Earned Value - At a quick glance

Earned Value

The purpose of Earned Value is to communicate from the contractor to the owner expected timing of billing to facilitate traceability. Earned Value provides a performance measurement of the “Promised” v. “Delivered”.

That is, the provided Statement Of Work (SOW) is deconstructed into its basic building blocks composing the Work Breakdown Structure (WBS).

1.????? Project Campus

...1.1? Building One

......1.1.1??????? Civil

.........1.1.1.1? Grading

.........1.1.1.2? Underground

............1.1.1.2.1??????? Electrical

............1.1.1.2.2??????? Water

............1.1.1.2.3??????? Sanitary Sewer

.........1.1.1.3? Immediate Parking

......1.1.2??????? Envelope

.........1.1.2.1? Foundation

.........1.1.2.2? …

The WBS is a direct representation of the complete scope of work without any omissions, additions, or overlaps. It describes a mutually acceptable level of detail of the deliverables and the relationship between those deliverables. It also provides elements for planning, budgeting, scheduling, cost accounting, work authorization, progress measurement, and general management control. Each WBS element ‘counts’ the unique elements of work scope that comprise the complete, currently approved SOW (Original + Approved Changes). The WBS facilitates communication between all project stakeholders as it provides a common frame of reference.

Once the project’s WBS has been identified and the respective tasks have been identified along with the respective budgeting, cost accounting, and other required elements, and a complete schedule is deemed acceptable (Tasks, Relationships, Resource, Costed, Cost Accounts assigned, reporting elements assigned, WBS element assigned), then a BASELINE can be created.? That is, a “FIXED” point of reference for the project. As any approved changes are made having an impact on any aspect of the project, the baseline will require a respective update (more/less: time, cost, earlier/later, resource(s), scope additions/deletions, etc.)

Earned Value allows for Performance comparison

Earned Value looks at the timing of the Expected date a “deliverable” element was planned and compares it to the “actual” date.

If the actual events follow the plan, then the respective “task” Actually started on day 48 and, if today is day 58, that task finished sometime “yesterday”.? The reality is that schedules and the respective tasks will vibrate throughout the life of the project. The START of the “task” may be earlier, on time, or later than planned. Likewise, the FINISH of the “task” may independently be earlier, on time, or later than planned (six possible combinations).? Note that if the “task” STARTED and FINISHED as planned within a single billing period, there would be zero unexpected financial impacts.

Actual Start Earlier than Planned Start

In the following scenario: progress is reported through day 45; the plan indicates that the task should have started on day 48 and is expected to finish on day 57; this task had an actual start of day 40 with 50% progress. BY PLAN, the progress for this task should only be 25%. Therefore, the Earned Value is 25%. Again, the intent is not to punish the performance of the project, the intent is to help match performance, billing, and expected cash-flow for the “owner” and the “contractor”. If the measured value for this element is $1000 (or 1000 labor hours, or 1000 widgets installed), assuming a straight-line application of resources and costs, the “billing” Actual Value should be $500 ($1000 x 50%). In contrast, the Earned Value is $250 ($1000 x 25%) resulting in an expected difference of ($250) for this billing cycle for this element. Assuming that the specific element is completed as planned within the next billing cycle, the entire balance outstanding would then be due to the contractor, $750.

The major consideration for the Earned Value element is that it is:

·???????? Discrete for the “responsible” stakeholder (Organizational Breakdown Structure for Control and perhaps independently for execution)

·???????? Discrete for the WBS element

·???????? Discrete for the applicable Cost Collection account structure

·???????? Consistent “costs” (unit, equivalent unit, lot)

·???????? Consistent reporting level as the approved plan

Additionally, use of Earned Value would direct those tasks used to track Earned Value LIMIT the possible duration to one or two potential billing cycles. If, for example, an EV task commences “mid-way” through a billing cycle and is expected to extend two billing cycles, then initial progress would be reported in period “3”, additional progress reported in period “4”, and finally be reported complete in period “5”. That is, even though by plan it was only two cycles in duration, it went through three update cycles prior to completion.??

Schedule Performance Index – A ratio of Time Variance Efficiency

As the project moves from one update cycle to the next, it is reasonable to expect minor variations.? A Schedule Performance Index (SPI) provides a non-distracting metric in the form of a ratio that compares the Earned Value over Planned Value in respect to TIME efficiency.? As an example, an Earned Value task has a to-date Earned Value of $40,000. Likewise, it has a Planned Value as of the “current” date of $50,000

Ideally, IF everything about that Earned Value task has been performed exactly as planned (Started on time; if not finished on time, then the “progress” as measured is exactly as planned) then the SPI would be (EV {40000}/PV {40000} = )100.00%.

Values less than 100% indicate behind while values greater than 100% indicate ahead.

I would suggest that any SPI values that are be 95% and 105% should be considered “within expectation”. That is, while the value is not exactly at 100% but due to operational noise (reporting “6” and not “7”, recognizing a day or two early/late, delivered material reported in another reporting period), this portion of the project is “as planned”.

Furthermore, any SPI that is between 90%-95% or between 105% and 110% may need to be reviewed due to developing issues.? Is this the beginning (or continuation) of a trend? Are there sufficient changes in conditions that may warrant a change directive, or potential tasks planned later in the project that need to be revisited for potential impact(s)?

For any SPI that is less than 90% or greater than 110%, a detailed explanation as to what has occurred to have this significant impact on the project is certainly warranted. ???The SPI indicates that there is an easy course change, a change exceeding 10% beyond the plan (early or late) is now occurring. Explanations such as “more warm/sunny days than originally expected”, or “shipping strike in Port of Lisbon…”, or “client changed the vendor for <equipment> which caused a change in engineering which caused a delay in delivery…” could be valid reasons. Regardless of the reason, these issues need to be communicated to the project stakeholders immediately.? One might believe that a SPI exceeding 110% is a “good thing”, perhaps. If the contractor is executing (and thereby billing more quickly) than planned, this may cause the “owner” cash-flow issues. That is, a previously defined funding stream may have been allocated to offset the periodic billing. Any significant deviation from that expectation could be a financial issue.?