Earned Value Management

Scenario: You are running a project with a complex scope; your customer feels that the project is beginning to track over budget. They have only seen 2 major milestones completed yet they feel they have incurred significant cost in excess of what they’ve seen delivered. Never-the-less, you continue to assure them that excellent progress is being made toward the rest of the milestones. From the customer viewpoint, it is easy to feel that nothing has been done (at least worth paying for) until a milestone is completed. Unless you employ alternate methods to communicate value…

How do you convey value for money in the meantime?

Customer: You need to get more efficient, every time I speak to my employee, she tells me it’s that your team is not good at Task “xyz”. I agree with her as I have noticed that this one task makes up a lot of the expense on the invoices. I’m very concerned that the project is going to overspend.

Project Manager: Our team believes it’s the preceding 3 tasks that we need to focus on.

Customer: What data do you have to support your statement?

Project Manager: I hear complaints from my team and subsequently did an RCA showing that the prior tasks are causing the delay. Regardless, we will not be over budget at the end of the project, we are on track as we are currently 1 year into the 3-year project and have delivered on schedule so far.

Customer: Unfortunately, we disagree. I’m calling a fire drill! I want you to focus on improving this task “xyz” now. My reports tell me this is the problem and I would like you to dig deeper. I will need to see progress reports and an action plan.

How do you handle this type of interaction with your customers? What if there is no efficiency left to be found in task “xyz”? Of course, you want the best for your customer, a true partnership is the goal after all. Quite often if you’re close to the execution team, you’re probably correct about your feelings of the team’s performance; unfortunately, this alone will not help you with your customers or even with your own organization.

One of the most critical tools that is missing from so many projectized organizations is effective Earned Value Management (EVM). Effective EVM would enable the following response:

Project Manager: You are correct in noting that task “xyz” makes up a lot of the cost, 27% of our work effort to be exact. However, it is typically performed at a Cost Performance Index (CPI) of 1.1 compared to the baseline (under budget). These 3 closely related preceding tasks make up 23% of our workflow, however, they are performing at a CPI of 0.91 (over budget). If you allow us to focus on these tasks first, you will see greater benefit.

Currently we have delivered $2.8MM of the $5MM budgeted work in the baseline, yet the project cost to date is currently at $2.5MM. At current cost trajectory, with expected efficiency considered, our Estimate at Completion (EAC) is approximately $4.5MM, a cost variance of $500M.

Earned Value or Budgeted Cost for Work Performed is an important metric as it indicates what value you provided with the work that was carried out in a period or project-to-date. You can compare this with actual cost for the period, anywhere from a granular task or resource level, through to project or program level, and report the “Cost Performance Index” metric. Most importantly, it enables value to be communicated before a milestone is delivered, while simultaneously helping project management quickly identify issues with execution, measure individual performance, and handle difficult cost discussions with facts.

CPI = BCWP/ACWP

  • BCWP = Budgeted Cost for Work Performed. This is typically the baseline that was originally agreed upon at project award or shortly thereafter.

  • ACWP = Actual Cost for Work Performed. This is the cost incurred to perform the portion of work that was budgeted for in the baseline.

Example 1: A task was estimated to cost $10,000 during original project planning. In this one-month period, your team spent $5,000 on that task, but are forecasting only 30% of the hours remain to complete the task.

CPI = $7,000 (BCWP)/$5,000 (ACWP) = 1.4

The new Estimate at Completion (EAC) for this task is $7,124.

Example 2: The same task is now completed 2 weeks later, the remaining cost was a little more than you estimated as remaining during the last period, with a total cost of $8,875.

CPI = $10,000 / $8,875 = 1.13

Ideally the team would get much better at estimating remaining effort with practice, but this is a discussion for a later date.

The CPI metric complements the many other metrics in a project manager’s toolbox, ensuring the project team can quickly identify great performance, as well as areas for improvement. On a regular reporting cycle, your customer would typically want a much higher-level view. All metrics require a robust project plan to be in place that is reviewed and maintained with discipline. While it may seem laborious at first, as with so many other planning efforts; prior planning pays dividends!

Thankfully we have many software tools at our disposal that can make the calculation of the suite of EVM metrics an easy process. For this reason, we will continue to discuss the other metrics and how they can drive your projects to success.

What do your project teams need help with? Don’t risk flying blind, contact Modus Operations today!