PART I:Earned Value Management Basics

CHAPTER 1:Introduction to Earned Value Management

Implementing any new process involves cultural change, emotional and financial investment, and acceptance of new ways of doing the familiar. So, why are more and more organizations opting to endure these difficult transitions to implement earned value management? Simply stated, over 30 years of experience demonstrate that earned value management is one of the most effective means available to monitor project cost and schedule performance.

Today’s projects operate in an environment of overcommitted resources, demanding stakeholders, and changing technologies. Corporate fiduciary responsibilities are increasing, and CEOs and CFOs must forecast earnings that may be dependent on both their internal projects and customers’ projects. The current status of projects, their likely completion date, and their final cost are crucial data items that CEOs and CFOs must possess. Earned value management provides a powerful tool for obtaining these data.

Earned value management is applied toward the end of the project planning effort and is dependent on good project plans. Because it is a way of instrumenting a project for monitoring cost and schedule during project execution and control, it quickly reveals poor project planning or the inability to execute a good plan. During project execution and control, earned value management provides insight into the project’s current cost and schedule status, helping the project manager balance the triple constraints of cost, schedule, and requirements.

Three metrics form the basis for earned value management (they are explained in more detail later in this chapter). At any point in the project, these three metrics reveal:

• The project work that should have been completed

• The work actually completed

• The cost of completing that work

It may appear that earned value management adds little to the traditional concepts of project monitoring. Any project manager should know what is to be delivered, what has been delivered, and how much has been spent delivering it. However, the power of earned value management is its ability to shift the point of view from deliverables planned, deliverables completed, and funds spent to the value of work planned, the value of work done, and the funds spent. This transformation to an all-economic basis allows analysis that is otherwise not possible.

To understand the limitations of traditional project metrics, consider the common practice of monitoring projects using a schedule (or a list of met and unmet milestones) and a financial report. The schedule (Figure 1-1) reveals the activities started, completed, underway, early or late in starting, and early or late in being completed. The schedule provides a general sense of current project status by comparing where each activity stands relative to its planned status. However, the schedule does not differentiate between types of activities: some are small efforts and some are large efforts, some are on the critical path and some are not. The schedule may be able to provide a qualitative sense of the project being ahead or behind schedule, but quantifying the schedule condition is difficult or impossible.

Figure 1-1. Typical Gantt Char

You might look at a list of milestones (Figure 1-2) or deliverables and compare the planned completion dates with the current status. Here you have even less information than you did when looking at the schedule. Some milestones were supposed to be met at this point and some milestones have been met. Some milestones may have actual dates different from the planned dates, other milestones may have a best guess completion date different from the planned completion date. Using a list of milestones, you might obtain some qualitative insight into the project’s progress, but you don’t have enough quantitative information for any depth of analysis.

Figure 1-2. List of Milestones

The project financial report (Figure 1-3) reveals how much of the total project budget has been spent. However, it cannot provide answers to such questions as: “Were the funds spent well?” or “Was any work completed?” Without such information it is impossible to know whether the project budget will ultimately be underrun or overrun. All that is known is that money has been spent on the project.

Earned value management quantifies project progress and compares actual progress to planned progress and funds spent. It does so using three metrics: Planned Value (value of work planned to be completed), Earned Value (value of work actually completed), and Actual Cost (funds spent). These parameters are determined for each project time period, and also cumulatively from project inception. While some suggest that earned value management is difficult, it really only adds one element to traditional project management—Earned Value.

Figure 1-3. Summary Financial Report

Earned value management provides information that is useful to all levels of management. The project manager can use earned value management data to help manage the project. Team leaders can use these data to help manage their teams. Program managers and project portfolio managers can use earned value management data collected across all their projects to help identify poor project performance, reallocate resources, reset priorities, and terminate efforts that are likely to fall short of return-on-investment expectations. Chief project officers and CFOs can forecast project expenditures and completion dates, allowing better predictions of corporate revenues, expenditures, and profits. The CFO can employ these forecasts to develop financial statements detailing next year’s projected corporate financial outlooks. Moreover, earned value management data can provide data for reports required under the Sarbanes-Oxley Act of 2002.

Whether the industry is information technology, new product development, aerospace, pharmaceuticals, construction, or any other, earned value management provides valuable project insight for any project stakeholder, from the team leader to a corporate stockholder.