Improving Project Management through Earned Value
Earned Value Management is a means by which projects can improve delivery performance through periodic and meaningful cost and schedule performance information, increasing the focus and understanding of status against schedule and budget goals throughout the project lifecycle.
The origins of Earned Value Management (EVM) embody Project Management ‘best practices’ in project planning and performance measurement. EVM provides performance management information to inform project team’s decision making. The principles of EVM represent best practice project control in project-based management.
EVM was first adopted by the United States Department of Defense in 1967 and today is at the heart of the project control systems applied by the governments of the UK, USA and Australia, to help manage the performance of major defence suppliers engaged on major development contracts. It is also widely used in other industries such as Construction and Oil & Gas.
In simple terms, Earned Value is the contract (or authorised) budget value of work accomplished on a project, typically to date. Earned Value is expressed using budget (and currency) values of the local environment (e.g. £ or $). This is one of the reasons why Earned Value has been misinterpreted in the past – it’s not a financial tool, it is a tool for project management.
So why is EV expressed in financial terms? EVM metrics are all converted to a single unit of measure (i.e. £’s) so that performance against both cost and schedule can be seen together, for example graphically, to inform our understanding of status against of two primary goals of projects: cost performance and schedule performance. Traditional methods of representing project data often look at these separately, which at best can be a significant weakness – at worst it can sometimes be completely misleading. Hence the big focus in the earned value world on the word integration – it’s critical to making EV work well.
The following shows the basics of how EV works in practice, using a simple one task example:
We have a task with a budget of 1000 hours to design a new widget, which we also expect to take 12 weeks to complete. At the end of week 6, we planned to have completed 55% (by effort) of the activities within the task, and we therefore budgeted those activities to consume 550 hours of our total budget – these numbers could be translated into cost (£) data using average costing rates.
At the end of week 6:
- the planned value = total task budget * our planned percentage complete (55%) = 550 hours
- our actual expenditure (in hours) was found to be 480, and
- on measuring actual progress (activities complete) we calculate that we have completed tasks worth 350 hours worth of the total task budget
In earned value language, this gives us Planned Value of 550 hours, Earned Value of 350 hours, and Actual cost (hours) of 480.
What can we derive from this?: Two things – schedule and cost performance (relative to plan), which are both commonly expressed as a ratio – cost performance index (CPI) and schedule performance index (SPI), where CPI/SPI of 1.0 indicates performance to plan – less than 1.0 is under performance to plan.
In this example our CPI would be 350/480, or 0.73 and our SPI would be 350/550 or 0.64.
What do we do with this data?
In the past, it has often been mistakenly believed that EV data is either financial or used (only) to report to customers. The most important use of this data is by those within a project team who have the responsibility for managing the work of a project using Earned Value data (via the project structures e.g. work breakdown structures) to understand their cost and schedule performance periodically throughout the project lifecycle. The aim is to highlight (cost and schedule) issues early, thus providing teams with the maximum time to minimise their impact and provide them a realistic opportunity to develop recovery plans where necessary.
The second thing we can do, is to use the data to provide a means of forecasting out-turn on projects – the most commonly used being:
- Estimate costs at completion (for the total task: EAC) = total budget: 1000 / CPI (.73) = 1,371 hours
- Estimate of forecast total duration for the task = current plan: 12 weeks / SPI (.64) = just under 19 weeks (this is a rough estimate that should be reviewed against project schedules for work remaining)
And for those who dismiss the above, history is littered with projects that displayed (performance) characteristics similar to the above – very very few came in on budget or on schedule (without significantly relaxing the scope) – if you know of one please let us know.
The production of EV data requires that a performance measurement baseline, drawn directly from the project plan, comprising of the following:
- The Performance Measurement Baseline (PMB). The PMB consists of a time phased aggregation of the resources (expressed in budgetary terms) required to execute the work inherent in the project schedule – this creates the ‘baseline’ against which cost and schedule performance is measured via EVM metrics. The PMB should also show how Earned Value will be measured and taken through the life of the project.
- Objective Measures of Progress progress must be assessed periodically – there are many ways of doing this and the simple rule is that the more subjective the methods are, the less reliable the EV data is likely to be and the greater room there is for unwanted ‘surprises’ downstream
- Actual Costs – Labour and Materials: Actual cost data must then be gathered against by the elements in the PMB – this requires that business systems and processes enable useful and timely capture of actual cost data, via the structures that are employed in the EVM system.
EV was not developed simply to report status to customers – it may be used in this way, but if this is the only way it is seen, a huge degree of the value of using the method will be lost.
The objective is to embed EV data into the practice of daily management of the project, leading to an improvement in decision-making based upon an informed analysis of real status against cost and schedule goals, at the working levels of the project.
For organisations implementing an Earned Value Management System, the challenge lies not just in the mechanics of the method, but more often in the cultural change required to underpin an EV based project control system.
Additionally, when most organisations first attempt to use EVM, they typically find that EVM highlights weaknesses or gaps in the project planning and control processes and capabilities. For example:
- a robust baseline needs to be developed as soon as possible after contract award – this task alone challenges many organisations – and then it must be maintained
- the planning process must identify all major project deliverables clearly, within the PMB, not just the functional effort assumed to be required to deliver a project
- objective measures of physical progress must be assessed routinely
- business systems and processes need to provide data in a timely manner (e.g. costs) and need to be structurally compatible with the needs of the EVM system.
The above question has raged in some environments for many years. EV gives objective measures of status against the cost and schedule goals of a project – there are no more primary or fundamental goals in project management. Assuming an organisation follows the principles that underpin good practice in EVM systems, it provides important data to project teams, without which teams can operate in a vacuum regarding their performance, or even worse, they could operate in an environment of false optimism that does not see the level of challenge or issues in their project, until it is too late to make a real impact on the same – something that occurs far too often in projects.
Earned Value is not just worth it – it is a fundamental tool to being in control in large scale risky development programmes.
Customers increasingly require contracts to be pro-actively controlled to assure delivery on time, to budget and to specification. Customers look for confidence in the project status information being supplied, and are increasingly achieving this by defining contractual agreements that require Earned Value Management to be used by their suppliers.
The major considerations include:
- defining and communicating your EV requirement including the incorporation of the Integrated Baseline Review process
- assessing the merits of payment by EV
- determining appropriate data access and reporting requirements
- defining and agreeing performance review cycles and processes
The purpose of an Integrated Baseline Review (IBR) is to assess a set of project management processes and to establish the degree of risk associated with the project’s Performance Measurement Baseline plan delivering on time, to budget and to specification.
Where it is important to have confidence at an early stage that the baseline plan for a project is realistic and capable of delivery, an Integrated Baseline Review may be deployed.
If you are required to perform an Integrated Baseline Review, it will require preparation and the attention of those who will participate in the review. As a minimum, the following should be agreed / prepared before the review:
- agreement on the specific objectives of the review and exit criteria
- the scope and timing of the review and how it will be conducted
- documentation and personnel to be made available at the review.
IBRs are often preceded by some form of readiness review – given that an IBR should be held as soon as possible and practical following contract award, the scheduling and resourcing of these activities needs to be considered urgently from contract award onwards.
- UK MoD Commercial Policy Guideline No.8 – Earned Value Management – Commercial Issues (Nov 2004)
- US NDIA ANSI 748 – A Standard for Earned Value Management Systems – Intent Guide (Jan 2005)