Project Management Institute

Application of earned value concepts to non-government contracts

Earned Value has been around a long time. Everyone knows the term, but few people practice the magic of it—the results you get will amaze everyone. It really is a better way to track projects.

What usually happens in a project environment is reflected in some common questions that are associated with the performance of projects. For instance, questions such as “Where are we?” “Is the job completed?” or, “When will the job be completed?” are to be expected in most project environments. I know that the Earned Value technique can be used to answer these questions. However, you don't have to plan to employ Earned Value on the very simple tasks, like the projects that you do at home or the little projects around the office. For those, you may simply look at the material remaining to be installed or the checklist of items to be completed. Using that information you can make a reasonable estimate of where you are and what it will take to complete. However, in industry, such as information technology, aerospace, or energy, it may not be that simple, since the projects are larger in scope and duration than those performed at home or in the office. On projects such as these, applications of the Earned Value technique will have to be planned in some degree of detail as well as administered. Industry, especially those firms in the non-government arena, hesitates to commit the funds necessary to do proper planning. The usual answer in industry to the aforementioned questions has been to measure the actual costs against the planned costs to date. This is the classic “watch how I can spend money” (Langford, 1986). However, using the planned versus actual method does not tell project managers how much of the project has been physically completed and what that effort has cost. It does not tell project managers what it will take to finish and how efficient their performance must be. Lastly, the planned versus actual method does not tell how efficient project managers have been at performing what was promised. It tells project managers only how much money was spent through a certain date. The planned versus actual methodology is aptly illustrated in Exhibit 1.

In answer to the first question, the answer is that “we are half done.” This method assumes that you have completed work equivalent to the dollars that were spent. The same people who espouse that technique are surprised when the actual costs equal the planned costs as shown in Exhibit 2, and the job is still not finished.

Another common occurrence is shown in Exhibit 3, at which time the job shown in Exhibit 2 is completed but a significant overrun has occurred.

Now, if Earned Value had been employed, generating a third line that indicated how much work had actually been accomplished, the answers to the previous questions may have been different. By examining Exhibit 4, it is obvious that not as much work had been accomplished as thought—in fact, what was accomplished cost a lot more than indicated in the planned versus actual method. In fact, computation of the Earned Value metrics highlights the problems this project is experiencing. From the analysis, it is obvious that project control systems utilizing Earned Value, provide a real basis for success using project management. They provide the means to deliver projects on time, within cost, and in accordance with the established technical performance parameters. The depth and application of an Earned Value Management System to projects depends upon the context of the project situation (i.e., size, complexity, etc.) and since the parameters are expressed in dollars, the ability to access company technical/financial data.

Exhibit 1. Budgeted Cost for Work Scheduled (BCWS) vs. Actual Cost of Work Performed (ACWP)

Budgeted Cost for Work Scheduled (BCWS) vs. Actual Cost of Work Performed (ACWP)

Exhibit 2. Budgeted Cost for Work Scheduled (BCWS) vs.Actual Cost of Work Performed (ACWP)

Budgeted Cost for Work Scheduled (BCWS) vs.Actual Cost of Work Performed (ACWP)

Exhibit 3. Budgeted Cost for Work Scheduled (BCWS) vs. Actual Cost of Work Performed (ACWP)

Budgeted Cost for Work Scheduled (BCWS) vs. Actual Cost of Work Performed (ACWP)

Exhibit 4. BCWS vs. BCWP vs. ACWP

BCWS vs. BCWP vs. ACWP

Exhibit 5. Budgeted Cost for Work Scheduled (BCWS)

Budgeted Cost for Work Scheduled (BCWS)

The Earned Value technique does not just belong to the Defense industry nor to the large project rulebook—it can be applied anywhere at anytime. So, we are going to discuss:

1. What Earned Value really is

2. How you can use Earned Value

3. How you can adjust Earned Value

4. How you can make Earned Value work for you.

Earned Value represents the conversion of planned project value (i.e., budget) to a completed (i.e., accomplished) or earned state. It is the “quantifying of work accomplished in terms of the work planned in budgeted dollars” (Slemaker, 1985). To put this into practice, let's examine Exhibit 5.

Exhibit 6. Budgeted Cost for Work Scheduled (BCWS) vs.Actual Cost of Work Performed (ACWP)

Budgeted Cost for Work Scheduled (BCWS) vs.Actual Cost of Work Performed (ACWP)

Exhibit 7. BHWS vs. BHWP vs. AHWP

BHWS vs. BHWP vs. AHWP

It shows the time phased cumulative value of a project over 12 months. The curve is the dollar representation of project work to be accomplished, and as such it is referred to as the Budgeted Cost for Work Scheduled (BCWS). It is a profile of planned spending for a project. When I measure the planned work as it is completed, I show that measurement as a solid line. In Exhibit 6, the solid represents the Budgeted Cost for Work Performed (BCWP). If I track up the BCWS curve,with the BCWP my project is in perfect shape, however, if I do not do that, then I will incur a variance from the BCWS. The solid line represents what has been earned—it is not a true cost but a measure of the planned cost that has been completed—it represents Earned Value. Earned Value is the same as BCWP. Remember that I am comparing budgeted cost to budgeted cost. Measurement of the value earned on a project requires the comparison of budgeted work that has been completed to budgeted work that was planned. It is important to remember that the measurement of earned value is not dependent upon the Actual Costs of Work Performed (ACWP). The ACWP are important and play a role in earned value analysis, but they do not play a role in measuring the progress on a project.

As you have seen, Earned Value relies strongly on financial data, but what if you don't have financial data to work with; what if your company is performing projects that do not require direct dealing with the government—but operating in the nongovernment contract environment. In this situation, since there is not a government entity involved, the company's overhead and indirect rates are still held close. Labor rates and company revenue are very sensitive and not freely disclosed. For these type companies, the cry “proprietary” is often heard when requesting financial data for the application of the Earned Value concept. Yes!, they retain the luxury of classifying financial data as proprietary. The in-depth understanding and free accessibility to the level at which work is authorized and performed (i.e., cost account/work package level) is thus restricted. The summary level data that is available does not allow for the full explanation that earned value demands and screens problems that arise at lower levels (i.e., WBS washout).

Now, some of the attitudes that occur in the non-government environment may also occur under a government contract, especially those with a civilian agency. In this situation the financial data is competitive and not shared with those in project management. In fact, in some situations, the labor rates, task order cost estimates and responses to Technical Direction letters is held very closely. We can probably surmise that access to the financial data of most companies, with the exception of those in DoD Contracting, is extremely limited.

In cases where financial data is limited, Earned Value can still be employed—instead of dollars, labor resource hours are employed. For projects in the service sector, especially Information Technologies, labor is roughly 90 to 95% of the total effort cost and sometimes 100%. Service companies are also very concerned with head count, hours spent per employee and will set up productivity goals for employees on some number of hours per week from 40 to 50. Using labor hours is a viable alternative to dollars. The only problem that arises is when large material purchases are scheduled, such as found on hardware and computer service contracts or bills of material for aerospace or energy projects. For this instance, an equivalency may be able to be calculated that would bring material buys into play, such as a large capacity server. The server may be equal to equivalent hours based upon the server price divided by the average rate of the labor resources employed. In the case of a server valued at $1,500, it may be equivalent to 50 hours based upon an average cost of labor at $30/hour.

To use hours instead of dollars, the parameters have to be renamed:

Budgeted Cost for Work Scheduled (BCWS) = Budgeted Hours for Work Scheduled (BHWS)

Budgeted Cost for Work Performed (BCWP) = Budgeted Hours for Work Performed (BHWP)

Actual Cost of Work Performed (ACWP) = Actual Hours of Work Performed (AHWP)

To ease up on the alphabet soup, will refer to BHWS as planned hours, BHWP as hours performed and AHWP as actual hours.

The budgeted label is maintained, allowing comparison of budgeted values to budgeted values. The actual expenditures are now in terms of hours, not dollars. Nothing really has changed—except that traceability has been restored for Work Breakdown Structures (i.e., hours can be traced by task, subtask, work element, etc.) and for each functional organization on hours scheduled, performed, and expended (i.e., hours can be traced by department, group, section, etc.). This traceability was denied under the use of dollars. Instead of earning dollars, the project is earning hours.

For Exhibit 7, I used an equivalency of 1 hour = $50 to translate to hours. Taking a look at Exhibit 7, we can see that the variances are calculated in the same manner, and the project manager will know how many actual hours it took to obtain the hours performed and whether he or she is ahead or behind on resource costs. It is the same for the resource schedule side—the project manager will know what he or she promised and what he or she performed. For instance, suppose that the Budgeted Hours for Work Scheduled (BHWS) on a project was 240 hours, the Budgeted Hours for Work Performed (BHWP) was 60 hours at a point in time, and the Actual Hours of Work Performed (AHWP) was 80 hours. Then the Cost variance would equal BHWP – AHWP or 60 – 80 = –20 hours and the Schedule variance would equal BHWP – BHWS or 60 – 130 = -70 hours. In this case, one can conclude just as they did when using dollars that a premium was paid to get the work done and the work that was performed fell way short of hours and hours promised. Efficiencies may also be calculated using the same method as was done when using dollars. For instance, the Cost Performance Index, hours will equal BHWP/AHWP = 60/80 = 75%. The CPI represents the ratio of the work performed to actual hours spent—it should be in the .9 to 1 range. The Schedule Performance Index, hours will equal BHWS/AHWP = 60/130 = 46%. The SPI represents the ratio work performed to work scheduled—it should also range from .9 to 1. The interpretation of the data is left up to the PM. As you can see the calculations were performed in the usual fashion, which enabled you to use the same guidelines as before when dollars were employed. The calculation of the Estimated Hours at Completion (EHAC) and the To Complete Performance Index (TCPI) are performed in the same way. The TCPI is the ratio of the amount of work remaining to the amount of hours remaining to complete the job. It represents the efficiency that has to be maintained to complete the project and should be within 20% of the CPI to indicate validity. If it is not valid, then the BHWP is probably in error. For example, using the data above with an BAC/EAC valued at 240 hours, the TCPI = (BHAC–BHWP)/(EHAC–AHWP) = (240–60)/(240–80) = 180/160 = %112.5 and the EHAC = AHWP +1/CPI (BHAC–BHWP) = 80 + 1/.75 (240-60) = 80 + 240 = 320 hours. The EHAC is the estimated total hours required for the project and equals the hours expended to date plus on the remaining hours based upon cost efficiency. EHACs calculated by this method are not as accurate as EHACs based on project team inputs. The calculated EHAC can be recycled through TCPI and an efficiency to go is calculated at approximately 75%, which indicates that the calculated EHAC has validity and it is time for a project team derived EHAC.

When I first employed Earned Value, I used the technique on a small project—fortunately I was working with a dedicated engineer. The hardest part was establishing the method to collect the value converted and to schedule the accomplishments or performance that we desired. At the time this occurred, PCs as they are now did not exist and the project tracking was performed “manually.” I am of the opinion that doing Earned Value “by hand” helped to cement the concept in my mind. So! I recommend that you try it on small projects first and then move up to larger ones. Remember that the use of labor hours does not require application of indirect rates, compliance with occupancy rules, or consideration of cost or price basis. Potential criticisms concerning the use of alternative data may arise even in companies amenable to the alternate approach. Resistance (is futile) will have to be met head on: you may hear things like “This project is a paper study, Earned Value won't work,” or “You can't do good project tracking without considering material buys,” or “I don't have the time to figure out milestones.”

In regard to the objection that Earned Value will not be feasible on a paper study, I find that there are always technical and documentation goals to be accomplished. These goals range from completing a given percentage of writing, preparing the draft, having Quality Assurance check the draft, etc. If these events were milestoned and hours allocated—then Earned Value may be applied. Considering material buys, there could be a variety of milestones assigned. Prime candidates are order acknowledged, material to be shipped and material arrival at loading dock. The amount of materials in dollars has to be made equivalent to labor hours (i.e., $1,000 of material = 50 hours of labor resource), then allocated across the selected milestones. As for as time to figure out the milestones to use, the average project manager should not have trouble selecting measurement points at which he or she can measure progress. It is to his or her advantage. Without measurement points, slippage can easily occur—the project team won't know where they are in relation to the plan and CHAOS will ensue. So, at the very least if measurement points per task can be determined and task hours can be allocated to those tasks—you will be performing the Earned Value technique.

The arguments stated are familiar one—for some reason, people in general are resistant to the establishment of points of measurement. They don't want to commit to a date certain regarding project deliverables, and yet it is this very deliverable that informs them of their progress (i.e., how the project is doing). They don't believe that Earned Value works until they see it work firsthand. The only way to hurdle the barriers placed in front of you is to patiently talk up Earned Value and its benefits— to find a champion in the firm that will listen to you. When Earned Value is specified in the contract as a tracking technique, there is little room for change. When Earned Value is not specified, you have to convince your champion of the risk of not employing Earned Value—that an overrun is more than likely to occur. One method is to offer to do part of the project under Earned Value to prove its worth. For instance, you may offer to perform the Earned Value technique on Task 1 and 2 of the project and then perform it on the rest of the project if results are satisfactory. Persuading project managers to undertake Earned Value takes leadership, patience and people skills.

The Earned Value concept is one of the best and proven methods for controlling projects. While it stresses (i.e., the goal it was designed for), cost control, it incorporates the measurement of achievement or accomplishment and may be easily structured around milestone methodologies.

The Earned Value concept is not difficult to apply if the simplicity of its approach is maintained. Adoption of Earned Value concepts will improve both project performance and company financial results in a non-government project environment. To modify an old commercial ad—“Earned Value—try it—you'll like it.”

Books

Fleming, Quentin W., & Koppelman, Joel M. (1996). Earned value project management. Upper Darby, PA: Project Management Institute.

Slemaker, Chuck M. (1985). The principles and practice of cost schedule control systems. Princeton, NJ: Petrocelli Books.

Seminar Documentation

Langford, Hugh. (1986). The effective use of cost/schedule data. Pasadena, CA: Langford and Associates.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

Proceedings of the Project Management Institute Annual Seminars & Symposium
September 7–16, 2000 • Houston, Texas, USA

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