement (i.e., project status) and performance management (i.e., what can we do about it). An EVMS is an integrated project management system that allows

•   Detailed definition of the work required to complete the project (a WBS)

•   Assignment of the organizational entities for work performance (an organizational WBS)

•   Schedule of the work to be performed (the project plan)

•   Integration of the cost and schedule in a baseline plan (a time-phased baseline budget)

•   Accumulation of costs

•   Measurement of progress (earned value)

•   Analysis of variances from the plan

•   Reporting to management

•   Forecasting of schedule and cost completion data

•   Disciplined maintenance of the plan data and proposed revisions (the change control plan).

    Does the value of EVM justify the return on investment needed to implement the technology and change the organizational culture?

Implementing EVM represents an expense to an organization. Typically, this expense comes out of the organization’s profit. A client that is specifically paying for EVM to be implemented on a contract may be willing to absorb some of the costs as direct contract expenditures. An organization must also change the way it reports progress if the leadership team adopts an EVM process. People must change the way they do business for EVM to be integrated and successful throughout the organization.

    So why should an organization be willing to go through this expense to implement an EVMS?

Here are several reasons for an organization to implement an EVMS:

•   EVMS is a single management and control system that provides reliable data. Once EVM is fully implemented, the leadership team can quickly go to one system that will provide status across all projects in the entire organization. Leadership is not left with project managers’ assessments of how things are going on a project; they can rely on consistent metrics that have been captured across all projects and programs.

•   EVM integrates work, schedule, and cost into a WBS. EVM requires discipline. The WBS portion requires very detailed analysis of the statement of work, schedule, resources, and costs necessary to perform each packet of work to complete the contract. This rigor provides greater reliability for ensuring that all costs associated with a project are considered. The WBS provides a tool for managing the contract after award.

•   EVM can be used to create a database of completed projects that is useful for comparative analysis. Most companies conduct a lessons-learned activity at the conclusion of a project. Seldom do the lessons learned become part of process changes to improve future projects, typically because they are documented in a file that is difficult to search and represents the results for just one project. Thus, it is difficult to look across projects to see problems that have emerged over time across numerous projects. An EVM stores data about projects in one system. It can be configured to highlight problem areas that keep arising on projects. Leaders don’t have to track all data; they can focus their attention on the exceptions. Armed with these data, leaders can institute process changes that can improve the quality, cost-effectiveness, and timeliness of future project deliveries.

•   The cumulative CPI and SPI provides an early warning signal. By consistently collecting the EVM metrics over time, the leadership team can spot anomalies in the data. The CPI and SPI metrics, in particular, can alert leaders to when a project is veering off schedule or is expending costs faster than budgeted. These data can allow leaders to intervene to get the project back on track. Furthermore, the CPI is a predictor of the final cost of the project, which will be useful information both internally and externally to the project.

•   EVM requires the use of the best practices of project management. Project management requires discipline and monitoring to ensure that projects stay on track. Components of EVM (e.g., WBS, task dependencies, organizational responsibilities, time-phased budgeting, formal planning and reporting) require team members to use the best practices of project management. Each enables the PM to provide an objective fact-based project status report.

    Is there any downside to implementing EVM?

Certain expectations must be established for users to understand what EVM implementation provides. EVM metrics summarize past performance, compare actual to planned results, and signal developing problems. However, EVM does not unambiguously indicate appropriate actions that should be taken. In other words, the EVM system can tell you that a problem is brewing, but it does not tell you why the problem is occurring nor does it tell you what you should do about it. Think of it as an early warning system that alerts you to a problem so that you have time to respond to it.

Nor is EVM a real-time system. If a project leader waits until an EVM report is run monthly, he or she may find that the problem causing the metrics to be askew has put the whole project in jeopardy. EVM is not designed to report information that is sufficiently timely and transparent to all interested parties. For example, the stakeholders who receive EVM measures rarely have access to detailed project plans, so although they receive a number that lets them know there is a problem, they don’t have the detail they need to find out what has caused the problem. Traditionally, comparison of EVM measures to the project plan is not a formal part of EVM metrics. None of the EVM metrics that reflect progress and remaining work correlate directly with completion of the project plan. Thus, the proper corrective action may not be obvious to either the stakeholders or the project manager without delving into the project plans.