The earned value body of knowledge
Quentin W. Fleming and Joel M. Koppelman
Although the concept of earned value originated with industrial engineers in factories at the turn of the century, the collection of knowledge centered on its practical applications has been done primarily by practitioners in the U.S. Department of Defense (DOD) community. Much in the same manner that the membership of the Project Management Institute has scientifically documented the subject of project management, resulting in the creation of A Guide to the Project Management Body of Knowledge (PM-BOK Guide), there has been a similar but less formal accumulation of data on earned value as the Army, Navy and Air Force have monitored various Cost/Schedule Control Systems Criteria (C/SCSC) applications and carefully documented their empirical findings. They have accumulated these findings into what is becoming an embryonic management science.
In particular, the performance management office in the Office of the Under Secretary of Defense for Acquisitions has been responsible for the continuing analysis of several hundred contract applications in which the C/SCSC have been employed. They have formulated some rather impressive conclusions based on the consistency, predictability, and reliability of these data. Their significant findings should not be ignored by those managing projects in the private sector. Quite possibly, the private sector will discover another valuable tool for use in the management of their projects.
The DOD studies have been augmented by works at the Air Force Institute of Technology (AFIT) in Dayton, Ohio, that have expanded the empirical observations of this evolving management science.
Legacy from the C/SCSC
Those who have championed the C/SCSC cause have made impressive achievements. But far too often we focus on only the sometimes overzealous practitioners who have carried their demands on private contractors to the extreme. Nevertheless, the positive aspects far outweigh the negative, and the trend is toward allowing more latitude for contractors to employ those practices that feel most comfortable.
It might take years to coordinate a collective position as to which are the most significant achievements made with the employment of the C/SCSC since they were first introduced. We have not tried to reach any broad popular consensus. Rather, we have assembled our own listing of what we feel have been the ten most important accomplishments resulting from the C/SCSC. To us, these ten items constitute the beginnings of an earned value body of knowledge.
1. The employment of a single management control system providing accurate, consistent, reliable, and timely data, which management at all levels can use to monitor performance throughout the life cycle of a project or a repetitive production effort.
One of the primary objectives the U.S. Air Force had in mind in the mid-1960s, when they began to define their requirements from the private sector, was the need to have all interested parties work from a common set of management control system data. They required accurate, consistent, reliable, and timely data, provided from a single management control system, which management at all levels would use to monitor performance during the full life cycle of a project.
Figure 1. DOD Earned Value Body of Knowledge
Too often they found there were multiple sets of books being kept. The project manager, senior corporate management, chief financial officer, and others, often had their own data, which frequently did not match other data. This condition produced disastrous performance results. Rightfully, the buying customer felt entitled to a single set of performance data for use by all vested parties.
2. A management approach that integrates the technical scope of work, the schedules, and the costs, allowing for the continuous measurement of integrated performance throughout the life cycle of the project or a production effort.
While most management theorists openly profess support for any concept that integrates work scope with schedules and with costs, this is seldom, if ever, actually achieved. The contract administrators define a project one way, the engineers another, and the cost estimators yet another. And the scheduling community has always had their own unique perspective. The result: projects are often defined by the sum of parochial interests, which may have no relationship to what is being done with other functions. Like it or not, most projects are defined and performed in a non-integrated manner.
Then, in the early 1960s, came a concept called the Work Breakdown Structure, which provided an opportunity for all key functions on a project to view the project in the same manner, to speak a common project language. All key functions had the opportunity to define their project in a like manner, which was relatable to other functional metrics.
Key functions could now break the project into progressively smaller units, down to the task level, at which point they could specify the technical work to be done, estimate the resources needed, and agree on a time frame for each task. With use of the WBS, all critical functions worked from an integrated project plan. Performance could be measured at the lowest task levels, allowing the project manager to ascertain how much work had been accomplished, how much money had been spent, and how much time it had taken. The WBS allowed performance measurement to take place in an integrated manner.
3. Documented empirical data collected from over 700 DOD contracts, reflecting a pattern of consistent and predictable performance history.
Since the mid-1970s, the management practitioners in the Pentagon have been empirically tracking the performance of contracts that employ the C/SCSC. They have recorded their findings, analyzed the results, and hypothesized future performance patterns for contracts that employ the C/SCSC. Their findings have been spectacular in that they have demonstrated a pattern of project performance that can be used to scientifically predict the future—the final project performance results. See Figure 1 for the summary results of these findings. (For more information on these findings, see Gaylord E. Christle, from the Office of the Under Secretary of Defense for Acquisitions, as documented in the Department of the Navy memorandum of Nov. 28, 1990, p. 6, on the A-12 Administrative Inquiry by Chester Paul Beach, Jr., inquiry officer. This study cited over 400 programs since 1977. Updates of this same study have increased the sample to over 700 programs without change to the conclusions.)
The hypothesis: As early as the 15 percent completion point in a project, the actual performance accomplishments (the earned value) can be used to predict the final costs and time requirements within a predictable range of values. The results of work performed can be used to forecast the final project results. Their empirical conclusions: If a project has overrun the work accomplished to date, that overrun will not be recovered on the work/tasks remaining. In fact, they conclude that overruns tend to get progressively worse, not better, with time.
Without attempting to explain the reasons for this conclusion, they suggest that there is a natural tendency for any project to do better planning for the near-term effort. And as the plan extends into future periods it will be progressively more vague, more incomplete. Thus performance trends will likely deteriorate as the project continues to its completion.
4. The utility and the stability of the cumulative Cost Performance Index (based on cost efficiencies), or CPI(e), to continuously monitor the performance trends of a project.
As early as the 15 to 20 percent completion point of a project, the cumulative cost performance efficiency factors (the earned values) have been demonstrated to be stable, and the data provided can be used to predict the final range of costs for a given project.
Note of caution: These same conclusions are not possible with periodic or incremental data, which have been found to be subject to wide fluctuations, thus limiting their utility as a long-term project trending tool. Only cumulative data is recommended for this purpose.
Individuals at the Air Force Institute of Technology have been instrumental in extending the scientific knowledge started in the Pentagon. One significant study provides insight into these findings: Using data from completed Air Force contracts, Major David S. Christensen established that the cumulative CPI did not change by more than 10 percent from the value at the 20 percent contract completion point. Based on data from the Defense Acquisition Executive Summary (DAES) database, his results indicate that the cumulative CPI is stable from the 20 percent completion point regardless of contract type, program, or service. Christensen published his findings in the National Contract Management Association Journal, Vol. 25 (1), 1993.
This study indicates the value of the CPI(e) from a government perspective, saying that “the government can now conclude that a contractor is in serious trouble when it overruns the budget beyond the 20 percent completion point.”
No longer must management wait until all the funds have been spent to conclude that more money will be needed to complete a given project. By monitoring cumulative cost performance against a detailed project plan and relating the value of the work performed against the costs of doing that work, a predictable pattern becomes available to management early in the life cycle of the project. Such patterns can be used by management to both assess the performance to date and to predict the final performance results.
The CPI(e) is determined by dividing the value of the work actually performed (the earned value) by the actual costs it took to accomplish the earned value. The use of the cumulative CPI(e) is displayed in Figure 2.
5. The utility of the Schedule Performance Index (SPI) to monitor and quantify the value of the work scheduled, and to compare it against the value of work physically performed.
One of the more important benefits of employing a performance measurement system is that is allows us to assess how much of the planned or scheduled work has been physically accomplished at any given point. The issue: Is a project on, ahead, or behind the work they set out to do, and by how much? This information is useful to any project to compare against the management of the critical path. Both indicators will accurately assess the true schedule position of any project.
Even though the SPI may have no relationship to the project's critical path, falling behind in accomplishing the planned work is one of the first indicators of potential problems. Project managers don't like to get behind schedule, even though a more important indicator will be their performance against the critical path.
The natural tendency when one falls behind the planned work is to add resources to try to catch up, to spend more money to accomplish the same effort. Arbitrary decisions to catch up on the work, to improve the SPI performance, can cause non-recoverable damage to the project's cost performance. The SPI is a useful schedule monitoring indicator, which can be used in conjunction with critical path methodology.
Figure 2. Monitoring Project Performance: Focus on Cum CPI(e)
Figure 3. Monitoring Production Effort: Focus on Weekly CPI(p)
The SPI is determined by dividing the value of the work performed (the earned value) by the value of the work planned to be accomplished (the planned value) as of any point in time. It is a valuable indicator and can be used with the CPI(e) to predict the final required costs.
6. The utility of the cumulative CPI(e) to statistically forecast a “low end” range of estimated costs at completion.
The cumulative CPI(e) has been scientifically shown to be a stable indicator of project performance. Perhaps its most useful benefit is the ability to use the cumulative CPI(e) to forecast the final costs required on the project.
A statistical forecast of the total funds required may be done by taking the project work remaining (total budget less earned value) and dividing this value by the cumulative CPI(e), and then adding the actual costs spent to date. This formula provides what some consider to be the best case possible for a project, within a statistical range of final estimates.
7. The utility of the cumulative CPI (e) combined with the SPI to statistically forecast the “most likely” range of estimated costs at completion.
The combination of the cumulative CPI(e) with the cumulative SPI, has provided the ability to also statistically forecast the final cost results of a project. Some consider this technique to represent the “most likely” in the range of statistical possibilities.
The empirical rationale for this condition: If a project is both behind its planned schedule position and is overrunning its costs to date, both these conditions will combine to exacerbate the final results. The use of the CPI(e) alone, and of the CPI(e) with the SPI, as forecasting tools will be discussed in detail later.
8. The utility of the To Complete Performance Index (TCPI) to monitor the remaining project tasks against a specific management financial goal.
The remaining work, the to-complete tasks for a project, constitutes the only area where a project manager can influence the final project cost results. Costs already spent are sunk costs, non-recoverable. Therefore, it is useful to any project to determine what performance level it will take to accomplish all remaining effort, to achieve some specified management objective. Such management objectives can take the form of the original project budget, or sometimes a revised (increased) financial goal to reflect a more attainable challenge.
The TCPI focuses on the remaining project tasks. It is effectively the mirror opposite of the cumulative CPI(e) in that it reflects what is needed to recover from a negative actual cost performance position.
The TCPI takes the work remaining (total budget less earned value accomplished) and divides it by the funds remaining (the latest management financial goal less funds spent) to determine what performance results it will take to meet this goal. The TCPI can be an effective indicator for management at all levels to monitor the remaining project tasks.
9. The utility of a weekly (or periodic) Cost Performance Index (based on the actual performance it took to achieve a planned production standard), or CPI(p).
Although the use of cumulative data has been found to work best to determine the long-term trend of a project, the industrial engineers monitoring production work have used periodic or weekly data to track the cost performance achieved against an established production standard. By breaking down a production effort into detailed sub-assemblies, and establishing a weekly production standard (a planned value) for each assembly, the tracking of production effort has been successfully employed with use of a CPI(p). The CPI(p) (for performance) is the opposite of the CPI(e) (for efficiency), and is determined by dividing the actual costs incurred to accomplish the earned value by the value of the physical work performed (the earned value) during the incremental period. Shown in Figure 3 is the use of the CPI(p) plotted weekly against the established equivalent unit costs for a given assembly.
10. The use of the Management by Exception principle to focus management's attention on significant exceptions to the authorized plan, thus allowing management to effectively monitor all critical aspects of performance and then develop and apply timely corrective actions.
Perhaps the ultimate utility in the use of earned value performance measurement is that it allows for the employment of the Management by Exception principle against an established and authorized project baseline plan.
Management need not follow each and every detailed task in order to effectively oversee the performance of a project. Rather, by focusing only on exceptions to the authorized project plan, in accordance with specified variance thresholds, management can effectively monitor all critical aspects of performance against the project plan.
These ten items represent to us the more significant of the body of knowledge resulting from three decades in the use of the C/SCSC. We will use these findings to suggest a simplified form of the earned value concept for use with the other more established project management tools.
Quentin W. Fleming is a senior staff consultant to Primavera Systems, Inc. His latest book is Cost/Schedule Control Systems Criteria—The Management Guide to C/SCSC.
Joel M. Koppleman, P.E., is president, cofounder, and co-owner of Primavera Systems, Inc. He has spent more than a decade managing capital projects in the transportation industry.
PM Network • May 1996