THE VALUE OF EARNED VALUE MANAGEMENTPMI Pittsburgh Chapter Meeting

February 8, 2001

Marilyn McCauleyMcManagement Group703-455-0602703-455-0598 (f)McMgtGrp@aol.com

AGENDA

Twelve Reasons Why Programs FailProgram Management PrinciplesEarned Value Management’s Role in PMWhat is Earned Value ManagementHistory of Earned Value ManagementThe Value of Earned Value Management

REASONS WHY PROGRAMS FAILJohn 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 FAIL7. 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 FAIL1995 Standish Group Report

1. Incomplete requirements2. Lack of user involvement3. Lack of resources4. Unrealistic expectations5. Lack of executive support6. Changing requirements and specifications7. Lack of planning8. Didn’t need it any longer9. Lack of IT management10. Technology illiteracy

PROGRAM MANAGEMENT PROCESSESInitiating Recognizing that a project or phase should begin

and committing to do so

Planning Devising and maintaining a workable scheme toaccomplish the business need that the project wasundertaken to address

Executing Coordinating people and other resources to carry outthe plan

Controlling Ensuring that project objectives are met by monitoringand measuring progress and taking corrective action when necessary

Closing Formalizing acceptance of the project or phase andbringing 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

Initiate

Close out

Control

Execute

Proj

ect m

anag

emen

t cyc

le

Plandevelop a realistic plan of the work scope, the budget, and the schedule

organize the work and the teams

program manager needs

authorize work properly

control changes understand variances

corrective actions forecast of final cost and schedule

performance reporting

Earned Value Management

EVMS fits naturally into theProject Management Cycle

Initiate

Close out

Control

Execute

Proj

ect m

anag

emen

t cyc

le

Plan

program manager needs

develop a realistic plan of the work scope, the budget, and the schedule

organize the work and the teams

authorize work properly

control changes understand variances

corrective actions forecast of final cost and schedule

performance reporting

WHAT IS EARNED VALUE MANAGMENT

EVMS IS THE PRIMARY PROJECT MANAGEMENTTOOL……

THAT INTEGRATES THE TECHNICAL, SCHEDULE, AND

COST OBJECTIVES OF THE CONTRACT OR WORK EFFORT

WHAT IS EARNED VALUE VALUE

A Way To MeasureHow 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 ManageThe 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 workaccomplishment. 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.

1. DEFINE THE WORK AND ORGANIZE TEAMS

Planning is a 3 Step ProcessPlanning is a 3 Step Process

100

4060

1525

3030

2. SCHEDULE THE WORK

3. ALLOCATE BUDGETS

$

CONTRACT BUDGET BASE

TIMEIN

TEGRATE

D BASELIN

E

Earned Value techniquesDiscrete

• physical, tangible end productApportioned

• 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 workMay tie in with success criteria or technical measure

• e.g., successful completion of a specific test, reliability growth curve

ESTABLISH OBJECTIVE MEASURES

FIVE BASIC PERFORMANCE DATAQUESTIONS & ANSWERS

QUESTION ANSWER ACRONYM

How much work should Budgeted Cost for BCWSbe done? Work Scheduled

How much work is done? Budgeted Cost for BCWPWork Performed

How much did the is done Actual Cost of ACWPwork cost? Work Performed

What was the total job Budget at Completion BAC supposed to cost?

What do we now expect the Estimate at Completion EACtotal job to cost?

Schedule Variance

BC WSBC WP

of the work I scheduled to have done,how much did I budget for it to cost?

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

SCHEDULE VARIANCE is the difference between work scheduled and work performed (expressed in terms of budget dollars)

formula: SV $ = BCWP - BCWS

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

SCHEDULE VARIANCE is the difference between work scheduled and work performed (expressed in terms of budget dollars)

formula: SV $ = BCWP - BCWS

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

BU

DG

ET B

ASED

Cost Variance

BC WPAC WP

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

of the work I actually performed,how much did it actually cost?

COST VARIANCE is the difference between budgeted costand actual cost

formula: CV $ = BCWP - ACWP

example: CV = BCWP - ACWP = $1,000 - $2,400 CV= -$1,400 (negative = cost overrun)

COST VARIANCE is the difference between budgeted costand actual cost

formula: CV $ = BCWP - ACWP

example: CV = BCWP - ACWP = $1,000 - $2,400 CV= -$1,400 (negative = cost overrun)

PER

FOR

MAN

CE

BAS

ED

Variance at Completion (VAC)

B AC what the total job is supposedto cost

E AC what the total job is expectedto cost

VARIANCE AT COMPLETION is the difference between what the total job is supposed to cost and what the total job is now expected to cost.

FORMULA: VAC = BAC - EAC

Example: VAC = $5,000 - $7,500VAC = - $2,500 (negative = overrun)

VARIANCE AT COMPLETION is the difference between what the total job is supposed to cost and what the total job is now expected to cost.

FORMULA: VAC = BAC - EAC

Example: VAC = $5,000 - $7,500VAC = - $2,500 (negative = overrun)

Estimate at Completion (EAC)defined as actual cost to date + estimated cost of work remainingsupplier develops comprehensive EAC at least annually

• reported by WBS in cost performance reportcustomer should develop a range of independent EACs for comparisonshould examine on monthly basisconsider 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

WHAT WILL BE THE FINAL COST?

ACWP + ETC = EAC

Common EAC Formulae:

EAC = BACCPI

= 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

One method: statistical formulae

THE VALUE OF EARNED VALUE MANAGEMENT

Early and accurate identification of trends and problems

Accurate picture of project statusCost, schedule and technical

Basis for course correction

Supports mutual goals of supplier and customerBring project in on schedule and cost

Why do we needEVMS?

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 EVOLUTIONDept of Defense Instructions – late 1960’3

Cost/Schedule Control Systems CriteriaFinancial Management SubcultureContractor “Validation” Procedures

Evolution in Late 1990’sValue reaffirmed Industry OwnershipPrinciples in Federal PolicyGlobal Acceptance of EVMApplication to DoD In-House ActivitiesEnterprise-Wide UtilizationCommercial Use

ANSI/EIA-748-1998Earned Value Management Systems

INDUSTRY DEVELOPED GUIDELINES FOR EVALUATION OF SUPPLIER’S SYSTEM

32 Guidelines 1. Organization

2. Planning and Budgeting3. Accounting4. Analysis5. Revisions and Access to Data

Standard does not prescribe specific systems, software, or procedures, only general guidelines

INTERNATIONAL USERSAUSTRALIA

CANADA

JAPAN

SWEDEN

UNITED KINGDOM

REFERENCESINDUSTRY EVM STANDARD – ANSI/EIA-748-98

www.cpm-pmi.org

www.pmi.org

www.acq.osd.mil/pm

www.deskbook.osd.mil