Earned value management


Earned value management, earned value project management, or earned value performance management is a project management technique for measuring project performance and progress in an objective manner.

Overview

Earned value management is a project management technique for measuring project performance and progress. It has the ability to combine measurements of the project management triangle: scope, time, and costs.
In a single integrated system, earned value management is able to provide accurate forecasts of project performance problems, which is an important contribution for project management.
Early EVM research showed that the areas of planning and control are significantly impacted by its use; and similarly, using the methodology improves both scope definition as well as the analysis of overall project performance. More recent research studies have shown that the principles of EVM are positive predictors of project success. Popularity of EVM has grown in recent years beyond government contracting, a sector in which its importance continues to rise, in part because EVM can also surface in and help substantiate contract disputes.
Essential features of any EVM implementation include:
EVM implementations for large or complex projects include many more features, such as indicators and forecasts of cost performance and schedule performance. However, the most basic requirement of an EVM system is that it quantifies progress using PV and EV.

Application example

Project A has been approved for a duration of one year and with the budget of X. It was also planned that the project spends 50% of the approved budget and expects 50% of the work to be complete in the first six months. If now, six months after the start of the project, a project manager would report that he has spent 50% of the budget, one can initially think, that the project is perfectly on plan. However, in reality the provided information is not sufficient to come to such a conclusion. The project can spend 50% of the budget, whilst finishing only 25% of the work, which would mean the project is not doing well; or the project can spend 50% of the budget, whilst completing 75% of the work, which would mean that project is doing better than planned. EVM is meant to address such and similar issues.

History

EVM emerged as a financial analysis specialty in United States Government programs in the 1960s, but it has since become a significant branch of project management and cost engineering. Project management research investigating the contribution of EVM to project success suggests a moderately strong positive relationship.
Implementations of EVM can be scaled to fit projects of all sizes and complexities.
The genesis of EVM occurred in industrial manufacturing at the turn of the 20th century, based largely on the principle of "earned time" popularized by Frank and Lillian Gilbreth, but the concept took root in the United States Department of Defense in the 1960s. The original concept was called PERT/COST, but it was considered overly burdensome by contractors whom were mandated to use it, and many variations of it began to proliferate among various procurement programs. In 1967, the DoD established a criterion-based approach, using a set of 35 criteria, called the Cost/Schedule Control Systems Criteria. In the 1970s and early 1980s, a subculture of C/SCSC analysis grew, but the technique was often ignored or even actively resisted by project managers in both government and industry. C/SCSC was often considered a financial control tool that could be delegated to analytical specialists.
In 1979, EVM was introduced to the architecture and engineering industry in a "Public Works Magazine" article by David Burstein, a project manager with a national engineering firm. This technique has been taught ever since as part of the project management training program presented by PSMJ Resources, an international training and consulting firm that specializes in the engineering and architecture industry.
In the late 1980s and early 1990s, EVM emerged as a project management methodology to be understood and used by managers and executives, not just EVM specialists. In 1989, EVM leadership was elevated to the Undersecretary of Defense for Acquisition, thus making EVM an element of program management and procurement. In 1991, Secretary of Defense Dick Cheney canceled the Navy A-12 Avenger II Program because of performance problems detected by EVM. This demonstrated conclusively that EVM mattered to secretary-level leadership. In the 1990s, many U.S. Government regulations were eliminated or streamlined. However, EVM not only survived the acquisition reform movement, but became strongly associated with the acquisition reform movement itself. Most notably, from 1995 to 1998, ownership of EVM criteria was transferred to industry by adoption of ANSI EIA 748-A standard.
The use of EVM expanded beyond the U.S. Department of Defense. It was adopted by the National Aeronautics and Space Administration, United States Department of Energy and other technology-related agencies. Many industrialized nations also began to utilize EVM in their own procurement programs.
An overview of EVM was included in the Project Management Institute's first PMBOK Guide in 1987 and was expanded in subsequent editions. In the most recent edition of the PMBOK guide, EVM is listed among the general tools and techniques for processes to control project costs.
The construction industry was an early commercial adopter of EVM. Closer integration of EVM with the practice of project management accelerated in the 1990s. In 1999, the Performance Management Association merged with the Project Management Institute to become PMI's first college, the College of Performance Management. The United States Office of Management and Budget began to mandate the use of EVM across all government agencies, and, for the first time, for certain internally managed projects. EVM also received greater attention by publicly traded companies in response to the Sarbanes-Oxley Act of 2002.
In Australia EVM has been codified as standards AS 4817-2003 and AS 4817-2006.

Project tracking

It is helpful to see an example of project tracking that does not include earned value performance management. Consider a project that has been planned in detail, including a time-phased spend plan for all elements of work. Figure 1 shows the cumulative budget for this project as a function of time. It also shows the cumulative actual cost of the project through week 8. To those unfamiliar with EVM, it might appear that this project was over budget through week 4 and then under budget from week 6 through week 8. However, what is missing from this chart is any understanding of how much work has been accomplished during the project. If the project was actually completed at week 8, then the project would actually be well under budget and well ahead of schedule. If, on the other hand, the project is only 10% complete at week 8, the project is significantly over budget and behind schedule. A method is needed to measure technical performance objectively and quantitatively, and that is what EVM accomplishes.

With EVM

Consider the same project, except this time the project plan includes pre-defined methods of quantifying the accomplishment of work. At the end of each week, the project manager identifies every detailed element of work that has been completed, and sums the EV for each of these completed elements. Earned value may be accumulated monthly, weekly, or as progress is made.

Earned value (EV)

EV is calculated by multiplying %complete of each task by its planned value
Figure 2 shows the EV curve along with the PV curve from Figure 1. The chart indicates that technical performance started more rapidly than planned, but slowed significantly and fell behind schedule at week 7 and 8. This chart illustrates the schedule performance aspect of EVM. It is complementary to critical path or critical chain schedule management.
Figure 3 shows the same EV curve with the actual cost data from Figure 1. It can be seen that the project was actually under budget, relative to the amount of work accomplished, since the start of the project. This is a much better conclusion than might be derived from Figure 1.
Figure 4 shows all three curves together – which is a typical EVM line chart. The best way to read these three-line charts is to identify the EV curve first, then compare it to PV and AC. It can be seen from this illustration that a true understanding of cost performance and schedule performance relies first on measuring technical performance objectively. This is the foundational principle of EVM.

Scaling EVM from simple to advanced implementations

The foundational principle of EVM, mentioned above, does not depend on the size or complexity of the project. However, the implementations of EVM can vary significantly depending on the circumstances. In many cases, organizations establish an all-or-nothing threshold; projects above the threshold require a full-featured EVM system and projects below the threshold are exempted. Another approach that is gaining favor is to scale EVM implementation according to the project at hand and skill level of the project team.

Simple implementations (emphasizing only technical performance)

There are many more small and simple projects than there are large and complex ones, yet historically only the largest and most complex have enjoyed the benefits of EVM. Still, lightweight implementations of EVM are achievable by any person who has basic spreadsheet skills. In fact, spreadsheet implementations are an excellent way to learn basic EVM skills.
The first step is to define the work. This is typically done in a hierarchical arrangement called a work breakdown structure although the simplest projects may use a simple list of tasks. In either case, it is important that the WBS or list be comprehensive. It is also important that the elements be mutually exclusive, so that work is easily categorized in one and only one element of work. The most detailed elements of a WBS hierarchy are called activities.
The second step is to assign a value, called planned value, to each activity. For large projects, PV is almost always an allocation of the total project budget, and may be in units of currency or in labor hours, or both. However, in very simple projects, each activity may be assigned a weighted “point value" which might not be a budget number. Assigning weighted values and achieving consensus on all PV quantities yields an important benefit of EVM, because it exposes misunderstandings and miscommunications about the scope of the project, and resolving these differences should always occur as early as possible. Some terminal elements can not be known in great detail in advance, and that is expected, because they can be further refined at a later time.
The third step is to define "earning rules" for each activity. The simplest method is to apply just one earning rule, such as the 0/100 rule, to all activities. Using the 0/100 rule, no credit is earned for an element of work until it is finished. A related rule is called the 50/50 rule, which means 50% credit is earned when an element of work is started, and the remaining 50% is earned upon completion. Other fixed earning rules such as a 25/75 rule or 20/80 rule are gaining favor, because they assign more weight to finishing work than for starting it, but they also motivate the project team to identify when an element of work is started, which can improve awareness of work-in-progress. These simple earning rules work well for small or simple projects because generally each activity tends to be fairly short in duration.
These initial three steps define the minimal amount of planning for simplified EVM. The final step is to execute the project according to the plan and measure progress. When activities are started or finished, EV is accumulated according to the earning rule. This is typically done at regular intervals, but there is no reason why EV cannot be accumulated in near real-time, when work elements are started/completed. In fact, waiting to update EV only once per month only detracts from a primary benefit of using EVM, which is to create a technical performance scoreboard for the project team.
In a lightweight implementation such as described here, the project manager has not accumulated cost nor defined a detailed project schedule network. While such omissions are inappropriate for managing large projects, they are a common and reasonable occurrence in many very small or simple projects. Any project can benefit from using EV alone as a real-time score of progress. One useful result of this very simple approach is to compare EV curves of similar projects, as illustrated in Figure 5. In this example, the progress of three residential construction projects are compared by aligning the starting dates. If these three home construction projects were measured with the same PV valuations, the relative schedule performance of the projects can be easily compared.

Making earned value schedule metrics concordant with the CPM schedule

The actual critical path is ultimately the determining factor of every project's duration. Because earned value schedule metrics take no account of critical path data, big budget activities that are not on the critical path have the potential to dwarf the impact of performing small budget critical path activities. This can lead to "gaming" the SV and Schedule Performance Index or SPI metrics by ignoring critical path activities in favor of big-budget activities that may have much float. This can sometimes even lead to performing activities out-of-sequence just to improve the schedule tracking metrics, which can cause major problems with quality.
A simple two-step process has been suggested to fix this:
  1. Create a second earned-value baseline strictly for schedule, with the weighted activities and milestones on the as-late-as-possible dates of the backward pass of the critical path algorithm, where there is no float.
  2. Allow earned-value credit for schedule metrics to be taken no earlier than the reporting period during which the activity is scheduled unless it is on the project's current critical path.
In this way, the distorting aspect of float would be eliminated. There would be no benefit to performing a non-critical activity with much float until it is due in proper sequence. Also, an activity would not generate a negative schedule variance until it had used up its float. Under this method, one way of gaming the schedule metrics would be eliminated. The only way of generating a positive schedule variance would be by completing work on the current critical path ahead of schedule, which is in fact the only way for a project to get ahead of schedule.

Advanced implementations (integrating cost, schedule and technical performance)

In addition to managing technical and schedule performance, large and complex projects require that cost performance be monitored and reviewed at regular intervals. To measure cost performance, planned value and earned value must be in units of currency.
In large implementations, the planned value curve is commonly called a Performance Measurement Baseline and may be arranged in control accounts, summary-level planning packages, planning packages and work packages.
In large projects, establishing control accounts is the primary method of delegating responsibility and authority to various parts of the performing organization. Control accounts are cells of a responsibility assignment matrix, which is the intersection of the project WBS and the organizational breakdown structure. Control accounts are assigned to Control Account Managers.
Large projects require more elaborate processes for controlling baseline revisions, more thorough integration with subcontractor EVM systems, and more elaborate management of procured materials.
In the United States, the primary standard for full-featured EVM systems is the ANSI/EIA-748A standard, published in May 1998 and reaffirmed in August 2002. The standard defines 32 criteria for full-featured EVM system compliance. As of the year 2007, a draft of ANSI/EIA-748B, a revision to the original is available from ANSI. Other countries have established similar standards.
In addition to using BCWS and BCWP, prior to 1998 implementations often use the term actual cost of work performed instead of AC. Additional acronyms and formulas include:
; Budget at completion
; Cost variance
; Cost performance index
; Estimate at completion
; Estimate to complete
; To-complete performance index
; Independent estimate at completion

Limitations

Proponents of EVM note a number of issues with implementing it, and further limitations may be inherent to the concept itself.
Because EVM requires quantification of a project plan, it is often perceived to be inapplicable to discovery-driven or Agile software development projects. For example, it may be impossible to plan certain research projects far in advance, because research itself uncovers some opportunities and actively eliminates others. However, another school of thought holds that all work can be planned, even if in weekly timeboxes or other short increments.
Traditional EVM is not intended for non-discrete effort. In traditional EVM standards, non-discrete effort is called "level of effort". If a project plan contains a significant portion of LOE, and the LOE is intermixed with discrete effort, EVM results will be contaminated. This is another area of EVM research.
Traditional definitions of EVM typically assume that project accounting and project network schedule management are prerequisites to achieving any benefit from EVM. Many small projects don't satisfy either of these prerequisites, but they too can benefit from EVM, as described for simple implementations, above. Other projects can be planned with a project network, but do not have access to true and timely actual cost data. In practice, the collection of true and timely actual cost data can be the most difficult aspect of EVM. Such projects can benefit from EVM, as described for intermediate implementations, above, and Earned Schedule.
As a means of overcoming objections to EVM's lack of connection to qualitative performance issues, the Naval Air Systems Command PEO organization initiated a project in the late 1990s to integrate true technical achievement into EVM projections by utilizing risk profiles. These risk profiles anticipate opportunities that may be revealed and possibly be exploited as development and testing proceeds. The published research resulted in a Technical Performance Management methodology and software application that is still used by many DoD agencies in informing EVM estimates with technical achievement.
The research was peer-reviewed and was the recipient of the Defense Acquisition University Acquisition Research Symposium 1997 Acker Award for excellence in the exchange of information in the field of acquisition research.
There is the difficulty inherent for any periodic monitoring of synchronizing data timing: actual deliveries, actual invoicing, and the date the EVM analysis is done are all independent, so that some items have arrived but their invoicing has not and by the time analysis is delivered the data will likely be weeks behind events. This may limit EVM to a less tactical or less definitive role where use is combined with other forms to explain why or add recent news and manage future expectations.
There is a measurement limitation for how precisely EVM can be used, stemming from classic conflict between accuracy and precision, as the mathematics can calculate deceptively far beyond the precision of the measurements of data and the approximation that is the plan estimation. The limitation on estimation is commonly understood but is not visible in any margin of error. The limitations on measurement are largely a form of digitization error as EVM measurements ultimately can be no finer than by item, which may be the Work Breakdown Structure terminal element size, to the scale of reporting period, typically end summary of a month, and by the means of delivery measure.
As traditionally implemented, earned value management deals with, and is based in, budget and cost. It has no relationship to the investment value or benefit for which the project has been funded and undertaken. Yet due to the use of the word “value” in the name, this fact is often misunderstood. However, earned value metrics can be used to compute the cost and schedule inputs to Devaux's Index of Project Performance, which integrates schedule and cost performance with the planned investment value of the project's scope across the project management triangle.