Abstract
Earned Value Project Management (EVPM) can be used very effectively in a typical software development project. This paper, by examining the process briefly step-by-step, will show how easy and effective the earned value process can be to a project. I am currently applying EVPM to my projects at work so I will be including real-life examples to show how effective EVPM is at managing progress in a project and showing its true status at any given time in the project.
Introduction
Earned Value Project Management (EVPM) has been bemoaned as being too much work with limited value. I get many resources that push back at me saying that there is too much documentation for little return. They have trouble seeing the value that EVPM brings to a project. Earned Value Project Management (EVPM) is a project management technique for measuring project performance and progress in an objective manner. It is a disciplined approach to ensuring that the project stays on course, on time, within scope and that it actually is getting its dollars’ worth. EVPM is a systematic process that uses earned value as the primary tool for integrating cost, schedule, technical performance management, and risk management (Kerzner, 2009). EVPM can determine the true status of a project at any given point in the project, but only if the rules for organizing the project are followed. This requires a disciplined approach.
What I will show in this discussion is how effectively EVPM can be on any size project, from $50,000.00 and up and how I have used EVPM on projects with resources both on-shore and off-shore. I will show you step-by-step from the initiation to the closing phase how effectively EVPM can help a Project Manager keep their project on track.
A Brief Look Back
EVPM got its start back in the late 1800’s when industrial engineers on the factory floors in the U.S. wanted to measure their production performance. These engineers created a three dimensional way to measure the performance of work done on the factory floor. They created a baseline called planned standards, and then they measured earned standards at a given point against the actual expenses to measure the performance of the factory. Today, their formula is the most basic form of earned value management today (Fleming & Koppelman, 2010).
Approximately forty years later the U.S. Navy introduced PERT (Program Evaluation Review Technique) to industry as a scheduling and risk management tool. The idea was to promote the use of logic flow diagrams in project planning and to measure the statistical success of using these flow diagrams. It didn’t last very long because it was cumbersome to apply.
Critical Path Method (CPM) was created by DuPont engineer Morgan R. Walker when he looked into developing a method that would improve the scheduling, rescheduling and progress reporting of the companies engineering programs. In 1957 Walker, with Remington computer expert James E. Kelley, Jr., developed a system using an arrow-diagram or network method which came to be known as the Critical Path Method (Archibald & Villoria, 1966). Pert/Cost would be introduced as a means in which to add into the network and manage both time and costs. Problem at the time was that computers had not become sophisticated enough to be able to support the concept.
But out of the Pert/Cost concept came the idea that you could measure earned value. The implementation of Pert/Cost in industry required eleven reporting formats, one of which was “Cost of Work Report” and within it there was a format called “value of work performed”. Pert/Cost standard lasted about three years, mostly due to its cumbersome use and industry not particularly liking being told what to do.
In 1965 the U.S. Air Force created a set of standards allowing it to oversee industry performance without it really telling industry what to do. What the Air Force did was to develop a series of broad base criteria and asked that industry satisfy these broad based criteria using their existing management systems. This developed into the C/SCSC (Cost/Schedule Control Systems Criteria) that every company wishing to do business with the government was required to meet.
And the results of these new criteria were impressive. But problems also arose. The original 35 criteria grew, at one point reaching 174, some being very rigid and dogmatic, mostly inflexible taking away from the original intent of being unobtrusive. In 1995 the National Defense Industrial Association rewrote the Department of Defense (DoD) formal earned value criteria and called the new list of 32 criteria the “Earned Value Management System” (EVMS) (Fleming & Koppelman, 2010). Eventually these new criteria would become part of the American National Standard Institute/Electronic Industries Alliance guidelines, what we normally call ANSI guidelines. And from this came a broad acceptance of the new criteria by industry.
Why Earned Value Project Management (EVPM)?
There are many reasons why EVPM should be used in every project. One reason is that EVPM provides a single management system that all projects should employ. The relationship of the work scheduled to the work completed provides a true gauge of whether one is meeting the goals of the project. The most critical association of what work was completed to how much money was spent to accomplish the work provides an accurate picture of the true performance cost.
EVPM requires the integration of the triple constraint: Scope, Cost, Time, allowing for the accurate measurement of integrated performance throughout the life of the project. Integration is a big issue in managing a project. Many times the project management team defines the project one way, the development teams another way, and further still QA will look at another way. Everyone is reading the same sheet of music, but they’re singing a different song. The requirement of the Work Breakdown Structure (WBS) has helped to bring alignment among the various teams impacted by the project. Its hierarchical structure helps to define the scope of the project in easily understood terminology to both the project team and the business sponsors.
Study after study conducted by the Department of Defense (DoD) shows that those projects using EVPM have demonstrated a pattern of consistent and predictable performance history (Fleming & Koppelman, 2010). The studies have shown that end results of projects using EVPM can be predicted as early as at the 15% -20% completion points. The ability to show at that early stage the direction your project is going allows the Project Manager to adjust course making corrections long before it is too late.
The development of a key metric called the “Cost Performance Index” (CPI), showing that acute relationship between the work actually completed and its matching budget, set against the actual costs spent to complete such work, allows management to constantly monitor the true cost performance of any project. In fact, the studies concluded the cumulative CPI didn’t change by more than 10% from the value at the 20% completion point (Christensen & Heise, 1993). I have used this metric successfully in many of my projects over the years. The Project Manager can deliver a forecast of the total funds required, or the Budget at Completion (BAC), by simply dividing the total project BAC by the cumulative CPI. This assumes that the actual cost performance results to date will likely continue to the end of the project. This is considered to be the best case forecast for a project within a statistical range of final cost estimates.
Another metric, “To Complete Performance Index”, concentrates on the remaining project tasks. It is the opposite of the cumulative CPI in that it reflects what it will take in future performance to recover from a negative actual cost position. The TCPI takes the work remaining, basically the total budget minus the work completed, and divides that by the funds remaining (the latest management financial goal less funds spent) to determine what it will take to complete the project.
One of the important benefits of using a performance measurement system is being able to determine how much of the scheduled work has actually been completed at any given point in the project. The basic issue is whether the project is on schedule, ahead of schedule, or behind schedule? And if you are behind schedule, by how far and what is the cost? Schedule performance knowledge like this is especially powerful when compared against the critical path of the project. Both the earned value Schedule Performance Index (SPI) and Critical Path Method (CPM) are metrics that, when used together, will correctly calculate the true schedule position of any project. Falling behind in getting the work scheduled completed is one of the first indicators of likely future problems. Project Managers do not like to fall behind schedule, even though a more important gauge is perhaps the performance against the project’s critical path. When one falls behind the planned work the tendency to add unplanned resources in an attempt to catch up can be quite strong. In essence, you’re doing the same work as was planned, but now you’ll be spending more money for the same amount of effort. Arbitrary decisions to catch up on the planned work can cause irreversible and non-recoverable damage to the project’s cost performance.
The employment of Management by Exception allows the portfolio or program managers to concentrate their efforts on those projects that are in trouble. Typically it means that those projects in the red get read, those in the green are of no concern. It allows managers to concentrate on the key metrics of CPI, SPI, TCPI, and EAC to determine if a project needs their help.
Must Have Documents in EVPM
There are three documents that every project must have, as a minimum, in order to employ EVPM:
The Scope
The most important document that can assure success in a project is the project scope document. EVPM cannot be effectively employed unless the Project Manager has defined the job to be done. It really is impossible to measure done if you don’t know what done means. The reason for EVPM is to be able to measure the work of the project as you are progressing. But you cannot know what to measure against unless you have defined the total scope of the project.
The scope, as defined by PMI, is the process of developing a detailed description of the project and product. The key benefit of this process is that it describes the product, service, or result boundaries by defining which of the requirements collected will be included in and excluded from the project scope (Project Management Institute, 2013).
The WBS
The WBS, as defined in PMI PMBOK, is a decomposition of the work deliverables into manageable work packages, it organizes and defines the total scope of the project (Project Management Institute, 2013). The WBS shows, in hierarchical form, each activity required to complete the project. These activities are organized into work packages of various duration’s, usually one day to one week. These packages are then aligned by precedent to determine a project schedule. The WBS will also include the resources that will be used to do the work on a particular package.
Project Schedule
The second requirement deals with the placement of the defined scope into a fixed time frame so that time performance can be measured throughout the life of the project. Some would suggest that these two rules are not unique to earned value project management, and that they are fundamental to all good project management, period. The project schedule is likely the best tool available for managing the day to day communications on any project. And further, one of the best ways to control a project plan is to monitor performance regularly with the use of a formal scheduling routine. Schedule the authorized work in a manner which describes the sequence of work and identifies the significant task dependencies required to meet the requirements of the program. Identify physical products, milestones, technical performance goals, or other indicators that will be used to measure progress. Identify, at least monthly, the significant differences between both planned and actual schedule performance and planned and actual cost performance, and provide the reasons for the variances in the detail needed by program management.
The Budget
Ultimately, you have to have a budget. Without knowing the costs of the different tasks that make up the project the Project Manager has nothing to use in which to measure against. These steps are particularly critical to an earned value project, because once the baseline has been put into place; the actual performance against the baseline will need to be measured regularly for the duration of the project. Regularly, on a periodic basis likely monthly, sometimes weekly, the Project Manager will want to measure how well the project is performing against the baseline. Project performance will be precisely measured employing earned value metrics, normally expressed as a cost or schedule performance variance from the baseline. Such variances will give an early warning of impending problems and are used to determine whether or not corrective action needs be taken in order for the project to stay within the defined parameters.
Baseline
Establishing a Performance Measurement Baseline (PMB), a baseline against which performance may be measured, is an essential requirement of earned value project management. The PMB is the reference point against which a project will measure its actual accomplished work. It will tell whether the project team is keeping up with the planned schedule, and how much work is being accomplished in relation to the monies being spent.
In Practice
Initiation and Project Estimations
I have discussed in a previous paper how the Software Development Lifecycle (SDLC) is implemented at Walgreens (Garling, 2015). Each project starts out as an idea in which an idea form is submitted to the Intake Management Group. The idea form contains the proposed name of the project, the sponsoring department, the Single Point of Contact (SPOC), and the target date. A business case document, Business Requirements Document (BRD), and the Charter are spelled are also included. These documents provide a detailed description of the proposed project and are submitted with the idea form. These documents provide a very high level view of the proposed project.
The idea form is logged and an announcement goes out to the intake committee members with the intake documentation attached to the meeting invite. The object of this meeting is for the committee to discuss with the requestor what it is the business is asking to be done and why. The committee will go over the specifics of the request, in particular the scope and the BRD of the project. They try to determine which teams in the company will be impacted by the project proposal. The makeup of the committee includes representatives from the Point of Sale (POS) Retail Execution teams: Development; Quality Assurance; eCommerce; Photo; Inventory Control; Payment Systems; Project Management Office (PMO); Key Performance Indicators (KPI); Electronic Data Warehouse (EDW), amongst others. The point here is that each group is represented to review the idea and to determine which of these various groups may be impacted by the proposed idea.
Phased Approach to Determine Project Costs – Phase Zero
Keep in mind that the Intake Committee is the first step to becoming an official project. If the idea is accepted by the Intake Committee, it is assigned to a Project Manager to help guide the proposed project along to determine the high level affect in time and dollars leading to an E0 estimation document. The E0 Estimation documents what the different teams impacted by the proposed project think, at a very high level, will the cost in dollars and time to do their portion of the project. This estimation is always at a +/-50% range. Much of the estimation is based on past experience of doing similar projects. If it’s a go, then the project is approved by the business sponsors.
At this point the Project Manager has used two methods in developing a project that can utilize EVPM methods: The scope of the project and Bottom-Up-Estimating. Each department impacted by the project delivers its estimation and the Project Manager adds them up. From the time the proposed project is assigned to the Project Manager, his main responsibility is to bring the identified impacted teams together to create a high level estimation of the time and cost of the work required to implement the proposed idea. This requires a well-defined and written scope. This estimation is based on a range of +/- 50%. So, if the QA team estimates it would take 2350 hours to go through the quality assurance process required by Walgreens, it would be quoted as a range from 1175 hours to 3525 hours. Walgreens usually uses a blended hourly rate to determine monetary costs.
The scope of the project is of utmost importance to EVPM. As stated early, you cannot properly plan a project unless you know the scope of the project. After all, how are you going to know when you’re done if you don’t know what you’re doing? Since EVPM is heavily dependent on time and cost, if you don’t define the scope you can never get to how long it will take and thus arrive at a measurable cost.
At Walgreens we keep in mind that at this point in the process we do not know the requirements in great detail. We use phased planning to define the scope and plan out the projects. Each phase serves as a gateway to the next phase causing the business and the PMO to determine if the project should move forward. In between each phase the project team is forming where members from each impacted team is assigned to the project. Their time is tracked in a software application known as PlanWell. PlanWell is an application that tries to mimic MS Project.
As I said earlier, Phase Zero determines go or no go with an estimation of +/- 50%. Phase Zero includes the Business Case document, the BRD, the Project Charter, a high level scope document and the E0 Estimation document. By approving the Phase Zero estimation the business sponsor has to set aside monies up to the upper limit of the estimation range.
At this point the project team has to prepare to present the project to an executive group called the IT Hub group. The IT Hub group will use the same documentation as the E0 estimation to determine if the project fits into the overall strategic goals of the company. This group is comprised of the management teams from each of the divisions within Walgreens. The IT Hub is a newcomer to the decision process. Walgreens has begun to recognize the importance of making sure these projects actually fit into the overall strategy of the company, especially with the recent merger with Boots. At this point in the IT Hubs development this will be the only time it reviews the project. If the IT Hub disapproves of the project, the project will be canceled.
Phase One
Phase One begins to determine detailed requirements. It produces the initial Functional Requirements Documents (FRD); provides more detailed information on the scope of the project; the project plan is developed; a Work Breakdown Structure (WBS) begins to be detailed out with the tasks and activities needed to complete the project; a more detailed BRD; creation of the project in PlanWell; the Project Management Plan (PMP) details the Communication Plan, the Risk Management Plan, the Change Request plan, the Document Management plan; all of these documents help to bring the team to the point of submitting what’s called an E1 Estimation. The E1 Estimation document tells the business that the team feels confident enough to estimate the cost of the project to within +/- 25%.
At this point a gateway meeting is held with the business sponsors, the PMO office, and representatives from each of the identified impacted teams. Their sole job in Phase One is to review the documentation put together by the project team and give a go/no go signal.
As the project team progressed with the analysis of the requirements of the project they were creating several important documents and information pertinent to using EVPM: The scope of the project; the WBS; and Functional Requirements Documents (FRD’s). Each of these documents would help to create the information needed to use key metrics in EVPM.
The team needed to determine the scope so that they could define the tasks needed to fulfill the scope requirements. From these tasks the team could determine the order in which each needed to be completed. They were especially interested in determining dependencies. Once they had determined the order of the tasks they could then determine the duration for each task and how many resources were needed for each task. Keep in mind that the number of resources could change if we determined that adding or subtracting helped with meeting our target date or our target cost.
From the completed WBS we would be able to create a schedule. The duration of each task can be converted into costs by taking the estimated duration and multiply by the blended hourly costs. Now we are able to determine Planned Value (PV) and eventually our Budget-at-Completion (BAC).
Phase Two
Phase Two brings the project team to the point of submitting an E2 Estimation, which is the final cost and time estimation delivered to the business. The project team is telling the business that it feels confident enough that it can bring this project together to a successful conclusion to within +/- 10%. By this time all project documentation has been created and approved. The scope document has been frozen with any changes requiring implementation of the Change Request process. All final FRD’s and TDD’s have been submitted, and the teams are ready to start the final phase: development.
Status Reporting
Each month the accounting department delivers to the PMO the monthly financial report through PlanWell. This report details the costs by project, by phase in the project, and by department. The Project Manager has to take this information and create what is called the monthly financial reports to each department and to the sponsoring business.
The financial report explains to the departments the financial status of their portion of the project, and explains to the sponsoring business unit the overall financial status of the project. The financial report shows the approved budget (PV), the actual spent for the project (AC), the remaining budget needed (ETC) and the Total Estimated Cost (EAC).
The project will also begin producing a weekly status report and possibly a monthly executive report. These reports contain a short summary of the project status, financial updates, what the project completed during the reporting period, and what it has planned to accomplish during the next reporting period. The length and detail of the information depends on the audience.
Project Performance Metrics
Once development begins, the Project Manager starts to use Project Performance Metrics (PPM) used in EVPM. The PPM measures project management performance compared to the approved budget and committed delivery date. The goal for Project Manager is to deliver projects within 10% of their budgeted work effort and within 10 calendar days of the agreed upon delivery date. The metrics are rolled up to the various management levels to measure project management performance at each level.
The key requirements for this metric are that projects are baselined at the appropriate time, and finding the true reason for any baseline change. The performance baseline work effort and go-live date are captured by the PMO, and the actual hours are captured using time sheets in the PlanWell project management system.
These PPM metrics are communicated to managers and above in the weekly status reports and the monthly executive status report. Two very important documents in the project are the project plan schedule and the WBS.
Included with the WBS is a document that further defines each work package activity of the WBS known as a WBS Dictionary. The WBS Dictionary includes a detailed description of the work to be done, what activity precedes and succeeds the activity. It also lists dependencies within and outside of the project, such as corporate servers that may be needed to house the result of the work package. It also lists the resource(s) responsible for developing the work package and the duration level of effort, usually in hourly units, to accomplish the work. The WBS Dictionary, at Walgreens, includes the blended hourly rate for the resource ($57/hour). Contractors at Walgreens are not allowed to know the exact rate of resources.
From the WBS and the project schedule we can use the following metrics that make up the PPM used in EVPM:
Planned Value (PV)
The Planned Value (PV): The PV, sometimes referred to as the Budgeted Cost of Work Scheduled (BCWS), is the authorized budgeted cost for a given work package. It is sometimes referred to as the performance measurement baseline (PMB) and the total PV project is known as Budget-at-Completion (BAC). It is made up of the planned duration and cost for the activity.
For example, let’s say that a given activity or work package is determined to take two resources five days to accomplish. Each resource cost is $57.00 per hour. Each work day is regularly scheduled for eight hours Monday through Friday. With two resources performing the work, that would come to a total of sixteen hours per day. Since it will take five days to complete the work, our costs would come to a total of $4560.00 (80 hours x $57.00).
Earned Value (EV)
The Earned Value (EV), sometimes referred to as the Budgeted Cost of Work Performed (BCWP), is the value of the authorized budgeted amount at a given point in the project. Using our above example, where each resource cost is $57.00 per hour, and each work day is eight hours per day Monday through Friday, by day three in the schedule for this activity the Project Manager would have the expectation that EV would equal $2736.00 worth of work had been completed according to the plan.
Actual Cost (AC)
The Actual Cost (AC), sometimes referred to as the Actual Cost of Work Performed (ACWP), is determined by the number of hours multiplied by the blended rate of $57.00 per hour. As each resource completes the day’s work they’re required to clock their time into PlanWell against whatever project they were working that day. The time entered is in hourly units.
For example, let’s take our aforementioned work activity or work package that we determined would take two resources five days to accomplish. With each resource costing $57.00 per hour, and each work day is eight hours Monday through Friday, we know our PV should come to a total of $4560.00 (80 hours x $57.00). By day three in the schedule for this activity the Project Manager would have the expectation that $2736.00 PV of work has been completed according to the plan. But our AC came in at $3648.00, and they only accomplished two days of planned work.
According to the above scenario the project is overspending and behind schedule. In fact it was expected, by day three, to have cost the project a total of $2736.00 for 48 hours of work. The two resources have accomplished only two days of work at a cost of $3648.00. Using the Cost Variance (CV) formula we can determine where we stand at this point:
CV = EV – AC
Cost Variance (CV) is a way to determine cost performance on a project. It is equal to the Earned Value (EV) minus the Actual Costs (AC). This measurement is critical as it indicates the relationship of physical performance to actual costs.
In our examples case the formula would look like:
CV = $2736.00 – $3648.00 = -$912.00
Another way to look at the same relationship is through the Cost Performance Index (CPI). It is considered the more critical of the Earned Value Metrics. A value of less than 1.0 would mean you’re spending more then you’re getting, while a value greater than one means you’re spending less and getting more.
In our example the formula would look like:
CPI = EV/AC
CPI = $2736.00/$3648.00 = .75
As you can see, the project CPI is less than 1.0. Basically, the project is spending more than is getting done. The project is getting $.75 worth of work for every $1.00 spent.
Part of the monthly financial report is to show the department and the business what is needed to complete the project as far as cost is concerned. We use the Estimate-to-Complete (ETC) and the Estimate-at-Completion to indicate what is needed to complete the project.
We use the following formula to determine ETC:
ETC = BAC – EV
ETC = $4560.00 – $2736.00 = $1824.00
The above formula is used if we expect everything to be on time and on budget.
If we expect, as in the case of our example, that we’re neither on time nor within budget and we expect this track to continue then we would use the following formula to determine ETC:
ETC = (BAC – EV)/CPI
ETC = ($4560.00 – $2736.00)/.75 = $2432.00
Estimate-to-Complete is the amount of funds that will be needed to complete the project (Subramanian, V., & Ramachandran, R., 2010). The method used to calculate the amount depends on the circumstances. In our example it was expected that the variance we experienced would continue for the remainder of the project.
We will use the same logic for determining our Estimated-at-Completion costs in that the variances we have experienced will continue. Our formula we will use is as follows:
EAC = AC + [(BAC – EV) ÷ CPI]
EAC = $3648.00 + [($4560.00 – $2736.00))/.75)] = $6080.00
My EAC is equal to $6080.00 and my Variance-at-Completion (VAC) would be equal to:
VAC = BAC – EAC
VAC = $4560.00 – $6080.00 = -$1520.00
The report I would have to deliver to the business would like this:
Approved Budget (PV) Total Budget Actual Spent FY15 (AC) Remaining Budget Needed (ETC) Total Estimated Cost (EAC) Est. Variance (VAC)
$4680.00 $4680.00 $3648.00 $2432.00 $6080.00 ($1520.00)
Conclusion:
As I’ve shown, the use of these metrics in EVPM gives us a fairly accurate picture of the status of the project on a monthly basis. Part of the problem we have at Walgreens is that the Project Manager is not given the previous month’s financial status of their project until the second week of the current month. What this means is that we’re basically a month behind when we learn of the bad news given in our example above. It can be very tough to fix the problem in our example when we don’t learn about it until six weeks later.
The object of EVPM is to give the Project Manager an accurate picture of the status of their project at any given moment so they can make corrections before matters get worse. By depriving them of basic information the company risks a successful conclusion to many of their projects. As you can see from our example, the numbers give us a pretty accurate picture of the status of the project. Using these metrics, in a timely fashion, gives the Project Manager the ability to control events quickly so that they can keep the project moving forward.
References:
Archibald, R. D., & Villoria, R. L. (1966). Network-based management systems (PERT/CPM). New York: Wiley.
Christensen, D. S., & Heise, S. R. (1993). Cost performance index stability. National Contract Management Association Journal.
Fleming, Q. W., & Koppelman, J. M. (2010). Earned value project management. Newtown Square, PA: Project Management Institute.
Garling, R. (2015). project metrics week 7 paper. AMU
Lipke, W. H. (2009). Earned schedule: An extension to earned value management– for managing schedule performance. Raleigh, N.C.: Lulu Pub.
Project Management Institute. (2013). A guide to the project management body of knowledge (PMBOK guide), fifth edition. Newtown Square, PA: Author.
Subramanian, V., & Ramachandran, R. (2010). McGraw-Hill’s PMP certification mathematics: project management professional exam preparation. New York, NY: McGraw-Hill.
Verzuh, E. (2012). The fast forward MBA in project management, fourth edition. Hoboken, NJ: John Wiley & Sons.
