Earned Value Management

Earned Value Management What is it? Where did it come from? What’s so special about it? How do you do it?

Earned Value Management What is it ? A systematic approach to the integration and measurement of cost, schedule, and technical (scope) accomplishments on a project. Provides the ability to examine detailed schedule information, critical program and technical milestones, and cost data.

Earned Value Management Where did it come from? 1960s – DoD adopted Cost/Schedule Control Systems Criteria (C/SCSC) as an objective measure of progress. 1970s – Continued use in DoD as a means to offset cost/schedule risk in cost-pus contracts. High-tech, newly-developed weaponry Arms race induced critical schedule needs 1990s – Policy moved Earned Value into all Federal agencies OMB Circular A-11 NASA Policy Directive 9501.3 DOE Order 413.3 2003 – OMB began enforcement in all civilian agencies.

Earned Value Management Earned Value Management Why do we care? Projects over budget and behind schedule* 53% of IT projects finish over budget and behind schedule 52% finish at 189% of their initial budget 18% are simply never completed Statistically proven performance projections Performance at a project’s 25% completion point will remain steady throughout the project’s lifecycle. Consistent performance measures allow comparison across the portfolio *Source: Standish Group’s Chaos Chronicles 2004

Earned Value Management What’s so special about it? Fundamental difference with traditional management is the data used for analysis. Budget vs Actuals Earned Value Analysis

Earned Value Management Traditional Management Approach:

Earned Value Management EVM Integrates cost, schedule, and scope. Establishes an Integrated Project Baseline What is to be done? (scope) When will activities be completed? (schedule) What will it cost (and when) when to complete those activities?

Earned Value Management Based on something called Earned Value. A concept that task activities earn value as work progresses A data point that expresses the value of work accomplished

Earned Value The concept that task activities “earn value” as work progresses. The value earned is the budgeted cost of the activity completed to date.

Earned Value A data point that expresses the value of work accomplished What is the dollar value of what you have gotten done to date? Does not address the money spent in getting there.

Earned Value Management So how do we do this stuff? EVM depends on three data points Planned Value (PV) Earned Value (EV) Actual Cost (AC)

Integrated Project Baseline Absolutely dependent on the Work Breakdown Structure One WBS per program Deliverable-oriented Organizational responsibility identified in WBS Work not in the WBS is out-of-scope All lower-level elements roll up to the WBS total

Integrated Project Baseline Absolutely dependent on the Work Breakdown Structure Full (and accurate) definition is key Defined deliverable(s) Timeframe for delivery of product Total cost (direct and indirect) to deliver product Assigned organizational responsibility

Planned Value Data source is the Integrated Project Baseline How much did you expect to have done at point X ? Expressed in dollars (PV) How much do you expect to have done at completion ? Budget at Completion (BAC)

Planned Value

Planned Value

Actual Cost Data source is the Earned Value Management System The dollar amount actually spent to date. Has no relationship to work accomplished.

Actual Cost

Earned Value Data source is the Earned Value Management System The dollar value of actual accomplishments to date. Does not address the money spent in getting there.

Earned Value Several ways to “earn” it: Percent Completion Estimates Start/Finish of WBS Elements Milestones Completed (0-100%) Percent Completion Estimate with Milestone Gates 25% 75% 50% 50% 0% 100% 33% 67% 100%

Earned Value

Integrated Performance Report Compares the amount of work completed with what was scheduled and budgeted, to determine if cost (AC), schedule (PV), and work accomplished (EV) are progressing as planned. By integrating these three measurements, it provides consistent, numerical indicators with which we can evaluate and compare projects.

Integrated Performance Report

Integrated Performance Report These three data points allow us to: Calculate variances in cost and schedule performance. Calculate performance indices that allow direct comparison to other projects’ performance. Analyze trends in project performance. Formulate predictions as to how well the project will perform in the future.

Calculating Variances Cost Variance A comparison of the budgeted cost of work performed with actual cost. A negative variance means the project is over budget. CV = EV – AC CV = 851,000 – 1,041,000 CV = - $190,000 Note that this is not “budget vs actuals.”

Calculating Variances Schedule Variance A comparison of amount of work performed to what was scheduled to be performed. A negative variance means the project is behind schedule. SV = EV – PV SV = 851,000 – 1,000,000 SV = - $149,000

Calculating Performance Indices Cost Performance Index CPI = EV/AC A ratio of the budgeted cost of work performed to the actual cost. CPI = EV / AC CPI = 851,000 / 1,041,000 CPI = 0.817 An index less than 1.00 means the project is over budget.

Cost Performance Cost Variance (EV-AC) $851K - $1041K = -$190K CPI (EV/AC) = 0.8175

Calculating Performance Indices Schedule Performance Index SPI = EV/PV A ratio of the amount of work performed to what was scheduled to be performed. SPI = EV / PV SPI = 851,000 / 1,000,000 SPI = 0.851 An index of less than 1.00 means the project is behind schedule.

Schedule Performance Schedule Variance (EV-PV) $851K - $1,000K = - $149K SPI (EV/PV) = 0.851 And look at this: $ - 149K = 1 Month Slippage

Predicting Future Performance Estimate to Complete (ETC) How much will we have to spend (after today) to complete? Total budget less what we’ve earned to date. (With some assumptions). Performance to date has been anomalous Cost Performance to date will continue Both Cost and Schedule Performance to date will continue

Predicting Future Performance Estimate to Complete (ETC) Performance to date has been anomalous: ETC = BAC – EV = $1,149,000

Predicting Future Performance Estimate to Complete (ETC) Performance to date has been anomalous: ETC = BAC – EV = $1,149,000 Cost Performance to date will continue: ETC = = $1,405,504 BAC - EV CPI

Predicting Future Performance Estimate to Complete (ETC) Performance to date has been anomalous: ETC = BAC – EV = $1,149,000 Cost Performance to date will continue: ETC = = $1,405,504 Both Cost and Schedule Performance to date will continue: ETC = = $1,651,574 BAC - EV CPI BAC - EV CPI * SPI

Predicting Future Performance Estimate at Completion (EAC) How much will we have spent when we’re actually done? Again, based on the same assumptions as ETC. EAC = AC + (BAC-EV) = $2,190,000 EAC = AC + = $2,446,505 EAC = AC + = $2,691,856 BAC - EV CPI BAC - EV CPI * SPI

Predicting Future Performance To-Complete Performance Index (TCPI) How well do we have to perform to get back on track? Again, based on the same assumptions as ETC. TCPIC = = 1.22 TCPIS = = 1.17 TCPICS = = 1.437 1 CPI 1 SPI 1 CPI * SPI

Earned Value Management And if everything goes perfectly:

Earned Value Management Systems ANSI/EIA-748 defines it: An EVMS is a set of business practices that, when applied to a project or program: integrate scope, schedule, and cost objectives, establish a baseline plan for accomplishment of project or program objectives, and employ earned value techniques for performance management.

Earned Value Management Systems ANSI/EIA-748 prescribes 32 criteria in five categories: Organization Planning, Scheduling, and Budgeting Accounting Considerations Analysis and Management Reports Revisions and Data Maintenance

ANSI/EIA-748 Compliance Organization (of the project) Define the entire project. Establish an integrated project baseline based on a WBS. Establish management control responsibilities within the WBS. Assign responsibilities for all WBS elements.

ANSI/EIA-748 Compliance Planning, Scheduling, and Budgeting Employ a formal planning, scheduling, and budgeting system. Measure performance against the integrated performance baseline. Cost Schedule Scope

ANSI/EIA-748 Compliance Accounting Considerations Provide accurate and timely cost reports (at the WBS element level). Record project costs as consumed or incurred. Provide accounting systems that can measure: Planned Value Earned Value Actual Cost

ANSI/EIA-748 Compliance Analysis & Management Reports Provide regular reporting, at least monthly. Cost Schedule Scope Analyze actual performance against the authorized baseline, including, at a minimum: Schedule Variance Cost Variance Revise forecasts of final results based on actual performance. Estimate to Compete Estimate at Completion Implement managerial actions in response to EV information.

ANSI/EIA-748 Compliance Revisions and Data Maintenance Provide timely approval/rejection of all change requests Incorporate approved changes in a timely fashion. Reconcile budget changes to authorized scope changes Control retroactive changes

ANSI/EIA-748 Compliance “EVMS scalability is viewed as a spectrum employing the principles of EVMS as fundamental to all programs and the EVMS guidelines as applicable to large, complex, and/or high risk programs; allowing any program regardless of size and complexity to realize the benefits of earned value management.” ANSI/EIA-748

Informed Management Decisions EVM In a Nutshell Management practices and discipline vs. a tool set Work Breakdown Structure (WBS) Integrated scope/schedule/budget baseline Accounting system that accommodates the WBS Change control plan EVMS Project Schedule Baseline Budget Accounting System WBS Actuals Performance Measurement Early Warning & Performance Trends Informed Management Decisions Corrective Actions Recovering Planning Planned Accomplishments

Wrong ? What Could Possibly Go Inadequate requirements definition No (or Incomplete) Work Breakdown Structure Accounting systems that can’t address the WBS Lack of management attention to project progress Failure to respond to warning signs Failure to reconcile baseline to funding shortfalls (Rebaseline)

So What ? Your Turn !

Source: The PMI© Earned Value Practice Standard EVM Rigor Frequency Rigor Significance Granularity Risk Uncertainty Source: The PMI© Earned Value Practice Standard