As IT professionals

As IT professionals, many of us will act as project managers. Project Managers are confronted with intrinsic questions during the project lifecycle such as “Are you ahead of, under or on budget? By how much and how do you know?” The same will be asked in regards to your schedule. You may also be posed with the question of your Estimated Cost at project completion.

Usually the replies given by project managers tend to be inaccurate and given without due diligence. This paper is an attempt to guide the project manager using an abbreviated version of Earned Value and Risk Management concepts even when engaged in agile development.

I will begin with theoretical knowledge of Earned Value methodology. Earned value has a direct relationship with physical progress or percent complete. Earned Value measurements are expressed with a common unit of measurement to enable variance analysis. The measurements are often expressed as dollars or hours. The earned value methodology requires a project to be fully defined and then a bottom up plan must be created and implemented enabling measurements to be taken at every stage of the project.

Ten Benefits of EVMS

1. It is a single management control system that provides reliable data.

2. It integrates work, schedule, and cost using a work breakdown structure.

3 The associated database of completed projects is useful for comparative analysis.

4. The cumulative cost performance index (CPI) provides an early warning signal.

5. The schedule performance index provides an early warning signal.

6. The CPI is a predictor for the final cost of the project.

7. It uses an index-based method to forecast the final cost of the project.

8. The “to-complete” performance index allows evaluation of the forecasted final cost.

9. The periodic (e.g., weekly or monthly) CPI is a benchmark.

10. The management by exception principle can reduce information overload.

Source: The Costs And Benefits Of The Earned Value Management Process; David S. Christensen, Ph.D. Acquisition Quarterly Fall 1998 http://www.dau.mil/pubs/arq/98arq/chrisevm.pdf

History of Earned Value Management

Earned Value may seem like a new buzz word in the Project Management circles, but contrary to popular belief, the methodology has been around for over a century. The ideology was conceived by American Industrial workers. It was derived originally to manage production costs for commercial industrial products.

This group of engineers understood the relationship between planned factory standards and actual hours did not provide them with a full picture of achievement. It was not until the engineers converted their factory standards into what they called earned standards and compared them to actual hours that they truly were able to capture measures of cost performance.

In later adoption of the management practice there was a directive issued in 1967 called the 35 Cost/Schedule Control Systems Criteria (C/SCSC) that mandated the use of Earned Value measurement for all industrial firms who wished to be involved in government contracts where the risk of cost overrun would be retained by the United States government. As you might expect, satisfying the 35 criteria was hardly a simple task. It was so daunting that the projects had to meet cost and time criteria for its use to be mandated. They had to have million dollar + budget and a minimum length of twelve months.

This was only the start of long and steady relationship between earned value management and the United States government. The measurement has been so effective for them that it has maintained its relevance over the past thirty years and has had versions of it adopted in other countries as well such as Australia, Sweden and Canada. The reason for its success is that it has been proven to provide accurate performance measures at 15 percent of the project’s completion. The early warning signal has allowed project management teams to assess funds and resources needed to complete a job within a very narrow range of values.

Earned Value Management: How Did It Come About?

1959 PERT and PERT/Cost

— Milestone Charts And Rate-of

Expenditure Curves

— Dollars Spent Vs Estimates Of Percent

Complete (DD 1097)

_1963 Earned Value Concept (MINUTEMAN)

_1964 Cost Accomplishment Concept (TITAN III)

_1966 AF—Cost/schedule Planning And Control

Specification (C/SPCS)

_1967 DOD—Cost/Schedule Control Systems

Criteria (C/SCSC) (DODI 7000.2)

_1972 DOD—-Revised DODI 7000.2 and Issued the

Joint Implementation Guide (JIG)

_1972 NASA Marshall Space Flight Center — C/SPC

_1975 DOE—Performance Measurement System

(PMS)

_1976 DOD—Revised the C/SCSC JIG

_1980 DOD—Revised the C/SCSC JIG

_1982 National Security Agency—Earned Value

_1983 NASA—Goddard Space Flight Center—

PMS

_1984 FAA & NASA Lewis Research Center —PMS

_1985 NASA Johnson Space Flight Center —PMS

_1987 DOD—Revised DOD C/SCSC JIG

_1988 NASA Marshall SFC—Revised PMS

(MMI 8020.7C, 44 Criteria)

_1989 Australian DOD—DODI 7000.2

_1990 Canadian DOD—PMS

_1991 DODI 5000.2 replaces DODI 7000.2

_1992 National Oceanic And Atmospheric

Administration (NOAA)—PMS

_1993 Swedish FMV—C/SCSC

_1994 Internal Revenue Service (IRS)—C/SCSC

_1994 Federal Bureau Of Investigation (FBI)

—C/SCSC

_1996 DODR 5000.2-R replaces DODI 5000.2

C/SCSC revised from 35 to 32 criteria

_1996 Revised JIG—Renamed Earned Value

Management Implementation Guide (EVMIG)

_1997 EVMIG Revised

_1998 MIL-STD 881B replaced by MIL HDBK 881

To truly understand the problem of deriving measurements that compare planned standards verses actual I will have to provide you with a concrete example.

At this point you do not know how much actual work has been accomplished. But unfortunately this is the standard for many companies when it comes to project measurements.

For this particular project the earned value results at this point are as follows:

Your Estimate at Complete is $8 million dollars of total spend coming in 8 weeks late.

As you can see by this example reporting on planned verses actual can not only be damaging for your project, but it can also be damaging for your career. You would be leaving out key indices that do not show the complete picture resulting in estimates with little to no validity.

Earned Value Management Systems (EVMS) employs criteria which are standards for management control systems that use the Earned Value measurement. These criteria have been mandated on flexible price defense contracts since 1967. Their purpose was to ensure reliability and manage risk when using the metric.

Earned Value is simply the metric that can be applied to projects in nearly every industry. The measurement does not require all of the criteria listed in the EVMS to provide useful, reliable variance indicators. Earned Value does require a management control system that meets some of the criteria. Again it is important to be able to differentiate the criteria that are required for success and those that can increase confidence by increasing project cost to maintain. (Quite possibly unnecessary)

The overall goal of earned value is to take projects that have what your accounting department might call “flexible spend”, where the final cost of the project is adjusted by the level of work put into it and evaluate them by using earned work rather than planned work. Variance is identified and analyzed to use as a decision tool at early stages of the project. It can give the project manager early and accurate visibility to consider variations to original plan. The measurement itself is both powerful and consistent.

One of the most criticized elements of Earned Value is that cost overrun that results from ensuring the criteria of EVMS, which used to be known as the 35, are met.

For the purpose of this paper it is important to note that the cost data evaluated and determined to be somewhat unnecessary was of cost related only to the incremental cost that results from compliance to the criteria and reporting. The costs that result from standard management control do not apply.

In order to accurately depict an earned value measurement project management fundamentals must be incorporated into the project including but not limited to the Work Breakdown Structure.

The Work breakdown Structure (WBS) defines activities that will make up the final project. The goal of the project manager is to align these activities with both schedule and financial accounting or a time reporting system in order to integrate project level reporting.

The development of the WBS is a crucial component with regards to the earned value measurement. The Work Breakdown Structure is:

“A deliverable-oriented grouping of project elements that organizes and defines the total work scope of the project. Each descending level represents an increasingly detailed definition of the project work.”

This development is difficult to achieve in any project discipline but is particularly difficult for software development. It is imperative that you define 100% of the project from project start. You can not accurately depict project variance with out this level of definition.

“You must make some intelligent assumptions about a new project to quantify the work with sufficient confidence that the defined effort can be planned, estimated and scheduled with some degree of certainty.”

The Work Breakdown Structure provides structure so that the project manager can produce the following information:

The Performance Measurement Baseline consists of all defined “Work Packages” that were defined in the Work Breakdown Structure.

In large scale projects the Performance Measurement Baseline may also consist of an undistributed budget, control accounts with plan detail, and planning packages.

Risk or Management Reserve are funds set aside by project management for work that is in scope and will be required but are not necessarily able to be defined in the beginning of the project or are simply unforeseen.

The risk reserve is a debated subject in the Earned Value Community. If the risk reserve is not owned by the project manager and is mandated by upper management it is not to be included in the performance measurement baseline.

In IT development projects the risk reserve is often owned by the project manager. If this is the case the decision can be justified either way. The risk reserve can then be included in the performance measurement baseline but does not have to be and is not favored to be.

“Work without budget overstates the cost variance. Budget without work understates the cost variance. In either case, effective control via variance analysis is impaired.”

Although earned value ideology has not gone main stream in the commercial sector it can be a beneficial tool for project managers. If the earned value concepts are in fact coupled with solid project management fundamentals the project manager can optimize his or her return on investment by using the statistical ability of Earned Value to make imperative project decisions based on project data to date that can identify both schedule and cost overrun as early as 15% of the project schedule. The commercial sector can benefit immensely from project fundamentals incorporating the principles of Earned Value by incorporating project management fundamentals that they are already using today to derive the Cost Performance Indices as well as the Schedule Performance Indices.

“The more you do of what you’re (already) doing, the more you’ll get of what you’ve (already) got”

Source: When Projects Go Wrong; Paul C Dinsmore PMP, PM Network, November 2001 at p16

Visualizing Project Management
Kevin Forsberg, Ph.D., Hal Mooz and Howard Cotterman

Earned Value Project Management A Powerful Tool for Software Projects, The Journal of Defense Software Engineering (1998)

16 Critical Software Practices for Performance-Based Management, The Journal of Defense Software Engineering (1999)

Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium Philadelphia , Pennsylvania , USA : Papers Presented October 10 to 16, 1999

Practical Software and Systems Measurement: A Foundation for Objective Project Management. U.S. Department of Defense and U.S.

Sizing Software with Testable Requirements. Journal of Systems Development Management (2000) P. B. Wilson