Leveraging Earned Value Management Concepts

Earned Value Management (EVM) (otherwise known as variance analysis) is the best project control technique for early detection of performance variances. The technique was developed nearly 40 years ago for the United States government to better manage contract payments to vendors. Ever since, EVM has grown in popularity and acceptance across many industries and now is regarded as the preferred project control technique by PMI. However, it has not been accepted as standard practice in all industries, and it is usually a technique found in organizations or industries that are relatively mature in their management processes. In addition, if you work in one of these process-mature environments, you will likely have many additional resources to address the details of earned value.

Still, there is tremendous value in a quick review of EVM. An awareness of the fundamental concepts will help you in your project controlling and performance reporting endeavors.

• Assess cost performance and schedule performance together—The main value of EVM is that it enables you to measure and track both schedule and cost performance. Evaluating project performance on just one of these indicators does not always give you the true picture and does not allow you to detect variances as early.
• Each work package has a planned value—The planned value of any work package is the budgeted cost of the work scheduled to complete the work package. The important point here: Estimate the cost of each work package in your schedule. Also, this means that the project as a whole has a baseline schedule and budget.
• At any point, the project has an “earned” value—The earned value of a project is the budgeted cost of the work actually completed. In other words, how many work packages (or partial work packages) have been completed at this time? The value is expressed in budgeted cost terms, not actual costs. This enables you to perform cost analysis by comparing budgeted versus actual costs for the work completed. The important point to consider: Be aware of the costs you expected to incur for the work that has been completed.

Before we introduce an example EVM graph, let’s review the other key terms and concepts that comprise EVM. Table 10.1 summarizes these key elements.

 Caution

A negative performance index value is not favorable. It means that you’re behind schedule or over budget.

TABLE 10.1 Earned Value Management Elements

Element	Definition	Notes
Planned Value (PV)	Budgeted cost of work scheduled.	Performance baseline.
Earned Value (EV)	Budgeted cost of work performed.	For the work performed, what was the budgeted cost?
Actual Costs (AC)	Actual costs of work performed.	For the work performed, what were the actual costs?
Cost Variance (CV)	Earned Value – Actual CostsCV = EV – AC	A negative number means you are over budget.
Schedule Variance (SV)	Earned Value – Planned ValueSV = EV – PV	A negative number means you are behind schedule.
Cost Performance Index (CPI)	Earned Value / Actual CostsCPI = EV / ACNumerical representation of project cost performance.	CPI < 1 means your project is costing you more than you planned. CPI > 1 means you are taking less money to do the project.
Schedule Performance Index (SPI)	Earned Value / Planned ValueSPI = EV / PVNumerical representation of project schedule performance.	SPI < 1 means your project is behind schedule. SPI > 1 means you are ahead of schedule.
Budget at Completion (BAC)	Total baseline project.	The original project budget.
Estimate at Completion (EAC)	Budget at Completion / Cost Performance IndexEAC = BAC / CPI	Based on current cost performance, what will be your total cost?
Estimate to Complete (ETC)	Estimate at Completion – Actual CostsETC = EAC – AC	Subtract AC from EAC to get estimated remaining costs.

EVM takes the planned value (PV), or what you planned to do at an estimated cost, and compares it against the estimated cost of the work performed (EV) and against the actual cost of work performed (AC), or what actually got done. These metrics provide a wealth of information about whether the project tasks are taking longer than they should (schedule variance, or SV), or whether they are actually requiring more work effort to complete (cost variance, or CV). In addition, the estimate-at-completion metric (EAC) helps you forecast final project performance and determine whether any corrective action needs to take place.

To illustrate how EVM could be used for performance reporting, see Figure 10.3.

In this example, the report provides EVM data for the fourth reporting period. At this time, the Planned Value = $75K, the Actual Costs = $100K, and the Earned Value = $60K. On this project, we can tell the following by analyzing this report:

• There has been a cost variance from the start. It could be the actual resource costs have been higher.
• Also, for the first three weeks, the project was ahead of schedule. More work was completed than planned. This was a likely factor for the actual costs being higher too.
• During the past reporting period, something has occurred that delayed progress. The project is now behind schedule (and the cost variance has increased significantly).

Many of the project management software tools, such as Microsoft Project, include these EVM calculations. To be useful, the schedule must include all assigned resources, individual resource costs, and current progress measurements.

Common Project Control Challenges

Although we’ve touched on several challenges facing project managers when attempting to control their projects, let’s run down the top reasons for difficulty in the project control arena:

• Time and cost accounting logistics—The logistical and organizational culture issues relating to time reporting and project costs tracking can prove detrimental to timely and accurate performance reporting. During planning, you want to understand and clarify how project time and cost information is reported and how quickly you can get this data. You might need to establish project-specific time reporting or approval procedures to ensure the integrity of your control system.
• Project manager reluctance, multitasked—The project manager might be reluctant to request WBS-level time reporting by project team members, especially if this is not part of the organizational culture. In addition, the project manager might be overallocated and might not be able to invest enough time to performing the project controlling duties. This is most common when the project manager has assigned other project roles to themself or when the project manager is assigned to multiple projects.
• No change control—The most common reason for project control difficulty is the lack of change control procedures. This is most problematic when the project scope has increased without the proper reconciliation with the project schedule and budget.
• No completion criteria—When clear completion criteria for work assignments are not established, you are more likely to have rework cycles, more difficulty in accurately reporting progress or status, and more likely to experience the 90% done phenomenon.
• No baselines—This should be obvious by now, but if a schedule and budget baseline are not established and controlled, then you will not be able to accurately measure for performance variances. Without this ability, you are less likely to detect problems early—when they are small and more manageable.
• No requirements traceability—This is definitely an issue for controlling scope and stakeholder expectations. The lack of a formal tracking procedure between original requirements and final products increases the odds of missed work and scope creep.
• Not consistent—When control procedures are not consistently implemented, it is difficult to detect performance variances early, and it is more difficult to get project team members to follow the defined control procedures.
• Measuring progress accurately—Accurately measuring progress is a natural challenge on work assignments with intangible final products, especially on any project where status is estimated. However, this challenge is further complicated when work definition is vague, completion criteria are not established, or work efforts are not reported on a daily basis.
• Impact of hidden work—This hits at the heart of work definition and change control. Any effort spent on unidentified work, unplanned rework cycles, or out-of-scope work adversely affects the accuracy and effectiveness of project control procedures.
• Virtual/distributed teams—When project team members are not physically located together, it can be more difficult to get information, detect potential issues, measure work progress, and ensure understanding of work expectations. We talk more about this in “Managing Differences.”

Lessons from Project Recoveries

To really understand what is important for controlling a project, let’s review what occurs during a typical project recovery. For clarification, a project recovery is an attempt to turn around a troubled project. If there is ever a case where project control is absolutely critical, it is when you are trying to heal a sick project.

The first thing that senior management will do to recover a project is to make sure there is an effective project manager in charge. This might mean anything from validating the current project manager, bringing in someone new, pulling someone up from the project team, or providing a mentor to the current project leadership. After the project leadership is solidified, most recovery missions involve the following activities:

• Review planning principles—The planning principles are revisited. A focus is placed on establishing priorities and objectives, clarifying acceptance criteria, gaining consensus, and reviewing roles and responsibilities.
• Reset baseline—As a final step in the replanning step, key milestones are set and new baselines are set for cost and schedule performance.
• Frequent status checks—To facilitate better communications, prevent additional obstacles, reinforce the visibility of the recovery mission, and emphasize individual accountability, team status meetings are conducted daily. In some situations, these checkpoints are even more frequent. It depends on the nature of the project.
• Aggressive issue resolution—One purpose of the frequent status checks is to gain visibility of any new or potential issue. The resolution of any new issue is aggressively pursued. These become top priorities for project leadership.
• Ensure clarity—Another technique normally employed in successful project recoveries is an extra effort to ensure clear understanding of all communications, expectations, and work assignments. When focus and efficiency are of paramount importance, the criticality of clear communications and mutual understanding is obvious.
• Increase visibility and accountability—This has been referenced indirectly already, but it is worth emphasizing again. A major reason that project recoveries often work is because people know they are more accountable for their efforts due to the increased visibility with senior management. For both the individual and the organization, the recovery mission helps to prioritize efforts and align resource allocations.

The Absolute Minimum

At this point, you should have a solid understanding of the following:

• The principles of project control are prevention, detection, and action.
• Project control consists of the information systems and the management procedures that enable us to answer the key questions regarding project performance.
• Key components of project control include performance reporting, change control management, configuration management, issue management, risk management, quality management, procurement management, and requirements management.
• The key management fundamentals of project control include focus on priorities, scale to project needs and organizational culture, set up natural control processes, expect project changes, be consistent, and pay particular attention to early project performance.
• Powerful project control techniques include using small work packages, managing to project baselines, conducting regular and effective status meetings, establishing clear completion criteria for each deliverable (and the project), conducting proper reviews, tracking requirements, and getting formal sign-offs.
• Performance reporting should communicate status with regard to critical success factors, any variances, and any changes to the performance forecast.
• The possible responses to an identified variance include taking corrective action, accepting it, resetting the performance baselines, and canceling the project.
• EVM is the best project control technique for early detection of project performance variances.

The map in Figure 10.4