Earned Value Management Series: Part 2 – Progress and Rules of Credit

Whether you are new to the principles of Earned Value, this article will give you an explanation of what is really involved in measuring progress on your investment. We will also provide some basic ways to keep your project on track and some best practices that you can use to improve your program today.

Progress Measurement

If we were to tasked with tracking the progress of some work or project, we may track it based on a few notions of progress. For example, let’s track the installation of an underground cable, 100 kilometers in length. We’ve estimated the task will take our crew 100 days to complete. Currently, we are 25 days in, and 25 kilometers have been installed. We could say we have completed 25 of 100 days of work, or 25 of 100 kilometers of cable. This is a nice example in that it is easy to assess progress in these ways. However, there are complications even in this scenario.

One complication perhaps more obvious than others, occurs when the work takes more or less time than estimated. If we had completed 25 kilometers of cable but it took our team 30 days, then we cannot say we have completed 30 of 100 days of work. We would quickly rely on the kilometers of cable installed as our basis of progress instead of days worked. We could then use this to recalculate our remaining days of work:

• 25km of 100km installed = 25% of the cable
• 30 days to install 25km of cable = our rate of progress
• Based on this rate, installing 25% of the cable in 30 days means we would expect 50% to be installed in 60 days, and 100% in 120 days

The formula used here is simply 30/X = 25/100, where X is the revised total time for the work, based on the current rate of progress. Simplified, that formula shows X = 30 / 0.25, or the new total time = the time taken so far divided by the percent completed so far. This may seem intuitive, and rightfully so; in project management terms, we are applying our known productivity to date to the remaining work to re-estimate our total duration.

In an Earned Value Management (EVM) system, we can say that the 25 kilometers of cable installed represents 25% of the total value of the 100km-long task. In other words, we can say we’ve earned 25% of the task’s value.

This example is quite idealized, and most of the time tasks do not so easily translate into percent completes; they are harder to assess. For example, let’s say the cable installation requires some initial preparation, has some corners to its route, and has some roadways to traverse over or under. Finally, let’s also assume this cable installation is in fact planned to be 187 kilometers in length. In this less idealized but more realistic version, it can be harder to quickly assess progress or earned value. How much value do we assign to preparations, difficult sections (corners / crossings)? With 187 kilometers of cable to install, even straight line progress is not as easy to assess percent complete without the help of some mathematics and formulas.

Rules of Credit

Rules of credit are simply the rules by which we earn value and measure progress; it’s a list that maps our estimated costs with easily identifiable steps of progression. So, rather than dividing 187 kilometers by 100 to give us each percentage of progress in kilometers, we may look at simplified and easily measurable rules of credit while we estimate and plan the work, like the following:

• Equipment Setup Completed = +5%
• 0km to 23km (to first corner) = +10% (15% total)
• First corner completed (km #24) = +5% (20% total)
• 24km to 94km = +29% (49% total)
• Roadway crossing completed = +8% (57% total)
• 94km to 176km = +28% (85% total)
• Second corner completed (km #177) = +5% (90% total)
• 180km to 187km (to completion) = +10% (100% total)

In our example, these rules of credit were decided by the project team, to reflect the value each step represents. These take into account the same assumptions and data that the cost estimate did, so little extra work was required. To assess this progress, you can give the field staff freedom within each step, but progress must be matched as each rule of credit is achieved. So equipment setup can be scored 0-4% complete, but cannot be credited the full 5% until it has been completed. The first 23 kilometers can be scored anywhere between 5% and 14% by the field staff, but cannot be awarded the full 10% / 15% of total until the first corner is reached. This system allows the field staff the freedom to assess their progress to signal higher or lower productivity.

In addition to limiting field assessments to discreet and finite steps, rules of credit also simplify reporting and tracking. In our example, the rules of credit were designed with the idea in mind that all of the steps were each likely to take less than 2 weeks to complete. The project reporting is also set to a 2 week frequency. This insures that each reporting period should show some progress, even if the field assessments are not done. For example, if field assessments have not been coming in due to staffing issues, but the project team is aware that the work is now ongoing somewhere in the 24th to 94th kilometer, the first corner can be scored as completed. This protects the project team from under-reporting their project by large margins. Similarly, scoring the project too optimistically is avoided simply by requiring completion of each step.

This system of steps and gates provided by the rules of credit allows for some limited movement, but offers simple control of progress measurement throughout the task.

Implementation

Now that we have some idea as to what rules of credit are and how they can be used, let’s review how they can be implemented to help keep your project on track.

Once we have established our earned value using rules of credit (or detailed progress tracking), we can apply this value to the Earned Value Management (EVM) system for further analysis. In terms of cost efficiency, EVM enlists the help of a metric aptly labeled the Cost Performance Indicator (CPI). This is calculated by taking the earned value (EV) of work that has been completed divided by the actual cost of that work. As shown above, the earned value of a task is calculated by applying the progress percent complete to the estimated total cost for that work. The actual cost (AC) is simply what has been actually spent on that work (or is expected to be spent). This simple metric, CPI = EV/AC, can help determine current monetary performance in relation to the estimated costs quickly. A result of less than 1 means costs are exceeding estimates. A result of 0.5 means costs are double that of estimates. A result above 1 means costs are lower than estimated. It’s a simple management tool that can flag issues if employed correctly.

One pitfall many teams fall into is in reporting only a project-level CPI. This may end up doing more harm than good. For example, if there are packages of work that are exceeding estimated costs and packages that are under estimated costs, the project CPI may show as near 1. However, this would hide the opportunity for further cost savings in the work exceeding estimated costs. To combat this, in addition to a project-level CPI, it’s advised that project teams report sub-units of the project CPI as well. For example, you may report each contract’s CPI, or you may report each structure’s CPI in a multi-structure project. Although each project may be different, the need for a deeper view should be met with some discussion and strategy from the project team.

Another obstacle in the way of successful CPI usage is how project teams handle inevitable change. When work is added or subtracted from the project, how that change is integrated into the estimate, and by extension the EV of the affected task, greatly affects the validity of he CPI measure. If work that is removed is kept in the estimate, then it may appear as completely earned with zero cost, seemingly artificially inflating CPI. Carried to the extreme, if the entire project is removed, does that not mean the cost performance is extremely good? If work that is added is not added to the estimate, then its earned value remains as zero but with actual costs. This would then deflate CPI; but is this a problem? If the project sees large amounts of added work, not adding earned value for it would quickly show low CPI numbers, alerting the project team to the negative cost impacts of all of the added work.

To determine the best way to handle change, it is best to recall the purpose of earned value. The purpose is to allow simplified progress measurement and forecasting, so that managers can easily identify and focus on problems. From a cost perspective, finding work that can be removed is cost efficient. As successful entrepreneur Elon Musk opines, removing parts and processes is a valuable efficiency dogma, with may downstream positive effects (Pressman, 2021). To reward removal of scope / work, we should therefore embrace the concept that removing scope (and its associated costs) equates to earning its estimated value.

In a similar line of thought, adding scope (and its associated costs) to a project, although sometimes necessary for the project to be successful, should represent no additional value, only additional cost. The reasoning here is that, from the perspective of cost, extra costs are extra costs, regardless of their necessity. Having extra scope bring its costs to CPI but not any of its earned value, helps bring the hard truth of these costs to the project team. Therefore, for best results in using EVM and its CPI tool, incorporating project changes should follow this simple rule: If costs are added do not include any extra earned value; if costs are removed, then score that value as earned.

Concluding Remarks

In summary, Rules of Credit allow a project to easily implement EVM tools such as CPI. The CPI tool in particular can help project teams flag cost problems. It can also reveal opportunities for cost savings, if implemented in more aggregate detail than simply at the total project level. Incorporating changes can interfere with CPI if done incorrectly, but an easy guiding principle can preserve the EVM system in these cases; adding scope, don’t add value; removing scope, value is earned. In terms of Rules of Credit, they provide the means by which progress is tracked. So in cases of additional scope, Rules of Credit can still offer a way to easily monitor progress, even if that progress is contributing to work package or project EV. In this way, project teams may wish to track changes as miniature projects, calculating EV for the change itself, just not passing this on to contaminate package / project / contract-level CPI analysis.

In the next article, we will assess how progress measurement in EVM can best be applied to a project’s schedule.

References

Pressman, M. (2021). Elon Musk Reveals His 5-Step Engineering Protocol. Available at: https://cleantechnica.com/2021/08/16/elon-musk-reveals-his-5-step-engineering-protocol (Accessed: Jan 3, 2021).