Earned Value Management: Not Just for Government Contracting Anymore
Christen Bergerud, COO
Largely because of the rather stringent and detailed ANSI/EIA-748 standard it's often associated with, earned value management (EVM) frequently suffers from the perception of being a burden rather than a benefit, and many organizations believe that it is altogether too complex to implement successfully outside of government-related work. This limited interpretation can delay or even prevent the adoption of EVM principles, which have proven reliable at facilitating effective measurement, forecasting, and improvement of project performance. Outside of government contracting, the core principles of EVM can be implemented in a simple and straightforward manner to great effect.
This paper will describe an overview of EVM, the misconceptions of implementing an EVM system, and the fundamental elements necessary to support a successful EVM system. In particular, it will detail the best practices for an organization that doesn't need to comply with complex and resource-heavy standards like ANSI/EIA-748 but still want an effective EVM solution in place.
This paper will also review topics such as the integration of required data, creating a fit with organization culture and processes, developing key performance indicators (KPIs) and metrics, application of rules of credit, updating of percentage complete, and automated EV reporting.
Cost analysts and other professionals responsible for project performance are likely aware of earned value management (EVM), a process to measure, forecast, and ultimately improve performance. While earned value metrics are not overly complex, EVM suffers from a reputation of being strict and overly burdensome in its use, and a common perception is that the overall adoption of EVM will likely be more hassle than benefit. Much of this belief originates from the regulations of the ANSI/EIA-748 standard for EVM and the associated systems that have been put in place to comply with the standard.
The core principles of EVM exist independently of ANSI/EIA-748, and how it is used can vary significantly across industries depending on norms, project types, contractual benefits, and many other variables. In this light, a “right-sized” EVM solution for organizations that are not specifically government contractors can yield tremendous benefits in measuring productivity and improved cost forecasting. This paper will examine those core principles of EVM along with a project-controls foundation that enables an effective EVM system, operating under the minimum requirements necessary to track and measure project performance for an organization.
Project management professionals should be able to use this information to demonstrate that an EVM system can be successfully executed within their organization, thus convincing executives and decision makers that EVM isn't a process they should be wary of but rather something that should be a part of their overall project management plan.
Topics to be reviewed include: foundational data required for EVM, creating a fit within organizational culture and processes, data integration to drive key performance indicators (KPI) and metrics, different uses and adoption of EVM in select industries, and applying the “right” amount of EVM.
The Advantage of EVM
Earned value (EV) follows from a fairly simple concept: Compare work completed against work that was planned to be completed, at any given date. How much have we done, and how does it compare to our expected schedule and costs? It can be expressed as a productivity index to quantify variances in schedule (value of work completed ÷ work planned) and cost (work completed ÷ actual costs) (Exhibit 1). This information is a valuable tool for forecasting and serving as an early warning system throughout the process, even as the project is completed and EV approaches and ultimately equals the planned value.
Exhibit 1: Earned value reveals cost and schedule variance.
Earned value management uses earned value to measure, forecast, and improve project performance. It is a very good predictor based on past performance, because cumulative cost performance index (CPI) tends to stabilize once a project is 20% complete, and any estimates based on that number will likely fall within 10% of the total at completion (Fleming & Koppelman, 2006). Lessons learned from EVM also lead to better scope definition (Little, 1984).
Common Misconceptions About EVM
EVM is surrounded by misconceptions that hinder its adoption. While executives may be aware of the benefits associated with EVM, they are told stories of rigid, costly, and unsustainable implementations that provide a false understanding of what is actually required.
Possibly the most significant misconception is the frequent conflation of EVM with the rigorous systems designed to comply with the ANSI/EIA-748 standard, which is often used by government agencies and contractors. Interested parties assume that a particularly complex type of EVM process must be implemented by any organization and avoid implementing EVM altogether, fearing the cost and effort needed to fulfill the level of rigidness and the extensive tracking details prescribed by ANSI/EIA-748.
The overhead expense—in both financial and labor resources—stemming from the implementation of an EVM system is an understandable concern for any kind of organization. Undertaking an added (and potentially very costly) expense for performance measurement is often looked upon as an unwelcome additional cost, rather than an investment leading toward cost reduction.
The sustainability of the EVM process has also been a cause for concern. Again, the requirements of an ANSI/EIA-748-compliant system imply a laborious level of detail that must be recorded and tracked to ensure an accurate measure of earned value. Organizations new to EVM, or with immature processes, would find this level of detail very burdensome. An EVM system relies on employees to accurately indicate times of productivity to measure progress. Within this data-capturing struggle, many find themselves in a minefield of information, having to record data from different sources. Human error becomes a greater risk with this type of reporting. In reality, however, there are less-cumbersome ways to collect data, and it is not necessary to begin collecting data at a much greater level of detail if that detail does not actually provide valuable information.
Another obstacle voiced by many is the unfamiliar terminology and formulas necessary to execute earned value (EV) metrics, making it difficult to train employees and difficult to translate findings for executive consumption.
All of these concerns have hindered the support project management professionals garner for the implementation of an EVM system within their organization. However, there is a way to make EVM applicable, practical, and actionable so that the concept is not only approachable but also of interest to executives and decision makers within an organization, and not just practitioners of project controls.
Leveraging EVM to Power Business Decisions
The perceived complexity and difficulty of implementing EVM detract from its value as a business tool for effective decision making. The insights EVM generates are ideal for the executive level but must be positioned in a way that makes EVM accessible and not something solely for the “back office” of project controllers. An effective, modern EVM system provides project information through summaries, graphics (reports and dashboards), and drilldown views to support the summarized information, as exemplified in Exhibit 2 below. These tools can allow senior managers to roll up EV across projects, whether it's a portfolio or a division of their organization, to provide insight into enterprise-wide performance.
Exhibit 2: EVM dashboard.
A key component of executive adoption of EVM is to streamline technical terminology. Instead, use descriptive information that delivers the point in a more approachable way. This approach can encourage executives to WANT to look closer at the metrics and actionable insights they can reveal about project execution. EVM can succeed with executive buy-in. For them, however, EVM is not a goal unto itself. Instead, the key selling point is delivering improved performance.
Additional value from EVM is unlocked when an organization is able to view EV from an enterprise or program portfolio perspective. An organization that can roll up EV generated at the project level to provide broader insights at higher levels of detail gains the benefit of visibility into enterprise-wide performance. The consolidation of all the data, measured and tracked, and viewable from one platform, becomes critical in providing metrics to decision makers in a company that would need to view EVM as a whole, providing them streamlined information at an actionable level to ultimately improve project performance not just of specific projects but of the enterprise as a whole.
Once decision makers are convinced of the value of EVM and supportive of the initiative, EVM can succeed within an organization. To reiterate, discarding unnecessary complexity and using an appropriately designed approach that fulfills the minimum level of detail and rigor needed for an organization is the goal (Sloninsky, 2011).
Core Principles of EVM
At its essence, earned value is a measure of project performance comparing work completed against work planned, as of a given date. It is used to (a) measure, (b) forecast, and (c) improve project performance for an organization. The goal of earned value management should be to achieve these core principles, and the basis of any EVM system should be providing the tools to help in this endeavor. Research has indicated that principles of EVM are positive predictors of project success. The ANSI/EIA-748 standard and the processes and details associated with it are not fundamentally required for increasing project success. Instead, the focus should be on the three principles of EVM and the appropriate level of rigor necessary for a particular organization to track, analyze, and act upon earned value information.
The approach described in this paper focuses on those principles and reduces EVM to the minimum requirements needed to track and measure project performance for an organization. The result is a more effective and efficient use of EVM without the overhead that isn't required for most projects.
Foundational Elements of EVM
EVM does not exist separate from the overall project management life cycle. It builds upon a solid project-controls framework by adding process standards and performance metrics. Therefore, if your EVM solution is separated from a solid project-controls plan, accurate measures for EVM are not possible.
A successful EVM system would not only more accurately measure, forecast, and improve performance but it would also provide better scope definition upfront, and greater visibility and perspective on a project through its execution, therefore contributing to a better cycle of project performance overall.
Because EVM needs a strong project-controls foundation, certain aspects of the project-control life cycle are vital in ensuring the success of an EVM solution. At its essence, EV looks at how much has been accomplished according to the plan. The foundational elements of EVM (as they relate to either planning or actual performance) are:
- Progress measurement
- Actual cost
Each of these facets must exist in order to successfully track the project-control life cycle.
Budgeting and Forecasting
One of the pillars necessary for a well-planned EVM solution is budgeting. A well-formed and accurate work breakdown structure (WBS) is the starting point. Planning at the correct level of the WBS is imperative. Both the budget and forecast should be granular enough to identify important trends but not so specific that you are adding too much information. It is important not to track detail simply because it's possible. When more granular information does not add value to your project management or decision making, it should be eliminated and budgeting and/or forecasting should occur at a higher level.
Once EV metrics are available, they, in turn, can help form additional forecast models. The following example (Exhibit 3) shows how an earned value management system (EVMS) is supporting multiple formulas for estimate at complete. The most appropriate method can then be selected to revise forecasts or initiate changes to the project execution.
Exhibit 3: Example of independent estimates at complete.
Again, the foundation of EVM is reviewing progress against the plan. Inherent within this is the schedule and planned timing for completion of the project and the stages along the way. It is the barometer that defines much of the success of a project. To calculate EV, a planned completion date must have been established.
Similar to budgeting and forecasting, measuring progress at too fine a level can be problematic. This is an area where the perceived overhead involved with EVM can be disconcerting. Certainly, progress can be measured by tracking all the activities of all resources assigned to all tasks applied against a project's WBS. While some projects may require this level of precision reporting, it can be cumbersome and costly. Progress measurement with this level of detail will not work for many projects. With complex projects, sometimes there are simply too many data or too many different departments are involved to safely track measurement without error. Understandably, there is rejection of this process if the project is relatively simple and does not require that level of rigor.
Instead, alternate simpler methods can be used to determine progress. For example:
- Defining rules of credit, such that a certain percentage complete is marked on a task based on specific milestones achieved;
- Self-reporting of percentage complete by contractors or sub-contractors; or
- Progress based on physical work accomplished (e.g., having laid 10 miles of piping on a 20-mile project yields 50% complete).
Measures such as cost variance and schedule variance will require actual cost data to be used for an accurate EV reading. These real-time measurements, whether they come from a commercial enterprise resource planning (ERP) system or any internal cost-tracking system, are vital in measuring earned value.
The Importance of Change Management
To be truly effective, an EVM solution must integrate change management. Throughout the life of a project, there will be changes—scope, cost, exchange rates, risks planned for and realized, and unforeseen events. A methodology to identify, approve, and allocate funds to address these changes should be inherent within the EVMS. Changing budgets within a separate system would be a waste of time and resources. Tools should support initiating, reviewing, and approving budget change requests; pulling information for distinctive contingencies; and outlining the justification required in change management.
Capabilities Derived From EVM
Through the use of EVM, what capabilities and information should an organization be striving for? The following are five key areas that EVM should be delivering:
- Ability to forecast estimate at complete (EAC) and estimate to complete (ETC). Inherent in these measures is a clear understanding of what has been spent so far and the current status of the project in question.
- Ability to perform scenario impact analysis. Your EVMS should deliver a model to answer the question, “To what degree will performance (as measured by cost and schedule) be impacted if we experience changes in project scope, design, etc.?”
- Ability to compare performance against performance baselines. One must be able to understand how our current performance differs from the original budget, the current budget, the current forecast, etc., and importantly, answer why.
- Ability to track trends over time. Typically, this is understood to mean performance to date, but ideally this capability will extend to looking at trends over different times as well. How has performance changed recently (e.g., in the past month or quarter on a multi-year project) and does this show a more appropriate trend?
- Drive changes in behavior. As initially stated, one of the principles of EVM is to improve performance. As such, it should reveal trends or warning signs to be addressed. This information should be delivered to the individuals within the organization who can make business decisions and shape the course of a project for the better.
The Right Amount of EVM
Effective EVM is not a “one-size-fits-all” approach. How an organization ought to implement it depends on the needs of the projects and the needs of the organization. Given this, how do you apply the “right amount” of EVM? What is the minimum EVM before you've stripped out too much detail? The following elements should be achieved:
- Build a solid platform for budgeting, forecasting, and change management.
- Use templates for WBS and progress-measurement rules.
- Standardize reports and views for periodic and cumulative trends.
- Match EV terminology to the culture of an organization to make it accessible, user-friendly, and better understood. CPI can instead be named “earned/burned” or “productivity.” Avoid the burden of using the ANSI/EIA-748 standard when an organization has already developed its own processes and expertise.
- Create a full project performance picture. This means monitoring non-EV key performance indicators (KPIs) in conjunction with EV metrics.
- Develop EV metrics on a cross-section of data as appropriate—not just costs but also hours or quantities. Then be able to roll up EV accordingly.
- Document variance analysis and justification. Reporting on trends and variances alone is insufficient. Having a central record of why variances are occurring provides a stronger tool for current and future performance improvements.
Uses and Adoption
The following three examples illustrate successful approaches to EVM adoption.
Nuclear Power Contractor
A nuclear power contractor with several projects in R&D, construction, and services across North America successfully implemented EVM within its organization. Standardized on industry-leading ERP and scheduling systems, the company desired a centralized source of project data that would provide accurate forecasts for a high-profile project while providing visibility into performance for their customers. To accomplish this, they added a project-controls platform that integrated with their other systems and served as the EV reporting engine.
They were tracking percentage complete in the scheduling system, which served as the source for progress measurement. Resource loading was also supplied from the scheduling system, and actual costs and commitments were sent to the project-controls system from the ERP. Approved change order and time-sheet data from contractors were then integrated within the project-controls hub, which became their EVM environment. Highlights of the project include:
- Allowing the EV techniques to vary by work packages, utilizing the concept of the right EV tracking for the right work package; and
- Keeping the full-time phased history of EV for a month so they were able to see how EV improved over time.
They looked at performance based on month, year, and project life to highlight long-term and local trends starting to develop. The also integrated changed management into their current budget and forecasts.
The organization was able take EV reports and reference them on not only baseline budget but also current budget and current forecast, thus allowing them to change the budgets or forecasts in real time. This gave them the ability to analyze performance not just by work breakdown structure but also by discipline, and by alternate breakdown structure of different sorts.
Federal Transportation Agency
Another example of how EVM was implemented within an organization was the system that was a part of the U.S. federal transportation program. The multibillion-dollar program was scheduled to modernize core transportation infrastructure in multiple locations across the country. The goals for this program were: standardize progress measurement, milestone percentage completion, and the ability to use standard project templates in their scheduling system.
For this project, it was important to consolidate funding information, budget commitments, and obligations that were coming out of their enterprise financial system. It was also vital for the agency to check what its vendors were reporting so they could submit their cost-performance reports based on standard percentage completion templates from their contractors. With real-time data being added into the system, they were able reconcile what their vendors were submitting for payment with what they were reporting in terms of performance and progress.
Engineering, Procurement, and Construction Firm
A direct-hire contractor with a 40-year resume and construction expertise in power, oil and gas, and petrochemical industries adopted EVM and tailored it to the requirements and complexity of specific classes of project. For large cost-plus or time-and-materials contracts, they utilize an EVM approach that fully complies with the 32 ANSI/EIA-748 standard. For medium projects and firm fixed-price (FFP) projects, they use a risk-based and scalable EVM system that complies with seven principles of EVMS contained in ANSI/EAI-748, and adopt selected ANSI/EIA-748 guidelines. For small projects, they create a document that outlines how work and performance will be measured.
In this simpler approach, the organization would track CPI and schedule performance index (SPI) as its key performance indicators. When performing according to plan, these metrics equal 1. With designated thresholds (e.g., below 0.9, signalling lower-than-planned productivity), this triggers a red flag that needs to be investigated right away. These measures would also be used in revising the periodically updated forecast.
Beyond the world of government contractors and ANSI/EIA-748 compliance, EVM is not a one-size-fits-all concept. Every organization must determine what the “right amount” of EVM is, to fit its unique project portfolio and internal processes. Fundamentally, this means delivering on the central principals of EVM—measuring, forecasting, and improving project performance—while minimizing the overhead and processes to achieve these principals to only what is essential. With this approach, project management professionals can elicit buy-in from executives and decision makers, assuring them that EV can be easily and effectively measured within their organization and that it is a necessary aspect of their overall project management plan.
Fleming, Q. W., & Koppelman, J. M. (2006). Earned value project management (3rd ed.). Newtown Square, PA: Project Management Institute.
Little, A. (1984). Survey relating to the implementation of cost/schedule control systems criteria within the department of defense and industry. Cambridge, MA: Defense Technical Information Center.
Sloninsky, J. (2011, December 13). EVM for the rest of us [Webcast]. Retrieved from http://info.ecosys.net/on-demand-webcast--evm-fru/.
© 2015, Christen Bergerud
Originally published as a part of the 2015 PMI Global Congress Proceedings – Orlando, Florida, USA