First of all, I’d like to wish you all a very happy New Year!

Back to business:

Back in the original Earned Value Management article I talked about how it can help a project manager track and communicate project progress to their customers and leadership, as well as support the decision-making process. Since then, I have engaged in a few discussions and have further insight to provide that may not have been obvious in the original article.

Earned Value Management Pt. 1

If you’re the customer and you frequently experience your contractors “front loading” the billing schedule as they’ve completed more work than originally forecast; how do you verify performance? Are you concerned that payment is well ahead of progress but struggling to quantify the concern?

In a lot of discussions since the last article, I hear different kinds of schedule & task or milestone tracking being described. This can give a vastly different picture of project progress to that given by EVM methods.

Common Methods of tracking Financial Performance

It is common for customers to hold a contractor accountable to a kind of schedule variance e.g. “Did they complete this schedule of tasks during this period?”. This does not necessarily indicate value for money; For example, what if it made more sense to move some tasks out and pull others into this period? It might have been done with excellent efficiency, yielding great value for you as the customer. Likewise, tracking task completion will only tell you if the specific tasks you originally planned to complete in the period, were completed, and it does not indicate anything about value for money or efficiency.

Another scenario to consider; your team had an emergency to attend to and was not able to support the execution of the project for a period. The contractor dutifully went on to complete tasks ahead of schedule that were not planned for the period, at excellent efficiency; however, they were not able to do as much volume of work due to your emergency. In this case, you might have disagreement about the value of the work performed in the period.

Payment upon milestone completion serves neither the customer nor the contractor very well. It might feel like accountability, but it will often be subconsciously focusing the contractor on completion of phases, rather than quality delivery. Remember; project teams are accountable to you, as well as their internal management, who are probably on a monthly financial reporting schedule with their senior leadership. Holding off delivery of tasks or re-ordering them to better execute will be penalized if milestone-based payment is utilized, as with duration based payment.

Earned Value Management Approach

The earned value management approach would require “% work complete” and remaining hours estimates, holding the contractor accountable to their reported progress. Regardless of the order of completion of tasks per the original schedule, Earned Value Management techniques ensure that you can track value for your money and true schedule performance. It is human nature to over-estimate % work complete, that is unless you consistently track estimates and hack the lessons learned through the implementation of EVM techniques. If you find that % work complete was over reported during an initial phase of work, say a 2-week period, the next period will correct for that. This way, you know far sooner that over-reporting has occurred, and you’re not waiting for a whole several months long milestone, to find out.

In short, the correct use of EVM techniques will reduce the incidence of over reporting of % work complete in a much shorter time frame. Teams very quickly correct for errors once EVM is implemented and maintained.

Example:

The above table shows a simple example of some project metrics to consider:

Planned Value would be based on the baseline project plan/schedule, which for “Period 1” is supposed to be $100,000.
Actual Cost would be the costs reported to the customer by the contractor/project team and directly relates to billable hours and materials expended during the period. For “Period 1” this came out to be $120,000 of costs.
Earned Value is the value of the work/materials expended per the baseline schedule. E.g. if it was originally estimated that Tasks 1 through 10 would cost $100k, in period 1, this table is saying it was all completed or “earned”, and then $3,000 of additional work was delivered.
Milestone Completion pertains to the amount of value assigned to the “Milestones” that were defined in the original baseline plan.
CPI and SPI are calculated as per the Earned Value Management Pt.1 article.

Now, lets see how this could play out in the real world.

Based on the discussions I’ve had since the last article, many situations would see the billing follow the “Actual Cost” row, meaning that the project would have expended all funds in the 4th period. In the case of a fixed price project, they would have hit the total amount of cost and then would be working for “free” until the project is delivered. This is unlikely to have the project team in the right mindset for quality delivery.
Another option would be milestone completion. This would likely see no revenue in the 2nd & 4th periods, based on “earned value”.
A duration-based approach would see payments of $124,000 each of the 4 periods. If this is a Not to Exceed or fixed price project, the final 5th period caused by the project being behind schedule, would be unpaid. Again, not great for either side of the transaction!
Earned Value would yield payments exactly proportional to the amount of value delivered to the customer and show the under-performance of the project in the first or second period, without any periods missing payment.
CPI and SPI do not show the same metric, as seen in the table above. They are useful in their own ways, but SPI would not show the efficiency performance (or issues) we are trying to solve for.

Depending on if your project is Fixed Price, Not to Exceed, or Time & Materials, there are a myriad of different solutions. An Earned Value Management approach is a great way to ensure consistency of payments, value for money, and a relationship conducive to project success.