WHO IS MANAGING WHO – You Managing the Project, or the Project Managing You?

 Earned Value Management as a tool and discipline for project managers including 12 Aspects of Planning, Scheduling, and Budgeting. 

Having the right KPI’s coming in from your construction project can make it, or break it. Earned Value Management has almost become a philosophy for me in managing and mitigating risk either in the cost or schedule, creating clear visibility on progress and as such; a tool or dashboard to manage projects instead of projects managing you. 

Those who know me, know I have high regards to accurate data and dashboards, as I have first-handed experienced the power and impact of such.

In the following we look at Earned Value Management (EVM) which, in conjunction with Earned Schedule, has proven itself to be one of the most effective performance measurement and feedback tools for managing projects. This article looks at EV from a business management perspective.

Thus, EVM as a tool to making your 3D/4D and 5D data speak is very powerfull and I hope you will enjoy this mash-up of different approaches to EVM.

INDTRODUCTION TO Earned Value Management: Earned Value & Earned Schedule Overview

Earned Value Management (EVM) has proven itself to be one of the most effective performance measurement and feedback tools for managing projects. It is often referred to as 'management with the lights on' because it helps objectively and succinctly identify where a project is and where it is going. The methodology incorporates project scope, schedule and costs and uses the fundamental principle that patterns and trends in the past can be good predictors of the future. Timely and targeted feedback can enable project managers to identify problems early and make adjustments that can keep a project on time and on budget by closing the loop in the classic business formula, 'Plan, Do, Check, Act'. 

EVM provides organizations with the methodology needed to integrate the management of project scope, schedule, and cost. It can play a crucial role in answering management questions that are critical to the success of every project, such as: 

• Are we ahead of or behind schedule? 
• How efficiently are we using our time? 
• When is the project likely to be completed? 
• Are we under or over our budget? 
• What is the remaining work likely to cost? 
• What is the entire project likely to cost? 
• How much will we be under or over budget? 

The project manager can use the EVM methodology to help identify: 

• Where problems are occurring
• Whether the problems are critical or not
• What it will take to get the project back on track. 

Effective use of EVM requires the principles of good project management, as outlined in the PMBOK Guide, to be used and requires the foundations of a well-defined WBS and schedule. EVM adds a number of effective practices in the areas of project planning and control that are related to the goal of measuring, analyzing, forecasting, and reporting cost and schedule performance data for evaluation and action by the project team, managers and other key stakeholders.

Managing external contractors

Managers working in a business environment where key processes have been outsourced are battling to retain control over projects they are responsible for delivering or funding. The key issue they confront is their lack of direct authority to control the destiny of the project. This is caused in part by their lack of visibility of many key commercial processes and in part by the outsourcing model itself. Many levers previously used by project managers to control vendors working on their projects (e.g hiring/firing authority, options for future work, payment provisions, knowledge of contracted rates, etc) have been taken away from the project managers working within the ‘client business’ and subsumed into an overall ‘outsource’ agreement. 

To succeed in this environment, project managers need to use new techniques to regain effective control of their projects. One of the most effective is to harness the power of Earned Value Analysis to create a high level of visibility (particularly early in the project) and to use the persuasive power created by the regular reporting processes to regain control. Understanding trends and trend analysis is a key part of this process. This process must be implemented with a blend of psychology and technology to obtain the maximum benefit and should focus on helping the vendors become effective and profitable. In an outsourced environment, the clients project managers can only achieve success by making their outsourcing partner successful

Earned Value Management Terms and Formulas for Project Managers

The basic premise of earned value management (EVM) is that the value of a piece of work is equal to the amount of funds budgeted to complete it. As part of EVM, you use the following information to assess your schedule and cost performance throughout your project.

• Planned value (PV): The approved budget for the work scheduled to be completed by a specified date; also referred to as the budgeted cost of work scheduled (BCWS). The total PV of a task is equal to the task’s budget at completion (BAC) — the total amount budgeted for the task.
• Earned value (EV): The approved budget for the work actually completed by the specified date; also referred to as the budgeted cost of work performed (BCWP).
• Actual cost (AC): The costs actually incurred for the work completed by the specified date; also referred to as the actual cost of work performed (ACWP).

Monitoring your project’s performance involves determining whether you are on, ahead of, or behind schedule and on, under, or over budget. But just comparing your actual expenditures with your budget can’t tell you whether you’re on, under, or over budget — which is where EVM comes in.

Monitoring planned value (PV), earned value (EV), and actual cost (AC)

To describe your project’s schedule and cost performance with EVM, you use the following indicators:

• Schedule variance (SV): The difference between the amounts budgeted for the work you actually did and for the work you planned to do. The SV shows whether and by how much your work is ahead of or behind your approved schedule.
• Cost variance (CV): The difference between the amount budgeted and the amount actually spent for the work performed. The CV shows whether and by how much you’re under or over your approved budget.
• Schedule performance index (SPI): The ratio of the approved budget for the work performed to the approved budget for the work planned. The SPI reflects the relative amount the project is ahead of or behind schedule, sometimes referred to as the project’s schedule efficiency. You can use the SPI to date to project the schedule performance for the remainder of the task.
• Cost performance index (CPI): The ratio of the approved budget for work performed to what you actually spent for the work. The CPI reflects the relative value of work done compared to the amount paid for it, sometimes referred to as the project’s cost efficiency. You can use the CPI to date to project the cost performance for the remainder of the task.

You can approximate the amount of time you’re behind or ahead of the approved schedule by drawing a line from the intersection of the EV and assessment date lines parallel to the x-axis to the PV line. Doing so suggests that the project being described by the graph is about one month behind schedule.

Planned and actual expenditures up to the date of the report.

The difference between planned and actual expenditures up to the date of the report is the result of both a schedule delay and cost savings.

Schedule and cost variances and performance indicators are defined mathematically as follows:

• Schedule variance (SV) = Earned value (EV) – Planned value (PV)
• Cost variance (CV) = Earned value (EV) – Actual cost (AC)
• Schedule performance index (SPI) = Earned value (EV) / Planned value (PV)
• Cost performance index (CPI) = Earned value (EV) / Actual cost (AC)

The final step when assessing task performance to date is to update what you expect your total expenditures will be upon task completion. Specifically, you want to determine the following:

• Estimate at completion (EAC): Your estimate today of the total cost of the task
• Estimate to complete (ETC): Your estimate of the amount of funds required to complete all work still remaining to be done on the task

You can use the following two approaches to calculate the EAC:

• Method 1: Assume that the cost performance for the remainder of the task will revert to what was originally budgeted.

EAC = Approved budget for the entire task – Cost variance for the work done to date on the task

      = Budget at completion (BAC) + Actual cost (AC) – Earned value (EV)

• Method 2: Assume that the cost performance for the remainder of the task will be the same as what it has been for the work done to date.

EAC = Budget at completion (BAC) / Cumulative cost performance index (CPI)

Whether you use Method 1 or Method 2 to calculate EAC, ETC is determined as follows:

ETC = Budget at completion (BAC) – Actual costs to date (AC)

12 Compliance Aspects of Planning, Scheduling, and Budgeting for EVMS projects

In developing a plan for a project there are many considerations and constraints that require evaluation and attention. Among these are: resources, project stakeholders, technical execution, sequence of activities and their interdependencies, estimation of the time each activity will take using a risk based approach and other project variables that commonly occur on projects. Documenting this plan and establishing a baseline to measure future progress against is fundamental when apply an Earned Value Management System.

The basic elements of Planning, Scheduling and Budgeting within an application of an Earned Value Management System (EVMS) consist of the following.

1)    Critical Path Method (CPM) Schedule

Critical Path Method (CPM) schedule, that is also a resource loaded network, is critical to establishing a project baseline. The baseline is the project’s measuring stick that monthly performance is measured against. Preparing an accurate, complete and compliant CPM schedule is therefore an important step in building the baseline.

The CPM schedule is a network schedule that depicts the activities, milestones and activity logic. It is organized by the Work Breakdown Structure (WBS). The activity sequencing is what determines the critical path. The sequencing drives activities based on the duration and logic tie between linked activities. The critical path can be found by examining the float between a chain of activities. The critical path is determined in two methods, the longest path and the least amount of float.

A current or update schedule is built off the baseline schedule and updated at least monthly. The update schedule reflects the current state, finish and percent complete of all activities. The current schedule is then loaded into the cost tracking software (EVM Cost Tool) to compare schedule and earned value progress against the baseline.

In an EVMS environment Vertical and Horizontal schedule traceability is required. Vertical traceability means that all budgets (and activities) can be summarized to all levels of the WBS. Horizontal traceability means that activities must have predecessors and successors through the entire schedule.

2)    Milestones and Deliverables

The schedule must include milestones that identify work completion. Other milestones may include technical accomplishment and completion, or other indicators used to indicate progress. The main goal of EVM is to measure work that is completed to get a true percent complete and earned value. It’s important to document interfaces with measureable activities so that it is clear from the beginning of the baseline how each activity is going to be measured. Documentation should include Quantifiable Backup Data (QBD) that will be updated monthly with contemporaneous project progress. Documentation about the technique used to measure the activity should recorded to demonstrate how each activity will be measured. Typically this is done in the Integrated Master Schedule (IMS) tool or EVM tool.

3)    Technical Performance Requirements (Contractual or otherwise)

Technical Performance Requirements including contractual requirements must be identified in the Integrated Master Schedule (IMS). The IMS must have all contractual requirement performance activities loaded to ensure that all scope is covered and planned. It’s important to schedule the review times and comment resolution activities in the IMS. When using activities that are time only related it’s important to identify those in the IMS as schedule visual techniques only. The time only activities have no resources loaded on them and therefore should not be transferred to the cost baseline via the EVM Cost Tool.

4)    Performance Measurement Baseline (PMB)

The Performance Measurement Baseline (PMB) is the output that demonstrates the alignment of the Scope, Schedule and Budget. It is the culmination of the IMS integrated with the EVM Cost Tool. It is the time-phased budget to complete all contractual work. It establishes a time-phased budget baseline at the Control Account (CA) level where program performance can be measured. Budget for far term effort can be held in high-level accounts until the appropriate time for allocation at the CA level.

The PMB plus Management Reserve (MR) must equal the Contract Base Budget (CBB). In some rare cases, an Over Target Baseline (OTB) is used, in this case the PMB plus MR must equal the Total Allocated Budget (TAB). Documentation must be keep for every BCP showing this reconciliation for each baseline change.

The CBB must reconcile to the Total Project Cost (TPC). Documentation must be keep for every BCP showing this reconciliation.

When updating the progress of the IMS and EVM Cost tool, there must be procedures and a process to update them timely and accurately. The typical update cycle centers on the accounting close period, because baseline periods and accounting periods should be aligned.

5)    Risk Assessment and Mitigation

Risk is a critical component to effective EVMS. Project Controls and CAMs should understand the types of risk, internal and external, the process for analyzing risks, the process of assessing risks, the process of identifying risks, the management of risks and finally risk mitigation. Risk mitigation is one of the most important tools of the “Risk” envelope. It’s one thing to identify risks, quantify them and run them through the model. It’s whole other world to mitigate and take actions to prevent or eliminate them.

6)    Control Accounts (CA) and Work Packages (WP)

The Control Account (CA) is where scope, schedule and budget are planned, measured, tracked and reported. Work Packages, including Planning Packages, are the next level down within the CA. Actual costs can be collected at the WP level or CA level, but not higher than the CA to be compliant with the ANSI standard and general accepted EVMS principles. Collecting costs lower than the CA, at the Work Package level, may help with future Variance Analysis.

A Work Package is a near term activity, short in duration, that can be measured in a single reporting period using a predetermined performance measure technique. A Planning Package is defined as effort that cannot yet be planned in sufficient detail. Planning Packages should be activities further out in the schedule, typically greater than 3 months from the status date. Both Planning Packages and Work Packages should be identifiable in the Integrated Master Schedule (IMS).

The CA is the management point at which budgets (resources) are planned and actual costs are collected. Budget and actual costs are compared to Earned Value (EV) for management control purposes at the CA level. CAs are derived from the WBS; they would be the lowest point in the WBS structure. CAs do not span multiple WBS or OBS elements.

7)    Cost Elements

The PMB is the authorized work and should include the identification of significant cost elements such as labor, material, equipment and subcontractors. Work Authorization (WA) documents should include a cost breakdown by cost element for the entire period of performance. When forecasting, it’s important to understand that each cost element can be affected by performance/progress differently so a one size fits all forecast may not be appropriate for the entire Control Account (CA).

8)    Contingency and Management Reserve (MR)

Contingency is held by the owner to cover unexpected costs or program enhancements. Management Reserve (MR) is held by the Contractor to cover estimate uncertainty and risk events. Both Contingency and MR should be establish during the estimating phase of the project by an experienced team of estimators, engineering and project managers.

MR is not distributed into the Performance Measurement Baseline (PMB) initially. MR is part of the Contract Base Budget (CBB). In equation form: PMB+MR=CBB. MR is used by the contract to cover a risk event occurrence, which could be identified or not, as long as the risk event is within the scope of work for the Contractor. This is done by processing a baseline change request to distribute the MR to the PMB.

Contingency is managed by the owner and would be distributed through the change management process defined in the contract. Typically through a cost proposal or request for equitable adjustment from the contractor. Once on contract, the budget would be distributed to the PMB through the baseline change request process.

MR, according to ANSI-748, should never be used to cover variance (cost overruns). This gets a little tricky because of the timing of baseline change requests, which distribute MR, make it appear to cover variance. The baseline change request would need to clearly define why the use of MR is applicable by documenting the risk occurrence(s).

9)    Undistributed Budget (UB)

Undistributed Budget (UB) is budget associated with specific work scope or contract changes that have not yet been definitized through a formal contract modification. Typically, these are changes under negotiation, the work needs to start without waiting for the full contract implementation process. It may also be the accumulation of distributed budget that has been removed from the baseline as part of a stop work order.

Once the UB work scope has been definitized, the contractor would apply it to the PMB and CBB as soon as practical within a typical reporting cycle.

UB for added scope that has not been negotiated is called Authorized Unpriced Work (AUW). The Contractor’s estimated budget for the scope is placed in UB and distributed as baseline when the work is being executed and performed. Once definitized into a contract modification, the negotiated amount is distributed to Control Accounts and/or MR.

10) Over Target Baseline (OTB)

Over Target Baseline (OTB) is a formal reprogramming of the baseline. It may be needed when the contract performance signifies that the baseline is insufficient to perform the remaining work scope and reporting against that baseline is not useful. OTBs are rare and require customer approval.

11) Integrated Baseline Review (IBR)

Integrated Baseline Review (IBR) is a formal review conducted by the customer’s Project Manager and customer representatives. The IBR is a team of reviewers who review baseline documents and acceptance of the baseline.

12) Earned Value Management Methods and Techniques

EVMS requires creating and documenting a performance measurement plan. The plan would detail how the budget for work packages will be earned. Earned Value (EV) or Budgeted Cost of Work Performed (BCWP) is compared to Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS) and Actual Cost of Work Performed (ACWP) to determine schedule and cost variances. EVMS cannot be implemented without all three and the earning technique is critical to program success.

EVMS gives managers the ability to see early warning signs of under or over performance against the plan. This allows them to react before it’s too late.

Selecting the performance measure technique or earned value measurement technique is slightly tricky. The general rule is to select the technique type that matches how the activity was planned and how the activity will be executed. 

The following are the types of performance measurement methods and techniques.

· Fixed Formula — examples include 0/100 (0% when the activity starts, 100% when the activity finishes) and 50/50 rules (0% when the activity starts, 100% when the activity finishes). There are limits to the use of these types, typically something that is not practical to measure and finishes in one (0/100) or two accounting periods (50/50).

· Milestones – following the schedule 

· Percent Completes – based on site feedback

· Equivalent Units or Actual Units Complete

· Level of Effort (LOE) – how many resources has been consumed

In closing, EVMS is a robust measuring system to provide managers an early warning sign. Done right, it can be very useful. Construction- and capital projects are inherently causal in nature, why a robust measurement system and KPI’s are key in succeeding emphasizing the importance of a project management system with integration of time and cost elements (4D/5D).