90_Percent_There

90 Percent There - Using Earned Value As a Leading Indicator Anonymous Abstract The required work that must be accomplished on a project to successful deliver a product or service is represented by a sequenced list of activities. They cumulatively reflect the lifecycle of a project from inception to delivery. These tasks must be carefully planned and aligned in a defined sequence with established durations to gain insight as to the time it will take and the budget that will be expended in getting the job done. Significant effort is placed on the planning activities to ensure a robust plan is established that can be achieved. However, these activities do not always occur in the manner in which they are planned. Often times, the project is fraught with problems and unexpected complications that result in unplanned deviations. Even the best laid plans can result in major upheavals for the project creating a bedlam of chaos and uncertainty. Whether the program is on-track or incurring issues that suggest a replan, it is important to have accurate insight as to what has been accomplished and what budget has been expended versus remaining to accomplish the work. The Earned Value Management System (EVMS) is a best-in-class tool used to effectively understand both the variation that has occurred and the resulting budget and schedule impacts. This paper will explore the history of EVMS, define what EVMS is, EVMS as a leading indicator of project status, address how it is used in an agile environment, and discuss potential issues or problems and possible solutions of implementing EVMS. Keywords: ACWP, ACWS, BCWP, BCWS, CPI, Earned Value Management System, EV, EVMS, SPI, PV, Are We Really 90 Percent There – Using Earned Value As a Leading Indicator Understanding where you are at and how much you have left to accomplish is a fundamental management expectation for any transformation process. Value, as defined for the customer, is inclusive of timing – it includes getting the completed product in the correct quantities when the customer needs it and at or below an agreed upon price. At periodic intervals the customer will inquire as to the status or progress of the project to garner confidence in a timely delivery that is on-budget. Periodic statusing will provide the requisite insight of project status; however, what is being presented is critical in understanding the impact of expended costs as they relate to the time consumed to get the job done. Therefore, it is critical that a realistic and accurate understanding of progress made versus the plan for schedule and dollars spent is both timely and accurate. There are many techniques that provide some insight as to where you are at in this transformation process. But are they all created equal' This paper will discuss the history of the Earned Value Management System (EVMS) and delve into EVMS as a leading indicator of project status, how it can be implemented in an agile environment, and discuss some problems encountered in trying to implement it. Method Research was obtained from the electronic database to collect and to synthesize existing scholarly journals and peer reviewed articles as the basis of research. The topics selected for the qualitative review and analysis included references to Earned Value Management System as well as implementations and potential pitfalls. References used within, and subsequently credited, are most appropriate for the subject under consideration. Discussion According to Chen (2008) most projects have an expected duration, from inception to project close-out, of twelve to thirty months. This duration can be a stressful and career altering experience for the already overworked project manager when the environment is fraught with schedule slips, broken promises, and consistent attempts to rebaseline the project in a reactive attempt to get the project on-track and reassure the customer that their needs will be met. Confidence in the ability of the supplier may be forever lost to the customer if the supplier is besieged with schedule slips, fire-fighting project management, and budget overruns. Goodwill can forever be lost threatening the company of their very opportunity to survive. However, given the right tool set project managers can gain confidence and insight all the while reassuring both their management and their customer that the project is proceeding as planned or that a replan is needed and realistic. The EVMS is one such tool that project managers can implement to gain insight as to where they actually are with respect to their plan, what is left to be accomplished, and what it has really cost them to get to where they are (Ruskin, 2004). The ability to answer the hard questions of how the schedule slip impacts cost and what the resulting impact will be allows the supplier to exude confidence that even in the unavoidable schedule slip, proactive attention to corrective actions will result in a customer with bolstered confidence and renewed goodwill. As Ruskin (2004) points out, earned value answers questions such as “Where exactly are we now'” or “Are we really 90 percent complete'” and allows proactive insight to corrective actions that must be addressed. The History of Earned Value The concept of Earned Value (EV) began as a measure of performance for industrial engineers in the 1890s (Cabri, Griffiths, 2006). A long history of cost overruns, schedule slips, and scope creep gave way to the dire need for industry to establish relationships between cost and schedule that would provide an accurate portrayal of the project’s status. The Navy revolutionized this methodology in 1962 as a part of their cost / schedule control system (Warhoe, 2004). As the Navy reaped success in utilizing this system to affect real-time corrective actions and proactive project management, they encouraged industry to embrace this revolutionary tool. A set of 32 criteria were established by the National Defense Industrial Association (NDIA) and the Program Management Body of Knowledge (PMBOK) which resulted in the system known today as the Earned Value Management System (Cabri, Griffiths, 2006). What is the Earned Value' Earned value is an objective and leading measurement indicator that incorporates information from the project schedule, the allocated budget, and the scope of work to be performed (Warhoe, 2004). From Cabri and Griffith (2006), the basic concept of this revolutionary new item in the toolkit for program managers revolves around understanding three basic aspects of the project: 1) how much was budgeted, in dollars or hours, for work scheduled to be completed by a given date, known as the Budgeted Cost for Work Scheduled (BCWS) or Planned Value (PV); 2) how much was budgeted for the work completed during a given time frame, known as Budgeted Cost of Work Performed (BCWP), or Earned Value (EV); and 3) what the actual cost of the work completed was during a given time frame, known as Actual Cost of Work Performed (ACWP), or Actual Cost (AC) (Cabri, Griffiths, 2006). These three variables share an intrinsic relationship between the planned effort and resulting cost and schedule. Many different metrics can be derived from the three basic variables of BCWS, BCWP, and ACWP (Cabri, Griffiths, 2006). From Cabri and Griffiths (2006), a list of commonly used metrics that are derived from the basic formulas are contained in Table 1: Table 1. Earned Value Metrics Cost Variance (CV) | EV – AC orBCWP – ACWP | Difference of Earned Value (EV) and the cumulative Actual Costs (AC) | Schedule Variance (SV) | EV – PV orBCWP - BCWS | Difference of Earned Value (EV) compared to Planned Value (PV) | Cost Performance Index (CPI) | EV / AC orBCWP / ACWP | A value < 1.0 indicates a cost overrun. It reflects what has been accomplished based on what has been spent. | Schedule Performance Index (SPI) | EV / PV | Answers the question “Am I on-track, as planned, in terms of schedule” | Budget at Completion (BAC) | Sum of all Budgets at Completion | Contract Budget Estimate also known as the Performance Measurement Baseline (PMB). It is the total PV at completion (the revised total cost estimate based on the earned value data and original scope) | Estimate at Completion (EAC) | EAC = AC + ETC or EAC = AC + BAC - EVEAC = BAC – BCWP + ACWP | The forecasted cost at completion | Estimate to Complete (ETC) | (BAC – EV ) / CPI | (The revised work schedule completion based on earned value data and original scope) | Establishing an Earned Value System Warhoe (2004) states traditional project estimation and planning begins by establishing a Work Breakdown Structure (WBS) which is used to define the scope of work for the project. Each WBS element should be well-defined, short, and of granular duration to provide a mechanism by which progress is measured (Turk, 2007). Each WBS element is assigned a specific allocation of funds or hours that represents the activities or tasks needed to complete this package. Multiple WBS elements are generated and used to allocate work throughout the project team. They are used to measure the progress of the project both from a financial tracking of expenditures made on the project as well as progress in terms of schedule performance. A correctly prepared WBS will define the explicit criteria for measuring percent complete to established objective measurements (Warhoe, 2004). The WBS is also used as an input to generate and baseline an Integrated Master Plan (IMP). The IMP is an event-based list of tasks and activities that have predefined success criteria and defined milestones. Once the IMP is established, the project creates the Integrated Master Schedule (IMS) which also reflects the WBS activities, but also establishes the completion dates for each activity, and applies durations that represent the time it will take to complete it. The IMS reflects the set of sequence activities and their durations that must be accomplished to complete the effort (Warhoe, 2004). The cumulative costs over time for all of the WBS elements are reflected in a chart known as the cumulative cost curve (Warhoe, 2004). This planned cumulative cost curve is also known as the Planned Value (PV) or the Budgeted Cost for Work Scheduled (BCWS) and it represents the planned costs to execute and complete the project. The actual cost of work expended is reflected by the Actual Cost of Work Performed (ACWP). The measurement of how much of the scope of work has been completed compared to what was planned to be completed is documented by measuring percent complete. The percent complete for a task can be updated to a specified value when the predefined criteria for meeting the task has been met. Criteria for these measurements are defined early during the initial establishment of the IMP. There are different methods by which the progress measurements can claim credit for completion. Different types of acceptable progress measurements include methods such as 50/50, 0/100, 80/20, 100/0, or applying a weighted value to each task. As an example, a 0/100 implementation would indicate that credit for the activity could not be taken until 100 percent of the activity was considered complete (Warhoe, 2004; Turk, 2007). EV is the Budgeted Cost of Work Performed (BCWP) which juxtapositions cost and schedule as an aggregate measure. It is a cumulative measurement which is composed of the total costs expended to date, or costs of activities and tasks completed, plus any incremental completion of tasks that were scheduled to be complete by the established date. It is reflected as a cumulative curve that shows progress to date. The schedule performance of the project is evaluated by comparing EV to the PV (Warhoe, 2004). The Cost Performance Index, CPI, indicates whether the project will over or under-run the established budget. Schedule Performance Index, SPI, will show whether corrective action should be applied and indicates whether the project will complete on-time or over-run the baselined schedule (Stephenson, 2004). Forecasted measurements include Budget at Completion (BAC) and Estimate at Completion (EAC). BAC, also known as the Performance Measurement Baseline (PMB), is used to assess the health of the project and is compared throughout the life of the project. It is composed of the contract estimate of the project plus any modifications made to the contract during execution of the project. The Estimate at Completion (EAC) is used to reflect the completion costs of the project based on the actual performance. The Estimate to Complete (ETC) is an estimate of what it will take to finish the project and represents work not yet completed. As is true for progress measurement methods, there are many ways to generate EAC. Once a method has been selected, it is critical that the same definition is used throughout the life of the project. EAC assumes past performance will recur thus it provides a forward view of future performance (Stephenson, 2004). Stephenson (2004) documents the use of variances in the EVMS. Variances are used to assess the condition of the project and they reflect the degree of changes in cost and schedule juxtaposed to the established baseline. The degree that a project is either ahead or behind schedule is reflected by the schedule variance (SV). It is an indicator as to whether the project will complete on time. A Cost Variance (CV) is the delta between the cumulative EV and cumulative AC and indicates whether a correlation exists with the costs expended and the work completed. Variance analysis provides an effective control in exceeding cost and schedule budgets. Table 2 reflects the performance indicators for determining desired values: Table 2. Earned Value Performance Cost Variance (CV) | > 0< 0 | Will complete under budgetWill complete over budget | Schedule Variance (SV) | > 0< 0 | Ahead of scheduleBehind schedule | Cost Performance Index (CPI) | < 1.0> 1.0 | Budget over runBudget under run | Schedule Performance Index (SPI) | < 1.0> 1.0 | Behind ScheduleAhead of Schedule | Earned Value as a Leading Indicator of Project Status EV is considered a leading indicator since it provides insight as to where you are going rather than where you have been (Turk, 2007). The primary purpose is to minimize cost risks associated with the project. It allows you to predict performance and identify activities that require corrective action (Stephenson, 2004). Ruskin (2004) points out that EVMS can be used to predict the final costs and duration of a project within 10 percent when the project has completed only 20 percent of the effort. This is due to the fact that 80-85 percent of the decisions have been made in the first 20 percent of the project. Establishing a WBS indicates allocated costs have been assigned; thus a budget has been put into place to accomplish an established schedule of activities. When comparisons are made between actual costs and planned or budgeted costs and items scheduled to be completed by a given date, an accurate picture of where the project is becomes clearly visible (Ruskin, 2004). Agile Implications Cabri and Griffith (2006) state agile organizations approach work different than a traditional project and thus must utilize EVMS somewhat differently. Agile projects utilize an iterative approach where the scope of effort is initially defined at a high-level. The scope of work for the project is volatile and the team often times adopts a work strategy that allows parallel or non-linear activities to occur (Cabri, Griffith, 2006). Due to the non-traditional approach to creating value for the customer, there are challenges in applying EVMS concepts to agile organizations. The fundamental rules of EVMS will result in an incorrect initial planned value of an agile project due to the iterative approach of rebaselines that account for the variability inherent in an agile organization. However, notwithstanding these deviations from traditional projects, EVMS concepts can be applied to agile projects. The questions program managers need answered, such as “where are we now”, still need to be resolved in agile projects (Cabri and Griffith, 2006). Agile projects implement burn-down, or burn-up, charts to capture their status. The charts reflect the decreasing work to be accomplished or increasing amount of functionality implemented as a function of time, respectively. This concept is juxtaposed to EVMS since it correlates status and rate of delivered features at a specific date. In lieu of the SV reported in a traditional EVMS report where SV is reported as a cost-based measure, in an agile project the SV represents a feature-based measure as a function of schedule for that iteration. Although costs are not typically tracked in a burn chart they can be graphed on these charts as a function of features implemented and completed. Comparisons of planned versus actuals in terms of features implemented and costs incurred have a direct correlation to each other. A measure of Completed Features / Planned Features could be used to reflect SPI in an agile organization (Cabri, Griffith, 2006). Potential Problems with EVMS and Possible Solutions Fleming and Koppelman (2009) provide insight to key requirements that must be met to ensure a successful implementation of EVMS. Failure to remain compliant with these requirements will ensure a meager attempt at an earned value implementation which is fraught with erroneous data and a failed cost accounting system. Examples of potential pitfalls include: * Costs must be collected in accordance with the way the WBS is established for the project. Compatibility between the accounting system, the project scheduling tools, and the method used to track EVMS can be a downfall if not carefully evaluated for interactive capabilities (Warhoe, 2004). * The project must be well-defined, fully understood, and scoped to represent the 100 percent of the project. The WBS elements must be granular or small enough to be tracked and have costs applied (Fleming, Koppelman, 2009). * Criteria for determining successful completion of each task must be clearly defined early during planning. This provides a mechanism to claim credit for work completed (Fleming, Koppelman, 2009). * WBS tasks are that are too large and not well-defined wi8ll precludes the ability to track cost and schedule to the plan (Turk, 2007). * The basis of EV is predicated upon a sound, well-thought out plan. If the estimate is not good, EVMS will fail (Warhoe, 2004). * A supplier who has been awarded a firm fixed price type contract must use extreme caution when developing their estimates. The impact an underbid estimate on this type of contract would result in a loss of profit for the supplier if an over-run condition should occur. If the project is a competitive bid, the impact of an overbid could result in a lost contract (Warhoe, 2004). * Lack of discipline in following the EVMS tenants will result in erroneous or useless data (Warhoe, 2004). * Scope changes that are volatile will preclude the ability to assign realistic schedule durations and costs for the WBS element (Turk, 2007). * EV is complex and expensive to implement; therefore it requires training to ensure those involved in tracking and maintaining EV are appropriately prepared to deal with the complexity of the system. In addition, establishing an EV implementation takes time to put into place (Warhoe, 2004). * Measuring percent complete as a function of time or actual costs are often used which is incorrect. The correct way to measure percent complete is based on the selected performance measurement method established early in the project (Warhoe, 2004). * In looking at variances, if the project personnel are completing “non-critical” activities and not addressing activities on the critical path, the variance might indicate on-time completion when in fact the project will not complete on time (Stephenson, 2004). Many companies have implemented EVMS or attempted to implement it in their organizations with varying results. Companies such as Raytheon (Corporate Website), Lockheed Martin (Corporate Website), and L-3 Communications have implemented EVMS as stipulated by contractual requirements levied by the Department of Defense (DoD) as a primary customer. Lockheed Martin uses EVMS to plan, manage, monitor, and report their financial and schedule status. In addition, they have implemented both an IMP and an IMS to help define the granular tasking needed for their EVMS. The EVMS is the formally recognized cost accounting system used to report reliable performance data. The cost of implementation however, bears its own burden. The cost of implementing EVMS in an organization is costly in terms of the continuous monitoring and control as well as the actual implementation. It has been reported the cost of implementing EVMS has been as much as 18 percent of the value-added costs. Nonetheless, Lockheed Martin finds great value in the EVMS as they have publicly stated they will continue to use EVMS regardless of contractual requirements to do so (Corporate Website). Conclusion The EVMS is a time-proven, best-in-class tool widely implemented to gain insightful data regarding the progress made and costs expended on a project. It accurately reflects whether the project is in an over-run or under-run position, or if the project is on-track. EVMS has consistently been implemented on projects since its inception in 1962. It is a complex, yet useful cost / schedule control system which provides insightful real-time data to proactively identify issues and risks on a project. The value and insights it provides is immeasurable in bolstering the confidence of management and the customer by providing accurate visibility into the actual progress juxtaposed to the plan. It is an effective tool used in the transformation process that ensures on-going customer goodwill, universal confidence, and accurate insight and visibility. Implementing EVMS on a project requires the project to be 100 percent scoped, defined, and fully understood as stated by Koppelman (2009). This scope must be broken down into granular activities or tasks that will be used in management control of the project. Critical structures, such as the WBS, must be established and decomposed capture the costs and expected durations for these elements to enable tracking of actual durations and costs. Once these are in place, it is critical that the project is baselined is established in order to track deltas from the plan to the actuals (Koppelman, 2009). The true value of EVMS lies in the fact that the resulting measurements rely less on the subjective measurement techniques than other cost control systems. Having realistic, accurate insight to where you are in the life of a project is invaluable both from the perspective of having a key understanding of where you are at any given point in time, but it also bolsters confidence in your customer since it is a time-proven, effective measurement system. It provides the mechanism to see the project in a proactive, objective evaluation of progress made and allows for real-time identification of necessary corrective actions to ensure the project succeeds. It utilizes both the plan and performance to the plan to capture effort and costs expended to deliver value to the customer. References Chen, M. (2008). The ABCs of Earned Value application. AACE International Transactions, 31-38.Cabri, A., & Griffiths, M. (2006). Earned Value and Agile Reporting. IEEE Computer Society, 17-22.Christensen, D. (1998). The Costs and Benefits of the Earned Value Management Process. http://www.suu.edu/faculty/christensend/evms/cbaevms.pdf | Fleming, Q., & Koppelman, J. (2009). The two most useful Earned Value metrics: The CPI and the TCPI. Cost Engineering, 51(3), 22-25.Lockheed Corporate Website. http://www.dtic.mil/cgi-bin/GetTRDoc'AD=ADA403435&Location=U2&doc=GetTRDoc.pdfRaytheon Corporate Website. (2007). http://www.bmpcoe.org/bestpractices/internal/raync/raync_24.html | Ruskin, A.M. (2004). Two issues concerning the use of Earned Value Measurements. Engineering Management Journal, 16(3), 26-30. Stephenson, H.L. (2004). Identifying risks and opportunities using EAC. AACE International Transactions, 61-69. Turk, W. (2007) EVMS for Dummies. Defense AT&L, 24-29.Warhoe, S.P. (2004). The basics of Earned Value Management. AACE International Transactions, 71-80. | | | `