What's the value of earned value?
Nancy Singletary, PMP
Have you noticed the whirlwind blur of activity surrounding Earned Value as it comes of age? Born old in 1960 as PERT COST, fully developed and complex, Earned Value remained plodding and intense through the 1960s, became mature and more responsive in the 1980s, and now seems young and vital in the 1990s. Today is the day for Earned Value!
No longer just a method for meeting Cost/Schedule Control Systems Criteria (C/SCSC) standards for the Department of Defense, Earned Value methodology is holding its own and paying its way in commercial industries, public and private sectors, manufacturing, financial institutions, pharmaceuticals, and other industries interested in optimizing the profit line or just breaking even!
Earned Value is an established method of analyzing budgets earned for work completed on an accounting period basis. Cost Management is Earned Value. This is more true today than at any time in our commonly acknowledged history. Historically, budgets were made based on experience derived from the school of hard knocks. Actuals were accumulated costs—sometimes anticipated, but too often not. Performance often meant the effort expended by the employee, whether or not compensated proportionately. The whole process ran according to economic theory (that's relatively young; John Maynard Keynes, the famed English economist and writer, lived 1883–1946).
Meanwhile, financial management theory has added some understanding and the ability to provide standard calculations to analyze and to create statistics for supporting more theory. An attention to motivation theory and people dynamics has only been a topic for the last 60 years at best. Earned Value methodology has not only survived these changes, but seems stronger and more useful now than at its inception.
Probably the greatest push for the development of a flexible, cost measurement methodology came about with the advancement of computer technology and the Space Age. Suddenly, changes were rapid and very expensive. Changes in technology were happening in leaps and bounds rather than plodding along with the horse and carriage. In this environment, unaccountable losses were frequent, destructive, and expensive. In 1960, the Polaris Special Project Office undertook a project that resulted in the design and pilot test of the PERT COST system. The cost and schedule saving results were exceptional.
Poor PERT COST was misunderstood, however. At the activity detail level the PERT (Performance Evaluation Review Technique) was never intended to be the framework for representing logical units for the planning and control of dollars. Through a misunderstanding, a miscommunication, or one of those stubborn events of human interaction, program offices have labored under heavy burdens of levels of detail much too deep for effective control, giving PERT COST and its nephew C/SCSC an unnecessarily bad reputation as being expensive and unwieldy.
At last, PERT COST and C/SCSC began the growth and evolution/offspring to what we know today simply as Earned Value. (Although a separate animal, C/SCSC standards embrace Earned Value methodology.) Now the very technology that promoted the Earned Value technique is the technology giving Earned Value the legs to stand on in any industry. Computers have advanced so far that calculations of large numbers of data and volumes of data points for graphics are no longer a major problem. Software packages and documentation to support Earned Value methodology are available in today's home office.
Who Needs It?
The average homeowner may not need the power of Earned Value measurement, but various levels of management—in both large and small businesses—do have an interest.
The program manager needs to know what is happening on the project being managed. Where the authority is greater, the risk is greater, the responsibility is greater.
The cost account manager needs to know what is happening on the cost accounts under his or her domain. The resource manager needs to know how the resources are being affected and how the use of resources affect the project. The financial manager needs to know how the finances are being managed and what areas need further statistical analysis. The information systems manager wants results of budgets, cost and resource analyses for software development. The executive manager wants a view of the project through management graphics and exception reports that result from Earned Value calculations.
Earned Value calculations provide visibility to the critical areas that need further attention. Earned Value provides a clearer picture of the viability of a project than looking at the budget or actuals alone. On an enterprise basis, Earned Value creates a realistic way to compare a research and development telecommunications project to refurbishing the space shuttle program. When teamed with detail-level network critical path method scheduling, Earned Value is a very powerful management tool that becomes essential for large-dollar or high-risk programs. If you need to compare apples and oranges—determine whether or not disparate projects are on track or have succeeded or failed—Earned Value is for you. ■
Nancy Singletary, PMP, is an implementation consultant for Mantix Systems, Inc. in Reston, Va. She has supported planning, scheduling, C/SCSC, and information systems for more than 20 years.
PM Network • December 1996