31ch Implementing Earned-Value Project Management in Ten Easy Steps (p 521-539)

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Implementing Earned-ValueProject Management in TenEasy Steps

Quentin W. Fleming andJoel M. Koppelman

Biographical Sketch . . . Quentin W. Fleming is an author, instructor, andproject-management consultant. He is the author ofeight published textbooks that have covered the var-ied subjects of earned-value project management,planning and scheduling, and procurement man-agement. He has been affiliated with the Universityof California at Irvine (UCI) since 1995 and serveson the UCI Project Management Advisory Board. Hedeveloped two new courses for UCI, both requiredcomponents of their project management certificateprogram.

He was one of the eight-person core team thatupdated the Year 2000 Edition to A Guide to theProject Management Body of Knowledge ( PMBOK)for the Project Management Institute (PMI). Specif-ically, he was responsible for all earned-value con-tent in the document and also the chapter coveringproject procurement management.

Joel M. Koppelman is co-founder, co-owner, andchief executive officer of Primavera Systems, Inc. Heis a registered professional engineer and an activemember of several professional societies. He is thecoauthor of the PMI-published best-selling bookEarned Value Project Management, together withQuentin Fleming.

Mr. Koppelman received the year 2002 Award ofMerit from AACE (Association for the Advancementof Cost Engineering) and the year 1994 Distin-guished Contributor Award from PMI (Project Man-agement Institute) and was named to the DrexelUniversity 100 in the year 2000. Koppelman is alsoa member of Drexel University’s Engineering Col-lege Advisory Council.

Field Guide to Project Management, Second Edition. Edited by David I. ClelandCopyright © 2004 John Wiley & Sons, Inc.

522 Project Oversight

Earned-value project management (EVPM) is often perceived as a com-plicated tool. Nothing could be further from the truth. In its most basicform, earned value requires simply following fundamental project-

management practices. Earned value can best be thought of as a ‘‘resource-loaded schedule.’’ You measure performance against your resource-loadedschedule.

However, earned value does require some discipline. It requires that theproject objectives be well defined and that a measurable project baseline beput in place. The earned-value baseline must reflect management’s expec-tations for the project. The baseline consists of three elements: (1) the au-thorized work, typically as specified in the project’s master schedule, (2) theauthorized time frame, also as specified in the master schedule, and (3) theauthorized budget for each major task. We refer to the EVPM baseline asthe planned value.

When employing earned value, management will focus their attention onthe completed work, which is called the earned value. The earned valuemeasured also consists of three elements:

1. The authorized physical work that has been completed2. The actual time frame in which the work was completed3. The original authorized budget for the completed tasks

An important point to understand: actual costs do not create earned value.Earned value is simply the authorized work when it has been completed,and management’s original authorized budget.

Project performance relates to the earned value achieved, measuring re-sults from as early as 15 percent up to 100 percent completion. Earned valueis thus synonymous with percent complete. Both the actual schedule and theactual cost performance are tracked against the approved project baseline.

Schedule performance is considered to be the earned value achieved, lessthe planned value baseline. The formula for determining the schedule var-iance is earned value (EV) less planned value (PV) equals the schedule var-iance.1 Any number, less than 1.0, reflects a behind-schedule position. TheEVPM schedule variance is important to track and typically is the first in-dicator that performance is falling behind the approved baseline plan.

However, a more critical indicator to watch when employing earnedvalue is the project’s cost performance. Cost performance is considered tobe the earned value achieved, less the actual costs spent to achieve theearned value. The formula would thus be earned value (EV) less actual costs(AC) equals the cost variance. Any cost number less than 1.0 reflects anoverrun of costs for the work actually performed. Early cost overruns mustbe watched closely because they are typically never fully recovered by theproject.

There is nothing complicated about what we have just discussed.

Implementing Earned-Value Project Management 523

Use a Simple Form of Earned Value to Help ManageAll Projects

It is likely that most of the projects in the world determine their cost per-formance using only two dimensions: the planned costs, the actual costs,and the difference between the two. Thus, if the project spends all the al-lotted money, it is considered to be right on target. If it spends less than itsauthorized budget, this is considered to be an underrun of costs. If it spendsmore than the allocated costs, this is an overrun of costs. What could bemore absurd? This comparison is not cost performance, but rather fundingperformance. It measures nothing more than whether or not the budget hasbeen spent.

What is missing in this picture is the value of the work performed for themonies spent. For example: If the project budget was $1.0 million, $0.9 mil-lion was spent, but only $0.8 million of physical work was accomplished,then, respectfully, this should be called what it is: an overrun of costs. Theproject spent $0.9 million to accomplish only $0.8 million of work. The miss-ing third dimension of most project assessments is a measure of the valueof the work accomplished.

Over a century ago, the industrial engineers, led by the father of scientificmanagement, Frederick W. Taylor, were correct in their assessment of whatrepresented ‘‘true’’ cost performance in the American factories. To thesescientific engineers, cost performance represented the difference betweenthe work accomplished, represented by the measured earned standards, andthe actual costs spent to do the work. Cost performance to Taylor et al. wasnever the difference between their planned standards and the actual costs.

Today, many corporate executives still do not grasp this fundamentallysimple concept and are content to focus on their planned expenditures ver-sus the actual expenditures and refer to this as representative of their costperformance. We should never confuse annual accounting with physicalproject performance. The accountants may elect to reset their cost accountsto zero at each year-end close. However, projects that span two or moreperformance periods should never, repeat never, zero out their actual per-formance balances. To allow this practice is to destroy one’s ability to pre-dict the final costs based on actual project performance.

The early industrial engineers created what they called their ‘‘plannedstandards,’’ representing the authorized physical work and the authorizedbudget for the physical work. However, planned standards represented onlytheir baseline plan, not the accomplished work. It was only when such workwas completed that they could determine their true cost performance.

Thus, Frederick W. Taylor and his industrial engineering associates overa century ago focused on the ‘‘earned standards,’’ which represented thephysical authorized work which had been accomplished, plus the originalauthorized budget for the completed work. They then compared the earned


standards against the actual hours expended to determine their true ‘‘costperformance.’’ It worked a century ago in the factories. The same funda-mental concept also works today in the management of projects.

The Fundamentals of Earned-Value ProjectManagement (EVPM)

The U.S. Department of Defense (DoD) was the first organization to adoptthis early industrial engineering concept for use in the management of one-time-only projects. In 1962, the DoD had underway a major new develop-ment project called the Minuteman missile. This project employedthousands of people and was costing millions of taxpayer dollars. It spannedseveral fiscal years. The U.S. Air Force personnel who managed this projectattempted to adopt this early industrial engineering concept for use on aone-time-only project. To their pleasant surprise, earned-value managementworked for them. It gave them a cost and schedule performance assessmentnot available with any other project-management technique.

They broke their project down into discrete pieces—separate tasks—andto each task they added an authorized budget. When each task was com-pleted, they credited completion of the authorized physical task, plus they‘‘earned’’ their authorized task budget. They compared this completed work,which they called the earned value, against the costs actually spent to ac-complish this work. The result provided an accurate reflection of their truecost performance.

Since 1962, the Department of Defense in the Pentagon has kept trackof the performance of hundreds of projects, reflecting actual performance,the good, the bad, and the downright ugly. They have now analyzed over800 separate projects. The results have been spectacular in allowing themto predict accurately the final project cost and schedule requirements basedon their actual performance.

The single most important metric to track in EVPM is the cost perform-ance index (CPI). This metric quantifies the relationship between the earnedvalue (the physical work accomplished plus its authorized budget) versusthe actual costs spent to accomplish the earned value. The cumulative CPIin particular has been proven to be a stable indicator of actual performancefrom as early as the 15 to 20 percent completion point of any project. Thus,the CPI represents an accurate reflection of true cost efficiency and can beused to predict accurately the final cost requirements for any project, eventhose spanning multiple years. For example, if the cumulative CPI registersa 0.80, it means that for every dollar that was spent, only 80 cents of valuewas earned. This condition can also be called an overrun.

But most important is the fact that the cumulative CPI can be used,starting at the 15–20 percent completion point to forecast the final projectcost results with amazing accuracy. For example, if a five-year $100-million-


dollar project has recorded a cumulative CPI of 0.80 at the 20 percent com-pletion point, one can forecast the final results within a finite range. Simplytake $100 million and divide it by the cumulative CPI of 0.80. You can im-mediately predict the final project costs at about $125 million, or a fore-casted cost overrun of approximately $25 million. How good is this forecast?Empirical studies by the DoD support the position that it will be accuratewithin plus or minus 10% from the $125 million final predicted costs:

DoD experience in more than 400 programs since 1977 indicates thatwithout exception the cumulative CPI does not significantly improve dur-ing the period between 15% and 85% of contract performance; in fact, ittends to decline.2

More recent additions to this same DoD study have increased the totalsup to over 800 projects without changing their empirical findings.

However, many projects managers today outright reject the DoD projectexperience, saying that it has no relevance to their smaller commercial-typeprojects. The authors believe that all projects possess unique characteristics,and these fundamental characteristics of projects transcend all industries.Projects are projects. In addition, many of the DOD projects included intheir empirical study represent rather sophisticated and complex endeavors:stealth aircraft, smart bombs, global positioning systems, state-of-the-artsoftware, etc. These can hardly be called simple projects.

One independent scholarly study done by the U.S. Air Force reinforcedthe position that the cumulative CPI can be used to predict final projectcosts with great accuracy:

[T]he cumulative CPI did not change by more than 10 percent from thevalue at the 20 percent contract completion point.3

Why Bother with Earned Value on Projects?

Employing earned value on a project provides reliable cost and scheduleperformance data not available with any other project-management tool ortechnique. Rather than allowing various organizational factions to have theirown set of (often self-serving) performance data, employing earned valueon projects allows everyone to track from the same metrics. Without ques-tion, the CPI is the single most important indicator available to any projectwhen employing earned value.

The CPI on a project can be compared to tracking body temperature ina human being. Departures from the normal body temperature of 98.6� re-flects a potentially sick patient. Likewise, any CPI readings of under 1.0 re-flect a project in immediate need of management’s attention. You get anearly warning signal from earned-value project management—in time tomake a difference.


The CPI represents the relationship between the earned value (the au-thorized work which has been completed, plus management’s originalbudget for the completed work) and the funds spent to achieve the earnedvalue. The index is available when one takes the earned value and dividesit by the actual costs. Thus, if one registers $100 in earned value and spends$100, the CPI reflects a 1.00 value. A CPI reading of 1.0 is considered to beperfect performance.

However, if one earns only $90 but spends $100, the CPI will register a0.9 performance figure. This condition tells us that for every dollar we spent,we got only 90 cents of value. It is an overrun condition, and overruns inthe early phases of a project are very serious in that they are rarely, if ever,recovered in subsequent periods. Even if later performance gets back ontrack, at the budgeted value, later performance typically does not compen-sate for the early overrun.

The significance of the CPI is that empirical studies performed by theU.S. Department of Defense have indicated that the cumulative CPI willstabilize at the 15–20 percent completion point on a project and will becomeprogressively more stable as the project completes the authorized work. Atthe 20 percent completion point, the ability to recover is �10 percent of theperformance achieved. A specific example might help.

Let us assume that a $1.0 million dollar project is 20 percent completeand has achieved a cumulative CPI of 0.75—that is, for every dollar spentthey realized only 75 cents of earnings. The most probable final costs pro-jection would be $1.0 divided by 0.75 equals $1.3 million in final projectedcosts. This value at the 20 percent completion point has been demonstratedto be stable by �10 percent of the projected value. Thus, the final projectedcosts value of $1.3 million might be as low as $1.2 million or as high as $1.5million. Bottom line: the project has some cost problems that must beworked out. Problems do not get better with time; they only get worse.

No other project-management tool provides an accurate reading of per-formance at the 15–20 percent completion point in time to make a differ-ence in the final results.

Ten Steps to Implement Earned-ValueProject Management

Implementing earned value on a new project can be considered a goodnews, bad news scenario. The good news is that there is nothing inherentlydifficult about the earned-value concept. Simply by following fundamentalproject-management practices, anyone can employ earned value on anyproject.

However, the bad news is that it takes discipline to employ fundamentalproject-management practices in any organization. And earned value, in or-


der to be employed, requires that fundamental project-management prac-tices be followed. If corners are cut and certain basic requirements are by-passed for whatever reason, then earned value cannot be effectively used.At a minimum, project goals must be set, the project scope must be definedto the best of our ability, a measurable baseline plan must be put in placeand tightly controlled, and measurement of actual performance must takeplace. These fundamental practices are often circumvented by organizationsnot ready to move from functional fiefdoms into management by projects.

The authors have studied the concept and have summarized the fun-damental requirements necessary to implement earned-value project man-agement. They have reduced the requirements to ten simple but criticalsteps:

STEP 1: YOU MUST DEFINE THE PROJECTOn any project, you must define the work to be done, if for no better reasonthan to know when you are done. To the extent that you can, you mustdefine 100 percent of the scope of the project. This is true on any project,but it is particularly critical on any project in which you intend to employearned value. With earned value, we must constantly focus on the author-ized work that has been completed, plus management’s official authorizedbudget for the completed work. We express our status as being ‘‘18 percentcomplete,’’ ‘‘27 percent complete,’’ ‘‘47 percent complete,’’ etc. Point: if wehave not defined what constitutes 100 percent of the project, how can weever assess our percentage completion point? Answer: We can’t.

Realistically, no project will ever define a new job with absolute precision.But one must make some educated assumptions about a new project inorder to quantify and then decompose the work with sufficient confidencethat the effort can then be planned, scheduled, and estimated with somedegree of certainty. Anything less and management will be committing to anew project by providing essentially a blank check. Vague scope definitionbegets scope creep.

How does one define a job when often specific details are lacking? Thereare no absolute answers. But one of the most useful of all tools available toany project manager is the work-breakdown structure (WBS). The WBS is tothe project manager what the organization chart is to the executive. A WBSallows the project manager to define a new endeavor by laying out all theassumed work within the framework of the WBS and then decomposingeach element into measurable work packages. A sample WBS is displayedin Figure 31–1.

Additionally, once the WBS is assumed to constitute a reasonable por-trayal of the new project, it can then be used to take the next critical stepsin the project-planning process, including make-or-buy analysis, risk as-sessment, scheduling, estimating, and ultimately the authorization of budg-ets to proceed.

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Level 1 of the WBS represents everything the project has agreed to ac-complish. All of the objectives to be met should be included in level 1. Con-versely, everything the project has not agreed to do should lie outside level1. If someone asks for work to be done and that work is outside of the scopedefinition contained in WBS level 1, it is by definition out-of-scope work.Out-of-scope work needs authorization, which may also require morebudget and possibly more time, and the added work may well impact otherauthorized work. If one casually accepts out-of-scope work the condition iscalled ‘‘scope creep,’’ which must be avoided.

Level 2 of the WBS is also important in that this level reflects the man-agement approach for the project. The project manager and typically thefull project team will have collectively chosen to subdivide their project intothese specific categories for purposes of management. As displayed in Figure31–1, the project team has elected to divide their project into six discreteparts: ‘‘Business Process Investigation,’’ ‘‘Application Design,’’ ‘‘DistributedDeployment,’’ etc.

Levels 3, 4, and so forth of the WBS constitute simply a further subdi-vision of subordinate defined work. The two most critical levels of any WBSare thus level 1 because it represents the total project, and level 2 becauseit constitutes the management approach.

STEP 2: YOU MUST DETERMINE WHO WILL PERFORM THE DEFINEDWORK, AND IN PARTICULAR IDENTIFY ALL MAJOR CRITICALPROCURED WORKIt does make a difference to projects who will perform the work. Experiencedworkers generally work better and faster than inexperienced people, but theyalso cost more. Often using an experienced work force is typically a goodinvestment. However, sometimes the project’s own organization will haveno experience in a particular area, perhaps in developing a new component,and the project must out of necessity send the work to another companyfor performance. These critical choices are called ‘‘make-or-buy’’ analysis,and determining those items which must be procured for the project is anessential extension of the scope definition process mentioned in step 1.

Why is it important to identify the work that must be procured? Simplybecause procurements are done under legal arrangements, formal contractsare issued, which are in effect nonforgiving. It you commit to buy somethingthat is not what you need, or the requirements must be changed, suchchanges will be accommodated of course, but at a price. Sellers love to havechanges in scope, because each change gives them an opportunity to ‘‘getwell’’ from a tight competitive bid. Projects will find that it takes time toadequately compile a tight procurement package, which can later be en-forced if need be in a court of law. The earlier the procured work is iden-tified, and responsibilities assigned, the better such packages can bemanaged.

By contrast, internal budgets can be executed in a more informal way,and the fact that everyone is on the same team allows some margin for slack.


But there is no slack with the procured work. Procurements must be doneproperly at the start, or the project will pay a price.

Lastly, whether the project work is done by the project’s own organiza-tion or procured from outside the company, the measurement and reportingof progress must take place. Inside or outside, the project must be able tomeasure the earned value of the work being performed.

STEP 3: YOU MUST PLAN AND SCHEDULE THE DEFINED WORKPerhaps the single most critical tool required to implement earned value isto have a formal scheduling process in place. The project’s scheduling sys-tem will portray the approved work scope, with each task carefully placedinto a specific time frame for performance. In earned-value vernacular, thescheduled work (plus its authorized budget) will constitute the project’splanned value. As performance then takes place on the project, that portionof the planned value that is physically completed (plus its budget) consti-tutes the earned value. Both the planned value and the resulting earnedvalue emanate from the project master schedule and must use the samemeasurement metrics both to plan and then to measure the actual perform-ance.

The project’s formal scheduling system is thus critical to the employmentof earned value because it is the vehicle that represents the project scope,the planned value, and the resulting earned value. The project master sched-ule is vital to earned value projects because it reflects the project manager’sbaseline planned value for everyone to follow.

On larger, more complex projects, a full hierarchy of project schedulesmay need to be put in place. Each subordinate schedule must reflect thesame requirements as was defined by the project’s master schedule.

Also on complex projects, there must be some method to isolate theconstraints between one task and all other tasks. Typically, to satisfy thisrequirement some form of critical path methodology (CPM) will need to beemployed. The critical path (or near critical paths) on projects must be ag-gressively managed and done so in conjunction with negative earned valueschedule variances. A behind-schedule variance (less than 1.0 performance)indicates that the project is falling behind its baseline plan. If the late tasksare on the critical path, or they are high-risk tasks, they must be aggressivelymanaged to successful completion.

STEP 4: YOU MUST ESTIMATE THE REQUIRED RESOURCES AND THENFORMALLY AUTHORIZE THE BUDGETSOnce the work scope has been fully defined and subsequently planned andscheduled, the next requirement to forming an earned-value baseline is toestimate the resource requirements for all defined tasks within each level ofthe specified WBS elements. Each defined WBS element must have a re-source value estimated to complete all of the specified work. The estimated


values must be reasonable and achievable. Management will then assess therequested resources and approve a value in the form of authorized budgets.Individual budgets will not contain contingencies or management reserves.Reserves or contingencies, if they exist, must be owned by the project man-ager.

Remember the rule: planned value represents two things: the scheduledwork, plus the authorized budget. Earned value also represents two things:the completed work, plus the same authorized budget. Thus in order to planand then measure earned value one needs to schedule all defined tasks alongwith the authorized budget necessary to complete the tasks.

All authorized budgets must be achievable in order to have a viable proj-ect baseline.

STEP 5: YOU MUST DETERMINE THE METRICS NEEDED TO CONVERTPLANNED VALUE INTO EARNED VALUEEarned value as a project-management technique focuses on the accom-plished earned value. The technique represents (1) the authorized work thathas been completed, plus (2) the official authorized budget for the com-pleted work. The actual costs incurred to convert planned value into earnedvalue have nothing to do with the measurement of earned value. Earnedvalue, often referred to as percent complete, is simply the authorized scopethat has been completed, plus the original authorized budget for that work.

Question: how does one measure the conversion of planned value intoearned value? Answer: one sets up metrics in the baseline project schedulesto quantify the authorized work and then the completion of the authorizedwork. Specific milestones or tasks with weighted values are measured as theyare physically completed. Remember, earned-value project management isnothing more than managing a project with a resource-loaded schedule.

Over the years since earned value was first introduced, various methodshave been devised to measure project performance. However, the most re-spected methods use some type of discrete measurement. Specific mile-stones representing points in time are assigned values; when fullycompleted, the assigned budgeted values are earned. Also, tasks are assignedvalues that can be measured as they are partially completed, at which timesome value is assigned to the completed work through the reporting period.

Displayed in Figure 31–2 are four of the more respected methods to mea-sure performance using what is called discrete measurement. Each methodwill need to be understood.

At the top of the figure are shown milestones, with each milestone as-signed a weighted value, a specific budget. As the milestones are workedand partially completed, no earned value will be credited. It is only whenthe milestone is completely finished that the total budget is earned. Thus,milestones are sometimes referred to as 0–100 percent measurements.Weighted milestones are somewhat like an ‘‘off-on’’ switch.


• Milestones (0-100%):

• Fixed-formula tasks:

• Percent Completion Estimates:

• Percent Completion Estimate with Milestone Gates:

25% 75% 50% 50% 40% 60%

100%

33% 67% 100%

Figure 31–2 Metrics to Convert Planned Value into Earned Value

The second line in Figure 31–2 represents a measurement techniquecalled fixed-formula. Work is expressed by individual tasks, with each taskassigned a specific budget. When a task is legitimately started, some pre-defined percentage of the total budget is earned, and when the task is com-pleted, the other predefined percentage is earned, up to 100 percent of thebudget. Before work is commenced, the percentage values for starting andfinishing each task are set, which must add up to 100 percent. As shown inthe first task, the split is 25 percent to start and 75 percent to finish. In themiddle 50 percent, 50 percent is used. At the right the split is 40 percent tostart and 60 percent to finish.

When using this method, earned value is only credited with the start orfinish of the task. It is thus important that all tasks span only one or tworeporting periods. If measurement is on a monthly basis, the defined tasksmust start in one month and finish in the same month or the succeedingmonth. You would not want to start a task and credit earned value, thenwait several months before earning the balance of the 100 percent. Likewise,if measurement is on weekly basis, the same rule applies with fixed-formula:not more than two reporting periods per task.

The third line in Figure 31–2 represents percentage completion estimates.There is nothing inherently wrong with this method, but, if one wants toplay games with earned-value measurement, it is typically done with sub-jective percentage completion estimates. With this method, a grouping ofwork is defined with a long task, which can span several reporting periods.As each reporting period is completed, the manager in charge of the workprovides a subjective estimate of the work completed, against the total al-


located budget. A 47 percent complete estimate suggests that 47 percent ofthe physical work has been completed, and 53 percent lies ahead.

One of the best checks on the validity of using subjective percent com-plete estimates is to have an aggressive and astute management that un-derstands the earned value process. If senior management periodicallyreviews the status of each task and challenges percentage complete esti-mates that appear excessive, this subjective earned-value technique can bequite accurate. It is easy to plan and administer. However, many people havehad bad experiences with percent complete estimate, where excessive esti-mates of performance were claimed, taking credit for work not yet per-formed.

To overcome the possibility of poor estimates of actual performance withsubjective percentage completion measurement, the next method was de-vised, which possesses both the ease of administration and built-in checksand balances similar to using specified milestones. This technique, calledpercent completion estimate with milestone gates, is displayed on the bottomline of Figure 31–2. It resembles percent complete estimates, but it insertsspecific tangible milestones, which serve as gates or checkpoints that cannotbe passed until specific deliverables have been achieved.

In the case of this long task as shown, there are three milestones to besatisfied: at the 33 percent point, at 67 percent, and finally at 100 percent.In order to go past these three milestones, certain predefined criteria mustbe satisfied, example deliverables made. A deliverable can be a specific pieceof hardware, a drawing, or an intellectual position such as a technical po-sition paper, a preliminary design point, etc. In between these milestones,the manager in charge will provide their subjective estimates of the per-centage completion. But they cannot go past each milestone until the spec-ified criteria have been met.

These four methods will typically represent the most accepted methodsused to measure project performance discretely. There are other methodsused to measure performance that are beyond the objectives of this briefearned-value introduction. Anyone interested in the subject can do addi-tional reading on the subject.4

STEP 6: YOU MUST DETERMINE THE POINTS OF MANAGEMENTCONTROL AND FORMALLY AUTHORIZE CONTROL ACCOUNTPLANS (CAPS)Earned value requires use of an integrated project baseline, meaning thatthe defined work scope must include both the baseline schedule and theauthorized budget. Integration takes place within each of the specified work-breakdown structure elements.

Project management must next specify their points of management fo-cus, referred to in earned value as control account plans (CAPs). CAPS areplaced at selected WBS elements and can best be thought of as subprojects,or project teams, subdivisions of the full project. The sum of the CAPS willconstitute the total project baseline. The actual earned-value performance


measurement will take place within each of the specified CAPs. Total projectperformance is simply the summation of all the detailed CAPs. CAPs can beplaced at any level of the WBS.

Displayed in Figure 31–3 is the same WBS that was used earlier to definethe initial project. At this point the project manager, typically supported bythe full project team, will have selected level 2 of the WBS to place theirpoints of management control, the CAPs. Each designated CAP must containfour elements: (1) a unique statement of work, (2) a schedule for perform-ance, (3) a finite budget, and (4) someone designated with authority andresponsibility for the performance of each CAP, typically called the CAPmanager. Performance measurement takes place within each CAP of theproject, and the sum of the CAPs will constitute the total project. The totalproject is simply represented by the sum of the CAPs.

On commercial type contracts, the total project baseline may sometimesinclude such things as indirect costs, and even profits or fee, to match thetotal authorized project commitment. The project baseline must thus in-clude whatever senior management has authorized the project manager toaccomplish.

Internal company projects typically do not contain indirect costs, or prof-its. Many (perhaps most) internal project baselines will simply represent thesum of the defined CAPs, which are made up exclusively from direct laborhours only. The authorized project baseline must constitute whatever man-agement has decided it should be.

STEP 7: YOU MUST RECORD ALL DIRECT PROJECT COSTSCONSISTENT WITH THE AUTHORIZED BASELINE BUDGETS, INACCORDANCE WITH THE ORGANIZATION’S GENERAL BOOKSOF ACCOUNTSA simple rule: Project managers must be told what they have spent on theirprojects. Some organizations find this basic task difficult, even impossible.How can that be? Simply because many organizations have been function-ally oriented for so long that they cannot see the projects from their func-tions. They can tell how much money was spent by functions, engineering,test, maintenance, manufacturing, etc., but they cannot tell the project man-agers what they have spent. They have not made the transition to manage-ment by projects.

In order to employ earned value on a project, the actual costs must bealigned to the authorized project budgets. Remember the rule: planned valuerepresents the authorized work plus budget, which is then converted to intocompleted work and the same budget to form the earned value. Earnedvalue must then be related to the actual costs to determine the cost effi-ciency factor, called the cost performance index (CPI). The CPI is the singlemost important metric for any project employing earned value. Thus costactuals by project, by subproject (CAPs) is an absolute requirement in orderto employ earned value.

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There is a trend in projects that employ earned value to measure theirperformance on a weekly basis. We need to understand what this meansand what it does not mean. Weekly earned-value measurement means themeasurement of internal direct labor hours. On a weekly basis, the companylabor tapes will produce a planned value, an earned value, and actual hoursfor internal direct labor only. Direct labor dollars, indirect costs, purchasedarticles, travel, etc. are not available on a weekly basis. Weekly performancemeasurement takes place on the internal direct labor hours only, and thiscan be a major factor in effective project controls.

The requirement for accuracy in the weekly labor reports is critical. Anyerror factor in labor reports will invalidate their usefulness. Errors in laborcan occur for a number of reasons. People charge to the wrong accountnumbers, they insert the wrong numbers, they continue to charge to com-pleted projects, etc. In order to eliminate errors, some companies have putin place a direct labor-tracking system that is fully automated. Employeesmust type in their project codes at the start of the reporting cycle. If em-ployees type in an incorrect labor code, the automated system immediatelyrejects the charge and the employee must correct the error prior to startingwork. Accurate labor tapes are critical to measuring weekly earned value.

STEP 8: YOU MUST CONTINUOUSLY MONITOR THE EARNED-VALUEPERFORMANCE TO DETERMINE EXCEPTIONS TO THE BASELINEPLAN: THE SCHEDULE VARIANCES (EARNED VALUE LESS THEPLANNED VALUE) AND THE COST VARIANCES (EARNED VALUE LESSTHE ACTUAL COSTS)Projects employing earned value will need to monitor their cost and sched-ule results against the authorized baseline for the duration of the project.Management will focus its attention on exceptions to the baseline plan, par-ticularly those that are beyond previously defined acceptable limits or tol-erances. Earned value is a management-by-exception concept.

A negative earned-value schedule variance simply means that the valueof the work performed does not match the value of the work scheduled, thatis, the project is falling behind in its scheduled work plan. Each behindschedule task should be assessed as to its criticality. If the late tasks are onthe critical path, or if the tasks carry a high risk to the project, then effortsmust be taken to get the late tasks back on schedule. However, additionalproject resources should not be spent on low-risk tasks or tasks that havepositive critical path float.

The single most important aspect of employing earned value is the cost-efficiency readings it provides. The difference between the value of workperformed and the costs incurred to accomplish the work provides the costefficiency factor. If the project spends more money than it receives in value,this reflects an overrun condition. Absolute overruns are typically nonre-coverable. Overruns expressed as a percentage value have been found to


deteriorate unless the project takes aggressive actions to mitigate the con-dition.

Perhaps of greatest benefit, the earned-value cost efficiency rate has beenfound to be stable from the 15 percent point of a project completion. Thecost efficiency factor is thus an important metric for any project manageror enterprise executive to monitor.

STEP 9: USING EARNED-VALUE METRICS, YOU MUST CONTINUOUSLYFORECAST THE FINAL REQUIRED COSTS BASED ON ACTUALPERFORMANCE AND KEEP MANAGEMENT APPRISED SO THEY CANTAKE CORRECTIVE ACTIONS IF NECESSARYOne of the more beneficial aspects of earned value is that it provides thecapability to forecast quickly and independently the total funds required tocomplete a project, commonly referred to as the estimate at completion(EAC). Based on actual cost and schedule performance against the baselineplan, a project is able to estimate accurately the total funds it will requireto finish the job within a finite range of values. The earned-value statisticalestimates constitute a sort of sanity check against other forecasts or fixedmanagement positions. Often management or customers will have a pre-conceived, unmovable notion of what final costs should be (or what theywould like them to be).

If the earned-value statistical forecast of estimated final costs is greaterthan the official project manager’s estimate to complete the project, some-one needs to reconcile these professional differences of opinion.

Actual performance results on any project, good or bad, are in effect sunkcosts. Such costs represent what the project has actually achieved in per-formance. Thus, any improvements in performance must come from thefuture work, tasks that lie ahead of the project’s status date. Earned valueallows the project manager to quantify accurately the cost and scheduleperformance achieved to date. And if the results achieved to date are lessthan those desired by management, the project can exert a more aggressiveposture to manage all of the future work.

Earned value, because it allows the project to quantify accurately thevalue of its work it has achieved, also allows the project to quantify the valueof the future work in order to stay within the objectives set for the projectby management. The single most respected method to forecast the final costresults is to assume that the project will continue at its established costefficiency rate—it will get no better or no worse. There is a scientific basisfor this assumption. As mentioned above, the cumulative CPI does not typ-ically vary by greater than 10 percent, plus or minus, once the project is 20percent complete. Thus, the cumulative CPI is a stable metric from the 20percent completion point and can be used to predict the final required costs.

Displayed in Figure 31–4 is a forecasting method of final required costsbased on the assumption that future cost efficiency will not change signifi-cantly from results thus far achieved. For example, if the project budget is


EAC

Plan

+

1.00

–

statusdate

EAC Formula:

Budget at Completion (BAC = $1.0M) = EAC ($1.3M)

Cumulative CPI

Cumulative CPI (.75)

Figure 31–4 Forecasting the Final Estimate at Completion (EAC)

$1.0 million and the cumulative cost efficiency factor achieved is 0.75, thenthe final projected costs would thus be $1.3 million ($1.0 million divided by0.75 efficiency factor equals approximately $1.3 million). With earned-valueforecasting we are not looking for absolute precision; rather, we want todetermine whether or not we have a problem. If a 30 percent overrun is aproblem, then steps need to be taken immediately to figure out a way tobring the projected final costs under control.

Thus corrective actions can be taken early, as early as 20 percent throughthe project, to stay within the final expectations of management.

STEP 10: YOU MUST MAINTAIN THE DEFINED SCOPE BY APPROVINGOR REJECTING ALL CHANGES AND THEN INCORPORATING THEAPPROVED CHANGES INTO THE PROJECT BASELINE IN ATIMELY MANNERThe project performance-measurement baseline that was initially put intoplace at the start of the project is only as good as the management of allproposed new changes to the baseline for the duration of the project. Per-formance baselines quickly become invalid simply by failing to incorporatechanges into the approved baseline, with the addition of or deletion ofadded work scope.

All new change requests of the project must be carefully addressed, eitherapproving such changes or rejecting them. In order for the initial baselineto remain valid, each and every change must be controlled. Maintaining anapproved baseline can be as challenging as the initial definition of the proj-ect scope at the start of the project.


1. Define the project scope

2. Determine who will perform the work

3. Plan and schedule the defined work

4. Estimate resources and authorize budgets

5. Define metrics to measure performance

6. Determine points of management control

7. Record costs by projects

8. Measure project performance

9. Forecast estimates at completion

10. Manage changes to the project baseline

Figure 31–5 Ten Steps to Implement Earned-Value Project Management

Summary

Earned-value project management is not a difficult concept to understandor to employ. It is certainly not as complicated a process as some have madeit to be over the years. The authors have concluded that effective earnedvalue can be achieved by simply applying ten steps, as listed above. Theseten simple steps are summarized in Figure 31–5 and can be applied to anyproject in any industry.

As you read over these ten suggested steps, we hope you come to theconclusion that employing earned-value project management consists ofnothing more than simply following fundamental best project-managementprocesses.

ENDNOTES1 All earned value formulas described herein are consistent with A Guide to the

Project Management Body of Knowledge (PMBOK). Newtown Square, PA: ProjectManagement Institute, 2000

2 Beach, Chester Paul, Jr., Administrative Inquiry Memorandum on the A-12 Can-cellation. United States Department of the Navy, November 28, 1990, p. 5

3 Christensen, David S. and Heise, Scott R. Cost performance index stability. NationalContract Management Association Journal 25(1):7–15, 1993

4 Fleming, Quentin W. and Koppelman, Joel M. Earned Value Project Management.Newtown Square, PA: Project Management Institute, 2000

BIBLIOGRAPHYChristensen, David S. and Heise, Scott R. Cost performance index stability. National

Contract Management Association Journal 25(1):7–15, 1993

31ch Implementing Earned-Value Project Management in Ten Easy Steps (p 521-539)

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