Earned Value Management

A Google search for “Earned Value Management” produced over 250,000 hits. For sure not all were examined. Two stood out: The first from the Wikipedia, and the second from a consulting firm that had a very simple tutorial.

Wikipedia… “Earned Value Management”According to Wikipedia, earned value management is a technique to measure project progress in an objective manner. Earned value combines measurement of scope, schedule, and accomplishment. The key components that must exist are:

• Project plans identify the work to be accomplished.
• Valuation or budgeted costs of the planned and scheduled work.
• Earning rules that quantify the earned value of accomplishment.
• Comparisons of planned work and its planned costs to actual work accomplishment and costs.
• Cost-based allocations of the overall project budget to individual “deliverable units” of a project plan.

Three key steps for simple or small projects are:

• Define the work….(WBS), that is, tasks and deliverables.
• Assign a planned value to each step.
• Define rules that determine when the step is completed, or partially complete.
• Perform the project.
• Accumulate the earned value as the project progresses.
• Accumulate the costs as the project progresses.
• Compute the earned value vs. actual costs vs. budgeted costs “curves.”

The Wikipedia article then states that for large and complex projects, you need to add: Pert, Gantt, and Critical Paths networks to then assess schedule and time.

Oak Associates, An Earned Value Tutorial (Mark Durrenberger, PMP)According to “An Earned Value Tutorial” from Oak Associates, earned value is a method for managing projects based on the regular comparison of actual project costs to planned costs and to completed work. The phrase, earned value, comes from the concept that when a deliverable is completed, its value has been earned.

Steps:

• Identify each project deliverable.
• Develop a schedule for the completion of each deliverable.
• Assign a value to each deliverable.

The example in the Oak Associates tutorial deals with building an outside deck. It addresses the basic issues of computing the key metrics, setting out a schedule via Microsoft Project, and setting a baseline that is then used to measure progress against. On point in the Oak example is that they run into an unexpected problem that throws off their estimate and schedule. In general, the project is on schedule until they try to dig their last four-foot footing hole. They ran into a boulder. Whoops. So much for the schedule, the baseline and the estimate.

From an earned value point of view, the project expended 36 staff hours but can only take credit for 26. They’re 34% behind. The tutorial then goes into all the different possibilities for corrective action which are really only three: maintaining the project schedule, maintain product features and performance, or maintaining project cost. For each of these a general approach must the chosen. These too are only three: sacrificing the quality of the deck, sacrificing the schedule, or by sacrificing cost. Once decisions are made and the client agrees to the remedy, a new baseline is created and the work restarted.

The tutorial represents the real world in that almost always something goes wrong. In this case, it was not the work plan, the costs, or the schedule. It was the completely unexpected “boulder.” Overall the tutorial is quite good and addresses the key issues of dealing with projects that get into trouble.

Readers are encouraged to access the entire Oak Associates paper. It has the example detailed including greater explanation of how to deal with unexpected situations.

Dennis J. Frailey, Tutorial on Earned Value Management SystemsThis next example from Dennis Frailey is more focused on the computations of the key measures and then the derived measures. It too includes an example that enables a greater focus on the mechanics of computing key earned value “numbers” and addressing earned value management issues once the “numbers” are known. The example provides a classic scenario of how earned value is computed. With Frailey’s permission, the entire example is provided here. First, here is a link to his excellent article: http://www.dfw-asee.org/archive/Earned_Value.doc

Frailey states that you compute the following at the end of each earned value assessment scheduled time period:

• Budgeted cost of work performed (BCWP).
• Budgeted cost of work scheduled (BCWS).
• Actual cost of work performed (ACWP).

Once these are computed, Frailey provides simple derived metrics that employ these computations to know if your project with respect to time and budget is on-time, ahead, or behind:

1. Schedule Variance (SV) = Budgeted Cost of Work Performed (BCWP) – Budgeted cost of Work Scheduled (BCWS). If 0, perfect. If > 0, you’re ahead. If < 0, you’re behind.
2. Schedule Performance Index (SPI) = Budgeted Cost of Work Performed / Budgeted Cost of Work Scheduled. If 0, OK. If > 0, ahead. If < 0, behind.
3. Cost Variance (CV) = Budgeted Cost of Work Performed – Budgeted cost of Work Scheduled. If 0, OK. If > 0, you’re under budget. If < 0, you’re over budget.
4. Cost Performance Index (CPI) = Budgeted Cost of Work Performed / Budgeted cost of Work Scheduled. If 0, OK. If > 0, under budget. If < 0, over budget.

Frailey’s article provided a very simple example that illustrates how earned value management is employed: Baking Cookies. This example employs copyrighted material from Dennis J. Frailey (Copyright ©2000, Dennis J. Frailey, All Rights Reserved). We are grateful for his permission to use the material.

Project: Suppose you are making cookies for a large party to be held tomorrow. Suppose the following are your plans:

Plans:

• 40 cookies per batch
• 5 batches per hour (200 cookies)
• Schedule: 5 hours to make a total of 1,000 cookies
• Budgeted cost per cookie is $0.05
• Total budget is $50.00 for baked cookies, or $10 per hour

Progress Report at End of Hour 1:

• 150 edible cookies have been made (some were burnt and had to be thrown away)
• Total actual cost of worked performed is $9.00 (ACWP)

Analysis:

• BCWS (Budgeted Cost of Work Scheduled) = $10.00
• BCWP (Budgeted Cost of Work Performed ) = $7.50 (Earned Value) [150 cookies x .05 per cookie]
• ACWP (Actual Cost of Work Performed) = $9.00 [from above]

Therefore:

• SV (Schedule Variance ) = BCWP – BCWS = -$2.50 (you are behind schedule)
• SPI (Schedule Performance Index ) = BCWP / BCWS = 0.75 (you are running at 75% of the planned schedule)
• CV (Cost Variance ) = BCWP – ACWP = $7.50 – $9.00 = -$1.50 (you are $1.50 over budget)
• CPI (Cost Performance Index ) = BCWP / ACWP = 0.833 (you are running over budget by about 17%)

Readers are encouraged to access the entire Frailey paper. It includes definitions, formulas, another example, and a quiz.

Requirements for Earned Value ManagementFrom the literature search, the following are essential for both successful project management, and for earned value assessment. If these are absent, project success is accidental.

• A clear set of well defined, accomplishable, and measurable deliverables.
• A clear set of standards to judge whether a deliverable has been accomplished.
• An ability to know when and how work can be divided among multiple persons.
• A method of determining parallel and serial deliverable accomplishment efforts.
• An ability to know all the different staff and skills necessary for deliverable accomplishment.
• A clear set of well defined, accomplishable, and measurable tasks that result in accomplished deliverables.
• A clear set of staff hour, unit-effort-based, allocations to accomplish deliverables via tasks.
• A strategy to assess staff and quantify the velocity at which they work, in order to accomplish deliverables.
• An enumeration of work environment factors that affect the rate of deliverable accomplishment.
• A strategy to quantify and assign work environment factors to individual deliverable accomplishments.

Project Management Support for Earned Value ManagementThe support for earned value management centers on its project management database. Every calculated statistic needs to be found in the database along with all the supporting project management data that is collected on a regular basis during a project’s execution. After a brief review of the key entity-clusters, each is described in greater detail.

Earned Value Management Database OverviewThe Whitemarsh project management database’s design, depicted in Figure 1, consists of a number of entities. All these entities are traditional and are interconnected through one-to-many relationships except for those entities that show a one-to-many relationship from an entity to itself. Organization (upper right) contains such a relationship. This relationship means that the entity contains subordinate organizations. For example, an Information Technology organization contains the Information Resource Management organization, which in turn may contain the Data Administration organization, and Database Administration organization.

The eight recursive entities are:

• Contract
• Deliverable
• Deliverable Template
• Organization
• Project Template Type
• Resource
• Task
• Task Template

The entities from Figure 1 are also divided into six distinct clusters, which are:

• Contracts, organizations and contract [staff] resources
• Resource and Resource Life Cycle Node
• Project, Deliverable, and Task Templates
• Project Staff
• Project Building and Estimation
• Project Work

In general, the Contracts, Organizations, and Contract [staff] Resource cluster of entities represent the environment within which projects take place.

The Resource and Resource Life Cycle Node1 entity represents the target of the project, that is, the area of the business benefitted by the project. For example, for manufacturing, finance, human resources, or land use planning.

The Projects, Deliverable, and Task Templates entity cluster enables the definition of the templates employed in the actual building of projects. Defined across the enterprise, these templates enable standard project execution and accomplishment measurement.

The Project Staff entity cluster enables the inclusion of the staff as resources for a contract, and also permit the specification of the specific types and performance ratings of skills that a person may bring to a specific project.

The Project Building and Estimation entity cluster represents the entities that support building projects. Projects and associated tasks are initially created through the use of the Project Deliverables, and Tasks Templates. Once projects and associated tasks are created, they are modified by attaching work environment factors and specific skill-level based staff assignments. Only then can task and project resources be computed.

Finally, as task work is accomplished, the Project Work entity is valued. As actual work is accomplished, it can be reported through any of its related entities.

Database Support for Earned Value ManagementThe meta entity clusters necessary for earned value management are:

• Contracts, Organizations, and Contract [staff] Resource
• Projects, Deliverable, and Task Templates entity
• Project Staff entity
• Project Building and Estimation
• Project Work

The sections that follow show how the data for these meta entities are necessary for earned value computation and management.

Contracts, Organizations, and Contract [staff] ResourceWhile doing earned value management for a given project is important, the real earned value management contribution is from its applicability across functions and/or entire organizations. A clear requirement of being an advanced CMMI level is earned value management. That’s because with earned value management, results are reliable, repeatable and the recycling of the lessons leaned is critical to CMMI level 5. These meta entities enable projects to be set within context of an overall enterprise.

With these entities, project earned value analyses can be conducted across individual staff members, organizations, and contracts.

Projects, Deliverable, and Task Templates The most critical earned value management meta-entities are project, deliverable, and task templates. While every project is different in terms of the quantity and possibly sequence of what is built, virtually all projects end up designing, building, testing, and maintaining objects within discrete, well-engineered object classes. That is, requirement specifications, database designs, data update processes, reports, analyses, testing plans, and the like. The Whitemarsh short papers, Manufacturing Project Plans, and Function Points, and Project Metrics that can be downloaded from the Whitemarsh website’s Short Papers section contribute to a comprehensive understanding of how to develop reliable and repeatable project plans that consist of highly engineered, standardized building blocks.

Each deliverable template consists of well defined components that are highly engineered, are created through a detailed set of steps, are stored in a metadata management system, and are integrated with all other deliverables of the same class in an integrated and non-redundant fashion. Included with every deliverable are unit-effort staff-hour metrics. These staff hour metrics result in project estimates after staff are allocated, and after a project is set within specific work environments.

Because of these characteristics, every deliverable is able to be compared to every other deliverable of the same class with respect to the time required for development, the staff employed in the effort, the organizations required for the construction, and the like. Because of this, projects with earned value management computations that are to far away from the mean can be quickly identified and examined to understand the deviations.

Task templates provide a standardized set of process steps through which deliverables are constructed. A key value from these process steps ensures that no critical element is missed or not done in an appropriate manner. For example, a critical missing element might be that database designs are created without the benefit of a business information system generator to proves the adequacy of the database’s design. Essentially, these process steps act as a comprehensive set of construction checklists along with suggestive processes.

In a way similar to deliverable templates, task templates enable cross functional and inter-organizational comparisons in terms of time and staff.

The key benefits from basing earned value management on deliverable and task templates is that these templates act as objective mechanisms that permit productivity determination across functions, organizations and staff. When this is done, the differences in actual costs from planned or scheduled costs become readily apparent. Additionally, there can be the feedback of lessons learned across a larger collection of similar deliverables and tasks. When this is done, the following can easily be determined with greater confidence because the results are comparable across projects, deliverables, tasks, staff, and organizations:

• Budgeted cost of work actually performed (BCWP),
• Budgeted cost of work that was scheduled to be performed (BCWS), and
• The cost of work actually accomplished (ACWP)

Project StaffOne of the great imponderables of any project is assignable staff. No two are alike. How are their differences incorporated within the allocation of staff hours to a task? The key to the determination is the creation of skill level multipliers. Every person has a job description that includes tasks that can be performed within specific task types. If a staff member is among the “eagles” the multiplier is less than zero. Normal is 1.0, and “turkeys” are greater than 1.0.

As staff are assigned to tasks, their skill level multipliers are used to adjust that unit-effort staff-hour metrics included with every deliverable. The resulting staff hour estimate is thereafter affected, one more time, by the Task and Work Environment Factors.

The benefit from the allocation of staff in this way is that the estimates are able to be normalized to account for the individual performance levels of individual staff members. Differences in BCWP and BCWS can be explained because the likely differences will be the allocated staff. As work is done accomplished, the ACWP is likely to be closer to the budgeted BCWP and BCWS that were created at the start of the project. The final benefits from this staff assignment approach is that the affect of a given staff member across multiple efforts can be compared. So to can the presumed benefit from assigning staff with certain skills and skill levels.

Project Building and EstimationAt the start of the process of actual project plan building and estimating, the deliverables and tasks are known, the staff and staff skill levels are known. Remaining to be determined are the work environment factors within which projects “live,” and the allocation of these work environment factors to staffed tasks.

The work environment tasks relate to the tools employed, the available of client subject matter experts, development tool sets and the like. Once these are allocated to staffed-tasks, a final project estimate can be created. These created estimates become the BCWP and BCWS parts of earned value management.

Project WorkAs projects are performed, costs in terms of staff expenditures, equipment, travel, and other project related costs are accumulated. At the end of an effort or period of time, the accumulated costs represent the ACWP (Actual Costs of Work Performed). It is likely that the ACWP will be very close to the BCWS and BCWP because of all the work expended to develop the deliverable and task templates, the work unit effort estimates, the skill levels associated with the assigned staff, and the task and work environment factors.

ConclusionsThe estimate is the most critical element in earned value management. When the estimate is very accurate, there is a high probability that the performed work will closely match the planned and scheduled budgets. When this happens, the various ratios are close to 1.0 . That is:

• Schedule Variance (SV) = Budgeted Cost of Work Performed (BCWP) – Budgeted cost of Work Scheduled (BCWS). If 0, perfect. If > 0, you’re ahead. If < 0, you’re behind.
• Schedule Performance Index (SPI) = Budgeted Cost of Work Performed / Budgeted Cost of Work Scheduled. If 0, OK. If %gt; 0, ahead. If < 0, behind.
• Cost Variance = Budgeted Cost of Work Performed – Budgeted cost of Work Scheduled. If 0, OK. If > 0, you’re under budget. If < 0, you’re over budget.
• Cost Performance Index = Budgeted Cost of Work Performed / Budgeted cost of Work Scheduled. If 0, OK. If > 0, under budget. If < 0, over budget.

However, if the estimating infrastructure is not present, that is, if there are no reliable and repeatable deliverable and task templates, no carefully calibrated skill levels, and no task and work environment factors with which to determine an accurate estimate, the likelihood that an estimate will match the costs incurred during work accomplishment is very low.

Organizations faced with severely mismatched estimates and actual costs that are, notwithstanding, required to accomplish the work according to the original estimates can react in only one of the following ways:

• Take a loss on the effort because it is accomplished through the expenditure of additional paid-staff effort.
• Convince that client that the bad estimates are due to reasons beyond the control of the developer.
• Convince the developing staff to expend significant quantities uncompensated staff hours to complete the work.
• Reduce or eliminate planned project tasks and deliverables that address, for example, review, testing, documentation, and quality control.

End Note:

1. Resource and resource life cycle node has the exact same definition as it does within the Whitemarsh metabase and also the process of Resource Life Cycle Analysis of Ron Ross.