Earned Value Management

Earned Value Management (EVM) is an integrated system of project management and control which enables a Contractor and their customer to monitor the progress of a project in terms of integrated cost, schedule and technical performance measures. The EVM system is created, owned and managed by the Prime Contractor, however the customer may have full and timely visibility of the information contained within it. From the a customer perspective this means that there is greater equality of information between the Contractor and the customer, something which is fundamental to true partnering.

Traditional project management practice tends to compare actual costs with planned expenditure, and confuses actual costs with actual progress. Actual costs are not necessarily a good measure of progress. CMMI Ltd advocates maintaining a Cost to Completion Spreadsheet or Project Schedule.  EVM provides a third reference point which is an objective view of the status of the Contract, i.e. the value to the end goal of the work completed to date. This can be compared with both the planned expenditure and the actual costs to determine the performance to date and to give early indications of problems. EVM may also be used to enhance cost Forecasting, risk management and as the basis for payment against the Contract.

Required Data

In order for EVM to be implemented the Contractor must have a validated system that can accurately measure the following three fundamental factors:

  1.    The planned costs known as the Budgeted Cost of Work Scheduled (BCWS)

  2.  The actual cost of the progress made, known as the Actual Cost of Work Performed (ACWP)

  3.   The earned value, known as the Budgeted Cost of Work Performed.

At the heart of EVM is the Work Breakdown Structure (WBS). The WBS is a product oriented family tree of all of the goods and services to be supplied. It is a consistent and visible framework that displays and defines the products as elements that relate to the end product.  The WBS needs to be defined down to at least the level at which EVM reporting will be applied. Care should be taken, however, in selecting this level; too low will create an overload of data; too high could lead to the masking of some vital information. Most projects will find 3-4 levels within a WBS will adequately meet their data requirements, however, large complex systems, such as a ship, may require to go to level five or six.

The schedules that are produced for the lower elements the WBS should be planned to the greatest possible detail, such that the resulting activities are of manageable duration and can be assigned to a single part of the organisation (short, sharp activities are best).

Earned value is based on assigning a value at the activity level to the achievement of project work. Ideally, achievement is determined non-subjectively, on the basis of milestones and deliverables, and is based on the planned cost (in money or hours) of achieving that milestone. There are a number of Earned Value techniques that can be applied to activities and specialist advice should be sought on which is the most appropriate to any particular activity.  These activities are grouped and controlled in a Control (sometimes called Cost) Account (CA). This CA coincides with the level at which EVM reporting will be applied. Each CA has a dedicated manager appointed. This individual is empowered to plan and deliver within time and cost constraints the work contained within the CA.

Once the project is underway the contractor will start to earn value by the commencement and completion of individual activities. The summation of the values earned in a particular Control Account gives the earned value of that CA to date.

Data Presentation

The earned value is plotted against the planned and actual costs over time. This illustrates in a very clear way the status of the project. The simplest progress reports comprise of a basic tabulation of the three basic data elements listed above, the estimate at completion and the budget, and three derived data elements, or variances, which are measured in terms of resources such as man-hours or cost. The derived data elements are:

Cost Variance (CV) - The difference between the planned and actual resource usage for an element of work. A negative variance means that more money was spent for the work accomplished than was planned. Cost Variance is obtained by comparing actual cost with earned value:

Cost Variance = Earned Value - Actual Cost

CV = BCWP -ACWP

Schedule Variance (SV) - The difference between the budget and the earned value for an element of work. Any difference is called the Schedule Variance.

Schedule Variance = Earned Value - Budget

SV = BCWP-BCWS

Variance at Completion (VAC) - The difference between the total budget allocated for a piece of work and the Project Managerís estimate of the actual resource cost at completion.

An example of the way EVM data may be presented in the form of a graph is detailed below. This can be available at the total contract level and at all WBS levels down to the lowest level set within the contract. There are a number of IT tools which help with the collation and presentation of this data.

How to Use the EVM Data

These graphical representations are a useful management information tool. For example, the above graph may represent a project or task that appears to be underachieving in terms of both cost and schedule. If corrective action is not taken the project/task will be completed behind schedule and over budget. There are a number of IT tools which are now available to assist with the collation and presentation of the data.  As well as the derived performance indicators mentioned above there are two measures of efficiency which are also useful for determining the status of the project; (a ratio of less than one implies that work is underachieving against the plan, and above one implies better than the plan)

Cost Performance Index (CPI) - How much it really costs to earn one pound of budget or the "Value for Money" report.

Cost Performance Index = Earned Value/Actual Cost

CPI = BCWP/ACWP

Schedule Performance Index (SPI) - The Schedule Performance Index is the ratio of Earned Value and the Planned Achievement.

Schedule Performance Index = Earned Value/Budget

SPI = BCWP/BCWS

All the above performance indicators are backward looking. One of the main advantages of EVM is the ability to use the data to predict with reasonable accuracy the future direction of the project. This can be done in the following way;

a)              Cost - The final cost of the project, or a sub-element of it, can be forecast using the following formula:

Final Cost = Budgeted cost
                            CPI

b)              Schedule - Forecasting the final end date requires the predetermination of a time based Schedule Performance Index. This can be calculated as follows;

Time based SPI = the original duration planned for the work to date
                                actual time expended on the work to date

Final project duration = Planned project duration
                                         Time based SPI

Reporting Cycle

The reporting cycle should as a minimum tie in with the contractors internal accounting periods (usually monthly - although on the high risk projects the reporting cycle is weekly). The version of the above chart should be produced for each Control Account and the summary levels up through the Work Breakdown Structure to the total contract level. These charts should be updated to show the plan, the actual cost and earned value of work performed along with any cost or schedule variances. Any divergence from the overall critical path in relation to each Control Account can be reviewed by the MoD and the Contractor and the suitability of corrective action agreed. Sub contractor performance and the status of their activity can also be confirmed at this point. The contractor should also be asked to produce variance reports to explain the reasons for the deviation from the plan, and more importantly, what corrective action will be taken. These reports generally form the basis of the Customer/Contractor discussions.

A word of warning - whilst the discussion of corrective action is essential to partnering agreements, the MoD must be mindful not to assume the transfer back of risks which are properly the Contractorís to manage.

Benefits

EVM provides sound cost, schedule and technical performance data which is at the centre of good decision making. The benefits to project management come from the disciplined approach to planning, the availability of metrics to show genuine variances from the plan and an ability to accurately forecast future performance. It therefore provides benefit to both the Contractor and the MoD.  Some of the relevant benefits to the customer are;

  1. Objective Contract status information - or where you really are in the Contract.

  2. Access to cost data - or are you getting Value for Money.

  3. A quantitative measure of the cost of any programme slippage - how much is it really going to cost you to continue?

  4. The ability to identify new problems and trace the source of them - where it is going right and where it is going wrong.

  5. An ability to accurately predict programme cost and schedule - should you carry on (and what provisions need to be made) or abandon the programme?

  6. Confidence in the Contractorís internal management system - the customer is able to make informed judgements based on real data.

  7. A more disciplined approach to the measurement and achievement of milestones - greater confidence that milestones have been achieved.

  8. Improved risk management - more disciplined planning identifies and drives out more risks; accurate real time progress information leads to a better informed risk management system.

EVM accords entirely with the ethos of Smart Procurement by creating a no surprise culture and a relationship whereby both the Contractor and the MoD are working towards the same common end goal of delivering the product.

Drawbacks

The above benefits can only be reaped if the project is prepared to invest time and resource at the beginning to establish baseline planning data. The amount of effort required to implement full EVM may be large depending on the company's previous EVM experience and/or the quality of their existing Project Management practices. Ensure that adequate time has been allowed by both the Contractor and the MoD to set up the EVM system and to carry out effective training of those individuals involved in using and analysing the EVM data.

Applicability

EVM is applicable to all types of contracts including Fixed, Firm and Target Cost Incentive Fee contracts, service, manufacture and development contracts and all phases of the project cycle (i.e. if you can plan it you can apply EVM). Although EVM can be applied to all values of Contract, a balance between the higher set up costs and the resultant benefits (and not just the cost benefits) must be made.

It is not recommended that EVM is introduced to an extant contract unless the programme is undergoing a major revision. EVM should be offered to the Contractor as part of the Invitation to Tender as an essential feature of Project Management. Where major items of defence equipment are being procured from nations that mandate EVM (eg USA, Australia, Canada), the customer should seek access to data as a condition of the Contract and consider payment via EVM metrics.

Payment Mechanisms

EVM can be used as a Project reporting tool only, or it can be used as an incentive for the Contractor to perform within Cost and Schedule parameters. This can either be via 100% payment each reporting period on the value earned or via a combination of milestone and reporting period Earned Value payments. The latter is the more usual option as the introduction of milestones allows a degree of payment retention to be introduced and enables MoD to additionally incentivise critical aspects of the programme. However, it only really works if the number of milestones are limited to no more than half a dozen highly critical milestones (e.g. In-Service Date, Launch Ship, etc.)

Where it has been decided to pay on both the value earned and milestones , it is important to determine an appropriate balance between the two. Although there are no hard and fast rules for the ratio for this, the milestone payment regime must reflect the critical path and the physical completion of the project. A minimum of 15% of the total contract price for the key milestones is recommended with a maximum of about 30% for most projects.

Further Information

  1. BS6079 - Guide to Project Management.

  2. International Earned Value Management Web Site
    http://www.acq.osd.mil/pm

  3. Defence Acquisition Organisation (Australia)
    http://www.defence.gov.au/dmo/esd/evm/index.cfm