More than 100 years ago,
industrial engineers first employed “earned value” to determine the true cost performance of production work. They established planned standards, measured the earned standards and related them against the actual hours used to measure their true cost performance.
In the early 1960s, the U.S. Air Force (with industrial engineers again taking the lead) successfully used this same concept to measure a one-time-only developmental project, the Minuteman Missile. A committee was formed to define management oversight requirements on the acquisitions of major new systems. The resulting document, the Cost Schedule Planning and Control Specification (CSPCS), was a list of 35 performance criteria required from private suppliers. Since the CSPCS criteria were first issued, they evolved into the Cost/Schedule Control Systems Criteria in 1967, the Earned Value Management System (EVMS) in 1996, and the American National Standards Institute-Electronic Industries Alliance standard in 1998.
While these same basic criteria have stood the test of time for large projects, they smother projects smaller and less complex than major government systems. In these cases, employing 10 of the 32 EVMS criteria creates a simple form of earned value “for the masses.”
The project management processes should be integrated with both the work definition (by WBS) and the functional organizations performing the effort.
EVM Criterion 1—Define authorized work elements for the program. A work breakdown structure (WBS), tailored for effective internal management control, commonly is used in this process.
The scope of the entire project must be defined in order to measure performance. Project managers must make some intelligent assumptions about the makeup of the new project based on whatever information can be gathered—this means defining project objectives, deliverables and key milestones based on professional experiences.
The WBS is a hierarchical family tree that groups the major project segments and specifies its deliverables: hardware, software, services, intellectual points and data. It serves to integrate scope with budget and schedule. Each WBS level provides a progressively more detailed description of the work to be accomplished. Any work not identified within the WBS is potentially out of scope and requires authorization.
Control Account Plans (CAPs), which are the points at which management control and earned value performance occur, will be placed at selected levels of specified WBS elements. CAPs also can be explained as subprojects, or points of management focus.
EVM Criterion 2—Identify the program organizational structure, including the major subcontractors responsible for accomplishing the authorized work, and define the organizational elements in which work will be planned and controlled.
This merely extends the scope definition process and requires a determination of who will actually perform the work. All tasks contained in the project's WBS must be assigned to a specific company organization for performance. If, however, the company is not capable of performing the work, it must be outsourced. “Make” or “buy” determinations are a part of the scope definition process.
EVM Criterion 3—Provide for integration of the company's planning, scheduling, budgeting, work authorization and cost accumulation processes and, as appropriate, the program WBS and organizational structure.
The project management processes should be integrated with both the work definition (by WBS) and the functional organizations performing the effort. This requirement specifies that projects employ a single management control system using a common information database that transcends the company's functional organizations. The project's CAPs provide the basis for this integration.
Companies, particularly those with large and well-established functional organizations, often have difficulty satisfying this criterion. Each functional organization will have its own performance agendas and would like to manage affairs in its own particular manner. Sometimes, functional performance goals can be at odds with project goals. Using CAPs, performance results can be monitored using the WBS (to satisfy external customer demands) or from the company's organizational perspective (to satisfy internal functional customers).
EVM Criterion 6—Schedule the authorized work in a manner that describes the sequence of work and identifies the significant task interdependencies required to meet the requirements of the program.
A good scheduling system will tell which tasks are impeding others and the project's longest or critical path. A master schedule will set forth all critical milestones and key tasks. The project's “planned value” will be determined by compliance with this criterion.
On larger and more complex projects and in organizations where there are numerous projects performed concurrently, the master schedule will be reinforced by subordinate schedules, often taking the form of detailed functional schedules. However, all schedules must agree with the requirements of each project's master schedule.
EVM Criterion 7—Identify physical products, milestones, technical performance goals or other indicators used to measure progress.
All projects must be able to measure physical performance, as defined within the tasks. This requires defined metrics to convert the “planned values” into “earned values.” Projects must specify what physical products, deliverables, outputs, metrics, milestones and technical performance indicators will be used to measure work actually accomplished against their planned schedules.
EVM Criterion 8—Establish and maintain a time-phased budget baseline at the control account level against which program performance can be measured. Initial budgets established for performance measurement will be based on either internal management goals or the external customer-negotiated target cost, including estimates for authorized (but incomplete) work. Budget for long-term efforts may be held in higher level accounts until an appropriate time for allocation at the control account level. On government contracts, if an over-target baseline is used for performance measurement reporting purposes, prior notification must be provided to the customer.
A time-phased project baseline is required to measure performance formed from the summation of the CAPs. Management reserves typically are outside the performance baseline until specifically authorized. The baseline must include all authorized work. Any authorized work that is not-yet-negotiated must be estimated. On long-duration projects, it may be impossible to budget effort to the specific work package level. In such cases, long-term budgets may be kept at the higher-level WBS elements called “planning packages.” However, long-term budgets also must be tightly controlled to prevent the co-mingling of such effort with near-term fully defined work packages. All project costs, including indirect costs, must be allocated into the baseline. If indirect costs are left outside individual CAP budgets, such costs must be allocated so that the full value of the baseline includes all costs, direct and indirect. Some projects accomplish this requirement by creating a separate CAP covering indirect costs.
Reader Service Number 175
EVM Criterion 16—Record direct costs consistently with the budgets in a formal system controlled by the general account books.
Accounting methods are required for all direct project costs. The preferred technique is “applied direct cost,” which simply means direct resources are tracked as they are consumed. Direct costs covering materials that are inventoried, consumed later or transferred to another project can be challenging to measure. In addition, companies that have been functionally oriented for so long experience difficulty isolating direct costs against specific projects.
EVM Criterion 22—At least monthly, generate the following information at the control account and other levels as necessary for management control using actual cost data from, or reconcilable with, the accounting system: The amount of planned budget vs. budget earned for work accomplished. This comparison provides the schedule variance. The amount of the budget earned vs. the actual (applied where appropriate) direct costs for the same work. This comparison provides the cost variance.
This criterion differentiates earned value management from other traditional approaches of measuring cost performance as planned costs vs. actual costs. While this requires only a monthly analysis, there is an industry trend toward weekly measurement of direct labor hours. The comparisons should be sufficiently detailed to allow for performance measurement by category of direct costs, subcontractor performance and organization.
Reader Service Number 197
EVM Criterion 27—Develop revised cost estimates at completion based on performance to date, commitment values for material and estimates of future conditions. Compare this information with the performance measurement baseline to identify variances at completion important to company management and any applicable customer reporting requirements, including statements of funding requirements.
A key issue facing all projects is the estimate at completion (EAC). Likely, this will be one of the primary reasons why projects elect to employ earned value: to gain an accurate forecast of the total funds to complete the project. If it will cost more than the authorized budget, management should know as early as possible.
EACs must be performed routinely based on actual performance and a reasonable determination of the work ahead. These forecasts must relate to the authorized statement of work and are best supported by bottom-up estimates for all remaining tasks.
Even though indirect costs will be beyond the control of any given project manager, they are an essential part of any accurate EAC. Historical performance of indirect pools should be considered.
EVM Criterion 28—Incorporate authorized changes in a timely manner, recording the effects in budgets and schedules. Base changes on the amount estimated and budgeted to the program organizations.
This last criterion requires all changes to be addressed, either approved or rejected. All approved changes must be incorporated into the project baseline in a timely manner.
Quentin W. Fleming is principal of a management consultancy firm, which he established in 1991. He served on the committee that updated the PMBOK® Guide – 2000 Edition. He developed the “Earned Value Project Management” course for the Univ. of California-Irvine, which is required for their project management certificate program. With Joel Koppelman, he co-authored Earned Value Project Management, second edition [PMI®, 2000].
Joel M. Koppelman is the co-founder, co-owner and president of Primavera Systems Inc. He is a registered professional engineer and has spent several decades in the planning, managing, and controlling of capital projects for the transportation industry. He has operated his own consulting firm, where one of his principal engagements involved managing alternatives analysis, feasibility studies and environmental impact statements.
