Deployment of Earned Value Management Systems in Project ... - QAI

Earned Value – a Primer
Deployment of Earned Value Management Systems in Project
Environment
A.What is Earned Value?
In an ongoing Project, the Manager needs to continually assess the Project Performance
across three primary dimensions – achievement of scope, time spent and costs incurred.
Depending on the exigencies, the evolution across these three parameters can vary dynamically
during the Project Lifecycle.
Earned Value (EV) is a mechanism to integrate the technical, Cost and Schedule performance of
the Project. This mechanism can be used during the commencement of the Project to set up
‘integrated Baselines’, collectively addressing the Contractor’s extent of Planning, scope
coverage as laid down in the Statement of Work (SOW), Scheduling of work activities,
resourcing, understanding and addressing of risks. As the project progresses, the performance
variations from the Baselines are periodically assessed to initiate necessary corrective actions.
The concept of EV was developed by the US Department of Defense in 1967 and used
subsequently by most of the major US governmental agencies like NASA, Department of
Defense etc. Many of such organizations stipulate the Contractor to demonstrate their
capability to institute EV based progress-reporting systems as a prerequisite for Project awardmaybe
through Tools based reporting
B. How EV is useful to the industry?
The true value of the EV lies in project progress reporting. There is a true equality of the
information shared between the Buyer and the Contractor, through EV based progressreporting
systems enabling reduction of information asymmetry.
It is a well-established phenomenon that institution of measurement systems leads to
modification of the actual behavior. Communication of the project progress through EV metrics
inculcates cost containment consciousness for the Contractors. Establishment of such systems
imparts confidence on the Contractors’ progress measurement and the risk management
processes for the Buyer.
EV measurement systems facilitate prediction of likely costs and schedules for the Project,
enabling the management to deployment of additional resources to focus on getting of
additional resources. Some Buyers use EV metrics to offer performance-linked incentives to the
Contractors.
EVM systems are universally applicable across multiple types of contracts, including
Firm Fixed Price, Cost Plus and Time and material situations- with varying connotations.
C. How to Set up the EVM systems?
The Project Management Plan usually includes the Work Break down structure (WBS), the
Project network, and the Cost Baseline, outlining the cumulative planned spending across the
Project Life cycle.
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The basic component of EVM is the WBS – representing the deliverables to be produced at the
lowest level as Work packages. The line of decomposition of Work packages facilitates Activity
definition, responsibility assignments and management of risks at the micro level. Activities get
associated at the Work Package level.
EV can be tracked at the Activity level or the Deliverable level. The activities controlled by
single manager get grouped together as Control Account Plan (CAP), which usually coincides
with the EVM reporting levels. Thus, in effect, CAPs are derived by taking WBS and
Organisational Breakdown Structures (OBS) together into account.
Cost Baselines are derived from planned resource allocations and resource rates across the
Project lifecycle. This Baseline represents Budgeted Cost of Work Scheduled (BCWS), which is
also called the Planned Value (PV) for the project. (Note – BCWS etc were nomenclature used
in earlier versions of application of the method and are retained for understanding purposes
only)
Most of the Projects use automated Project Management Information Systems (PMIS) to
load cost data during the Project execution. Typically, the actuals vary from budgets
due to multiple factors – including resource usages, resource rates and difference in the tasks
performed as compared to schedule. The cumulative costs incurred during the Project life
cycle get plotted as the Actual Cost of Work Performed (ACWP), also called Actual Costs (AC)
currently.
The next element in the EV Management system is to determine the Budgeted Costs of Work
performed. ( BCWP) – which is also commonly known as the Earned Value (EV). Herein, we
assess the extent ofwork performed at any time and relate it to the original budgets. BCWP can
be determined in different ways:
- Based on Task percent completion, prorate the budgeted costs
- Loading EV accruals for intermediate Phases
EV Calculation for assessment of current performance
At any intermediate point during the Project, we have three factors:
a) Actual Costs (AC) : Actual Costs of the Work Performed so far, which get typically
accumulated via the Project Accounting system established for the Project.
b) Planned Value (PV) which is the Budgeted Cost of Work Scheduled so far.
c) Earned Value (EV), which is the Budgeted Cost of Work Performed so far.
Above three factors are basic to EV calculations.
The variance of actual performance with planned schedule arises on account of slippages of
two kinds:
A) Schedule slippage: Tasks are not getting completed as per planned schedule. This is
measured by Schedule Variance (SV), as EV – PV or Schedule Performance Index (SPI), which is
computed as EV/PV.
At the reference time point, this formula computes the ratio of the value of the Work
performed to the value of the Work Scheduled. As expected, any value of SPI greater than 1 is
favorable for the Project Management.
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B) Cost Slippage: It is quite likely that the Project is on schedule but behind in cost
performance. This phenomenon typically occurs due to overspending as compared to budgets.
The performance metric for measuring Cost slippage is Cost variance (CV), which is computed
as EV-AC. In ratio terms – Cost Performance Index (CPI) is calculated as EV/AC.
At the reference point again, CPI calculates the ratio of Budgeted costs to Actual costs for the
work performed. As with SPI, any value of CPI greater than 1 is advantageous to Project
Management.
SPI and CPI vary dynamically across the Project Lifecycle and could fluctuate in different
directions depending on schedule and cost efficiency of the project performance.
A composite index - CSI (Cost-Schedule Performance Index), defined as CPI x SPI., measures
the combined performance on schedule and cost fronts.
The indices are used for measuring the current performance of the Project and for future
prediction.
D. Use of EV for future predictions
Under the assumption that the current efficiencies in the cost and time fronts continue to
prevail, CPI and SPI can be used to predict for future.
If BAC (Budgeted at Completion) is the original budget of the Project, then BAC/CPI gives an
estimate of the likely total spending on the Project at completion. (This is also known as
Estimate at Completion – EAC).
Adjustment for both Schedule and Cost Parameters – gives a future Cost prediction of
EAC = AC + (BAC-EV)/(CPI*SPI)
Similarly, if OSAC is the original Scheduled at Completion, then OSAC/SPI gives an estimate
of the revised schedule for completion, which may be termed as Likely Schedule at
Completion ( or LSAC).
Thus (OSAC, BAC) represent the original coordinates as per the Plan and (LSAC, EAC) represent
the expected durations and costs at the end of the project, based on the current progress so
far. Of course, it is possible to compute these statistics for any interim milestone also.
The reporting periodicity can be pre determined with the Contractor for various Control
Account Plans and for the overall Project. Significant variations between the planned and
actual performances may call for rebaselining, which the Project Manager has to undertake,
through established Change Control Procedures.
E.Which are the industry standards for EVM?
ANSI/EIA standard 748 Industry Guidelines for EVM as a part of Cost/Schedule Control Systems
(C/ SCS) to be followed by the organizations.
These guidelines cover multiple aspects including the Organization, Planning, Scheduling, and
Budgeting, Accounting Analysis and Management Reports, Revisions and Data
Maintenance standards to be used by the Organizations. In all, 32 criteria have been laid down
in the ANSI standards, significant of these include:
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Integration of the organization’s WBS and OBS to permit measurement by tasks and
resources
Clear identification of interdependencies of tasks to be performed and the
authorizations systems involved
Identification and incorporation of indirect costs and overheads cutting across multiple cost
elements
Setting up of reporting periodicities, reporting structures and Change control systems
F. What are the challenges facing computation of EVM?
Good PMIS tools are needed to support EVM – the depth of support varies across the
Tools.
A complex project has multiple streams of costs pouring in. Some of these elements can be
measured through direct costs and others through indirect costing processes. Organizational
Chart of Accounts and Work authorization policies play a significant role in setting up of the
EVM systems.
Most of the EV Packages enable incorporation of accounting principles. These include Activity
Based Costing, Allocation of Direct and Overhead costs, Resource Burdening, interfacing to
organizational financial systems etc.
On the Human resources front, the systems need to collect the resource rates, timesheet
interfacing, hours worked, whether they are used directly or indirectly for the Project etc.
EVM is not very useful for moving scope Projects or when baselines get shifted frequently due
to external constraints. Also, measurement of EVM in intellectual type of work ( as in Software
development) can be subjective – when it comes to measurement of extent of work ‘done’ – in
between milestones. A good way in this context is to have closely paced milestones ( say not
more than a week apart) and use 20/80 loading rule for measuring the value of work in
between milestones.
More often than not, Project Management and the Business Management need to understand
the significance of various EVM parameters, for proper interpretation and action. EVM works
well in a contractual context but for internal Projects, the costs may have to be substituted by
efforts.
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