R&D engineers face up to earned-value

We applaud someone who earns his keep. The lawyers call it “quid pro quo” — something for something.

Engineers wrestling with today’s research and development problems for the federal government now are forced to come to grips with measurement of their performance — are they earning their keep.

R&D budgets have been in a shrink phase. Gone are the easy going laissez faire days of the missile gap, the moon race, and the Vietnam stalemate. Now comes environmental protection, energy independence, and core city rebuild. But the backdrop is different. Inflation and taxes squeeze R&D budgets. Material costs rise at the crack of the whip of skimpier natural resources.

To control costs and schedule for R&D the Department of Defense developed some years ago an earned-value technique. Driving the technique is the theme of “cost control” rather than “funds control.” Cost control means measuring the work accomplished against the dollars spent and against the original planned expenditure. Funds control merely measures dollars spent against the passage of time.

To most of us funds control seems natural and logical. That is the way we control our personal budgets. That is the way the federal government has always controlled its budgets.

Government’s R&D Policy

R&D budgets are not small. Batelle, 9 major R&D performer, estimates in 1976 a total R&D expenditure of $38.2 billion. The federal government antes up 53% of it, or $20.2 billion. The balance contributed 43.5% from profit-minded industry and 3.5% from not-for-profit groups.

The Office of Management and Budget, charged by Congress to establish a uniform federal procurement policy, accepted the Congressional challenge to:

“Establish government-wide criteria and policies for use in the development and approval of new management systems. . .”

The Congressional challenge embodied in the December 1972 “Report Of The Commission On Government Procurement” pinpointed:

“The management system concepts currently being explored by DOD are sound and should be pressed to completion. . .”

This policy corrals the R&D fat-cats: the Department of Defense (DOD), the National Aeronautics and Space Administration (NASA), the Energy Research and Development Administration (ERDA), and the Department of Health, Education and Welfare (HEW).

The National Science Foundation estimates that 86.6% of the $20.2 billion federal R&D pie will be dished out among the fat-cats this way:

DOD 49.1 percent
NASA 15.8 percent
ERDA 11.0 percent
HEW 10.7 percent

Leading this pack in seeking ways to answer the question: “is our R&D dollar spent productively” is DOD. Already the DOD earned-value technique has been embraced by NASA and last March by ERDA.

Measuring Engineering Development Performance

The federal government splits its R&D budgets this way: basic research, applied research, and engineering development. About 80% of all federal R&D is spent on engineering development. Engineering development is pragmatic and measurable. So it leads the R&D performance measurement parade under the banner of earned-value.

The run-of-the-mill development engineer balks at measurement of his performance. It is something new. It can be threatening. It certainly will separate the good engineer from the mediocre — the true professional from the cook-book artist chuck full of energetic optimism. Earned-value applies the discipline required in today’s R&D environment of budgetary constraints and meeting scheduled deadlines.

Define The Work

The first order of business for the project manager is to define the work to be accomplished and the end product. To fail here is to admit that performance cannot be measured — is to admit that the R&D performer is at the whim and mercy of uncontrollable forces. This is not all bad. Basic research and to some extent applied research are buffeted by these forces. However, here we are concerned only with an engineering development R&D project.

A work breakdown structure diagrams the R&D project operational plan into successively smaller chunks of work or tasks. The lowest chunk, or “level” as it is sometimes called, is a work package assigned to a functional group such as engineering or manufacturing. The work package chunk must be measurable and manageable.

The work breakdown structure defines what work must be accomplished. The who and the how comes from the work package plan.

Establish A Realistic Plan

Each work package chunk assigned to a work-package manager must be described by a written plan. The plan outlines the work, states who will perform the work, establishes how the work will be done, and brackets the time span for work performance. The number of people assigned and the time span must be realistic but not “loaded.” After all, the work package plans added together cannot exceed the total dollars allotted to the R&D project!

Herein lies a major discipline. The plan must be realistic. The R&D project budget cannot be exceeded. So now the task is to trim the work plan to fit the budget. Budgets are not arbitrarily slashed without also modifying the work plan. The work-package manager has an active role in establishing his work package plan along management-by-objectives lines.

Agree On Method of Measurement

The written work plan for each work package is budgeted month-by-month. This becomes the budgeted cost of work scheduled (BCWS) against which the work-package manager will measure himself. The total cost is his budget at completion (BAC).

At first it may seem too harsh to ask for a detailed plan that may change the very next month. But without an initial plan there is no baseline against which to measure and to answer the questions: are we getting anywhere? Are we spending too much for the results achieved?

If new factors upset the plan, it must be replaced with another plan. Only with the consent of the project manager can a new budget be established for the new plan and, if necessary, increased from a reserve.

When uncertainty looms large, many work packages are made bite-size to be completed in one to two months. In some cases the work packages expand to many months punctuated by appropriate milestones. The milestones must require defined performance: completion, submittal, or other type of delivery of a sliver of the work package chunk.

In some cases only cost performance can be measured such as with administrative work. These become level of effort packages. The project manager keeps the number of these packages to a minimum.

Isolate Significant Unfavorable Variances From Plan

Each month the work-package manager bounces his month’s accomplishment against his plan (BCWS) and against the actual cost of work performed (ACWP) to show where he stands. He does this by an objective estimate of work accomplished — his earned-value. This estimate becomes the budgeted cost of work performed (BCWP).

Next, the work-package manager re-examines his estimate to complete (EAC). Many times this monthly analysis deflates the original euphoric-planned optimism. It pulls up short the run-away thoughts of “let’s do an extra bang-up engineering job” — even though not the original plan.

Construction business task-cost analysis of the work remaining comes closest to duplicating what the R&D engineer must estimate monthly.

The variances calculated each month for the work-package manager are:

BCWP-BCWS Schedule Variance
BCWP-ACWP Cost Variance
BAC-EAC Estimate At Completion Variance

Trace Problem Indicators

Whenever these mathematic expressions become negative, the result is unfavorable and must be explained. Significance is a matter of judgement. Usually the project manager establishes tolerance limits below which he does not expect an analysis.

Unfavorable variances are “indicators” only and must be explained in writing whenever they exceed the tolerance limits. Most engineers tend to regard these indicators as absolutes to worry and fret over. This is not productive. The original plan stemmed from current best estimates. When the plan cannot be met, there is a rational explanation of what went wrong.

Those unfavorable monthly variances that do not recur should be noted but not worried over. However, unfavorable variances that persist should be analyzed and alternate scenarios plotted out.

Develop Corrective Action

Rules to follow that are common sense as well as appropriate:

• Withholding unpleasant news is a “no-no.”

• Another “no-no” is working out today’s problems with tomorrow’s money by transferring funds from one task to another.

• Written variance analyses should be future oriented. The past is past. One cannot change it. One can only look at it. So develop a corrective action plan.

• Establish a firm date by which the corrective action will have been completed.

• Do not blame the measurement system. Do not complain about an error in BCWP claimed as earned.

Earned-Value As A Panacea

Earned-value is a technique. It cannot correct the past. It cannot prevent over-runs. That is the project manager’s job. The R&D performer is always on the razor edge of choice. Some plans will work and others will backfire. He is responsible for his choices.

As to the work-package manager, it is pointless to look at “what happened” when he should be looking at “what’s coming” and work to control it. Only then is he performing as a professional engineer.

Many engineers are derailed by chasing after ideas of how a partially completed task can be redone better. The redo is a budget-buster unless controlled by a specific plan for corrective action.

The work package is a contract between the work-package manager and the project manager. Changes require a reasonable time to chart a new course. The earned-value technique cannot respond instantaneously to rapidly shifting “customer needs” imposed on the R&D project manager. Few project managers can hang on to a whip-lashed budget and gyrating performance measurement plans at the same time.

A more or less stable overall plan is a must. Performance measurement of plans that weave and waffle is an exercise in futility.

Some career minded R&D project managers demand the best of two worlds — the best and most advanced product money can buy and all without blowing his R&D budget. It is not possible. Something must give. The “something” is the kid-in-the-candy-store approach to real life. The R&D project manager must give it up. His earlier swashbuckling days are things of the past.

Experience has shown that engineers, as do others, enjoy being “right.” The earned-value technique tries to surface need for change and correction rather than to establish “lightness.”

Earned-value is a tool and not a panacea. It is not a “buzz word” sop for top management’s money problems. Mechanical engineer Frederick W. Taylor brought earned-value to successful use for measuring factory-work during the horse and buggy days. Today DOD spearheads the effort to expand and refine earned-value for knowledge-work during these tight R&D budget times.

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.

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