3.3 – EARNED VALUE PROJECT MANAGEMENT
3.3.1 Basics of Earned Value Project Management
Project Management is often defined as the integrated management and control of Time, Cost, Resources and Quality for the successful on time and on budget completion of projects. Traditional approaches to PM ranged from simple Gantt Charts which help in representing the work to be done on a time scale to techniques likes CPM and PERT that addresses the needs of deterministic and probabilistic scheduling. All of these techniques tend to be used primarily for managing time. Cost is often measured independently by the accountants. This separation between cost and time is often the cause of project failure because the executing team is often unable to detect cost overruns until they are well past the point where they can change the outcome of the project.
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3.3.2 Illustrative Explanation
Earned Value Project Management (EVPM) is a concept that helps Project Managers seamless link Time and Cost for more effective control. Despite the difficult sounding title and the typical jargon associated with EVPM the basic idea is very simple and can be used effectively in a wide variety of situations. The best way to under stand EVPM is to walk through a sample project, so I am going to take you through a software project. Let’s say we are working on the ERMS (enterprise resource management system) that has 10 deliverables/modules each to be completed in one month with a budget of 10 Lac Rupees each. The total project span works out to 10 months at a budget cost of Rs. 100 Lacs (Rs. 1 crore).
We are at the end of the first three months and the Project Manager is busy preparing his project report. He starts up by reviewing progress and finds that two deliverables are fully complete while the third one is 80% complete. He checks with accounts and finds out that that a total of Rs. 28 Lacs have been spent so far. With this information he is ready to assign values to the three basic variables required to perform EVPM. These are as follows-
18.104.22.168 BCWS / Planned Value (PV)
Budget Cost for Work Scheduled, also known as ‘Planned Value’ in the amount of money that should have been spent at this point in the life of the project if the project was proceeding as per plan. It is time phased budget baseline (figure). It is the approved budget for accomplishing the activity, work package or project related to the schedule. It can be viewed as the value to be earned as a function of project
Work accomplishments up to a given point in time . In our case we had planned to complete three deliverables in three months so we should have spent Rs. 30 Lac. A word of caution here, most projects don’t’ proceed in a linear fashion (i.e. total budget/total duration in months). Correct BCWS values can be obtained from a resource loaded project plan that takes in account the actually work to be done in each period. Budget Cost for Work Scheduled is also called ‘Planned Value’.
22.214.171.124 Budget at Completion (BAC)
This is the total budget baseline for the activity, work package or project. It is the highest value of PV as shown in Figure-1 i.e. 100 Lac.
126.96.36.199 ACWP / Actual Cost (AC)
This is the cumulative AC spent to a given point in time to accomplish an activity, work-package or project . Actual Cost for Work Performed is the amount of money that we have actually spent on the project. Accounts have told us that we have spent Rs. 28 Lac.
188.8.131.52 BCWP / Earned Value (EV)
This is the cumulative earned value for the work completed up to a point in time. It represents the amount budgeted for performing the work that was accomplished by a given point in time . To obtain EV of an item, simply multiply its total budget by its completed proportion. Budget Cost for Work Performed is the assessment of the value of work that we have completed. Think of this as the worth of the work that we have completed, so if we had completed three deliverables we would have
Completed 30 Lac Rupees worth of work. But we have only fully completed two deliverables so we have Rs. 20 Lac and we have 80% of the third deliverable. Partial completion is a tricky issue, because partial estimates generally vary from person to person depending on how optimistic or pessimistic they are. There are rules of the thumb (Heuristics) to deal with this situation. The common ones are 0-100 (give no credit till the task is complete), 20-80 (give 20% credit when the task is underway and the remaining 80% when it is completed), 50-50 (give 50% credit for starting the task and the balance on completion). The selection of method is up to you, but you need to ensure that you will use the same measure across the project for all tasks. In our case let’s say we go with the 50-50 rule, so we’ll give Rs. 5 Lacs credit for the third deliverable which brings the BCWP to Rs. 25 Lacs (20+5). Note that BCWP is also referred to as the Earned Value (EV).
Let’s start by calculating the two basic measures of performance SPI and CPI -184.108.40.206
220.127.116.11 Schedule Performance Index (SPI)
Schedule Performance Index is an indicator for accessing our performance relative to the plan. SPI = BCWP/BCWS = 25/30 = 0.83. We know we are behind schedule, what SPI is telling us is that we have only completed 83% of the work that we originally planned to complete.
18.104.22.168 Cost Performance Index (CPI)
Cost Performance Index shows us how much value we are getting for each Rupee that we spend on the project. CPI= BCWP/ACWP – 25/28 = 0.89. We are over budget because, for producing Rs. 25 Lacs of work we have spent Rs. 28 Lacs. So we are only getting 89 Paisas of value for each Rupee that we spend.
Just looking at SPI and CPI we know that we have a problem in that we are both over budget and behind schedule. A lot of work has been done on the use of SPI and CPI early in the project to predict the final outcome. Most of the work has been done in the US defense industry where researchers have looked at dozens of completed projects and tried to correlate their outcome with the status of their SPI and CPI early on during the project. Most studies show that the value of SPI and CPI when the project is only 20% complete can very accurately predict the final outcome. Using heuristics developed from these studies we can predict the following-
- Projected Project Duration = Planned Duration / SPI = 10 / 0.83 = 12 Month. So we are expecting that the project will be completed two month behind schedule,
- Projected Project Cost = Planned Cost / CPI = 100 / 0.89 = 112 Lacs. We are expecting a Rs. 12 Lacs overrun on the budget.
- Recovery Cost – This is the cost that we will incur if we need to complete the project within the originally specified time by adding additional resource to the project. Projected Project Cost = Planned Cost / CPI*SPI = 100 / 0.89*0.83 = 135 Lacs Rupees. We should be ready to exceed the budget by 35% if we want to complete the project in time.
Conventional wisdom says that your ability to change the outcome of a project is maximum at the start or the project and minimum near the end of the project. So it makes good sense to detect problems early and take action when you have room for maneuver. If you think about the 20% point intuitively, you’ll note that the any estimation errors that are leading to low CPI (i.e. budget overrun) are likely to effect the remaining activities of the project at the same rate, similarly the performance of your resources in execution is unlikely to get any better than what they have proven capable of in the first fifth of the project.
Given the importance of early detection, think about conventional project management and how little it can tell you from the fact that you have completed two deliverables and 80% of the third and spent 28 Lac Rupees, Because of this, problems often evade early detection and by the time someone detects the problem its too late in the project to do much about it i.e. in a stage where the project is controlling the project manger instead of vice versa.
3.3.4 Integrating EVM & Risk Management
In todays uncertain business environment there is understandable pressure to improve the quality of decision-making at all levels in the organization. A number of techniques have been developed to address this concern, in an attempt to introduce some rational framework to the decision-making process. Two of the leading approaches are Earned Value Management (EVM) and Risk Management (RM). These stand out from other decision support techniques because both EVM and RM can and should be applied in an integrated way across the organization. Starting at the project level, both EVM and RM offer powerful insights into factors affecting project performance.
Another key similarity between the two techniques lies in the word “management”. It is possible to conduct “Earned Value Analysis” and “Risk Analysis” to expose underlying drivers of performance. But both techniques emphasize the need to move from analysis to management, using the information to support proactive decision-making.
Consequently, both EVM and RM encourage those using the techniques to take appropriate management action based on the results, and not to stop at mere analysis. Since both EVM and RM address the same problem space (performance of projects, programs, portfolios and businesses), and both provide management information to provide a basis for decisions and action, there has been considerable interest in the possibility of developing a combined approach to create synergistic benefits.
Currently EVM and RM operate as parallel coexisting processes without systematic integration (although good project managers may intuitively link the two in practices). Much of the discussion to date on the relationship between EVM and RM has been rather theoretical, addressing the key principles underlying the two techniques. The objective is to analyze steps that can be implemented to combine EVM and RM in order to gain maximum benefit for projects and the organization.
22.214.171.124 Weakness in EVM and RM
The strength of EVM & RM has already been described, as their proponents seek to encourage wider update & use. Each technique however has atleast one key weakness which presents a significant danger to those relying on the output to support strategic or tactical decision-making.
For EVM, one of the main perceived weaknesses is its reliance on a key assumption, that future performance can be predicted based on past performance. Calculated performance measures (CPI, SPI, CV, SV etc) are used to predict forwards and estimate cost at completion or overall duration.
Unfortunately there is no guarantee that the basic EVM assumption will be true, and it is likely that the future will deviate from that predicted by simply extrapolating from past performance. The strength of EVM lies in its rigorous examination of what has already occurred on the project, using quantitative metrics to evaluate project past performance. It goes on however to predict future performance by extrapolating from the past. But it is not possible to drive a car by only looking in the rear-view mirror. A forward view is also required, and this Is what RM offers.
While project planning looks at the next steps which lie immediately ahead, RM has a horizon further into the future, It acts as forward-looking radar, scanning the uncertain and unclear future to identify potential dangers to be avoided, as well as seeking possible additional benefits to be captured. However this undoubted strength of being resolutely and exclusively future-focused is also one of the key weaknesses in RM. Any thing which occurred in the past is of little or no interest to the risk process, since there is no uncertainty associated with past events. RM starts with today’s status quo and looks ahead. How the project reached its current position is not relevant to the risk process, unless one is seeking to learn lessons to assist RM on future projects. As a result RM as commonly implemented often lacks a meaningful context within which to interpret identified risks, since it has no means of capturing past performance and feeding this into the decision-making process.
If EVM is weakened by assuming that future performance can be predicted from past performance, and if RM is weakened by looking only forwards with no real awareness of the past, a useful synergy might be obtained if a combined EVM-RM approach were able to address these weaknesses. Combining a rear-view mirror with forward-looking radar would use the strengths of complementary approaches to compensate for the weaknesses inherent in using each alone. Consequently it is possible to produce significant benefits by using RM to provide the forward view required by EVM, and by using EVM to provide the context required for RM.
126.96.36.199 Synergies from a Combined Approach
Given the common aims of EVM and RM to examine and expose drivers of project performance in order to focus management attention on achievement of objectives, and given their differing perspectives towards the past and the future, a number of areas of possible synergy exist between the two techniques. The steps required to implement these synergies are :
- Creating the baseline spend plan
- Predicting future outcomes
- Evaluating risk process effectiveness
1. Creating the baseline spend plan
The foundation for EVM is the baseline plan of expected spend over time, creating the profile of “Budgeted Cost of Work Scheduled” (BCWS) or “Planned Value” (PV) against which project performance is measured. This baseline is derived from a costed and resourced project plan, including fixed and variable costs arising from financial and human resources. The BCWS profile is typically presented as a cumulative curve, or S-curve, as in Figure below.
The baseline BCWS exists as the benchmark against which project performance will be measured. However one of the first things a project manager learns is that reality will never precisely match the project plan. As soon as work starts, there are variations in productivity, resource and information availability, delivery dates, material costs, scope etc. This is why a rigorous change control process is vital to successful project management. Although not all changes can be foreseen before the project starts, it is possible to assess the degree of uncertainty in a project plan, in both time and cost dimensions. This is the domain of RM. One of the first contributions that RM can make to EVM is to make explicit the consideration of uncertainty and risk when constructing the baseline BCWS.
By undertaking a full risk assessment of the project plan before the project starts, addressing uncertainties in both time and cost, it is possible to evaluate the degree of risk in the baseline project plan. Quantitative risk analysis techniques are particularly useful for this, especially the use of Monte Carlo simulation on integrated models which include both time and cost uncertainty. These risk models take account of variability in planned values, also called “estimating uncertainty” (for example by replacing planned single-point estimates of duration or cost with three-point estimates or other distribution types), and they should also model the effect of discrete risks to reflect their assessed probability of occurrence and the subsequent impact on project time and/or cost. Both threats and opportunities should be addressed in the risk model, representing the possibility of exceeding or failing to meet the project plan.
The results of the risk analysis allow the best case project outcome to be determined, representing the cheapest and. quickest way to reach project completion. Similarly a worst case profile can be produced, with highest cost and longest duration. All other possible outcomes are also calculated, allowing the “expected outcome” within this range to be identified. These can be shown as a set of three related S-curves, as in Figure below, which take account of both estimating uncertainty (variability in planned events) and discrete risks (both positive opportunities and negative threats).
The ellipse at the end of the curves represents all possible calculated projects outcomes (90% confidence limit), with the top-right value showing worst-case (highest cost, longest schedule), the bottom-left giving best-case (cheapest and Quickest), and the centre of gravity of the ellipse being at the expected outcome of project cost and duration.
The existence of this set of possible project outcomes raises the question of where the baseline spends profile for EVM should be set. The recommendation from a combined approach to EVM and RM is to use the expected value cumulative profile from a quantitative time-cost risk analysis as the baseline for BCWS. In other words, the central S-curve in Figure 2 would be used as the baseline instead of the S-curve in Figure 1. This ensures that the EVM baseline fully reflects the risk associated with the project plan (including an appropriate amount for contingency which is automatically incorporated in the risk analysis results), rather than measuring performance against the raw “all-goes-to-plan” plan.
2. Predicting future outcomes
Both EVM and RM attempt to predict the future outcome of the project, based on information currently known about the project. For EVM this is achieved using calculated performance indices, with a range of formulae in use for calculating Estimate At Completion (EAC). Most of these formulae start with the Actual Cost of Work Performed to date (ACWP, or Actual Cost AC), and add the remaining budget adjusted to take account of performance to date (usually using the Cost Performance Index CPI, or using a combined Performance Efficiency Factor based on both CPI and SPI). These calculations of the Estimate To Complete (ETC) are used to extrapolate the ACWP plot for the remainder of the project to estimate where the project might finally end (EAC), as shown In Figure 3 below.
RM predicts a range of possible futures by analyzing the combined effect of known risks and unknown uncertainty on the remainder of the project. When an integrated time-cost risk model is used, the result is a set of S-curves similar to Figure 2, but covering the uncompleted portion of the project, as In Figure 4.
It is also possible to use risk nalysis results to show the effect of specific risks(threats or opportunities) on project performance as measured by earned value. Since the risk analysis includes both estimating uncertainty & discrete risks, the model can be used to perform “what-if” scenario analysis showing the effect of addressing particular risks.
3. Evaluating risk process effectiveness
A risk can be defined as “any uncertainty that, if it occurs, would have a positive or negative effect on achievement of one or more project objectives”. RM aims to address this uncertainty proactively in order to ensure that project objectives are achieved, including completing on time and within budget. As a result, if RM is fully effective, actual project performance should closely match the plan.
Since EVM performance indices (CPI, SPI) measure deviation from plan, they can be used to indicate whether the risk process is being effective in addressing uncertainty and controlling its effects on project performance.
- If CPI and/or SPI are below 1.0 indicating that project performance is falling short of the plan, then one of the most likely underlying causes is that the risk process is failing to keep the project on course. An Ineffective risk process would fail to avoid adverse risks (threats) proactively, and when threats materialize into problems the project incurs delay and/or additional cost. Either the risk process is not identifying the threats, or it is not preventing them from occurring. In this situation, management attention should be directed to the risk process, to review its effectiveness and consider whether additional resources are required, or whether different techniques should be used.
- Conversely, if CPI and/or SPI are above 1.0 indicating that project performance is ahead of plan, the risk process should be focused on exploiting the opportunities created by this situation. Best-practice RM addresses both threats and opportunities, seeking to minimize threats and maximize opportunities. When EVM indicates that opportunities exist, the risk process should explore options to capture them and create additional benefits for the project.
- It should also be noted that if CPI and/or SPI far exceed 1.0, this may indicate other problems in the project and may not simply be due to the existence of opportunities. Typically, if actual performance is much greater than expected or planned, this could indicate poor planning or incorrect scoping when setting up the initial baseline plan. If this highly anomalous behavior continues, a baseline re-planning effort should be considered, which of course will involve the need for further risk management.
- Similarly if CPI and/or SPI are well below 1.0, this may not simply be due to the impact of unmanaged threats, but may indicate problems with the baseline plan or scope. Figure 5 illustrates the relationship between the values of EVM indices (CPI and/or SPI) and RM process effectiveness.
The key to using EVM indices as indicators of RM effectiveness is to determine appropriate thresholds where action is required to refocus the risk process. Clearly some variation of EVM indices is to be expected as the project unfolds, and it would not be wise to modify the risk process in response to every small change in CPI &/or SPI. However if a trend develops & crosses the thresholds of “common variance”, action should be considered. Figure 6 illustrate this, with the thresholds of “common variance” for CPI &/or SPI set at = 0.9 and =1.25.
A further “warning threshold” is set at 0.75, suggesting that an adverse trend is developing and preparatory steps should be taken. The thresholds of 0.75, 0.9 and 1.25 used in Figure 6 are illustrative only, and organizations may be able to determine more appropriate threshold values by reviewing historical trend data for CPl and SPI, and identifying the limits of “common variance” for their projects.
Plotting the trend of CPI and SPI over time against such thresholds also gives useful information on the type of risk exposure faced by the project at any given point. For example Figure 6 Indicates that the project schedule is under pressure (SPI trend is consistently below 1.0), suggesting that the risk process should focus on addressing sources of time risk. The figure also suggests that cost savings are possible which might create opportunities that can be exploited, and the risk process might be able to maximize these. These recommended action types are illustrated in Figure 7, corresponding to the following four situations:
- Both CPI and SPI high (top-right quadrant), creating opportunities to be captured
- Both CPI and SPI low (bottom-left quadrant), requiring aggressive action to address threats
- High SPI but low CPI (top-left quadrant), requiring focused attention to cost risk, with the possibility of spending additional time to address
- High CPI but low SPI (bottom-right quadrant), where attention should be paid to addressing schedule risk, and cost trade-offs can be considered
Figure 7 also suggests that if either CPI or SPI (or both) remain abnormally high or low, the baseline plan should be re-examined to determine whether the initial scope was correct or whether underlying planning assumptions were unfounded.
It is important to note that these action types should be viewed only as 1st options, since other considerations may lead to different actions. For example in projects with high schedule-constraints (e.g. product launch, event management etc), the trade-off between time & cost may be prioritized differently than in cost-constrained projects.
Both Earned Value Management (EVM) and Risk Management (RM) seek to improve decision-making by providing a rational framework based on project performance. EVM examines past performance against clearly-defined quantitative metrics, and uses these to predict the future outcome for the project. RM looks ahead to identify and assess uncertainties with the potential to affect project performance either positively or negatively, and develops responses to address each risk proactively. Both techniques share a focus on project performance, and have the same purpose of developing effective actions to correct unwelcome trends in order to maximize the Likelihood of achieving project objectives. One (EVM) does this by looking back at past performance as an indicator of likely future performance. The other (RM) looks ahead at possible influences on future project outcomes. These two approaches are not in conflict or mutually exclusive. Indeed their commonalities imply a powerful synergy, which is available through combining the complementary strengths of each technique and using insights from one to inform the application of the other (as summarized in Table 5).
1. Creating the baseline spend plan (BCWS/PV)
- Develop costed WBS to describe scope of work, without hidden contingency
- Produce fully costed and resourced project schedule
- Assess estimating uncertainty associated with initial time/cost estimates
- Perform risk identification, risk assessment and response development
- Quantify time and cost risk exposure for each risk, taking account of the effect of agreed responses
- Create integrated time/cost risk model from project schedule, reflecting both estimating uncertainty (via 3-point estimates)
- Select risk-based profile as baseline spend profile (BCWS/PV); it is most common to use the “expected values”, although some other confidence level may be selected (say 80%)
2. Predicting future outcomes (EAC)
- Record project progress and actual cost spent to date (ACWP), and calculate earned value (BCWP)
- Review initial time/cost estimates for activities not completed, to identify changes, including revised estimating uncertainty
- Update risk identification, assessment and quantification, to identify new risks and reassess existing risks
- Update integrated time/cost risk mode! with revised values for estimating uncertainty and discrete risks, taking account of progress to date and agreed risk responses
- Select risk-based calculation as estimate of final project duration and cost (EAC), using either “expected values”, or some other confidence level (say 80%)
- Use risk-based profile as updated expected spend from time-now to project completion
3. Evaluating risk management process effectiveness
- Determine threshold values for CPI and SPI to trigger corrective action in risk
process (or use default values of 0.75, 0.90 and 1.25)
- Calculate earned value performance indices (CPI and SPI), plot trends and
compare with thresholds
- Consider modifications to risk process if CPI and/or SPI cross thresholds,
enhancing the process to tackle opportunities more effectively if CPI and/or SPI are
high, or refocusing the process on threat reduction if they are low
- Take appropriate action either to exploit opportunities (high CPI/SPI), address threats (low CPI/SPI), spend contingency to recover time (high CPI/low SPI), or spend time to reduce cost drivers (high SPI/low CPI)
Consider need to review initial baseline, project plan or scope if CPI and/or SPI
persistently have unusually high or low value
Table-5: Summary of steps to integrate EVM and RM
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