In this article, we will take a look at formulas and processes available to project teams using an Earned Value Management System (EVMS).

These formulas operate on the same principle as any such a system, vulnerable to a garbage in – garbage out weakness. This weakness, “GiGo”, is a feature whereby data analytics only provides accurate results when inputs are also accurate and relevant (Rose et al., 2011). In an EVMS, the two main data inputs are original estimate / budget / baseline data, and progress / update / actuals data. We will review these data points, and their resulting analysis that EVMS provides.

Common Earned Value Management Data Points

Budget at Completion – BAC

One of the foundational EVMS data points is the budget at completion. This represents the baseline or total estimate, sometimes referred to the original total planned value. This is a cost-based data point that equals the originally-estimated total cost for the portion of work being assessed. It can be all costs budgeted for an entire project, a work package, contract task, group of tasks, subset of tasks; any grouping you wish to assess. For example, if you want to track the task of painting a railing, you would include:

• the total painter contract budget / estimate ($5,000)
• the total (proportionate) management / overhead (indirects) budget / estimate ($300)
• the cost of any provided materials ($100)
• BAC = $5,400

Oftentimes in large projects, overhead and management (indirect) costs are not included, as it’s rightly assumed that managing the direct costs will control the indirect costs. More in this further on.

Actual Cost – AC

Another fundamental EVMS data point, actual costs, is one data point that at first seems straight forward, but it can have its own complexities during implementation. These complexities are best thought about before your project team gets too far into tracking your project, to avoid the GiGo effect. In essence, actual costs are a measure of what has been spent up to the current reporting date. For example, if you report monthly, the AC would represent what you’ve spent to the end of the previous monthly period. This alludes to two complications when determining AC.

The first of these complications involves these reporting periods. Unlike BAC, AC is defined by a point in time, and is often tied to partially-completed work. This means that the point in time must be well-defined, and the portion of the work partial payments cover are also well-defined. This is because, for example, if actual costs are delayed behind progress reports, you would end up reporting higher cost efficiency than is accurate. Conversely, if your actual costs include advance payments for work as yet to be completed, your cost efficiency would appear lower that is accurate. Therefore, the following guidelines should be followed to maintain accuracy, and to avoid GiGo:

• Align status dates / reporting dates with all period reporting measures in EVMS, including AC. This means that any agreed-upon payments, sometimes referred to as accruals, should match the progress that has been measured / scored. For example, if there is partial progress on a task within the month (and reporting is done monthly), then calculations must be done to align total spent and accrued costs with the progress. Let’s assume that progress for the month includes 4 of 10 roughly equal sections of railing painted, and the fixed price contract for this work has a BAC of $5,000, to be paid upon completion. We have 40% of the work completed, put we are not due to pay for the work until it is completed. However, for EVMS to work properly, we need to recognize 40% of the costs as set aside for competed work to date; we need to accrue it (AC = 40% x $5,000 = $2,000).

There are accounting reasons to do accruals as well (partially-completed work represents a liability until paid for), but we don’t want to contaminate each function (Project EVMS tracking and Corporate Accounting) with requirements of the other; there may be slightly different accrual rules or status dates that Corporate Accounting requires, that if implemented, would interfere in the accuracy of EVMS calculations (GiGo risks again). Perhaps some data and processes can be shared, yet project teams should endeavor to create their own EVMS tracking tools to preserve data accuracy. This isn’t to say project teams can’t share cost and progress data with accounting teams (they should); they just need to maintain control over how that data is used in the project’s EVMS system.

Planned Value – PV

Similar to AC, Planned Value (PV), refers to an item’s costs. When partially completed, it is often referred to more specifically as the Budgeted Cost of Work Performed (BCWP), a point-in-time measure, or Earned Value (EV). Again like AC, PV needs to be aligned with the reporting period in order to assist in determining EV / BCWP. PV is the data point used to determine a task’s (or project / task grouping’s) progress as measured against the total original budget (Budget at Completion – BAC) for that task or task grouping. For example, similar to the railing painting example above for AC, 40% work completion measured against the $5,000 planned contract budget results in a $2,000 PV (scored as EV / BCWP). The obvious question now is of course, how is PV different from AC.

PV is designed to always measure against the original planned budget for a task. However, AC can vary greatly. In the railing painting example above, we used a simple fixed-price contract to simplify the explanation of AC. Yet many contracts have variable costs, change orders, an other such levers that change costs, and benefit from an EVMS system that helps flag the impact of these changes to project teams. For example, let’s assume that the painter notes that they are catching up to the fabricators of the railing and are finding that they are often waiting idly, something the contract did not address. The painter submits a change order for the additional idle hours, which is then accepted by the project team as a reasonable accommodation. This change order represents an additional $400 in agreed-upon payments that must now be added to the AC. Therefore $2,000 of fixed costs plus $400 in change order costs now results in an AC of $2,400 to be reported this period. That said, the PV does not incorporate this $400 in delay charges; rather it is tied to the budget for the work and remains at $2,000.

Earned Value – EV

As seen above, simply put, Earned Value (EV) represents the amount of PV that has been scored as earned, or completed. It’s easiest to think of PV and EV as one and the same concept, with PV referring to the originally-estimated value, and EV referring to the portion of PV that has been scored as completed, or earned to date.

Project Change

Now that we have began to consider variable costs and project change, we can to see how important having a strategy to manage this change in an EVMS can be. Project changes and variable costs by their nature change AC. To what extent they change your project’s BAC or EV / PV data is a matter of some debate. For example, some teams prefer to manage change through a lens of approvals, or in an environment where changes in costs create blame and internal political struggles. Other teams prefer to manage change in their EVMS as a natural feature of projects, something to be expected and managed, not something to be feared and punished. We will view change in the latter manner, and the following is how such an EVMS system of change can operate.

When a change order is approved, those (usually increased) costs are to be accounted for in the schedule and cost plan, as part of the forecasted remaining work. Once the change order work has been completed, its costs will then be added to the AC. If the change order removes cost, then those costs are not added to the AC, but they are scored as earned in the EV / BCWP. This will show in the EVMS as an increase in cost efficiency, which is how removing unneeded scope or finding savings would be expected to show. If the change order adds costs, the AC is increased accordingly, but the EV / BCWP should not include the extras, only the originally-planned costs. This will then have the EVMS output a cost inefficiency, which is the correct usage of the system. This really only needs to be dispositioned by the project team; perhaps a risk item has been quantified as an issue, or some other explanation. There is no need to add approved changes to the EV or BCWPP; adding them to the forecast or schedule plan allows for tracking of approved change, without breaking he EVMS outputs.

As a side note, many project teams are motivated to add approved changes together and “re-baseline” the project, effectively resetting the EV and BCWP to the AC. This resets all EVMS indicators, and in many minds, shows that the sunk costs are now approved and accepted. However, this is not how EVMS is designed to work. Project teams may instead consider maintaining an approved forecast, as well as a pending or working forecast instead, to help illustrate the current status of the project budget. The EV and BCWP, however, work best with as much historical / statistical data included in them as possible, especially as they are applied to EVMS metrics and formulas.

Cost Performance Indicator – CPI

The main cost performance indicator in an EVMS is referred to as CPI, and it is calculated as the EV divided by the AC, at a specified point in time. For example, a $2,000 EV having cost $2,400 in AC to complete would result in a CPI of 2000 / 2400, or 0.83. Since the CPI is lower than 1, you can easily spot a few characteristics about this package of work. First, you know that something has cost more than initially planned; perhaps scope was added via change order, or perhaps there has been some risk item realized as an issue, or perhaps both. Second, you also get some sense as to the impact of the variance. At an 83% cost efficiency, you know this work has been completed to date with a near 20% efficiency loss compared to the original plan. The next steps here are important; EVMS is a tool, of which CPI is a sub-set, and it is only useful if used as part of a management effort. In other words, having this CPI is only useful if it triggers actions. Perhaps the project team requires written dispositions for CPI changes of more than 5%. Teams should also provide an assessment as to the impact of this CPI on the final forecast; is this 0.83 likely to continue? Is the issue over with, and a slightly better CPI is predicted in the forecast at completion? These assessments should be performed whenever a metric like CPI is updated. Simply reporting the CPI may spark conversation at meetings, but teams should have assessments and dispositions ready. This way the EVMS will promote management of the work and associated issues, not management of the metric itself.

Concluding Remarks

In the next article in this series, we will continue to look at EVMS tools and metrics, starting to look at perhaps the more controversial SPI, or Schedule Performance Index. However, we already have a good appreciation for different foundational features of an EVMS. Actual Costs need to be tied to work that has been completed, and this requires rigid accrual and period reporting processes in order to avoid data can easily contaminate EVMS metrics. The Planned Value for tasks needs to be easily segmented with rules that allow for Earned Value to be scored accurately. Finally, these values need to be considered properly when processing the inevitable changes a project goes through, to avoid employing and EVMS suffering from “GiGo”, that does not assist in managing work, instead having teams manage metrics. In a dashboard culture, modern project teams may need to spend time setting these expectations early with their reporting audiences, and having a good dispositioning and assessment process should help bring focus back to what’s important; solving problems to achieve the project goals.

References:

Rose, L.T. and Fischer, K.W., 2011. Garbage in, garbage out: Having useful data is everything. Measurement: Interdisciplinary Research & Perspective, 9(4), pp.222-226.

Burned and earned hours are sometimes misunderstood. What are they? How do you calculate them? This article takes a deeper look at what these hours are and how to calculate them.

What are Burned and Earned Hours?

Burned hours, in many other industries, refer to hours that were non-billable, don’t contribute to the product or service being sold, or both. In project management circles, burned hours tend to refer to the actual hours spent on a task, as opposed to the earned hours. Earned hours represent the portion of estimated / baseline hours that were initially budgeted to get to the current state of progress of a task.

How to Calculate Burned Hours

To calculate burned hours in a project management environment, you simply need to account for all expended or charged hours. These are often referred to as the actual hours, or time-sheeted hours, etc. For example, if you had a crew of 3 work for an 8-hour day, then the burned hours would be:

3 x 8 = 24

Therefore, 24 hours have been burned.

How to Calculate Earned Hours

To calculate hours that have been earned on a task, we need to know the originally estimated hours and have some idea as to the rules of credit, so that we know how to score the progress of the task. Refer to our other article on rules of credit and progress for a discussion on that topic. For this example, let’s assume we are painting a large room. We originally estimated it would take our crew of 3, 2 days to paint the room. Therefore our total estimated hours is 3 x 8 x 2, or 48 hours. The room has 4 equally-sized walls to paint, and so our simple rules of credit are set at 25% per wall. At the end of the first day, the workers tell us they have managed to paint 2.5 walls. We can now calculate the earned hours:

2.5 walls x 25% per wall

= 2.5 x 0.25

= 0.625

= 62.5% completed

62.5% of the originally-estimated 48 total hours

= 48 x 0.625

= 30 hours earned

Final Thoughts

It’s clear how burned / actual hours are useful, in that they relate to costs expended and schedule time used. This is very useful in understanding your resource usage and expense, and in forecasting spend with a quick burn rate calculation, for example. However, earned hours are seemingly not as useful, at least intuitively. This is because they relate back to the original estimate, so they really don’t tell you much about what is happening now; this has led many on-the-ground managers to dismiss earned hours as a useful management tool. This may be so at the work face, however earned hours can be used as inputs into an Earned Value Management System (EVMS) to easily re-estimate cost and schedule forecasts. This allows project management team members to focus on flagging and solving macro-level progress issues, something burn rates and actual hours alone do not inherently allow. In future articles, we will expand on some of these tools, and how they can be employed in various ways (some easy, some complex) that your team may find useful.

When it comes to project management, the percent complete is an incredibly important measure. It’s a statistic that can be used to determine the status of a task in relation to its overall completion. From a management perspective, it also offers an objective way of measuring the amount of work that has been completed when compared with the overall scope of the project. The purpose of this article is to help explain exactly what a percent complete is and illustrate how it can be used by managers when overseeing projects.

What Is a Percent Complete? Simply put, a percent complete is the measurement of how much work has been done on a given task when compared with the total amount of work needed to finish said project. For example, let’s say that you have a project that needs to be completed by June 15th and there are 10 equal parts that need to be completed before it’s finished. If you’ve completed three parts by June 1st, then you’re 30% complete. While that may sound simple enough, sometimes figuring out what constitutes being 30% complete can get complicated depending on who you ask. Is it 30% of the total hours needed? Parts? Lines of code? Manhours? There are many different ways to measure what constitutes measuring percent complete.

Calculating Duration Percent Complete

A duration percent complete is a simple calculation of your project status and can be calculated at any time. The easiest way to calculate this is by dividing the total effort in hours by the total hours expected (work remaining) as follows:

% Complete = Total Hours / Remaining Hours

This requires, therefore, that you have re-estimated the remaining duration your task will take. If you simply remove spent hours from the original estimated hours, you will not be providing percent complete; you will be calculating percent of budgeted hours spent.

One other tip if you are calculating this manually, it is important to ensure that you round up the numbers correctly. If you only have a small number of hours left to work, then this will be easy to do. However, if there are a large number of hours left to work, then it is possible that rounding down, rather than rounding up will be more accurate. This is because adding a decimal point can create a result that looks like the value is decreasing when it actually isn’t. For example: If there are 10 hours of work left and 8 hours worked in total, then we would expect the % complete to equal 83%. Instead, rounding down would give us 80%. This may then be interpreted as being behind schedule when in fact you are on track.

Calculating Physical Percent Complete

Previously we discussed rules of credit as a method of measuring progress. These rules are essentially steps or sub tasks with progress weightings. This can be as simple as a project such as painting a room in your house. The task is to paint the room and the subtasks would be things such as buying paint, buying drop cloths, putting up plastic to protect furniture, cleaning the room, etc. Tasks that are 100% must have all of their steps completed. Sub tasks, however, can be individually assessed for completion, and contribute up to their pre-determined portion of the task’s total percent complete. To calculate this, therefore, use the following formula:

% Complete = (Step 1 % Complete X Step 1 Weighting) + (Step 2 % Complete X Step 2 Weighting) + etc.

The key here is to ensure there are enough steps per tasks to prevent large gaps in progress scored. Similarly, too many steps may become difficult to manage. To help with this, you might consider bundling similar steps together, making them easier to assess progress. If you have 4 similar steps, such as cover the sofa, cover the lamp, cover the TV, and cover the table, you might group those together into “cover the furniture” and simply score 25% for this step for each item you see covered.

The key to successful physical percent complete assessment is in having predetermined rules of credit established. These should contain steps that are easy to score, and allow for meaningful progress between reporting periods.

Calculating Units Percent Complete

Tracking progress through units may be considered a version of physical percent complete. However many scheduling and tracking programs offer this third way of tracking, linked to the expenditure of tracked resources.

Tracking resource usage in Primavera P6 is seen as important for many reasons. It allows you to monitor your resource capacity and provide updated information through its built-in reporting so you can act accordingly. You can view resource usage from the Unit Resource Usage report or from a custom report that you create.

To use this method of tracking progress, you would need to re-estimate the remaining units required to finish a task, and update your schedule accordingly. The units themselves represent progression steps, much like in physical percent complete. For example, if your schedule is tracking the installation of 700 windows in a large building project, you may decide to input your windows as resources to be expended in your tasks. Therefore, you could simply count the number of windows remaining to be installed to score this task’s completion percentage. However, if more windows are added to or removed from your scope, you would need to account for those.

This method, therefore, suffers from the difficulties of re-estimation that duration percent complete presents. Yet it does allow for easy tracking of progress without requiring sub-task assessments as would physical percent complete. Progress in this manner is calculated as follows:

% Complete = Total Units / Remaining Units

Concluding Remarks

The traditional way of measuring project progress is using the ratio between the total work effort and the total time that was planned for the project in advance. This method is usually referred to simply as “percent complete”. However, because percent complete measurements are subject to human interpretation, they can be misleading and often result in inaccurate status reports leading to mismanaged projects. The duration percent complete method helps by bringing focus on the need to a re-estimation of remaining work. This, if done properly, will show a more realistic progression figure. However, physical percent complete reduces the need for re-estimation of work, as each step is scored based on its completion, not by the work or time expended. In certain cases, tracking units or resources can further remove the interpretation of progress present within each physical percent complete step. Therefore the method used to score each task’s progress should be decided by the project team, aiming to best match the method with the type of work each task represents.

The next article will continue discussing progression, this time with more detail and technical examples.

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).

This series is designed to work our way from the basics of Earned Value Management (EVM), into the best practices, and eventually beyond, to explore improvements and advanced concepts. The intent is to provide a roadmap for those looking to learn about EVM, or for those looking to review their knowledge and stimulate their advanced learning in this field.

In this, Part 1, we will look at the basic concept of EVM: what is it? why is it useful? how is it used?

Management

Earned Value Management, at its heart, is a way of managing projects. One natural approach to managing a project would be to simply hold daily meetings, asking everyone on your project team what they are doing, and them giving them direction. You would be relying on your own skills and way of managing, your own methodology. What sorts of questions would you have? Likely, you would focus on some “what” questions: “what did you get done yesterday?”, “what are you planning to work on today?”, “what is important?”, “what can we move to lower priority?”, “what exactly does our customer want in the end?”. You would likely also ask some “when” questions: “when will you finish what you are working on?”, “when can you start this other work?”, “when can you get the materials we need?”, “when will the contractor be available?”, “when does the customer need the job done by?”, “when do you think we will be done the job?”. Furthermore, since project teams use labour, material, equipment, and other resources, you will likely be concerned with “how much money” questions: “how much did we spend yesterday?”, “how much have we spent so far?”, “how much money do we have left?”, “how much will the whole job cost?”, etc. After answering your many questions, you would then direct your team, helping to overcome obstacles, with the aim at staying on track.

If this example made sense to you, or if it seems to be at least a reasonable natural approach to managing a project, you already understand the purpose of EVM; it is simply a more rigorous methodology. As in most modern project management systems, in EVM, many of the “what” questions are bundled together into the category of “scope”. The “when” questions are represented by the category “schedule”. Finally, questions about money fall into the category of “budget” or “cost”. (Kloppenborg, 2012)

Many other important and vital categories exist in EVM and in the Project Management field, yet they all seem to find their way into these three from a management methodology standpoint. Safety; it needs to be in your scope, it needs resources and time allowed for in your schedule, it reduces risks and associated costs. Quality; it needs to be considered in order to meet scope specifications, it may require additional time to achieve, and these measures are sure to affect the budget. Environment; regulatory requirements must be included in the scope, approval will affect schedule, mitigation and management requires extra funds. Risk; is tied to each scope item, considers schedule impacts, and defines the budgeted contingency amount. As you consider how you manage projects yourself, looking at your methods through the lense of “scope / schedule / budget” may help you simplify your methods. That’s one of the keys to the success of EVM; it offers a systematic approach that clarifies and simplifies project management methodology. Many are tempted to overly complicate project management, as intelligent people are often tempted to do (Lebowitz, 2015). However, success is found in employing EVM as a systematic approach, relieving the team from spending valuable brain power on how best to manage, allowing everyone instead to focus their skilled energy on solving the problems that EVM helps to bring into focus.

Here we see the second benefit to Earned Value Management. EVM offers a methodology that helps organize a comprehensive project management system into a concise, clear, and cogent framework. By doing so, project teams are able to focus on problem solving, and less on problem identification. This has the further benefit of presenting future problems earlier, allowing the team more valuable time to react. Projects are by their nature emergency-making enterprises; it’s not a production environment where all problems have been ironed out. Therefore, we should all want to spend more time on solving problems in advance instead of reacting to them. This is surely less stressful, and history tells us this approach is also more successful in the end.

Earned Value

Morin (2009) reviewed the history of Earned Value Management, showing how it emerged from struggles with the useful, but limited, Program Evaluation and Review Technique (PERT) that was in vogue in the 1950’s and 1960’s. The PERT methodology focused on constantly re-estimating total project cost, including all money spent to date and a new estimate of the cost of all remaining work. However, large projects using PERT seemed unable to get an idea of how current progress was to be assessed. Instead, teams were busy constantly updating the estimates higher and higher. During this time, several ambitious and unprecedented large military projects were being undertaken, including the notable Minuteman Missile project. EVM was proposed as as a replacement for PERT, as it was able to bring focus to progress assessment:

“Earned Value is a concept – the concept that an estimated value can be placed on all work
to be performed, and once that work is accomplished that same estimated value can be
considered to be “earned.” The utility of this concept as a management tool is that the
summation of all earned values for work accomplished when compared to what was actually
expended to perform the effort can provide management with a comprehensible, objective
indicator of how the total effort or any identifiable segment is progressing”

Morin (2009), referencing A. E. Fitzgerald, “Earned Value Summary Guide”, Feb. 25, 1965.

Now we are moving from the “management” part of EVM to the “earned value” part. Earned Value is the foundational concept that allows the entire EVM methodology to function. The 50+ year-old concept, is simply a way to match current progress against what your initially thought it would cost. For example:

Earned value, then, is simply a way to measure current progress against your original estimate. Although a simple assessment, we can now easily ascertain many other aspects of our project. For one, we can provide what the PERT methodology did; we can easily estimate our total cost at the completion of the job by applying the money we’ve spent against the percent complete. 50% complete and $2,000 spent would mean we will likely spend another $2,000 to complete the job. This puts our estimated completion cost at $4,000. However, we can also score our current progress, something PERT could not. We have earned $1,500 of value, but we’ve spent $2,000 to get it. We have a cost efficiency of 1500/2000, or 0.75. In other words, for every dollar we spend, we are only getting $0.75 worth of our planned work completed. This is a good number to know. Our project team can now ask probing questions for tasks like this that show a cost efficiency lower than 1. In fact, you could sort all of your tasks in a spreadsheet by this number and the task total budgets. This will allow your team to focus on specific big impact issues.

For longer tasks, regular assessments can point out big issues early on. For example, if we have a 4-week task that has a budget of $1,000,000, assessment in the first week can show our cost efficiency and allow the project team 3 weeks to deal with a low cost efficiency number. Now, sometimes there is a strong urge to increase the original estimate once a large cost efficiency gap is found. In our brick wall example, we could say the estimator used an out of date number, and the brick layer contractor is working efficiently. In other words, the estimate is to blame, not the contractor. However, this urge must be resisted, or else you will break the foundation of EVM, and you will lose its benefits.

Planned Value

Now we need to dig deeper into the concept of “earned value”. Above we learned how EVM assigns a value to a task’s progress using its percent complete and its original estimated cost. The original estimated cost is referred to commonly as the “planned value” (PV). However, if the original estimate is bad, how do we trust our assessments? The answer is also simple, but not often stressed; the planned value is simply a reference point. In fact, I would go so far as to say it is expected to be wrong. Often, project teams have the urge to equate the planned value with something akin to: “an accurate estimate assuming all variables that should be know to an expert in this field“. As an example, for our brick wall project, a good estimate would be one that the brick layer may estimate based on his most recent similar work. However, EVM is not interested in the absolute accuracy of the estimate. Sure, we all want an accurate estimate to create a proper budget, but EVM is about managing the project after that estimate has been approved. Unlike PERT, EVM is not in the business of estimation, it is in the business of management. Instead, we should think of planned value like a surveyor’s reference point.

As the surveyor measures targets, all data points are taken in reference to a single reference point. If the reference point changes, then this results in one of two things: garbage data, or extra effort to tie together survey data taken from one reference point with data taken from another reference point. The more reference points you have, the more time you spend processing the data than analyzing it. For project teams, planned values are their reference points. Cost efficiency assessments over or under 1.0 should be expected, we simply need to disposition them, and possibly adjust our targets. For tasks that appear to have been under-estimated, we can report the new target efficiency (say 0.75) and the resulting estimated total cost (say $4,000 for our brick wall). Upon further assessments, we can look for further deviations from the new target. Further deviations would need another explanation other than estimation issues, and this may point to mitigating actions being required. Changing the planned value to maintain a cost efficiency score of 1.0 wastes precious analytical effort, and all too often invites managing or gaming the numbers to please clients and senior managers instead of managing the work. So, like the surveyor, project teams can work best with a solid reference point, without needing to change it as data starts coming in from their measurements. This maintains the simplicity of implementing EVM while still allowing project teams to track concerning trends.

In Conclusion

Earned Value Management is a simple project management methodology that is meant to focus project teams on managing work and progress rather than managing data and estimates. The concept of “earned value” allows a task’s percent complete to translate into costs, providing simple progress assessment while allowing current and future issues to be easily identified, sorted, dispositioned, and tracked. It’s a problem identification tool. Project teams who best understand this concept and how to use it consequently become better at identifying problems, and identifying them sooner. Using EVM as intended frees up project teams to spend more time analyzing progress issues and thereby more time solving such issues. Projects that have more problems solved, and solved earlier, are more successful. They cost less, take less time, and are less stressful for staff. In the next part, we will look further into some of the analysis tools EVM provides, along with specific terminology and assessment formulas. Further on, we will discuss limitations of EVM, and will end this series discussing updates and additions to EVM that solve these limitations.

References:

Kloppenborg, T.J. (2012). Contemporary Project Management, 2e. South Western.

Lebowitz, S. (2015). 7 surprising downsides of being extremely intelligent. Available at: https://www.businessinsider.com/downsides-of-being-extremely-intelligent-2015-8 (Accessed: Dec 23, 2021).

Morin, J. (2009). How it all began. The creation of earned value and the evolution of C/SPCS and C/SCSC. PM World Today, 11(12), pp.1-8.