Earned value management

from data analysis to executive action

Note: “EVM: From Data Analysis to Executive Action” is the result of U.S. Air Force Headquarter analysts trying to create standard Earned Value Charts for Senior Executives. In a short time it was realized that traditional Earned Value analysis charts require the user to understand not just the graphic presentation, but also the underlying principles, formulas and statistics behind them. The traditional charts used by analysts remain unchanged and the backbone of the transformation. However, a different display is required for Senior Executives to quickly transfer information rather than data.

Introduction

Earned Value, embraced by project management as a good tool for project control, now has many believing the major contribution of Earned Value is to identify cost and schedule variances. Based on this assumption, the major complaint with Earned Value is the timeliness of the data, sometimes not being seen for up to 90 days after the close of the reporting cycle. Also, most commonly used charts, designed by analysts, require knowledge of Earned Value terminology and an in-depth understanding of underlying data and calculations.

The concerns voiced by U.S. Air Force Program Managers to Senior Executives identified problems not with the technique, but where Senior Executives were spending their analysis time. What has occurred at Headquarters Air Force is a philosophical change; instead of spending their time emulating project managers and asking about cost and schedule variances, the emphasis on Earned Value as used by Senior Executives focuses on overall trends, completion costs and impacts on program funding. The goal: to transform Earned Value to better serve Senior Executives. The tool to achieve this philosophical transformation was to create simple charts for Senior Executives, with one idea per chart, devoid of Earned Value terminology, that could be interpreted in five seconds or less. This paper describes the transformation.

Basic Earned Value Definitions

The predictive nature of earned value serves as a strong cost estimating tool, using “work in progress” to project completion costs. This section reviews of how to use the data in this way.

Every program contains five basic measures that are regularly reported. The first measure, Contract Budget Base, or the Budget, is the value of all the work to be performed. It is usually the contract value less fee. The second measure, Planned Value, evaluates how much work was supposed to be completed by this time, traditionally called Budget Cost of Work Scheduled abbreviated to BCWS. The third measure called the Earned Value shows how much work was actually completed using the same measure (i.e., dollars or hours) as the Planned Value. This is called Budget Cost for Work Performed or BCWP. The fourth measure is Actual Costs or Actual Cost for Work Performed translated to ACWP. The final number is the reporting organization (contractor's) completion estimate.

Basic Earned Value Calculations

•   The Cost Variance (CV) is the measure of Earned Value minus Actual Costs.

•   The Schedule Variance (SV) is the measure of Earned Value less Planned Value.

•   The Cost Performance Index (CPI) is calculated by dividing the Earned Value by the Actual Costs.

•   The Schedule Performance Index (SPI) is calculated by dividing the Earned Value by the Planned Value.

Two other major calculations used in this article center on the “To Complete” indices. They calculate the level of cost efficiency required on the work remaining to meet either the Budget or the Completion Estimate. It is calculated by dividing the Work Remaining by either the Budget Remaining or Estimate Remaining. To determine Work Remaining subtract the Earned Value from the Budget. To determine the Budget or Estimate Remaining subtracts Actual Costs from either the total Budget or Estimate amount.

Example: Budget = $20.8
Planned Value = $7.0
Earned Value = $ 6.8
Actual Costs = $7.3
Estimate = $20.7

Cost Variance (CV) = Earned Value - Actual Costs

6.8 - 7.3 = -0.5

Cost Performance Index (CPI) = Earned Value / Actual Costs

6.8 / 7.3 = 0.93

Schedule Variance (SV) = Earned Value - Planned Value

6.8 - 7.0 = -0.2

Schedule Performance Index (SPI) = Earned Value / Planned Value

6.8 / 7.0 = 0.97

Exhibit 1. Traditional Contract Performance Chart

Traditional Contract Performance Chart

Exhibit 2. Baseline History

Baseline History

Work Remaining = Budget - Earned Value

20.8 - 6.8 = 14

Budget Remaining = Budget - Actual costs

20.8 - 7.3 = 13.5

Estimate Remaining = Estimate - Actual Costs

$20.7 - 7.3 = 13.4

To Complete Index (TCPI)Budget = [(Work Remaining) / (Budget Remaining)]

14 / 13.5 = 1.037

To Complete Index (TCPI)Estimate = [(Work Remaining) / (Estimate Remaining)]

14 / 13.4 = 1.045

Exhibit 3. Traditional Cost and Schedule Variance Trends Chart

Traditional Cost and Schedule Variance Trends Chart

Contract Performance Chart

The traditional Contract Performance Chart contains a lot of useful data that the analyst must interpret to reach conclusions on a variety of performance issues (see Exhibit 1). Three main ideas are displayed on the chart:

•   Changes to the baseline and both contractor's and Program Office completion estimate over time

•   Planned Work, Earned Value, and Actual Costs over time

•   Estimated cost and schedule completion.

No one idea is central on this chart. Additionally, cost and schedule variances must be manually derived. While this chart is a good central repository for analysts, who perform calculations on the chart in their heads and reach conclusions, it does not meet the goals for a Senior Executive chart

Baseline History

Changes to the baseline during the history of the contract are not represented on any other traditional chart. This gave rise to the Baseline History Chart (see Exhibit 2), which tracks this trend and the contractor's completion estimate over the same time period. From here the Senior Executives can see the relative stability or instability of the contract over time, how the contractor's estimate has tracked against the baseline, and contract-specific notes explaining the trends. This box will be repeated throughout the Executive Charts.

Variance Graph

The variance graph, traditionally used at the program level:

•   Assesses current cost and schedule variances

•   Prompts analysts to understand the issues behind them

•   Tracks corrective actions implemented to reverse unfavorable trends

•   Tracks the contractor's Management Reserve usage.

From a Senior Executive standpoint, the only purpose of this graph should be to provide early warning to funding problems.

The traditional Cost and Schedule Variance Trends chart (see Exhibit 3) compares the variances against a 10% threshold band. This 10% is not arbitrary, but based on research that shows that once a contract is 20% complete, the cumulative CPI does not vary from its value at that point by more than 10%; in fact, it tends to worsen (Christensen and Heise, Summer 1992, “Cost Performance Index Stability,” National Contract Management Journal). Many completion estimate formulas use the CPI, which identifies how much work is accomplished for every dollar spent.

Exhibit 4. Performance Review. Cost and schedule efficiency (compared to plan).

Performance Review. Cost and schedule efficiency (compared to plan)

Exhibit 5. Confidence in Contract Value. Will contract complete at baseline value?

Confidence in Contract Value. Will contract complete at baseline value?

The traditional chart leads to the conclusion that variances are worsening, but are within the 10% tolerance bands. A Senior Executive may interpret this to mean that no action is required until threshold bands are breached. Based on the research stated above, once a cost variance crosses the 10% threshold the contract will probably complete with an overrun. To state it another way, once a cost variance crosses the 10% threshold, it is too late to recover costs without some type of management or contractual action. While the Program Manager should be keenly concerned with these variances, Senior Executives need to focus on future trends, which this chart does not do.

The Performance Review Chart (see Exhibit 4) translates the previous chart into threshold ranges rather than tolerance bands. It also moves the alarm from 10% to 5%, when management action can influence outcome. By transforming the traditional chart to a “stoplight” chart Senior Executives can see the message: problems are developing. “Yellow” means caution, and Senior Executives may increase their attention to this program, versus one that is in the “green” range.

Confidence in Contract Value Chart

Program Managers must ensure they know the causes of the variances, and what corrective actions may be taken. Just as important, they need to understand the predictive quality of earned value. Senior Executives need to know the cost, schedule and technical status of a program, but focus on the future, and the remaining charts do exactly that.

Exhibit 6. Confidence in Estimate. Will contractor complete at contractor's current estimate?

Confidence in Estimate. Will contractor complete at contractor's current estimate?

The Confidence in Contract Value Chart (see Exhibit 5) focuses specifically on the predictive nature of Earned Value. The basic information an Executive needs to know is if the contract will complete at the expected cost. This chart displays the reasonableness of completing within the contract value by comparing the cumulative cost performance index to the level of efficiency needed to complete the remaining work to meet the contract value. Based on discussions above, the CPI is not expected to improve by more than 10% by the end of the contract. In this example the level of efficiency required to complete the work and still meet the contract cost is about 10% higher than efficiency to date. The contract will probably overrun if no management action is taken, hence, the display is right on the line between yellow and red.

Senior Executives should ensure the Program Manager understands the root causes of the cost and schedule variances are understood, if they are recoverable, and what action the Program Manager is planning. While the Program Manager is centered on the current information, the Senior Executive also needs to look toward the future. As a contract overrun is a distinct risk in this example, alternatives should be identified and discussed between the Senior Executive and the Program Manager.

Confidence in Estimate Chart

Once it has been determined if the contract will complete within its cost parameter, the focus changes to the contractor's completion estimate. As the contractor is closest to the work, he or she has the best understanding of variances to date and have the best handle on the work completed and the work remaining. A completion estimate is required so that a similar comparison to the Confidence in Contract Value Chart can be derived, the Confidence in Estimate Chart (see Exhibit 6). This chart, similar to the last one, compares cost efficiency to date against the efficiency required for the remaining work to meet the Completion Estimate. As displayed, the estimate is of statistically low confidence.

Exhibit 7. Expected Completion Estimate

Expected Completion Estimate

Expected Completion Estimate

A summary chart for Senior Executives is also required (see Exhibit 7). This chart only discusses the bottom line: How much will this contract cost? It displays the Budget, the Contractor's Estimate, the Program Manager's estimate and a statistical range for comparison. An important point to remember is a statistical range is just that, and assumes no management actions or planned changes through the rest of the work.

Summary

The traditional Cost and Schedule Variance Chart shown in this presentation draws a conclusion of slight cost and schedule variances within threshold. By viewing the three additional charts presented here, the conclusions reached by the Senior Executive would be different, something on the line of the following:

“Cost and schedule variances need to be addressed. If nothing is done this contract will probably complete in an overrun situation. Additionally, the contractor believes the contract can be completed at less than the contract value, which is statistically improbable. Therefore, I should speak with the Program Manager and find out more information.”

Earned Value has become a leading project management tool. Although there have been some criticisms that the data is too focused on the past and irrelevant for management, this paper tries to challenge these positions by centering on the use of trends as a cost estimation tool. This paper has also demonstrated that Earned Value is useful to both Program Managers and Senior Executives, but both discussions and visual presentations must take a different slant. Finally, when others see how data can be used, it will improve both the quality of the data and the management discussions it produces.

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
October 3–10, 2002 • San Antonio, Texas, USA

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