APraCom© Project

Management

Focus on

Earned Value

Earned Value Management for Successful Projects

First Edition, 2010

Ir. Luc De Ceuster, PMP

Published in the Czech Republic by APraCom s.r.o.

First Edition, December 2010

© Ir. Luc De Ceuster, PMP

Content review: Dan Fiala, PMP, PMI-RMP

Editing and Language: R. Adriel Vasquez

Cover Design: Rene Slauka

ISBN 978-80-254-8709-9

Copyright © 2010

By Luc De Ceuster

All rights reserved. No part of this publication may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval system without permission in writing from the publisher. In no circumstances can this work be retransmitted in any form, repackaged in any way or resold through any media.

Published by:

APraCom s.r.o.

Strakonicka 15

150 00 Praha 5 - Smíchov

The Czech Republic

www.APraCom.cz

Obsah

Introduction

Chapter I Project Planning for Earned Value Management

1 Tools for preparing EVM

1.1 Scope the project and create the WBS

1.2 Planning and Scheduling

1.3 Project Budget

1.4 Project Baseline

1.5 Risk Management

1.6 Change Management Process

1.7 Conclusions

Chapter II Defining the three Basic Parameters of Earned Value Management

2 What is the project's time-phased budget?

3 How much of the planned work has been done?

4 How much do we pay for the work that has been done?

5 Planned Value, Earned Value, and Actual Cost

6 Project ”LDC” - PV, EV and AC

Chapter III Analyzing Schedule and Cost using Earned Value

7 Questions to Answer

8 Schedule Variance (SV)

9 Cost Variance or CV

10 Time Based Schedule Variance

11 Variances and Project Status

12 Project ”LDC” - SV and CV

Chapter IV Measuring and Reporting Project Performance

13 Efficiency

14 How efficiently are we using time?

15 How efficiently are we using our money?

16 Performance Indices and Project Status

17 Project ”LDC” - SPI and CPI

Chapter V Forecasting Duration and Cost using Earned Value Management

18 When will the project probably be completed?

18.1 Percentage complete approach

18.2 Money based approach

18.3 Time based approach

18.4 Using the project schedule and Gantt Chart

18.5 Comment

19 What will be the project's final cost?

19.1 Project Manager's official estimate

19.2 Mathematical estimate

19.3 Estimate with constant cumulative cost efficiency

19.4 Estimate with schedule and cost position

20 Alternative ways to estimate the project final costs

21 To-Complete Performance Index

22 A probabilistic approach to estimate the project final costs

23 Project ”LDC” - Forecasting in terms of schedule and cost

23.1 Calculation of the Estimates at Completion Mathematical Estimate:

23.2 Using PERT to calculate the Expected Cost

23.3 b-distribution for project LDC at 9th period

Chapter VI Information Gathering for Earned Value Management

24 Documents available after project planning

25 Ways to get information

25.1 Team meetings

25.2 Forms and Templates

25.3 Management by walking around

25.4 Software and systems

25.5 Informal communication

26 Getting the ”good” information

27 Gathering Information

27.1 Schedule

27.2 Cost

27.3 Functionality

27.4 Quality

28 Reporting sheets

Chapter VII Comments and Conclusions

29 The dangers of extrapolation

30 Estimating Project Duration using EVM

30.1 Use Money or Time as reference?

30.2 Is the SV or SPI really showing us bad performance?

30.3 Do we really have to take action?

31 Estimating Project Costs using EVM

31.1 On Schedule

31.2 Behind Schedule

31.3 Ahead of Schedule

31.4 On Budget

31.5 Over budget

31.6 Under budget

32 Final Conclusion

Annexes

Annex 1 - Abbreviations

Annex 2 - Definitions

Annex 3 - Symbols and Formulas

Annex 4 - Project Widgets

Annex 5 - Project LDC

Annex 6 - Beta function

Annex 7 - Triangular Distribution

Index

Bibliography

For Franciscus De Ceuster

who left us too early

I want to thank my family and all my friends who have always supported me and were especially there for me at the end of last year when I was infected with H1N1 and had very small chances to recover. Their energy, concerns and help made it possible for me to recover remarkably well and finish this work.

I explicitly want to thank Guy without whom I surely would not be alive anymore. Of course my parents, my brother Steven and my family, Ludo, Dan, Michal, Miluse, Erik and Irena.

A special thank also for the Doctors and Nurses at the FN MOTOL Hospital in Prague for their remarkable persistence, professionalism and creativity for giving me my life back.

Introduction

Once a project starts we move from the planning phase into the execute and control phase. The project team executes the project plan. The project manager will control the plan's execution and compares actual information he/she receives from the project team members with the data that were obtained at the end of the planning phase. The main documents the project manager has at his/her disposal have been generated during the initiation and the planning phases. These are (non limited list):

- Project Charter or other name;

- Work Breakdown Structure (WBS);

- Detailed task descriptions;

- Project precedence diagram and critical path;

- Gantt chart;

- Project resource planning (people and other resources)

- Periodical and Cumulative Project Budget or S-curve;

- Project risk management plan.

Project planning will use these documents as a project baseline and the project team members will give the project manager detailed information related to the tasks for which they are responsible. The information the team members will communicate should contain at a minimum the following data:

- Start and end date of each task;

- Cost incurred during the reporting period in order to work on each task;

- Estimated remaining duration of each task;

- Progress of the work in detail and overall;

- Other information that may be useful.

Using all the information available, the project manager is able to provide project stakeholders with a summary of the project status, and report on important parameters indicative of the financial position and its progress towards completion.

In the classical approach, financial information is only used to compare the actual spending with the time phased budget. Spending equal to the budget at that time in the project would lead to the conclusion that the budget is ”on target”.

The main problem with the classical approach is that the financial and scheduling information were looked at separately and the information are not combined to a more sophisticated evaluation and forecasting system. There was no system set up to evaluate project performance using variances, performance parameters or indexes and using it to forecast the outcome of the project.

Project managers are reporting the data without exploiting the hidden information the data contained.

Past experience with complex projects has showed that it is difficult to predict the final outcome of the project. In many cases, management could only get a accurate idea of the total cost of the project after it was completed. In some cases, costs could only be accurately evaluated even later, when all accounts had been closed!

Although project success today is not only determined by the total cost of the project, or the time by which the project was late, money and schedule still remain important parameters. In many projects they still remain key elements, and project success may depend on just these two parameters. Just imagine some of the following examples:

- Timing: schedule delays may be catastrophic when the objective is to launch a new product or service before the competition does. Launching a product or service too late may have a negative impact on sales and return on the investment (ROI);

- Cost: delivering a project that is more expensive than initially estimated may have a serious impact on profitability. Higher initial cost (fixed costs) will move the break-even point to the right, which means that more products have to be sold before it becomes profitable.

The project management community realized over time that better forecasting methods made possible by integrating financial and schedule information should become standard. A good project performance evaluation system would be beneficial for many reasons, some of which some are mentioned below:

- To better allocate budgets;

- Identify budget and planning problems early in the process;

- Improve portfolio management;

- Better manage budgets;

- Know in what direction we are heading;

The first to use Earned Value Management was the United States Department of Defense (DOD) in the beginning of the 1960s when they started implementing ”cold war” projects like the minuteman and Polaris missile. They started looking at project efficiency to know how government money was spent and to be able to predict the total cost of the project as early as possible.

The methodology they decided on was first used at the end of the 19th century, the beginning of industrialization. At that time, engineers started evaluating the work that was done and measured efficiency of the processes they were monitoring.

The process is in fact relatively simple and, performance can be easily measured using information that is already available. The project manager is monitoring project progress and budget. During weekly reporting, information like work executed, money actually spent and, other parameters, are provided. Therefore, project-wide information is available to the project manager on a weekly basis.

The database that has been built during many years of projects by the DOD is in fact a very valuable treasure. Unlike private companies, military and government agencies tend to keep records of all projects including those that were overdue and over budget. Certainly in military history, it has become very important to learn from mistakes and not to conceal, or make them appear better. Military history is still a very important topic in Military Academies worldwide and is still the basis of Military Operations today. Hiding the ”bad” experiences would reduce the capability of today's military commanders to act in the most optimally decisive way.

I had the same experience during my aviation teaching. Some years ago, I met one of my old students flying back from Nice (France) to Brussels (Belgium). All passengers had been waiting impatiently because everybody saw the plane landing, but boarding never seemed to start.

My old student invited me to the cockpit for the flight and I also could invite a friend. When he arrived in the cockpit, the question was obvious: ”why did we have to wait so long to board the plane and why did we leave with an important delay while we saw you arrive even before time?” Without any problems, he explained that his approach was not how it should have been and he decided to make a ”go around”1 and start the approach procedure again.

Hiding mistakes would only lead to unsafe behavior and would not guarantee safe flying conditions. When a pilot makes a mistake in the cockpit, he/she shouldn't hide it but openly speak about it. In fact, the people hiding their mistakes to others in order to appear perfect will finally get into a situation where they do everything wrong. The problem is that in our world around us, many people are posing like ”perfect” or are playing the role of the person who made mistakes and learned from it. In fact many of them are hypocrites who only believe in themselves and are hiding their imperfection.

For companies, it may be important to appear perfect to their customers and competitors. In reality, we all know that this is certainly not the case. People should not select companies because they appear to be perfect. We should select a company because we believe in their capabilities to do what we expect from them, and therefore it is more important to know and trust how they manage and solve problems and crises than to assume they will not make any mistakes.

A ”go around” in aviation relates to a landing that is broken off. There are many reasons for which a landing can be cancelled: another plane may still be on the runway, a technical problem that changes the approach parameters, unsafe weather conditions, too much deviation from the glide slope or from the center of the runway and many other reasons. In most cases it is not related to an emergency. For the passengers however, it may be a bit scary. The pilot will first return to a safe position and then explain to the passengers what really happened. During one event, coming back from Rwanda in a DC10, the flaps system showed an alert related to an asymmetry between the left and right flaps. Continuing the landing would be very dangerous and the pilot decided to ”go around”, recalculate the approach parameters with a safe flap setting and tested everything at a safe altitude to be sure not to encounter any problems at the final approach. As you may assume, everything ended well!

If a company wants to hide its errors to the outside world, it should at least be honest to take into account all their experiences, also the worst ones, to set up company statistics. Removing the projects that management does not like will falsify the statistics, which will be using in the future to do business. In fact, this would be like navigating a ship through dangerous waters with the wrong maps! Just tell this to your shareholders when you explain another failure!

Projects are not always done in a perfect way. Many parameters influence what is being done and the experience of the project manager does not relate to the fact he can plan a project perfectly. His or her experiences become really valuable from the moment the project begins and how he or she will handle unforeseen events. Making plans is and remains an important phase of the project and should never be neglected. Preparation will show, already in advance, what can go wrong. In fact, once the project starts it is the ability of the project manager to manage the unforeseen events that will determine the success of the project.

The Japanese company Toyota has built a strong worldwide reputation related to quality and reliability of their products. The company's methodology has been discussed on many occasions. One of the most important elements in their philosophy relates to the fact that nothing is perfect. A production process or a project going on without interruptions or errors cannot exist. Each time an issue or problem show up, it is an opportunity for improvement. Hiding problems only lead to more and larger problems.

The classical tools that project managers use and get trained with relate to planning, estimating, scheduling and others. These focus on the initiation and planning phases of the project. Earned Value Management (EVM) is in fact an additional tool, that will help the project manager to better manage his/her project during project execution.

EVM has been used by the DOD for more than 40 years and has been applied also by other US government agencies like the Department of Energy (DOE). EVM has also been integrated in Public Offering Procedures in the US. Nevertheless, the EVM is not yet widely in use in the industry. In many cases, financial control and forecasting is in many cases limited to following up spending and comparing it with the budgeted cost. In many cases however, no real financial control is done at all.

Using EVM is in fact not difficult. The necessary parameters can be calculated using very simple mathematical formulas, and predictions of final project costs can be done very quickly. EVM can be used on any project whatever duration or complexity. Of course, the technique and its conclusions become very interesting for complex, high risk and long duration projects.

As we all know, the more detail we want, the more work we ask to be done and the more complex and time consuming the interpretation of the results becomes. Obviously, the rigor and the frequency of application of EVM will increase with project complexity and risk.

Since computing software has become more available to project managers, gathering and consolidating data has also become easier. Many software programs offer functions that allow us to integrate EVM without any supplementary effort. Of course, having the data at hand does not mean that the people will use it.

Statistics held by DOD show that EVM offers a very useful tool for estimating total project costs after 15 or 20% of the project has been completed. Having this information so early in the project can help management to take the necessary measures to make ”good” business decisions.

Unfortunately, sometimes management does not want to know the bad news and they hide their heads in the sand like an ostrich that does not want to see the lion that is ready to attack.

Statistics as set up by DOD will be further used in this publication about Earned Value Management. These data can be used without problems to start EVM in your company. The common factor is a ”project”. Whatever the military have been doing for the last 100 years, they were doing projects and projects still remain projects.

It is of course true that some differences may exist between all the projects the military has been doing and still are doing. It may be a surprise for you, but military agencies also do things that are very ”normal” to us.

They also construct office buildings, airports, information systems, hotels, BBQ, cinemas and other projects. These statistics of DOD take into account all their projects, in whatever disciplines they may be, however many differences may exist between different disciplines like ICT or Construction, and others when viewed independently. Of course, nothing is withholding the Project Management Office (PMO) to start building their own, industry and company related statistics. This may be part of the lessons-learned sessions held at the closure of each project, and upon which the data are stored in the archives of the PMO.

Chapter I Project Planning for Earned Value Management

Earned Value Management cannot be introduced without taking precautions and may be different from how you are managing your projects at this moment. In order to use EVM it is important that the Initiation and Planning phases of the life cycle have been done with the future EVM in mind.

Introducing EVM is not changing the general principles of Project Management. The same principles will be applied; nevertheless, it is important to emphasize those principles that are important when you will start applying EVM in your projects.

Earned Value Management can only be done correctly when the 10 steps of the project life cycle are done in a rigorously way. This does not mean that EVM is present in all phases. Nevertheless, all phases are linked, and badly executing one phase will definitely influence the next phase. We give a short overview of the project life cycle and the 10 steps we defined in these phases:

Initiation

• Step 1: Creating the Project Definition Document A well-defined ”scope of work”, or whatever you may call this document, is the basis for defining the project. ”When you don't know where you want to go, it does not matter where you go” as Carol Lewis stated correctly in the fairy tale ”Alice in Wonderland”. This does not mean that not knowing where you are going is bad. You may encounter fantastic things, meet great people, and see nice places. It is just NOT about project management. That's all!

A well-defined scope, including what is not included, is of course the most important part of the project. All following steps depend on it and a bad job here will make all the following work and information obsolete.

Planning

• Step 2: Creating the Project Work Breakdown Structure (WBS)

The WBS is a hierarchical representation of the project starting at the project level or level 0. Each subsequent level shows more and more details until the final level or task level is reached. Tasks are independent work packages that generally take one or two weeks to complete. When all the tasks are completed, the project is also completed. Each task is described in detail on a ”task description sheet” which contains a detailed work description, success criteria, deliverables and skills.

• Step 3: Resources, Effort and Duration Estimates Identifying skills, people, responsibilities and effort to complete the tasks will finally lead to the resources assignment matrix (RAM), costs, and duration of the tasks.

• Step 4: Task Precedence, Project Network and Critical Path Analysis

Once the tasks and their duration have been determined, it is important to determine the logical order in which the tasks have to be completed. In fact for each task the predecessors have to be identified. A task can only start when all preceding tasks have been completed. Once the precedence relationships have been identified, the project network diagram can be drawn. The diagram will identify all possible logical paths through the project and the duration of all paths can be calculated using the Precedence Diagramming (PDM) and Critical Path Method (CPM). Finally, the project duration is determined by the path with the longest duration or the critical path. Each project manager wants to know the critical path or paths of his project because each delay of a critical path task will increase the duration of the project. In addition to the critical path, it is important to know how the non-critical path tasks are positioned relative to the critical path. This is also known as the critical path position of the project.

• Step 5: Gantt Chart

Once the start and finish dates of each task have been determined, the sequence of the tasks can be represented in the Gantt diagram. This diagram was first introduced by Gantt at the end of the 19th century and was used to schedule resources over time. Although the method as designed by Gantt, only allowed scheduling tasks in sequence, the design of the chart is still used today together with the PDM.

The chart is generally used in the project management arena to graphically represent the project schedule, the critical path, and the critical path position of the non-critical tasks.

• Step 6: Resource Loading and Leveling The resources needed for each task can be represented on the Gantt chart and can be analyzed by the project manager and his or hers team. It allows them to identify problem areas and find solutions by resource leveling. Resource leveling can be done by moving non-critical path tasks into their float, adding resources, moving resources or other techniques. Once an acceptable solution has been reached, the final project plan can be determined.

• Step 7: Project Budget and S-curve

Adding the costs for each task to the Gantt chart following the task sequence gives us the time-based project budget. This indicates how much money will be spent during each reporting period, every week or month, For example. In the same way it is possible to calculate the cumulative cost for the project (S-curve). The name S-curve refers to the curve form has which is typical for many projects

• Step 8: Risk and contingency planning

Risks, threats, or opportunities, may occur during the project and an in-depth risk qualification and quantification is done to determine the possible impacts on the project. Where necessary, a contingency plan will be set up. The occurrence of risk events during the project may influence the project plan and budget. Funds to deal with risks will be provisioned in a special budget.

Execution and Control

• Step 9: Project Status and Follow-up

During this phase, you will collect data related to project progress and actual spending, a task that becomes even more important since you will use the gathered data to make some predictions related to the project outcome. Gathering the data should be well thought out during the planning phase. The project manager and team leaders should be well instructed as to what data is to be collected, how to collect them and at what frequency (in most of the cases weekly).

Close-out

• Step 10: Project Completion and Project History Documentation

During the close-out phase we collect lessons learned. One of the elements we will collect is the data related to the EVM we calculated and interpreted during the life span of the project. These data will, after some time, give us more information about our industry and company specific parameters, and will also give us information about how we are growing into maturity while executing projects. It is also important that also our ”catastrophes” are taken into account. Although we may not like the outcome and want to hide the results to the world outside, we should always stay honest with ourselves and learn from the mistakes we made in the past. These mistakes may teach us in what fields we are not performing well, and we can then learn lessons on how to improve in those areas or just withdraw and focus more on our strong areas. Isn't portfolio management also about identifying the projects we will be successful in?

In the basic concept of Earned Value Management, there is no reference to a scheduling system that has to be used in combination with the EVM calculations. Using the parameters we will determine in the following chapters without referring to a schedule may also lead to the wrong conclusions. It is therefore important that a formal scheduling technique is used.

Those of you who are already more experienced and followed some courses before, or who already obtained the PMP certification, will know that there are different scheduling techniques available. Today, the most commonly used is the ”Precedence Diagramming Method” or PDM. (In some cases also wrongly referred to as ”PERT”). In addition, with the PDM, project planning is typically represented in a Gantt chart, showing dependencies, start & stop dates, and slack.

While EVM will give you indications related to the efficiency of use of time and money, the PDM and Gantt chart will show how the project is evolving time wise. Adding the Gantt and the PDM will help you to improve your judgment and forecasting precision. The PDM and Gantt will also show clearly what the projects critical path position is or how the non-critical path tasks are scheduled compared to the critical path tasks. Are they starting at their ”early start” (ES) or ”late start” (LS) dates, or at an intermediate date?

1 Tools for preparing EVM

EVM can only be successful when project preparation has been done as described in the previous reference work regarding tools and techniques. More detailed information can also be found in the references mentioned in the bibliography at the end of this publication.

During the project preparation and planning phases of the project life-cycle, a number of interesting documents have been prepared that will be used by the project manager during the execution and control phase, and which of course will also be available for EVM.

The most important documents are:

- Project Scope as described in the ”project charter” which included the ”triple constraint”;

- Detailed WBS in tree and table form, up to the task level;

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