What is the Health of My Project? The Use and Benefits of Earned Value
We all know about the three monkeys: See No Evil, Hear No Evil, and Speak No Evil.
As project managers, our goals are to control our projects, be sure they come in on budget, and avoid any cost overruns. In order to do this, we must ignore the advice of the three monkeys. We need to see the potential for cost overruns, hear about the risks, and speak about the likelihood of failure before it actually occurs or we run out of budget.
– Budget versus actual costs.
– Project ahead of schedule versus project behind schedule.
– Being told not to worry versus spending sleepless nights worrying.
These factors have been used to manage projects in the past, yet can they alone describe the real health of a project?
In a word, no. An earned value management tool is a valuable partner when determining the answers to these and many other questions about the ongoing state of a project. Earned value fills the need when project success and the success of the company hang in the balance in this fast-paced, budget-conscious 21st century.
In a Standish Group study of software projects in both the public and private sectors, nearly 90% of the studied projects failed due to cost and time overruns. In addition, more than 33% were cancelled before they ever came to completion.
Nearly one third of the small, medium, and large companies studied experienced cost overruns of 150-200%, with project costs coming in with an average overrun of 189% of the original cost estimate.
Ten Benefits of EVMS
David Christensen’s The Cost and Benefits of the Earned Value Management Process is an interesting paper that weighs the cost of implementing earned value versus the benefits.
Likewise, time overruns experienced similar difficulties. Over one third of all the companies in the study reported time overruns of 200-300%, with the average overrun being 222% of the original time estimate (Chaos 1995).
Failure records like these can be interpreted to mean that project management tools and techniques are not being effectively used and applied. Overall, failed and challenged projects alone cost US companies and government agencies an estimated $145 billion per year.
Need a Solution?
Earned Value to the Rescue!
When faced with a new project, we want it to be successful. We’ve heard all the horror stories about cost overruns, and we want an early warning system to let us know when problems arise before it is too late to resolve the problem. We certainly don’t want history to repeat itself, so we’re in search of a solution that can help.
Earned Value Management (EVM) is a methodology that has been in use since the 1960s when the US Department of Defense adopted it as a standard method of measuring project performance. Its principles were set down as Cost/Schedule Control Systems Criteria in the DoD’s financial management orders in 1967. However, the idea has actually been in existence since the 1800s when industrial engineers wanted a way to measure performance on the factory floor.
In August of 1999, Dr. Jack Gansler, USD(A&T), signed a memorandum announcing that the Department of Defense had adopted the ANSI EVMS Standard for use on defense acquisitions. The EVMS guidelines incorporate best business practices for program management systems that have proven to provide strong benefits for program or enterprise planning and control.
The processes include integration of program scope, schedule and cost objectives, establishment of a baseline plan for accomplishment of program objectives, and use of earned value techniques for performance measurement during the execution of a program. The system provides a sound basis for problem identification, corrective actions, and management replanning that may be required (Gansler 1999).
Why Use Earned Value?
Have you ever asked yourself any of these questions?
- My actual costs are less than my budget. Is my project doing well, or is it behind schedule?
- My project’s actual costs are now higher than budgeted, and the project is only halfway complete. What’s it likely to cost at completion?
- My project manager or engineer keeps telling me not to worry about the cost overruns. The rest of the work will cost less than budgeted. Is this probable?
- Do I have the necessary staff for this new contract?
- Will labor rate and currency exchange rate fluctuations affect my project’s costs?
- How will funding cuts affect my cash flow?
- Is price or usage causing my cost variance?
If you’ve asked yourself these questions, then earned value is a tool you should seriously consider using to determine your project’s health.
My actual costs are less than my budget.
Is my project doing well, or is it behind schedule?
Earned value is a means of placing a dollar value on project status. This allows you to compare budget versus actual costs versus project status in dollar amounts.
Proper analysis of a project requires four major items: budget, earned value, actual costs, and forecasts.
All four are needed to obtain a true picture of the project’s health. If you analyze only the budget versus actual costs, an incorrect representation often results.
For example, if the project spending is 10 percent under budget, this might appear as if the project is doing very well.
However, when the project status or earned value is added to the analysis, it may then show that only half of the originally planned work has been performed. If so, we have a project that is behind schedule, and the completed work costs much more than originally planned!
Figure 1 shows actual costs as less than budgeted. Without earned value, it is impossible to tell if the actual costs are less because work is progressing at a slower rate than planned or if the actual costs are really less than what is budgeted.
How earned value is calculated?
Earned value may be defined as the sum of the budgets for the work that is complete.
Therefore, earned value for completed activities is equal to the total budget. For activities not yet begun, the earned value is zero.
In order to measure the performance of activities in progress, you must come up with a system of measurement that includes objective judgments.
The Earned Value Management System (EVMS) guidelines give a number of alternative methods for measuring the earned value of an activity in progress. These methods are often called earned value methodologies or performance measurement techniques (PMT).
The basic theory behind all of the methodologies is to multiply the budget by a percentage complete to get the earned value.
Most projects contain at least some work that is regarded as inherently immeasurable. An example of this is the work performed by a project manager or a quality control inspector.
This type of task is sometimes referred to as “level of effort” since its earned value is assumed to be the same as the amount budgeted. Basically, as long as the task is performed, then the value is earned.
Figure 2 shows the schedule variance (SV) – the difference between the earned value and the budget – and the cost variance (CV) – the difference between the earned value and the actual costs.