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					                          The Earned Value Body of Knowledge
                                    Quentin W. Fleming, Primavera Systems, Inc.
                                    Joel M. Koppelman, Primavera Systems, Inc.

Introduction                                                   a fixture in Federal procurements for almost three
The earned value concept was conceived by industrial               Then in 1995, private industry as a part of a Na-
engineers working in American factories over a century         tional Defense Industrial Association (NDIA) initiative
ago. The concept was used to manage production costs           took a more proactive role in the reengineering of
of commercial industrial products.                             earned value management as a part of the C/SCSC. The
   These industrial engineers were astute enough to            NDIA procurement subcommittee redefined the crite-
know that the relationship between their “planned fac-         ria, which was formally issued as the Earned Value
tory standards” versus their “actual factory hours” did        Management System in December 1996. Then in 1998,
not provide them with a measurement of the true costs          as a direct result of this NDIA initiative, the ownership
for the products they were producing. Today, many ex-          of EVMS was transferred from the United States Gov-
ecutives still do not understand this critical distinction     ernment into private industry where it rightfully be-
and are often content to compare their planned costs           longs. In July 1998, the Earned Value Management Sys-
with the actual costs and call this their cost management      tem became the American National Standards Institute
approach.                                                      (ANSI/EIA) Standard #748.
   Only when the industrial engineers converted their              In parallel with these actions, the Congress of the Unit-
“planned factory standards” into “earned standards” and        ed States enacted three new laws . (the Government Per-
then related these “earned standards” against the “actual      formance Results Act of 1993, the Federal Acquisition
hours” did they begin to focus on the true cost perfor-        Streamlining Act of 1994, and the Information Technolo-
mance. The industrial engineers made this critical distinc-    gy Management Reform Act of 1996) that now require
tion over a hundred years ago, and the modern practi-          some form of earned value performance measurement on
tioners of earned value performance management still base      all federally-funded projects. Also, the United States Of-
their technique on the legacy left them by these early in-     fice of Management and Budget (OMB) has further man-
dustrial pioneers.                                             dated earned value measurements on all federally-funded
                                                               projects beginning with the Federal Fiscal Year 1998 Bud-
                                                               get. Earned value project management is now well en-
From “PERT/Cost” to “C/SCSC” to “EVMS” to                      trenched as an official policy in the United States Federal
“ANSI/EIA Standard #748”                                       Government’s procurements.

The earned value concept was originally adapted to the
management of single projects by the United States Air Force   The PMI College of Performance Measurement
on their Minuteman Missile Program in the early 1960s.         (CPM)
Earned value was first introduced to American industrial
firms as a part of the PERT/Cost technique in 1962.            In 1985, a professional organization was formed for the
   By 1967, the United States Department of Defense            purpose of working closely with the Department of
(DOD) formally endorsed the use of earned value man-           Defense (DOD) in the implementation of earned value on
agement on all new major systems acquisitions, and it has      major systems applications. It was called the Performance
been consistently applied by the United States Govern-         Management Association (PMA). Thirteen years later, the
ment and other foreign governments for over thirty years.      membership of the PMA organization voted overwhelm-
   The United States Department of Defense (DOD) ini-          ingly to amalgamate their organization within the Project
tially defined earned value management in the form of          Management Institute (PMI) in order to broaden the
their Cost/Schedule Control Systems Criteria (C/SCSC)          applications of earned value management to all projects.
for all new systems acquisitions anytime they used a cost      On 15 March 1999, the consolidation was completed
or incentive type contract, that is, anytime the DOD un-       and the PMA organization became known as the “PMI
derwrote the risks of cost growth. The C/SCSC have been        College of Performance Measurement (CPM).”

             Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium
                     Philadelphia, Pennsylvania, USA: Papers Presented October 10 to 16, 1999

   At their fifteenth annual international meeting in May    performance data early in a project’s life cycle. Such data
1999, the new PMI-CPM organization held planning             can be used to both assess the current status of projects and
meetings to discuss what role they would hope to play in     to predict the project’s final cost and schedule require-
the broadening of earned value management to applica-        ments. We refer to these findings as the beginnings of an
tion to all projects. This committee set these three goals   “earned value body of knowledge.”
for themselves:                                                 The DOD’s hypothesis: As early as the 15 percent com-
• First, to encourage the PMI Standards Committee to         pletion point in any project, the actual earned value per-
   place added emphasis on earned value management           formance results can be used to predict the final costs and
   within PMI’s A Guide to the Project Management Body       time requirements within a predictable range of values.
   of Knowledge (PMBOK™ Guide), by citing it as a scal-      The physical work performed can be used to accurately
   able tool in the management of all projects, not simply   forecast final project results … as early as 15 percent into
   limited to major systems projects                         a new project!
• Second, to encourage the PMI Standards Committee to           These empirical conclusions are based on the following
   officially recognize and embrace in some way the          assumption: If a project has experienced an overrun of
   Earned Value standard ANSI/EIA #748                       costs for the work it has accomplished to date, that over-
• Third, for the PMI-CPM organization to develop an          run cannot be recovered on the tasks remaining to be per-
   Earned Value Body of Knowledge position as an adjunct     formed. In fact, the DOD concludes, overruns have a ten-
   to the broader PMBOK™ Guide.                              dency to get progressively worse, not better, with the
   The new PMI-CPM organization was deeply encour-           passage of time.
aged by the December 1998 PM Network article entitled           Without attempting to explain the reasons for this pre-
Updating a Guide to the Project Management Body of           dictable pattern, they suggest that there is a natural incli-
Knowledge by Cynthia Berg and William Duncan, which          nation for any project to provide better planning for the
stated in part:                                              near-term work. And as the planning extends into later
                                                             periods, it becomes progressively more vague, containing
     We plan to give more visibility to the importance       less precise definition. Thus, cost and schedule perfor-
     of performance reporting by moving the                  mance trends will likely deteriorate as the project contin-
     Performance Reporting process (Section 10.3)            ues through to its completion.
     from Project Communication Management                      We will cite just three broad “knowledge findings,”
     (Chapter 10) to Project Integration Management
                                                             which seem to the authors to represent the most signifi-
     (Chapter 4).
                                                             cant discoveries on the use of earned value project man-
                                                             agement (Fleming and Koppelman 1996, chapter 3).
   This presentation will discuss the unofficial body of
knowledge that has been empirically accumulated in the
use of earned value management since the early 1970s. A      Body of Knowledge Finding #1
series of fundamental project management principles have
emerged that make the use of the technique as a valuable     Earned value provides organizations with the opportuni-
tool … for all projects.                                     ty to employ a single, integrated management control
                                                             system on all their projects. The technique provides a
                                                             method to integrate the project’s technical scope of work
The Earned Value Body of Knowledge                           with the contractual requirements, scheduling, and the
                                                             budgeting process. Earned value applications allow orga-
Since 1977, selected individuals working within the          nizations to utilize the Management by Exception (MBE)
United States Department of Defense Pentagon have sys-       principle by focusing management’s attention exclusively
tematically compiled actual performance results on over      on deviations from their integrated project plans.
seven hundred acquisition projects on which the earned          One of the primary objectives of the DOD when they
value technique has been applied. Some rather impres-        issued the earned value criteria was the need to have all
sive findings have been formulated based on the consis-      participants work from a common management control
tency and predictability of earned value performance         system. They wanted management at all levels to employ
data. These empirical results are hard for anyone to         a single system that would accurately monitor perfor-
ignore (Beach 1990).                                         mance during the full life cycle of a project. Earned value,
   A pattern of consistent and predictable performance has   with its standard performance indices, provides manage-
emerged which suggests that earned value provides accurate   ment at every level with a common language.

             Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium
                     Philadelphia, Pennsylvania, USA: Papers Presented October 10 to 16, 1999

  Exhibit 1.

                                Traditional Matrix                       Earned Value

                                    Project                                Project
                                    Manager                                Manager

                                 Engineering =                CAP             CAP          CAP
                                Technical Scope

                                  Contracts =
                                  Statement of                      Control Account Plan
                                                                      1. Technical Scope
                                                                      2. Budget
                                  Finance =                           3. Schedule
                                Budget Controls

                                   Planning =

   While most management theorists may openly profess          and then decompose a project into manageable subparts in
support for an integrated management approach, seldom          an integrated manner. At each of the lowest level WBS ele-
in practice does integration actually happen. The contract     ments, the technical scope of work, the budgeted resources,
administrators will define project requirements one way,       and the scheduled timeframe for completion will be inte-
the technical community another. Cost estimators will de-      grated, taking the form of Control Account Plans (CAPs).
velop their values in another format, and, finally, the        The CAP is the lowest point at which project performance
scheduling community will have their own unique inter-         will be measured. The summation of all CAPs will consti-
pretation of the project. Thus, the same project will in-      tute the total project. Exhibit 1 displays CAPs on the right
variably have multiple interpretations of the same re-         side. A project employing earned value consists of the sum
quirements, based on the unique perspective of each of         of its CAPs.
the functions individuals represent.                              Perhaps the most significant benefit in the use of earned
   This approach to project management is displayed in         value performance measurement is that it allows for the
Exhibit 1. On the left side is shown traditional matrix        employment of the Management by Exception (MBE)
management, with each function taking its own interpre-        principles. Management need not continuously oversee
tation of requirements. By contrast, an integrated earned      the effort of all tasks being performed on a project.
value approach is displayed on the right side.                 Rather, once a baseline performance plan has been ap-
   A nonintegrated approach presents great difficulty for      proved and put into place, management will merely focus
management while attempting to accurately measure pro-         on any deviations from the authorized plans. If all tasks
ject performance as completion moves from zero to 100          are being performed in accordance with the plans, no
percent. Each unique function will have its own interpre-      management actions will need to be taken.
tation of its status, which may not match the interpreta-
tions made by others. Most projects today are unfortu-
nately defined and subsequently performed on a                 Body of Knowledge Finding #2
nonintegrated basis.
   From its inception, earned value projects have been de-     Earned value project management provides accurate
fined with the use of a device called the Work Breakdown       measurements of the true cost and schedule performance
Structure (WBS). The WBS serves a number of purposes;          for projects, taking the form of the Cost Performance
most importantly, it provides a method to completely define    Index (CPI) and the Schedule Performance Index (SPI).

             Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium
                     Philadelphia, Pennsylvania, USA: Papers Presented October 10 to 16, 1999

These two indices provide an accurate assessment of the           that can be used in conjunction with the CPI as a final po-
true status of a project.                                         sition predictive tool.
    As early as at the 20 percent completion point of a pro-
ject, the cumulative Cost Performance Index has been
found to be stable, and the measurements provided can be          Body of Knowledge Finding #3
used not only to assess the true cost performance status
but also to statistically predict the final range of costs for    The two earned value performance indices, the Cost
a given project. Incremental performance data can be valu-        Performance Index (CPI) and the Schedule Performance
able in assessing current project status but have question-       Index (SPI), can be used both independently and collec-
able use as a trend-forecasting tool. Only cumulative CPI         tively to forecast a range of statistical final cost estimates,
data has been found to be viable as a predictive tool, as         thus providing an “early warning” signal in time for pro-
will be discussed below.                                          ject managers to take corrective action and avoid unac-
    Individuals at the United States Air Force Institute of       ceptable results.
Technology (AFIT) have been instrumental in extending                One of the most compelling reasons to employ earned
the scientific knowledge that began in the DOD. One sig-          value management is its ability to provide management
nificant study provided insight into these findings: “Using       with realistic final cost estimates for the project. Manage-
data from a sample of completed Air Force contracts …             ment corrective actions, if taken early, can often avoid ad-
the cumulative CPI is stable from the 20 percent comple-          verse results.
tion point regardless of contract type, program, or ser-             Prior to the introduction of earned value, it was not un-
vice” (Christensen 1993).                                         common for project managers to paint an optimistic pic-
    Thus, this study scientifically verified the utility of the   ture of the status of their projects, then expend all of the
cumulative CPI, based on its stability as a performance           authorized funds, and later come to the harsh realization
metric. No longer must management wait until all the              that only part of the project work had been achieved.
funds have been spent to conclude that additional funds           Management had the unenviable task of either investing
will be needed in order to complete a project.                    more money to complete the job or canceling the effort
    The CPI is determined by dividing the value of the            outright.
work actually accomplished (the earned value) by the ac-             It wasn’t necessarily that project managers wanted to
tual costs it took to accomplish the physical earned value.       deceive their management—such moves are not career en-
    Still another important advantage of employing an             hancing. Most likely they did not actually know the true
earned value system is its ability to quantify how much of        cost status of their projects.
the originally scheduled work has been physically per-               Today, many software development projects are expe-
formed, in any point in time. The central issue: Is a given       riencing spectacular overruns of cost resources and sched-
project on its schedule, ahead of schedule, or behind the         ules. Management often has no choice but to provide ad-
schedule they set out to accomplish? Such information is          ditional money to complete a critical project, but it is
particularly useful to projects in relating against their crit-   often a lesser final project than was originally planned.
ical path position. Both indicators (the SPI and Critical         The term is called “dropping features.” Dropping features
Path Method) used in concert provide an accurate reflec-          late, when all of the initial money has been spent, results
tion of the true schedule position for any project.               in less final features and a reduced customer satisfaction.
    Even though experiencing a negative SPI may or may               What if management had the means to quantify the ul-
not reflect a project’s critical path, falling behind in per-     timate cost of a project from as early as the 15 percent
forming the planned work is one of the first indicators of        completion point? There is truly a need for earned value
potential problems. Project managers do not like to get be-       applications as a cost risk mitigation tool. This concept is
hind their scheduled work … period.                               displayed in Exhibit 2, reflecting a range of “low-end” and
    A natural tendency when one falls behind of the               “high-end” final cost forecasts. Accurate predictions of fi-
planned work is to utilize unplanned resources to catch           nal costs can be made as early as 15 percent into a new
up, such as overtime, additional people, and so on. Such          project.
actions have the effect of doing the same work as was                Because the cumulative Cost Performance Index (CPI)
originally planned, but with the use of greater resources.        stabilizes early, as early as the 15 to 20 percent completion
    The SPI is determined by dividing the value of the work       point, it is a useful device to quickly forecast a “low-end”
physically completed (the earned value) by the value of the       estimate of final costs at completion. Since the cumulative
work originally scheduled (the planned value) in any point        CPI has been found to stabilize early, it is reasonable to as-
in time. The SPI is a valuable project performance indicator      sume that the project will complete all the remaining work

              Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium
                      Philadelphia, Pennsylvania, USA: Papers Presented October 10 to 16, 1999

  Exhibit 2.

                                                               Low-end               Earned Value
                                                                                     Cost Estimate
                                                                          Project Budget



at about the same efficiency factor. This is a valid as-         management. If the values are unacceptable to manage-
sumption, proven by studies of hundreds of projects.             ment, steps can be taken to mitigate the final results.
    The Department of Defense has such confidence in the
reliability of the cumulative CPI as a predictive tool that,
since 1991, they have included a requirement in their ac-        Conclusion
quisition policy document that states that service project
managers must justify any final cost forecast lower than         Earned value performance measurement has been
that produced with this CPI formula: Justify the Program         demonstrated to be a valuable tool in the management of
Manager’s best estimate if the contract is at least 15 per-      any project. Unfortunately, most of the documented
cent complete, and the estimate is lower than that calcu-        applications have taken place on major United States
lated using the cumulative cost performance index (De-           Government projects. These findings have formed what
partment of Defense 1991).                                       these authors are calling the “earned value body of
    There is another respected technique used to forecast        knowledge.”
a “high-end” range of final cost results, which combines            However, simplified applications of earned value are
both the cumulative CPI with the cumulative SPI. The re-         starting to emerge on many commercial projects in all sec-
sults of this method are also displayed in Exhibit 2, as the     tors. The attraction to the use of the earned value tech-
“high-end” forecast.                                             nique is that it provides accurate measurements of perfor-
    The logic behind using both the cost efficiency factor       mance to the project manager as early as 15 percent into
(CPI) and the schedule factor (SPI) is also quite sound.         a new project. With an accurate “early warning” signal, ac-
Whenever a project falls behind in the work it set out to        tions can be taken by a project manager to avoid unac-
do, to a late schedule position, there is a natural ten-         ceptable final cost and schedule outcomes.
dency to take actions to catch up on the late effort.
Management will often put everyone on overtime or
bring in added people to catch up on the late work. The
result is to spend more money to do the same original                Beach, Chester Paul, Jr. A-12 Administrative Inquiry. Studies by
job. But such actions merely deteriorate the cost effi-          Gaylord E. Christle et al. from the Office of the Under Secretary of
                                                                 Defense for Acquisitions. Documented in the Department of the
ciencies (CPI) further.                                          Navy memorandum of November 28, 1990, p. 6. This study cited
    With the use of these two earned value indices, a pro-       “more than 400 programs since 1977.” Updates of this same study
ject can quickly estimate the final cost requirements in or-     have increased the sampling to over 700 programs without change
der to compare against the budget authorization from             to the conclusions.

             Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium
                     Philadelphia, Pennsylvania, USA: Papers Presented October 10 to 16, 1999

    Christensen, David S. 1993. Cost Performance Index Stability.
National Contract Management Association Journal, 25/1, 7.
    Department of Defense. Defense Acquisition Management Doc-
umentation and Reports. Manual, DOD 5000.2-M, under Secretary
of Defense for Acquisitions, February 1991, p. 16-H-6.
    Fleming, Quentin W and Joel M. Koppelman. 1996. Earned
Value Project Management. Upper Darby, PA: Project Management

              Proceedings of the 30th Annual Project Management Institute 1999 Seminars & Symposium
                      Philadelphia, Pennsylvania, USA: Papers Presented October 10 to 16, 1999