Project Management Institute

The earned value concept

back to the basics

Concerns of Project Managers

PM TUTORIAL

Quentin W. Fleming and Joel M. Koppelman, Primavera Systems, Inc., Bala Cynwyd, Pennsylvania

THE ORIGIN OF THE EARNED VALUE CONCEPT

Most of us likely became acquainted with the “earned value” concept as it has been apart of what is commonly called the Cost/Schedule Control Systems Criteria, or C/SCSC. These 35 standards (or criteria) are applied against a private company's management control system to verify the acceptability of the system by the procuring agency, the buyer the owner, etc., the entity that retains the risks of cost growth. These criteria were first issued by the United States Department of Defense (DOD) in December 1967. They have been continuously applied as a method of cost monitoring by the government in the acquisition of their major systems.

Since 1967 other U.S. government agencies and other governments have adopted identical or slightly modified criteria for application to private company management control systems. While the C/SCSC do encompass the “earned value” cost management concept, the C/SCSC are broader in application than simply the earned value technique. We owe it to ourselves to understand the fundamental differences. In the opinion of the authors, the opportunities for broad-based project applications lie with the “earned value” concept…but extracted from C/SCSC and taken back to their basic fundamentals.

The earned value concept was developed by the followers of such scientific management notables as Frederick W. Taylor, Frank and Lillian Gilbreth, Henry Lawrence Gantt, and others, and by the industrial engineers in the factory. One former United States Air Force general who was deeply involved in the initial implementation of earned value on the Minuteman developmental program over 30 years ago commented recently:

The earned value concept came to us right off the factory floor from the industrial engineers who were comparing their planned standards with the earned standards and actual costs. We simply applied this same concept to our one-time-only, non-recurring developmental tasks.1

The favorable experience with the earned value concept as employed initially on the Minuteman program eventually led to the issuance of C/SCSC as a formal doctrine in 1967.

This set of 35 formal management control system standards has led to the development of some rather sophisticated techniques for the reliable monitoring of project costs. It has also provided a means to accurately predict the project's final required costs, and final time requirements based on a project's own performance record, as of a given point in time. As early as 15 percent through a project, the accomplishments achieved (earned) can be used to predict the final required costs within a precise range of values.2 As early as 20 percent into a project, the actual cost performance efficiency factors (earned values) have been demonstrated to be stable, and the data provide a 95 percent confidence interval of ± .012, which can be used to predict the final costs for a given project.3

If they were still with us today, the Taylors, and Gilbreths, and Gantts would all be pleased with the body of scientific knowledge that has been carefully accumulated over the past quarter of a century. In fact, certain professional societies have incorporated some of these same findings into their professional repositories of information. Of greatest consequence to most of us would likely be the Project Management Institute's professional Body of Knowledge (PMBOK), in which the cost management section has carefully captured the more salient features of the earned value concept.

Editor's Note: This is the first in a series of articles on “earned value” cost management. The authors will trace the technique from its formal introduction as a part of PERT/Cost in 1962, through its most prominent application within the Cost/Schedule Contral Systems Criteria (C/SCSC) over the past 25 years.

There are many positive benefits to be gained in the use of earned value on projects. Particularly beneficial is its ability to send out an “early warning” signal that your project is on a performance path that will lead to a cost overrun…unless you change your spending habits…immediately! Such danger signals are transmitted in time for projects to react. Some projects da react, while others do not, and miss their opportunity to stay within the authorized budget.

But there are also certain negative aspects associated with the concept, particularly the usage of terminology that can boggle one's mind: for example, BCWS, BCWP, LRE, OTB, etc. The authors will candidly discuss both the good and the not-so-good aspects of earned value.

It is their belief that ‘“earned value” has not reached its full potential as a viable tool of project management, and will not until and unless the practitioners ease up on their more stringent rules and interpretations, and return earned value to a more simple approach of simply relating “planned standards” versus “earned standards” versus “actual costs.”

THE EARNED VALUE CONCEPT WITHIN C/SCSC: Mixed Results

The utilization of the earned value concept within the C/SCSC has provided some great results. But, in other cases, the experience has been less than satisfactory from an industry perspective. The positive aspects are obvious and were touched on above: the body of scientific knowledge based on actual experiences with hundreds of programs. But there have also been some negative experiences, and we should candidly discuss those as well.

The C/SCS Criteria have had some 25 years of evolutionary interpretations of the original meanings of the criteria. These interpretations have subsequently led to the creation of numerous implementation and surveillance manuals, and checklists containing hundreds (174) of questions for the use of practitioners. These checklists are a sort of litmus test to impose on contractor management systems. In some cases there have been reasonable applications of the checklists. But in other cases the applications have been, shall we say, somewhat arbitrary and perhaps even dogmatic. The checklist questions were intended by the originators to be used as a guideline only, to be exercised with sound wisdom and professional judgment. However, it would seem that some practitioners have elevated the checklists and associated questions to a position slightly superior to the Ten Commandments! Contractors do understand the importance of having to meet standards, but choke on many of the peripheral issues that have been raised on the appropriateness of the criteria as they are applied to a particular firm's management control system. Private contractors have typically had little voice in such matters, which were established prior to the current more positive environment of total quality management initiatives.

In cases where the private contractors felt they were victims of overly zealous review teams, they have sometimes had to appeal such disputes to customer policy boards established to act as a sort of appeals court. Fortunately, some customers were prudent enough to allow for this process to be available.4 However, the results of such appeals have often led to additional “supplemental guidance” interpretations of the criteria, to be subsequently documented in the form of updates to the guidance and surveillance manuals, for further assistance to the practitioners. A sort of cultist society of C/SCSC professionals has emerged, which has not sat well with many project managers in the private sector. Project managers look for simple tools that will assist them in meeting their primary mission of completing their activities on time, within the authorized finds, and while still meeting the technical objectives.

A NEW LANGUAGE HAS EMERGED

Perhaps the single most difficult aspect associated with C/SCSC for project managers in the private sector to accept has been the terminology associated with the doctrine. Does the earned value process have to be this complicated? We think not.

For example, instead of calling a plan a “plan,” or the “planned value, “C/SCSC practitioners have chosen the term “Budgeted Cost for Work Scheduled,” abbreviated to “BCWS” or sometimes simply “S.” Instead of using “earned value,” or “earned,” which would connote physical accomplishments, the term “Budgeted Cost of Work Performed” (abbreviated to “BCWP” or simply “P”) is used. Skilled project managers do not typically respond to terms like the “S” or “P” words, and they do object to having to learn a new cryptic vocabulary.

Perhaps one of the more interesting and unexplainable phenomena in the usage of terms for C/SCSC applications is the deliberate avoidance of ever using the dreaded term “overrun.” Interestingly, avoiding overruns is the primary reason that the earned value concept should be used on projects in the first place. But instead of calling an overrun an overrun, such incomprehensible terms as “OTB” (standing for over target baseline), or “formal reprogramming,” or “variance at completion” are substituted for simple, intelligent and unambiguous words.

Bottom line: We have a lot of work ahead of us. We have the opportunity to make the earned value concept a widely accepted tool for broad-based project management applications. But we must go back to the basics, or the earned value concept will not be accepted universally by project management professionals.

SUMMARY

While the earned value concept has been around for some three decades, and was first formally introduced to us as the “Cost of Work Report” within PERT/Cost in 1962, its applications have been largely restricted to acquisitions of major systems by the United States Government. For some reason, the technique has not been universally embraced by the countless project managers in the private sector who strive to perform their work in an exemplary manner.

The authors believe that the resistance to universal adoption of the earned value concept is not the fault of the technique itself, but rather in the implementation, the terminology used, and the countless rules and interpretations, which have been perceived by project managers to be overly restrictive. We must find a way to simplify the concept, to reduce it to its bare essentials, if it is to be adopted as a broad-based project management tool for all applications in all industries. We must find a balance between the utility of the technique and the energy it takes to implement the process.

That can easily be achieved by getting back to the basics: relating planned standards to earned standards to actual costs.

NOTES

1. From an interview with retired United States Air Force Lieutenant General Hans Driessnack, July 9, 1993.

2. Studies by Gaylord E. Christie, et al, from the Office of the Under Secretary of Defense for Acquisitions, as documented in the Department of the Navy memorandum of November 28, 1990, page 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 changing the conclusions.

3. Christensen, Major David S., Ph.D, USAF, Cost Performance Index Stability, National Contract Management Association Journal, vol. 25, no. 1, page 12.

4. The DOD C/SCSC appeals board is called the Performance Measurement Joint Executive Group (PMJEG). ❑

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Quentin W. Fleming has been senior staff consultant to Primavera Systems, inc. since July 1993. He has over three decades of industrial experience, and was with the Northrop Corporation from 1968 until retiring in 1991. While there, he held various domestic and overseas rnanagement assignments. He served on a CEO-directed “earned value” corporate review team in 1989-90, and subsequently wrote the corporate policy directive on scheduling.

He has instructed both the time and cost management modules of the PMP exam on several occasions. He holds a bachelor's and master's degree in management, and has written six books, including Put Earned Value Into Your Management Control System, (1983) and Cost/Schedule Control Systems Criteria—The Management Guide to C/SCSC (1992).

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Joel M. Koppelman is co-founder, co-owner, and president of Primavera Systems, Inc. He is a registered professional engineer who spent more than a decade in the managing of capital projects in the transportation industry. He earned a bachelor's degree in civil engineering from Drexel University, and an M.B.A. from the Wharton School of the University of Pennsylvania.

He was a vice president at Day & Zimmerman, Inc., where he was responsible for financial consulting assignments. Earlier he operated his own consulting firm, and was with Booz, Allen & Hamilton for five years as a senior consultant responsible for projects.

Mr. Koppelman is a member of several professional societies, has delivered papers for AACE, APTA, ASCE, CMAA, CFMA, PMA, PMI, and has been a guest lecturer at several universities.

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.

PMNETwork • January 1994

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