Introduction
The Sanskrit word nirvana means “freedom of the personal soul from the pain of the physical world.” As project managers, we are always striving, in a sense, to attain “nirvana,” at least as a state of mind that is free from project worries. This paper presents some ways and means for project managers to achieve this type of “nirvana”—namely, by using earned value management (EVM) effectively.
High success rates of project execution are the need of this hour. Effective project management is becoming more and more important. Enough has been said about the importance of managing each project successfully. This paper discusses how EVM can be used in a practical way to manage all modes of a project, whether it is a “firm fixed price” project or service through work orders in “time and material” mode. It brings about a radical way of treating “time and material” mode projects in order to apply and harness the power for effective control.
This paper discusses EVM at a conceptual level and suggests various ways to implement it in a practical way. It discusses scope, time, cost, and quality variances within an intrinsic, integrated, and competing environment and describes how to monitor and control these variances.
Based on the experience of guiding project management teams in rescuing troubled “firm fixed price” projects using EVM technique and based on using some of project management tools, in this paper the author suggests a practical way of implementing EVM.
We discuss the various steps to be considered while planning the project in terms of preparing the people, design of processes, requirement of tools, and the imperatives for effective implementation of EVM as a means for effective project health check. Finally, a checklist is presented as an aid for project managers for the effective implementation of EVM.
EVM Concepts
Earned value management is an important and proven tool in the management of projects. EVM helps the project team provide reliable and accurate forecast to questions such as “How long will the projects take to be completed?” and “How much money will it cost to be complete?” For projects employing earned value, costs need to be monitored their cost and performance results need to be analyzed against the approved baseline to calculate the variance with respect to the baseline.
The basic concepts of EVM are:
- All project steps “earn value” as the project progresses.
- The earned value (EV) can then be compared to actual costs spent and planned costs to determine projected performance and predict future performance trends.
- Physical progress is measured in dollars, so schedule and cost performance can be analyzed in the same terms.
EVM helps us to analyze past performance and forecast future performance (Exhibit 1). The key questions EVM allows us to answer are:
- Is our project on schedule?
- Is our project within the budget?
- Are there any variances?
- How can we finish the project on schedule and within cost?
- How much will it cost at the end in the same run rate?
- What strategy we can adopt?
Exhibit 1: EVM measurements and forecasting
Project Modes
Firm Fixed Price Projects
This category of projects involves setting a fixed total price for a defined product or service to be provided. Under the fixed price arrangement, buyers must precisely specify the product or services being procured.
Although theoretically this type of project should have a well-defined scope and statement of works (SOW), in everyday life, the project agreement is signed when the scope is not clearly defined. This gives rise to scope creep and time and cost overruns, and it increases risk and reduces the revenue returns to the performing organization.
There are conflicting interests between the customer and the performing organization. The customer always wants to keep their cost low and hence negotiate for a very low price, although the scope is not clearly spelled out by them. The performing organization, on the other hand, wants to maximize its returns from the project.
This situation puts the project manager in a difficult situation. An effective use of EVM can help him or her to manage the project and identify the actions that need to be taken to meet the expectation of both of the stakeholders.
T&M Projects
Time and material (T&M) contracts are a type of contractual arrangement that contains aspects of both cost-reimbursable and fixed-price contracts. They are often used to provide staff augmentation, acquisition of experts, and any outside support when a precise statement of work cannot be quickly prescribed. T&M contracts provide for acquiring supplies/services on the basis of:
- Direct labor hours at specified fixed hourly rates
- Materials at cost, including material handling costs, if appropriate
Under a T&M contract, the performing organization may provide products or services using any of the following four models:
- The performing organization gets a project on a T&M basis to provide resources or facilities for a specified period of time at a pre-agreed-upon cost.
- The performing organization gets a project on a T&M basis, where the scope and calendar time are clearly specified.
- The performing organization gets a project on a T&M basis for R&D work, where very high level scope is known.
- The performing organization gets a project on firm fixed price and outsources part of the project work to another vendor under a T&M contract.
If not managed properly, T&M contracts can increase the project value as if they were cost-reimbursable contracts. To address this, most organizations specify “not to-exceed values” or “time limits” placed in T&M contracts with a performing organization to prevent unlimited cost growth. This situation forces the performing organizations to look for ways to manage them effectively, balancing the competing constraints of scope, cost, time, quality, and risk.
T&M projects expend costs with the passage of time and consumption of materials. Most T&M projects have a product or service as its deliverable and follow a planned schedule of work. In these projects the EV can be calculated in the same way as in projects of other categories. But the challenges here are:
- What is the PV (BCWS) for the period of performance?
- How one can measure percent complete?
Of the four models of T&M projects discussed in the previous section, it is with Model 1 that application of EVM does not make any sense from the performing organizations’ perspective, as the project is only for providing resources or facilities at a fixed price for the stipulated period described in the contract. Hence, the success or failure of the project is not the responsibility of the performing organization; one can say that it is not even a project.
In case of the other models, there is an indirect pressure on the performing organization, as the performing organization needs to deliver the product or service within the “ceiling price” described in the T&M contract. Therefore, these projects need to be treated differently from a regular T&M project. This paper suggests the use of EVM as an approach to keep the project under control.
Use of EVM in Projects
In any ongoing project, the project manager needs to continually monitor the performance in three areas: achievement of scope, time spent, and costs incurred. Earned value (EV) is the technique that can integrate the scope, cost, and schedule performance of the project. At the start of the project, the project manager needs to establish baselines clearly; the performance variations from the baselines are periodically assessed to initiate necessary corrective actions.
EVM measurement systems facilitate the prediction of likely future costs and schedules for the project, enabling the project management team to deploy additional resources to bring the project on track in case of deviations. EVM systems are universally applicable across multiple types of contracts, including firm fixed price, cost plus, and T&M situations—with varying connotations.
The project management plan usually includes the work breakdown structure (WBS), the project network, and the cost baseline, outlining the cumulative planned spending across the project life cycle.
The basic component of EVM is the WBS, representing the deliverables to be produced at the lowest level as work packages. The line of decomposition of work packages facilitates activity definition, activity duration, activity resource estimation, responsibility assignments, and management of risks at the micro level. All activities get associated at the work package level.
EV can be tracked at the activity level or the deliverable level. The activities controlled by single manager get grouped together as a control account plan (CAP), which usually coincides with the EVM reporting levels. Thus, in effect, CAPs are derived by taking WBS and organizational breakdown structures (OBS) together into account.
Cost baselines are derived from planned resource allocations and resource rates across the project life cycle. This baseline represents budgeted cost of work scheduled (BCWS), which is also called the planned value (PV) for the project.
Most of the projects use automated project management information systems (PMIS) to load cost data during the project execution. Typically, the actual costs vary from budgets due to multiple factors—including resource usages, resource rates. and difference in the tasks performed as compared with the schedule. The cumulative costs incurred during the project life cycle are plotted as the actual cost of work performed (ACWP), also called actual costs (AC) currently.
The next step in the EV management system is to determine the budgeted costs of work performed. (BCWP)— which is also commonly known as the earned value (EV). Herein, we assess the extent of work performed at any time and relate it to the original budgets. BCWP can be determined in the following different ways:
- Based on task percent completion
- Prorating the budgeted costs
- Loading EV accruals for intermediate phases EV calculation for assessment of current performance
At any point during the project, we have three factors:
1. Actual costs (AC): Actual costs of the work performed so far, which typically are accumulated via the project accounting system established for the project
2. Planned value (PV) which is the budgeted cost of work scheduled so far
3. Earned value (EV), which is the budgeted cost of work performed so far
These three factors are basic to EV calculations.
The variance of actual performance with planned schedule arises on account of slippages of two kinds:
1. Schedule slippage: Tasks are not getting completed as per planned schedule. This is measured by schedule variance (SV), as EV - PV, or schedule performance index (SPI), which is computed as EV/PV. At the reference time point, this formula computes the ratio of the value of the work performed to the value of the work scheduled. As expected, any value of SPI greater than 1 is favorable for project management. We use a schedule modeler to dynamically monitor or change critical path (CP) to save a scheduled completion. However, we need to apply EVM principles as a valuable parameter apart from “crash cost vs. crash schedule.”
2. Cost slippage: It is quite likely that the project is on schedule but is behind in terms of cost performance. This phenomenon typically occurs due to overspending with respect to the budget. The performance metric for measuring cost slippage is cost variance (CV), which is computed as EV – AC. In ratio terms, cost performance index (CPI) is calculated as EV/AC. At the reference point again, CPI calculates the ratio of budgeted costs to actual costs for the work performed. As with SPI, any value of CPI greater than 1 is advantageous to project management. The relation between cost and the symmetric/asymmetric nature of work reveal many facts that the project manager needs to consider.
Composite Index or Critical Ratio
SPI and CPI vary dynamically across the project life cycle and could fluctuate in different directions depending on the schedule and cost efficiency of the project performance. A composite index, CSI or CR (cost-schedule performance index or critical ratio), defined as CPI × SPI, measures the combined performance on schedule and cost fronts.
- CR indicates integrated performance of any task or project as applied.
- A ratio of 1.0 suggests that work is progressing as planned.
- A ratio of >1.0 suggests that work is progressing better than planned.
- A ratio <1.0 suggests that work is not progressing as well as planned.
- Control limits can be applied to each project to track CR
For example, if the CR is between 0.9 and 1.1, we may consider the performance to be acceptable. CR greater than 1.0 means that work is progressing better than planned. However, if CR is greater than 1.1 continuously, it is a cause of concern, as it could be “too good to be true,” and hence calls for deeper investigation of the specific task(s) or the project, as the case may be. If CR falls below 0.9, it is definitely a cause for concern, and again, the specific task(s) or the project needs to be deeply investigated
The indices are used for measuring the current performance of the project and for future prediction.
EVM for Forecasting Performance
On the assumption that the current performance with respect to cost and schedule will continue to prevail, CPI and SPI can be used to predict future trends. If BAC (budgeted at completion) is the original budget of the project, then BAC/CPI gives an estimate of the likely total spending on the project at completion, known as estimate at completion (EAC).
Adjustment for both schedule and cost parameters gives a future cost prediction of EAC: EAC = AC + (BAC-EV) / (CPI*SPI)
Similarly, if OSAC is the original scheduled at completion, then OSAC/SPI gives an estimate of the revised schedule for completion, which may be termed as likely schedule at completion (or, LSAC). Thus (OSAC, BAC) represent the original coordinates as per the plan and (LSAC, EAC) represent the expected durations and costs at the end of the project, based on the current progress so far. Of course, it is possible to compute these statistics for any interim milestone also. The reporting periodicity can be predetermined with the contractor for various control account plans and for the overall project. Significant variations between the planned and actual performances may call for rebaselining, which the project manager has to undertake, through established change control procedures.
What Are the Challenges in Computing of EVM?
Good PMIS tools are needed to support EVM; the depth of support varies depending on the tools. A complex project has multiple streams of costs pouring in. Some of these elements can be measured through direct costs and others through indirect costing processes. The organizational chart of accounts and work authorization policies play a significant role in setting up of the EVM systems.
Most of the EV packages enable incorporation of accounting principles. These include activity-based costing, allocation of direct and overhead costs, resource burdening, and interfacing to organizational financial systems, etc.
On the human resources front, the systems need to collect the resource rates, implement timesheet interfacing, hours worked, and whether they are used directly or indirectly for the project, etc.
EVM is not very useful for moving scope projects or when baselines get shifted frequently due to external constraints. Also, measurement of EVM in intellectual type of work (as in software development) can be subjective—when it comes to measurement of extent of work “done”—in between milestones. A good way in this context is to have closely paced milestones (say, not more than a week apart) and use 20/80 loading rule for measuring the value of work in between milestones.
More often than not, project management and business management need to understand the significance of various EVM parameters, for proper interpretation and action. EVM works well in a contractual context, but for internal projects, the costs may have to be substituted by efforts.
Imperatives for Successful EVM Implementation
The following are needed for successful implementation of EVM in any project:
- Precise estimation of the effort and resource requirement in the bidding cycle and delivery cycles
- Planning of the delivery work and loading optimum resources
- Precise measurement of the amount of work accomplished, both tangible and intangible, in any review period
- A record of effort spent (precisely to the hour) by each resource in the project
- A daily record of all project-related expenses
- Up-to-date unit costs of all resources and infrastructure
- Disciplined use of timesheet system
- HRMS to contain up-to-date resource information and levelwise unit costs
- Optimum review frequency must be determined
- All tasks of the project must be monitored at determined review frequency
- A project management tool is implemented to facilitate EVM
EVM Checklist: An Aid for Project Managers
Project Plan
- Have you clearly defined your project goal in terms of technical performance, time, and cost?
- Have you implemented a well-defined work breakdown structure (WBS) and the project goals in your plan?
- Have you linked your WBS components to your organizational breakdown structure (OBS)?
- Have you clearly defined the control of accounts point in your WBS?
- Have you created the project schedule showing dependencies, milestones, etc.?
- Have you estimated the budget for each component of the WBS, summarizing all direct and indirect costs?
- Have you established the budget, schedule, and scope baseline of the project?
- Do you have a well-defined process in place:
- detailing the EVM and analysis process of your project?
- defining clearly the roles and responsibilities?
- spelling out the metrics and measurement that needs to be collected?
- mentioning the upper / lower limit or target value for each identified metrics?
- defining the time interval for performance monitoring?
- defining the corrective action / preventive action processes, in case variance is high?
Project Execution
- Have you measured the actual cost spent (AC or ACWP) for executing each work packages at the control of accounts point in your WBS?
- Are all direct and indirect costs are taken into consideration on computing the AC or ACWP?
- Have you measured or quantified the work performed in physical terms or as a percent of the scheduled work?
- Have you identified the planned value (PV) or budgeted cost of work scheduled (BCWS) for the reporting / performance analysis period?
- Have you measured the earned value (EV) or budgeted cost for work performed (BCWP), by multiplying percent complete with planned value (PV or BCWS)
Project Monitoring and Control
- Are you doing an analysis at the frequency specified in your EVM process, using the data collected to calculate:
- Cost variance
- Schedule variance
- Cost performing index
- Schedule performance index
- Are you comparing this with your target performance value and find that they are significant?
- In case of significant variance, do you analyze and find root causes?
- Do you identify and take appropriate corrective / preventive actions to reduce the variance?
- Have you use these data to forecast the future project performance?
- Do you provide the management with information on planned /accomplished work and costs at least once in a month?
- Are the actions taken are documented for future references?
Conclusion
The success of Earned Value Management System Implementation requires a sustained and thoughtful approach to people, processes, and tools, with strong support from the senior management. All changes in project scope must be addressed by raising change requests in a timely manner. Based on this, revised PV must be re-planned and thereafter monitoring as per the revised plan. A more disciplined usage of the timesheet system, capturing on a daily basis the hourly effort spent by every resource, should be in place from commencement of the project to ensure that efforts of resources are captured to the hour. To get an accurate status of the project, EV monitoring must be carried out both at the project level and at every task level. Above all, a good project management tool facilitating the EVM techniques must be in place.
