One of the favorite items my grandfather left me was a plaque with Lord Kelvin’s famous quote: “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind”.
My grandfather knew all about numbers – he was an electrical engineer and worked at Bell Laboratories for many years and contributed significantly to microwave development for communication. But on the flip side, you hear people talk about “lying with numbers” or “lying with statistics”. You can do a survey and get data, you can look at an athlete’s statistics, and come to conclusions. But are the conclusions correct?
Context is as important as data
I got a 4.0 grade point average (GPA) for a semester at college (when a 4.0 was the highest score on the GPA scale). I was on the team that won the New England Regional Irish Dance Championship. Does that mean I was a great student and a great Irish dancer? Well, the semester I got the 4.0 was grad school, when I was only taking one class (at night). As far as the dance, while there were thousands of participants and many dozens of categories, for our category – adult, 8-hand, mixed – we were the only team entered. So while I’m fairly smart, and can move around a stage in an orderly fashion, the numbers by themselves can be a bit misleading.
Earned value (EV) and an earned value management system (EVMS) are built on numbers. They are all about budgets and plans. They ask for actual spend and estimate to complete. Spreadsheets and data, columns and rows of numbers neatly aligned. If you want to get lost in acronyms, this is the field for you. It can be a real alphabet soup. EVMS is a great subject for people who love numbers. For others it can be boring, tepid and inconsequential. I’ve seen training where students are given bingo cards to record EVMS acronyms just to keep their attention. It was fun to watch the instructor discuss “over-budget baseline, or OBB” only to be interrupted by a student shouting “BINGO!”
Using EVMS on product development programs is a best practice and is required on many or most of US military or government contracts. Businesses that have contracts where EVMS is required usually have EVMS analysts, training materials, software tools and processes built to support whatever compliance is necessary to validate their system. Where EVMS is not a contractual requirement, there is much to be gained by using its fundamentals to not only help monitor and control your projects, but to improve your processes and estimating.
Setting up an EVMS
The first step is creating your plan. Everybody creates a plan, right? But the plan needs to tie the scope of work to the timeframe you have to complete it with the available budget. This is really the hardest step, and I have seen many projects overrun budgets because plans were started but abandoned. This article isn’t about creating plans, but they are important in so many ways. Missing a schedule is bad and it happens, but missing a schedule and not being able to articulate exactly why it was missed and what you will do to avoid missing for that reason again ensures it will happen again. And that reduces your credibility and reduces your financial performance. On the positive side, it gives someone else (but it’s not you!) an opportunity to do the work. Don’t let that happen!
You’ve taken the time to do a good plan, and you are going to use earned value management (EVM), so what are the keys to ensuring accurate numbers that everyone can understand? To me, there are 3 main keys in planning to ensure everyone understands the context of your EV data and analyses. They are: 1) defining Control Accounts and their Planning Packages, 2) defining EV methods and how to use them, and 3) whether to include material and other non-labor costs.
The planning part of your EVMS should identify the standard control accounts your program has been broken down into, and what the planning packages should be in each control account. For these packages you will need to have the planned spend, or Budgeted Cost of Work Scheduled (BCWS), be able to record the actual costs, or Actual Cost of Work Performed (ACWP), and be able to determine the value of what was performed, or Budgeted Cost of Work Performed (BCWP). This lets you report at a program level, but understand within the program how each main element is performing.
The second key in the planning part of the EVMS is defining the methods for determining how much value was earned, and give guidelines for when and how each is to be used. Typical methods are “level of effort” (LOE), “percent complete”, and discrete methods (“0 – 100” and “50 – 50”). I remember years ago we had one part of the business whose EV numbers put everyone else to shame. When I finally did some digging to find the secret to their success, I was told they had a very large aftermarket engineering support contract. Seems this contracts’ work wasn’t completely defined, so they just considered the entire thing “Level of Effort”. Well, since LOE has you make what you earn equal to what you had planned (BCWP = BCWS), their schedule performance index (SPI) was always 1.0 (SPI = BCWP/BCWS). The contract was predominantly labor, so there cost performance index (CPI) hovered around 1.0 (CPI = BCWP/ACWP). A general rule of thumb is to not have more than 15% of the project using LOE. Most people use “percent complete” a lot, but that can lead to subjectivity without guidance.
The third key is how to handle material and other non-labor costs (such as travel). These costs are included in your budget, and you have to monitor your spend against plan for them. Whatever your decision, document it and ensure when you discuss your numbers and you talk to overall budget, you are clear as to whether the non-labor costs are included, and if they aren’t, document that part of the spend as well. Where non-labor costs can impact your EVMS numbers is in the calculated estimate at complete (EAC). EAC is your total spend-to-date (cumulative ACWP) plus the cost of the remaining work (BCWS – BCWP). Typically the remaining work is factored by your performance, usually a combination of your CPI and SPI. Material and other non-labor costs aren’t always on plan, and if they are in your performance calculation, they will have an impact on your remaining work calculation (good or bad).
I have EVMS, what’s next?
With plans in place for executing and monitoring the work, it is time to start. Typical practice is for projects to evaluate their EV performance on a monthly basis. The time to start the assessment is the first of the month. To determine your performance indices (SPI and CPI), you need just three numbers; your planned spend (BCWS), your actual spend (ACWP) and what you earned (BCWP). You already have your BCWS – that is what your plan said you would spend. Your ACWP will come from your finance team member – so start with determining what was earned. Evaluate the planned activity and determine its status based on the EV Method determined. Also, look to see if there was unfinished work from prior months, and don’t forget to see if anything got started early. I have had people tell me they can’t determine what was earned until they know what was spent. This is a ploy to try to influence the results. Resist this, and determine your BCWP objectively. Your schedule performance can be determined very early in the month, but you will likely have to wait several days to get the actual spend data to allow you to determine your schedule performance.
With the performance calculated, you now have to determine what the numbers mean. Evaluate each Control Account separately. Here are a few main reasons for having a CPI less than 1.0:
- Underestimated effort required to do the task
- Redo of activity required due to an error or failure
- Scope creep or extra steps needed to be performed to complete task
- EV Method limits earned claims compared to what was spent.
Did you read that last one correctly? This happens if you have a task that maybe called for a “0 – 100” discrete EV method. For this task, you may have started, and done most of the task, but since you can’t claim anything earned until you are complete, your BCWP for it is $0.00. In this case, your variance assessment would report the CPI impact due to the EV method, with a corresponding improvement the next month when the task is complete. The other reasons will require a root cause assessment with corrective action put in place to improve your corresponding process.
The other part of the assessment should be a review of your overall budget. Calculating your estimate at complete (EAC) is important to understand how your performance to date is likely to affect your projects’ budget and your business’ finances. If your project performance is under 1.0 (CPI or SPI) and one of the first three reasons above is the cause, you either need to find a way to counter the extra spend or ask the business for more money. If the performance is caused by the EV method, then explaining that is simple – here’s the number (0.91, for instance) with the context that the EV method calls for claiming the “earnings” in the next period.
Earning value of using earned value
Using EV on projects will lead you to a better understanding of your performance and will drive corrective actions for processes and estimating into your business. Using EV also creates a common knowledge and vocabulary across project and business personnel where all know what the numbers are and their context; that is, what they mean, and what is being done about them. If you get to this point, everyone can call BINGO!
Robert has worked in the Engineering field for nearly 4 decades, as a shipboard Engi- neer in the US Merchant Service, as a (Fluid) System Design Engineer at a shipyard, as a Design and Project Engineer in the Space business and a Manager in the Aerospace Industry. He currently works as an Engi- neering and Program Management Office lead. He enjoys being with his family, work- ing/playing outdoors and reviewing box scores for sporting events