THE VALUE OF EARNED

VALUE MANAGEMENT
PMI Pittsburgh Chapter Meeting
February 8, 2001
Marilyn McCauley
McManagement Group
703-455-0602
703-455-0598 (f)
McMgtGrp@aol.com
 AGENDA
Twelve Reasons Why Programs Fail
Program Management Principles
Earned Value Management’s Role in PM
What is Earned Value Management
History of Earned Value Management
The Value of Earned Value Management
REASONS WHY PROGRAMS FAIL
John Gioia, Robbins Gioio, Inc., PM Network, November 1986

1. Understanding Program Complexity

2. Lack of Management Access and Internal Communication

3. Not Integrating the Key Elements of Project Management

4. No Measurable Controls

5. Requirements Creep

6. Ineffective Implementation Strategy

REASONS WHY PROGRAMS FAIL
7. A Software Tool is Not the Only Answer

8. Different Contractor and Customer Expectation

9. No Shared “Win-Win” Attitude

10. No Formal Project Management Education

11. Lack of Top Management Commitment and Sponsorship

12. Projects Not Viewed as a Business

REASONS WHY PROJECTS FAIL
1995 Standish Group Report

1. Incomplete requirements
2. Lack of user involvement
3. Lack of resources
4. Unrealistic expectations
5. Lack of executive support
6. Changing requirements and specifications
7. Lack of planning
8. Didn’t need it any longer
9. Lack of IT management
10. Technology illiteracy
PROGRAM MANAGEMENT PROCESSES
Initiating Recognizing that a project or phase should begin
and committing to do so

Planning Devising and maintaining a workable scheme to

accomplish the business need that the project was
undertaken to address

Executing Coordinating people and other resources to carry out

the plan

Controlling Ensuring that project objectives are met by monitoring

and measuring progress and taking corrective action
when necessary

Closing Formalizing acceptance of the project or phase and

bringing it to an orderly end

Source: A Guide to the Project Management Body of Knowledge

published by Project Management Institute
 EVM’S ROLE IN PROJECT
MANAGEMENT
program manager needs
Project management cycle

Initiate
develop a realistic plan of
organize the work and
Plan the teams the work scope, the
budget, and the schedule

Execute authorize work properly

control changes performance reporting understand variances

Control
corrective actions forecast of final cost and schedule

Close out
 EVMS fits naturally into the
Project Management Cycle
program manager needs
Project management cycle

Initiate
develop a realistic plan of
organize the work and
Plan the teams the work scope, the
budget, and the schedule

Execute authorize work properly

control changes performance reporting understand variances

Control
corrective actions forecast of final cost and schedule

Close out Earned Value Management

 WHAT IS EARNED VALUE
MANAGMENT
EVMS IS THE PRIMARY PROJECT MANAGEMENT
TOOL……

THAT INTEGRATES THE TECHNICAL, SCHEDULE, AND

COST OBJECTIVES OF THE CONTRACT OR WORK
EFFORT
WHAT IS EARNED VALUE VALUE
A Way To Measure
How much work should be done?
How much work was completed?
How much did the work cost?
How much is the job supposed to cost?
What do we expect the job to cost
A Way To Manage
The best way known to integrate scope, schedules,
Resources and risk management
 EVM PROCESSES
• PLAN - The supplier establishes a system to control management processes
– An integrated baseline plan is established
- work is defined, scheduled, and resources are
allocated

EXECUTE - Work and resources are driven down to lowest level for execution
– Budgets are “earned” as work is completed = EARNED VALUE

CONTROL - The system is used to control changes to the baseline

– Status provided against baseline
- schedule and cost variances are isolated
- Problem assistance
- early warning
- corrective plans
- Early insight provided into final estimated cost
- Project manager uses EVMS data to manage and control
 FIVE CORE PRINCIPLES
Organize the project team and the scope of work,
using a work breakdown structure. Each task should have a single WBS
number and organizational code.

Schedule the tasks in a logical manner so that lower level

schedule elements support other elements and the top level milestones.

Allocate the total budget resources to time-phased control

accounts.

Establish objective means for measuring work

accomplishment. Budget should be earned in the same way that it was
planned.

Control the project by analyzing cost and performance variances,

assessing final costs, developing corrective actions, and controlling changes to the
integrated baseline.
 Planning
Planning is
is aa 33 Step
Step Process
Process
1. DEFINE THE WORK AND ORGANIZE TEAMS

CONTRACT BUDGET BASE

2. SCHEDULE THE WORK

NE
LI
SE
BA
D
TE
RA
G
TE
IN
3. ALLOCATE BUDGETS

40
100
$
60
15
25
30
TIME
30
 ESTABLISH OBJECTIVE
MEASURES
Earned Value techniques
Discrete
• physical, tangible end product
Apportioned
• discrete, dependent on another discrete work package
• example: quality assurance
• planned as historical estimating factor (e.g., 7%)
Level of Effort
• no tangible end product
• basis of measurement: time
• when clock starts ticking, you automatically accumulate earned value
• no schedule variance
• example: management personnel
Should be a quantitative and discrete way to measure the work
May tie in with success criteria or technical measure
• e.g., successful completion of a specific test, reliability growth curve
 FIVE BASIC PERFORMANCE DATA
QUESTIONS & ANSWERS

QUESTION ANSWER ACRONYM

How much work should Budgeted Cost for BCWS

be done? Work Scheduled

How much work is done? Budgeted Cost for BCWP

Work Performed

How much did the is done Actual Cost of ACWP

work cost? Work Performed

What was the total job Budget at Completion BAC

supposed to cost?

What do we now expect the Estimate at Completion EAC

total job to cost?
 Schedule Variance

BC WS
of the work I scheduled to have done,
BUDGET BASED

how much did I budget for it to cost?

of the work I actually performed,

BC WP
how much did I budget for it to cost?

SCHEDULE VARIANCEisisthe
SCHEDULEVARIANCE thedifference
differencebetween
betweenwork
workscheduled
scheduled
and work performed (expressed in terms of budget dollars)
and work performed (expressed in terms of budget dollars)

formula:
formula: SV
SV$$==BCWP
BCWP--BCWS
BCWS
example:
example: SV
SV==BCWP
BCWP--BCWS
BCWS==$1,000
$1,000--$2,000
$2,000
SV= -$1,000
SV= -$1,000 (negative
(negative==behind
behindschedule)
schedule)
 Cost Variance

PERFORMANCE BASED
BC WP
of the work I actually performed,
how much did I budget for it to cost?

of the work I actually performed,

AC WP
how much did it actually cost?

COST
COSTVARIANCE
VARIANCEisisthe
thedifference
differencebetween
betweenbudgeted
budgetedcost
cost
and
andactual
actualcost
cost

formula:
formula: CV
CV$$==BCWP
BCWP--ACWP
ACWP
example:
example: CV
CV==BCWP
BCWP--ACWP
ACWP==$1,000
$1,000--$2,400
$2,400
CV= -$1,400
CV= -$1,400 (negative
(negative==cost
costoverrun)
overrun)
 Variance at
Completion (VAC)

B AC what the total job is supposed

to cost

E AC what the total job is expected

to cost

VARIANCE
VARIANCEAT
ATCOMPLETION
COMPLETIONisisthe
thedifference
differencebetween
betweenwhat
whatthe
thetotal
total
job
jobisissupposed
supposedtotocost
costand
andwhat
whatthe
thetotal
totaljob
jobisisnow
nowexpected
expectedtotocost.
cost.
FORMULA:
FORMULA: VAC
VAC==BAC
BAC--EAC
EAC
Example:
Example: VAC
VAC==$5,000
$5,000--$7,500
$7,500
VAC
VAC==--$2,500
$2,500 (negative
(negative==overrun)
overrun)
 WHAT WILL BE THE FINAL
COST?
Estimate at Completion (EAC)
defined as actual cost to date + estimated cost of work remaining
supplier develops comprehensive EAC at least annually
• reported by WBS in cost performance report
customer should develop a range of independent EACs for comparison
should examine on monthly basis
consider the following in EAC generation
• performance to date
• impact of approved corrective action plans
• known/anticipated downstream problems
• best estimate of the cost to complete remaining work

ACWP + ETC = EAC

One method: statistical formulae
Common EAC Formulae:

EAC = BAC
CPI

=
ACWPcum + Budgeted Cost of Work Remaining
CPI3

=
ACWPcum + Budgeted Cost of Work Remaining
.8(CPI) +.2(SPI)

=
ACWPcum + Budgeted Cost of Work Remaining
CPI * SPI
THE VALUE OF EARNED VALUE
MANAGEMENT
Early and accurate identification of trends and
problems

Accurate picture of project status

Cost, schedule and technical

Basis for course correction

Supports mutual goals of supplier and customer

Bring project in on schedule and cost
 Why do we need
EVMS?
Course corrections are easier
when you have time to make
small adjustments

It’s too late when you’re this

close to the iceberg!
EARNED VALUE EVOLUTION
Dept of Defense Instructions – late 1960’3
Cost/Schedule Control Systems Criteria
Financial Management Subculture
Contractor “Validation” Procedures
Evolution in Late 1990’s
Value reaffirmed
Industry Ownership
Principles in Federal Policy
Global Acceptance of EVM
Application to DoD In-House Activities
Enterprise-Wide Utilization
Commercial Use
 ANSI/EIA-748-1998
Earned Value Management Systems

INDUSTRY DEVELOPED GUIDELINES FOR

EVALUATION OF SUPPLIER’S SYSTEM

32 Guidelines 1. Organization
2. Planning and Budgeting
3. Accounting
4. Analysis
5. Revisions and Access to Data

Standard does not prescribe specific systems, software, or

procedures, only general guidelines
 INTERNATIONAL USERS
AUSTRALIA

CANADA

JAPAN

SWEDEN

UNITED KINGDOM
 REFERENCES
INDUSTRY EVM STANDARD – ANSI/EIA-748-98

www.cpm-pmi.org

www.pmi.org

www.acq.osd.mil/pm

www.deskbook.osd.mil