Daniel M - Christian Brothers University



Implementing Earned Value Easily and Effectively

Published in Project Management Journal, June 1998

Daniel M. Brandon, Jr., Ph.D.

Christian Brothers University

School of Business

650 East Parkway South

Memphis, TN 38104

Phone: (901) 321-3615

Fax: (901) 321-3566

E-Mail: dbrandon@odin.cbu.edu

Implementing Earned Value Easily and Effectively

Abstract

“Earned Value” is a very powerful approach for the evaluation of true project performance. It also provides a quantitative basis for estimating actual completion time and actual cost at completion. However the effective use of this important technique is rare outside of the US Government and its contractors. There are several reasons for this general lack of use, and the associated implementation problems are discussed herein. This article also presents some methodology and specific techniques to overcome each of these problems, thus providing an effective and relatively easy implementation of earned value.

Implementing Earned Value Easily and Effectively

“Earned Value” is a quantitative approach to evaluate true performance of a project both in terms of cost deviation and schedule deviation. It also provides a quantitative basis for estimating actual completion time and actual cost at completion. However the effective use of this important technique is relatively rare outside of the US Government and its contractors [4]. It is one of the most underused cost management tools available to project managers [3]. There are several reasons for this lack of use, and these reasons involve the over complication of the surrounding methodology and procedures, and also the effort and human factors involved in gathering the necessary input data, reporting same, and integrating results with other management information systems. This article will present some methodologies which when integrated into the basic earned value approach will yield a simple and yet very effective quantitative project management tool.

Brief Earned Value History

The Earned Value concept has been around in several forms for many years dating back to types of cost variances defined in the 1950’s. In the early 1960’s PERT (Program Evaluation Review Technique) was extended to include cost variances and the basic concept of earned value was adopted therein. PERT did not survive, but the basic earned value concept did. That concept was a key element in the 1967 DoD (Department of Defense) policy, to which contractors had to comply (for contracts where the government had some or all of the risk for cost overruns), called Cost/Schedule Control Systems Criteria (C/SCSC). These criteria were compiled by the Air Force in the early 1960’s, and were 35 statements defining minimum requirements of an acceptable project management system. Despite these mandates, the C/SCSC criteria were typically implemented by companies in word only and not in spirit. The methodology was viewed as excessive “beancounting” rather than a true management tool; this in part due to excessive checklists and other paperwork, specialist acronyms, and overly complicated methods and tools. Horror stories of excessive administrative cost due to “over implementation” of C/SCSC were common. However, C/SCSC has been very effective overall and the government has accumulated years of statistical evidence supporting it. Also in the last several years initiatives within DoD have been started to remove excessive and ineffective components of the C/SCSC [1], and earned value is being used for in-house government projects [5] and some commercial systems [6].

Earned Value Definition

“Earned Value” is basically the value (usually expressed in dollars) of the work accomplished up to a point in time based upon the planned (or budgeted) value for that work. The government’s term for earned value is “Budgeted Cost of Work Performed” (BCWP).

Typically when a schedule is being formulated, the work to be done is broken down into tasks or “work packets” which are organized into a logical pattern usually called a “Work Breakdown Structure” (WBS). The WBS is usually formulated in a hiearchial manner as shown for our example project in Figure 1, which has two levels.

| |Level One | |Level Two | |

| | | | | | |

| | | | | | |

| | | | | | |

| |Planning & Staffing | | | |

| | | | |Project Plan | |

| | | | |Resource Commitments | |

| |Prototype Design | | | |

| | | | |Requirements | |

| | | | |Design | |

| |Construct Prototype | | | |

| | | | |Detail Design | |

| | | | |Construction | |

| |Test/Evaluate Prototype | | |

| | | | |Test Plan Development | |

| | | | |Component Testing | |

| | | | |Full Testing | |

| | | | |Destructive Testing | |

| | | | |Test Documentation | |

| |Full Design Specs | | | |

| | | | |External Specifications | |

| | | | |Internal Specifications | |

| |Documentation | | | |

| | | | |Internal Specifications | |

| | | | |Required Documents | |

| |Site Preparation | | | |

| | | | |Site Design | |

| | | | |Site Construction | |

| |Construction | | | |

| | | | |Component Construction | |

| | | | |Component Assembly | |

| |Test/Certification | | | |

| | | | |Test Plan Development | |

| | | | |Component Testing | |

| | | | |Full Testing | |

| | | | |Destructive Testing | |

| | | | |Test Documentation | |

| |Finishing | | | | |

| | | | |Component Finishing | |

| | | | |Assembly Finishing | |

| |Maintenance Training | | | |

| | | | |Maintenance Personnel | |

| | | | |Supervisory Personnel | |

Figure 1

Each work packet (there are 28 of them here) is assigned to an organization for work management/responsibility. The organizational structure may also be represented in a hiearchial manner typically called an “Organizational Breakdown Structure” (OBS). The amount and type of cost to complete each work packet is then estimated. Resources to perform the work are identified for each packet and may be coded by using a “Resource Breakdown Structure” (RBS). Each packet typically has one type of cost (labor, travel, materials, etc.), coded by an “Element of Cost Breakdown” (EOC) or simple general ledger account number. Thus each work packet is the intersection of these coding dimensions, and it has a detailed description plus definition of:

WBS Identification

OBS Identification

Resource(s) (RBS)

Element of Cost

Estimated Cost

Dependent Tasks

The estimated cost may be a function of the resources, and the dependent tasks is a list of tasks which must be completed before starting this task. These tasks are then typically input to a scheduling program which produces a time phasing of task start and end dates based upon: project start date, task resource needs, resource availability’s, and task interdependencies. When these tasks are “rolled-up” the WBS hiearchy, the total cost plan is derived as shown in Figure 2 in spreadsheet form (for our example project) or as Figure 3 in graphical form. The government’s term for this planned cost curve is “Budgeted Cost of Work Scheduled” (BCWS). With a full spreadsheet model, there would be a subsidiary spreadsheet for each level 1 task also (similar to Figure 5); or for our example here a workbook (file) of 12 spreadsheets (worksheets).

|Project Cost Plan |

| |

| |

| | | | | | | | | | |

| | | |Budgeted Cost of Work Performed (BCWP) | |73 | | | | |

| | | | | | | | | | | |

| | | | | | | | | | | |

| | | |Budgeted Cost of Work Performed (BCWP) | |73 | | | | |

| |

| | | | | | | | | | |

| | | | |Budgeted Cost of Work Performed | |12 | | |

| | | | | | | | | | | |

Figure 9 - Earned Value “Drill Down”

Overcoming the Employee/Contractor Resistance Problems

To be fully successful any project management performance measurement system must be accepted by project team members and project managers. Thus it is important that such performance systems be “non-intrusive” and directed primarily towards measuring projects not individuals.

Since earned value analysis provides a level of insight deep into the project workings, it is likely to be viewed by some as a means of “employee (and/or contractor) evaluation” instead of project performance evaluation. The best way to address this issue is to adopt earned value methodology along with some form of TQM (Total Quality Management); or if TQM (or a similar effort) is already in place, seal earned value within that other envelop. Management must focus on the use of earned value for:

Extrapolation of project cost to complete

Estimation of actual completion date

Knowledge of project trouble areas (so resources/plans can be adjusted)

Refinement of work packet estimation methods

and not the use of earned value for individual evaluations.

Integration with Executive Information Systems

Earned value methods have another advantage over current reporting techniques (Gantt Charts and Cost Versus Budget). Since earned values are quantitative numbers expressed in dollars (for both cost and schedule deviations), these numbers can be rolled up, along an OBS for example, to give a picture of how all projects are performing in an organization. Since under spent projects do not necessarily help over spent projects (in either time or dollars), often the negative variations are set to zero and estimate at completion (EAC) is unchanged. This is illustrated in Figure 10. If spreadsheet models are used for earned value, such as the example herein, then these are easily interfaced with most Executive Information Systems.

|PROJECT |BCWS |BCWP |TIME VAR ($) |VAR + | |ACWP |COST VAR ($) |VAR + |PLAN |EAC |

| | | | | | | | | | | |

|Project 1 |91 |73 |18 |18 | |83 |10 |10 |254 |289 |

|Project 2 |130 |135 |-5 |0 | |125 |-10 |0 |302 |302 |

|Project 3 |65 |60 |5 |5 | |75 |15 |15 |127 |159 |

|Project 4 |25 |23 |2 |2 | |27 |4 |4 |48 |56 |

|Project 5 |84 |82 |2 |2 | |81 |-1 |0 |180 |180 |

|Project 6 |53 |47 |6 |6 | |48 |1 |1 |110 |112 |

|Project 7 |102 |103 |-1 |0 | |110 |7 |7 |190 |203 |

|Project 8 |35 |37 |-2 |0 | |40 |3 |3 |78 |84 |

| |585 |560 | | | |589 | | | |1385 |

| | | | | | | | | | | |

| |Total Schedule Variance |33 | |Total Cost Variance |40 | | |

| | | | | | | | | | | |

| |Relative Schedule Variance |5.64% | |Relative Cost Variance |6.84% | | |

| | | | | | | | | | | |

| |Schedule Variance (Months) |0.68 | |Cost at Completions |1385 | | |

Figure 10 - Reporting Multiple Projects

Summary

Earned value analysis is a very powerful project management tool. If an organization can effectively integrate this tool into their procurement, timekeeping, and executive information systems, then it is probably the best single method for measuring and reporting true project performance and estimating time and cost to complete. This article has presented some methodology which can yield an effective and relatively easy integration of these systems including: appropriate work packet sizing, simple yet accurate estimation of work packet percent complete, feed forward actual cost acquisition, simple spreadsheet (or database) reporting methods, and use of a quality management envelop.

Works Cited

1. Abba, Wayne. “Earned Value Management Rediscovered”,

2. Christensen, David S., et al., "A Review of Estimate at Completion Research", Journal of Cost Analysis, Spring 1995

3. Fleming, Quentin and Joel Koppelman. “The Essence of Evolution of Earned Value”, Cost Engineering, Vol. 36/No. 11 Nov 1994: 21 - 27

4. Fleming, Quentin and Joel Koppelman. "Earned Value Project Management", Project Management Institute, 1996

5. Hewitt, Leland and Michael O’Connor. “Applying Earned Value to Government In-House Activities”, Army Research, Development & Acquisition Bulletin, Jan-Feb 1993: 8 -10

6. Horan, Ron and Don McNichols, "Project Management for Large Systems", Business Communications Review, v.20 September 1990, 15 - 24

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