Monitoring performance against the baseline
| ||EARNED VALUE |
Quentin W. Fleming and Joel M. Koppelman
All projects need to establish some type of a baseline against which their efforts may be monitored during the period of project performance, as we discussed in our May article. Therefore, an earned value performance measurement baseline will have been established for the project. The project's baseline will be made up of detailed cost account plans, a generic type of management control cell, perhaps best thought of as constituting a mini-project. Each cost account plan must have a specified scope of work, a time frame to start and complete the effort, and contain the authorization for the required resources, a budget. Each cost account will be performed separately, and the sum of all cost account plans (plus contingency funds) will constitute the total project value.
The next required step is for the project management team to stand back and monitor performance against its earned value baseline. The purpose of management oversight is to discern the long-term trends in project performance. Earned value is a “strategic” trend indicator. It seeks answers to a number of questions. If we stay on this present performance course where will we end up? How much money will we need to complete the project? How long will it take to get there? This is the purpose of earned value measurement. It looks for a monthly performance position, and the long-term direction of the project.
If the project needs a weekly, or daily, or even hourly assessment of its performance, it must look to its complementary project management tool: the scheduling system. Both cost management and scheduling management function well in earned value applications. For that reason some have chosen to refer to such applications as their cost and scheduling system.
Earned Value Projects Focus on Exceptions to the Baseline
Employing earned value does not require that each and every cost account plan in the baseline be continuously monitored throughout the life of the project. Rather, the project team will want to focus their attention directly on any exceptions to the baseline plan. Earned value project management allows the team to utilize the “management by exception” principle in the execution of their project plan.
An earned value performance measurement baseline can be numerically quantified and displayed graphically for management oversight. Perfect performance for an earned value project is considered to be 1.0 performance, on both the cost side and for the scheduled work. Any cost or schedule performance that falls below the 1.0 standard should be the focus of the project manager and the team. Earned value measurement can be expressed in dollars, in hours, or in any measurable unit. For simplicity, we will typically use dollars in our illustrations.
For example, perfect schedule performance to a project baseline will result in a dollars worth of earned value being achieved for every dollar that was originally scheduled. Perfect schedule performance to its plan could thus be described as 1.0. Anything less than 1.0 reflects a behind-schedule condition to the originally planned (or scheduled) work.
On the cost side, you look to the value of physical work that was accomplished (the earned value) as compared to the costs incurred for doing that same work. For every dollar of earned value achieved, precisely a dollar should be actually spent. Thus the project would be performing at a cost efficiency factor of 1.0. It doesn't get better than 1.0 performance for earned value projects, although it may be mathematically possible. If, however, a project accomplishes less than a dollar's worth of earned value for every dollar it spends, obviously the project is experiencing a cost overrun for the work it has accomplished.
Unfortunately, performance sometimes falls below 1.0, which is the “buzzer” or the “alarm” to the project team that something is wrong. Once the project reflects earned value performance falling below the 1.0 level, for either the cost or scheduled work, the project management team will want to first understand the reasons why, and then take corrective actions to improve performance on the remaining tasks.
Earned value projects have two areas of primary focus. The first is on the performance to the planned schedule. How much actual earned value was accomplished against the original planned value. To determine this factor the earned value actually accomplished is divided by the planned value, which provides what is called the Schedule Performance Index (SPI). The SPI is a representation of how much of the original scheduled work has been accomplished. The formula for the SPI is shown in the box insert at the bottom of Figure 1.
An SPI performance of less than 1.0 indicates that the project is running behind the dollar value of the work it planned to accomplish. The earned value SPI, when compared to the critical path method (CPM) schedule position, provides the project team with an accurate insight as to the true schedule position of the project. The SPI and the CPM tools, when used in conjunction, provide a means to accurately forecast how long the project will take to complete.
The second area of focus is on cost performance. It is that delicate relationship between the dollar value of the earned value accomplished versus the actual costs incurred to accomplish the work. This factor is called the Cost Performance Index (CPI), and the formula for the CPI is also shown in the insert in Figure 1.
While both the SPI and CPI are important indicators to watch, the CPI is likely a more significant factor than the SPI. The reason: any CPI performance that is running at less than 1.0 is non-recoverable by the project. Whereas the SPI will eventually drift back up to a full 1.0 position when all of the project tasks have been completed, any CPI performance of less than 1.0 will not be recovered by the project.
Thus it is imperative that the project manager monitor closely the rate of the cumulative CPI, as well as the completion of all those tasks that are on the critical path. The SPI is likely the least important of these three indicators: CPI, SPI, critical path performance.
Any overruns to date, meaning performance at less than 1.0, will constitute a permanent loss of funds to the project. The only question is at what rate the project will perform the remaining work: at the full budgeted value of 1.0, or at a lesser rate. There is strong empirical evidence that suggests that projects will most likely continue to perform at their “cumulative” CPI rate for all remaining tasks, or perhaps even deteriorate further. Only with the recognition that they have a cost problem, and through the aggressive management of all remaining tasks, can there ever be an improvement in the CPI position.
The performance of any project that employs earned value can be effectively tracked with a focus on simply the cumulative CPI and SPI curves, as displayed in Figure 1. This chart reflects both the SPI and CPI curves over a time scale, with three key project milestones also displayed across the top. Note, that we recommend the use of cumulative data over monthly incremental data when monitoring earned value performance. Monthly data are typically too prone to wide fluctuations caused simply by the placement of planned or actual costs placed in the wrong time frame. Cumulative data tends to smooth out such variances. More importantly, cumulative cost performance data has been demonstrated to be extremely accurate as a forecasting tool with earned value projects.
The monitoring of cumulative SPI and CPI performance curves can be an effective management oversight tool. As illustrated in Figure 1, we have a project off to a bad start. Both its SPI and CPI curves are running negative trends. While the SPI seems to have leveled off, the CPI continues to deteriorate. Let us attempt to speculate what might be happening on this particular project.
In an attempt to get back on the planned schedule—that is, to bring their cumulative SPI back closer to a 1.0 performance position—projects will often add resources to accomplish the same amount of planned work. The added resources may take the form of additional people or sometimes overtime for the full work force. The battle cry is sounded: everyone on overtime! Either way, the project will be using additional resources, but only to accomplish the same amount of planned work.
While the project may improve the performance of its SPI, it will be inflicting non-recoverable damage to its CPI position. Remember the rule: the SPI will eventually correct itself back to a full 1.0 whenever all the tasks have been completed, but any funds spent that cause an overrun, causing damage to the CPI, will not be recovered. Rather than the indiscriminate use of overtime, the project might better focus on the aggressive management of all tasks along its critical path, and perhaps let the SPI recover over time. Any project that is operating with limited authorized funds, and most are these days, must carefully balance its SPI and CPM schedule positions within its cost objectives.
The value in monitoring the SPI and CPI efficiency factors is that these two indices can be used to statistically forecast the estimated final costs for the project. Forecasting the final estimated costs to the project will be covered in our next article in this series.
Earned Value Performance Takes Place Within Cost Account Plans
When the earned value concept was formally introduced to the public in 1967 as a part of the Cost/Schedule Control Systems Criteria, a cost account was defined as representing the intersection point of the lowest work breakdown structure (WBS) element, with a single functional organization. The combination of the lowest WBS element and a single function resulted in the formation of an excessive number of cost account cells for most projects to monitor. Within the cost account would take place all performance measurement.
The initial establishment and subsequent maintenance of detailed cost account plans requires discipline from the project team, and this sometimes presents a challenge to them. Each of the authorized cost accounts must be maintained with integrity, meaning that the specified scope of work and its corresponding budget must remain in concert. Once established, neither scope alone nor the authorized budget alone can be shifted independently of the other. Unilateral shifts in either budget or scope would serve to mask the performance of the cost accounts, and negate the very purpose of employing earned value.
While having performance measurement take place at the detailed cost account level, the project manager may monitor periodic (monthly) performance at three levels as is depicted in Figure 2. Performance may be tracked at the detailed cost account, at the intermediate summary levels displaying either WBS or functional performance, and at the top summary project level. Each of these three levels will establish an individual performance pattern that can be used to discern the trends to date, as well as to forecast a final position.
Owners and buying customers will typically have a particular interest in project performance by WBS, with a focus on any high-cost or high-risk WBS elements. By contrast, internal company management reviews will often center their attention on the performance of their functional organizations. Those functional activities that happen earliest in the project cycle will receive the closest initial scrutiny; as an example, engineering design and testing.
Three decades ago when earned value was initially introduced, the use of small, short-span cost accounts was in vogue. This approach resulted in the formation of huge numbers of detailed cost accounts, and excessive numbers of management control cells for the project team to monitor each month.
More recently and consistent with the increased popularity of integrated project development teams, there has been a paradigm shift within the earned value community. Typically, we now see larger segments of common work effort being defined as cost accounts, including all of the functions necessary to perform the work.
The multi-functional work team cost account has resulted in a higher-level placement of defined work on the WBS, that is, larger segments of cohesive work. This logical approach has resulting in perhaps a 90 percent reduction in the total number of cost accounts for any project. Such cost accounts represent a more natural subdivision of project work for the team to monitor.
There is nothing inherently wrong with the approach of utilizing larger segments of work. As long as these larger work team cost accounts continue to represent a definitive scope of work, expressed in precise work tasks, each containing its own budgets and schedules, the performance measurement will not be compromised. The use of larger cost accounts must be done with perhaps greater care and skill than with the use of smaller cost accounts.
Displays for Management
Two of the more popular displays of earned value performance data can be compared side by side, as shown in Figure 3. To the left is shown a display of cumulative performance trend data representing the three key elements: the planned value, the actual costs, and of course the earned value. This is likely the most common of all earned value displays. Management can step back and reflect on the long-term trends in project performance. And when the major project milestones (or major project tasks) are also depicted across the top, this chart becomes a very effective monitoring tool.
As a related corollary to the cumulative performance curve shown on the left, the resulting cost and schedule performance variances can be magnified for closer examination, as displayed on the right of the chart. Both charts are displayed with use of a common time scale, with the same project milestones also depicted across the top. In addition, the project's consumption of its management reserve can be displayed on the variance chart. Thus in these two side-by-side charts a wealth of performance data can be quickly observed by the project manager.
How is this project doing? Obviously, unless there is a dramatic improvement in earned value performance, one can quickly see that the project will take longer than the 24 months originally planned, and cost more than the current authorized budget. It is time for the aggressive management of all remaining project tasks.
Using an earned value technique, with its focus on “exceptions” to the baseline plan, the project team knows exactly where to focus its attention. ∎
Quentin W. Fleming is a senior staff consultant to Primavera Systems, Inc., with over three decades of industrial experience. His latest book is Cost/Schedule Control Systems Criteria—The Management Guide to C/SCSC.
Joel M. Koppelman is president, co founder, and co-owner of Primavera Systems, Inc. He is a registered professional engineer and has spent more than a decade in the managing of capital projects in the transportation industry.
PM Network • September 1995