Earned Value Variance Reporting Dos and Don’ts

1. Earned Value Variance ReportingDos and Don’ts Presenter: Gary Heth, PMP

2. Agenda • Earned Value Basics • Earned Value in a Nutshell • Performance without Earned Value • Earned Value Framework • Planning • Executing • Controlling • Earned Value Benefits • Earned Value Lessons Learned • Earned Value Limitations • Earned Value Do’s and Don’ts

3. Earned Value Basics

4. Earned Value BasicsEarned Value In a Nutshell • What is more important? • Knowing where you are on schedule? • Knowing where you are on budget? • Knowing where you are on work accomplished? • It compares the PLANNED amount of work with what has actually been COMPLETED, to determine if COST, SCHEDULE, and WORK ACCOMPLISHED are progressing as planned. • Work is “Earned” or credited as it is completed. • Did we get what we planned, for the amount of money we planned to spend, and did we get it when we needed it?

5. Earned Value BasicsProject Analysis Without Earned Value?Gantt Charts • Most used PM tool for representing phases and activities of a WBS • A clear way of showing schedule status to your sponsor and team • Great for small projects but can be hard to read for larger projects with many dependencies • Only show part of Triple Constraint (focus on schedule management) • Married to waterfall development • Does not adequately represent project size or size of the work element • Magnitude of “behind schedule” condition can be misleading • If two projects are the same # of days behind schedule • Which of the two has the larger impact on resource utilization? • Gantt does not represent the difference • Gantt does not show resource management • Does not indicate if the task is “front” or “back” loaded • % complete may be miss-represented

6. Earned Value BasicsProject Analysis Without Earned Value?Gantt Charts

7. Earned Value BasicsProject Analysis Without Earned Value?Budget Spend Plan • Medium to Large Projects – “S” Curve Project Spend Tracking • Provides a budget baseline for tracking actual costs against periodic budget targets. • Start by creating a time-phased budget by plotting your weekly, monthly, quarterly budgeted costs or hours (time and dollars) • Use MS Project baseline estimated project costs and plot graphically over time, they usually result in an “S” curve • Add MS Project actuals to plot dotted lines at each chosen interval to track variances. • Provides a simple Top-Level view of project financial performance useful for status reports and dashboards. • If you don’t have labor rates you will need to use budgeted vs actual hours. • Challenges • Works fine if your project is on schedule – Spend plan still needs additional status information (for example Gantt) • If behind schedule – PM may not be able to understand project status from this graph • Actual budget could be in worse or better shape than shown • If your budget spend shows overspending and your schedule shows milestone slippage you know you are in trouble. You may not be able to tell how bad the trouble is.

8. Earned Value BasicsProject Analysis Without Earned Value?Budget Spend Plan Budget Ceiling Spend Plan Actuals

9. Earned Value Basics Minimal Requirements • EVM Requires 3 values • Planned Value (PV) - Baseline • Actual Costs (AC) – Based on Time Entry or Cost Entry • Earned Value (EV) – What you “earned” • Work is “Earned” or credited as it is completed. • Did we get what we planned, for the amount of money we planned to spend, and did we get it when we needed it? • Answer: • Where have we been? • Where are we now? • Where are we going?

10. Earned Value Basics Minimal Requirements

11. Earned Value Framework

12. Earned Value FrameworkSteps to Success Condensed ANSI/EIA748 32 Step Standard Planning • Step 1: Define the Scope (Planning) • Step 2: Determine Who Will Perform the Work • Step 3: Plan and Schedule Work • Step 4: Establish Resources and Budgets • Step 5: Determine Performance Metrics and Thresholds • Step 6: Create Performance Measurement baseline and Mgmt Control Executing • Step 7: Record Direct Costs Controlling • Step 8: Monitor EV Performance Against Baseline (Control Step) • Step 9: Forecast Final Required Costs (Variance Reporting Step) • Step 10: Manage Scope Through Change Control

13. Earned Value Framework Steps to Success Planning Steps Planning • Step 1: Define the Scope (Planning) • Step 2: Determine Who Will Perform the Work • Step 3: Plan and Schedule Work • Step 4: Estimate Work and Procurement • Step 5: Determine Performance Metrics and Thresholds • Step 6: Create Performance Measurement baseline and Mgmt Control Executing • Step 7: Record Direct Costs Controlling • Step 8: Monitor EV Performance Against Baseline (Control Step) • Step 9: Forecast Final Required Costs (Variance Reporting Step) • Step 10: Manage Scope Through Change Control

14. Earned Value Framework Steps to Success: Planning Step 1: Define the Scope • Scope Definition • Single most important factor to a sound EVM process and implementation • Work Breakdown Structure • Roadmap for analyzing the project progress and performance • Each element of the WBS is broken down into pieces – each piece defines responsibility to a person for that element • 100% of scope – What is not in the WBS is not in scope • Work is broken down into measurable work packages • Focus on “authorized” work • Must be firm –Critical for Earned Value Projects • Break the Work Packages into activities of the project. These should be included within your WBS and will produce the project schedule activities. • Organization Breakdown Structure (matrix organizations) • Relates WBS elements at the work package level to the organizational unit responsible for completing the work

15. Earned Value FrameworkSteps to Success: Planning Step 2: Determine Who Will Perform the Work • Who will perform the work? • Determine Skill Level • Experience is faster but more costly • Task identification takes place during this step • Make or Buy Decision (Internal or Sub Contracting) • Will all or some of your project be outsourced? • Internal projects (Make Decision) has some cost flexibility • Scope definition critical for external (Buy Decision) • Contracts are unforgiving – Cost to change can be excessive • Critical to get scope right because cost to change can be excessive • Responsibility Assignment Matrix (RAM) • Tied to the WBS with the OBS • Responsibly Chart for activities

16. Earned Value FrameworkSteps to Success: Planning Step 3: Plan and Schedule Work • Scheduling is vital to Earned Value • Formal scheduling system (i.e. MS Project) is required • EV is nothing more than: Scheduling system, authorized scope, timeframes, and budgets • Reflects PM’s baseline “Planned value (PV)” for everyone to follow • Critical Path (Task Sequencing) • Which tasks are sequential? Parallel • Network Diagramming tools • Must be aggressively managed when negative earned value schedule variances are discovered. • Will help determine which task variances receive the most attention • High risk tasks must also be identified for same reason • Begin Scheduling

17. Earned Value Framework Steps to Success: Planning Step 4: Establish Resources and Budgets • Establish resource requirements (budgets) for all defined tasks • Start-up sequence may be different for your organization • Scope, Schedule, and Budget vs. Scope, Budget, Schedule • Best practices – should be iterative but SCOPE DEFINITION MUST COME FIRST • Enter resources for each task • Determine the costs for the activities • Labor rates per task hour • Fixed cost per activity or work package (need to be spread across each lower level activity) • Risk Analysis and Risk Management Plan • Resource Leveling Exercise • Management will then approve the budget • Contingency – Never include contingency in an individual task… why? • Will most likely cause a variance • Contingencies and other reserves should be isolated and owned by the PM Must plan/schedule all defined tasks along with the authorized budget necessary to complete each task. This is required to have a viable project baseline.

18. Earned Value FrameworkSteps to Success: Planning Step 5: Determine Performance Metrics and Thresholds How is planned value completion measured? EV Systems rely on the effective collection of the Performance and the Costs. There are basically 2 types of methods of collecting the Performance: • Discrete – something tangible to measure against • 0/100 – no EV credit until 100% of work is completed. • 50/50 and 25/75 – some EV credit at 25% or 50%, remaining EV at close of Work Package • Weighted Milestone – Each completed milestong completion “earns” a percentage of EV. Must be individually valued. May also consider monthly milestones • Physical % Complete – ie. 5% start, 50% unit test, 75% code review, 100% signoff • % Complete based on hours necessary to complete the task (common) least desirable • Units completed – For physical counts of product or outputs • Incremental milestones - % complete based on individual milestone completion • Non-discrete – where the measuring of performance is not associated with anything tangible • Level of effort should only be used when schedule performance is of no importance. A level of effort package can never give an indication of the work that has actually been performed (PV) will always equal the schedule work (PV)

19. Earned Value FrameworkSteps to Success: Planning Step 6: Create Performance Measurement baseline and Mgmt Control • Earned Value requires a baseline project schedule (time-Phased budget baseline) • Indirect costs “could” be included in some commercial type contracts • Schedule Management focuses on the schedule performance of the project. • It looks at the relationships between the Earned Value (EV) and the Planned Value (PV). • This will be your Planned Value (PV) for the life of the project • Remember, MS Project can handle multiple baselines but you should always measure against the last baseline required by the stakeholders. • This information will be plotted into a traditional “S” Curve diagram. • Results should be added to the Performance Management Plan • See Next Slide for an example

20. Earned Value FrameworkSteps to Success: Planning Budget Ceiling Spend (PV) (Planned Costs) Cost to Date “Actuals”

21. Analysis Actual costs are below planned costs (good news?) Unless you look at the planned costs of the completed work, you don’t know if this is good or bad That is exactly what is missing and what Earned Value will tell you Budget Ceiling Spend Plan (Planned Costs) Cost to Date “Actuals”

22. Earned Value Framework Steps to Success Executing Steps Planning • Step 1: Define the Scope (Planning) • Step 2: Determine Who Will Perform the Work • Step 3: Plan and Schedule Work • Step 4: Estimate Work and Procurement • Step 5: Determine Performance Metrics and Thresholds • Step 6: Create Performance Measurement baseline and Mgmt Control Executing • Step 7: Record Direct Costs Controlling • Step 8: Monitor EV Performance Against Baseline (Control Step) • Step 9: Forecast Final Required Costs (Variance Reporting Step) • Step 10: Manage Scope Through Change Control

23. Earned Value FrameworkSteps to Success: Executing Step 7: Record Direct Costs • Purpose is to show how much money they have spent on a project • Update the schedule with the period progress • PM’s are required to enter actual hours on a consistent basis • Costs from invoices are also entered • After actuals are entered cost and schedule variances can be calculated • This is where discrete measures come into play • Earned value must then be relatable to the actual costs in order to determine the cost efficiency factor, called the Cost Performance Index (CPI). • The CPI is likely the single most important metric for any project employing earned value. • To-Complete Performance Index (TCPI)

24. Earned Value Framework Steps to Success Controlling Steps Planning • Step 1: Define the Scope (Planning) • Step 2: Determine Who Will Perform the Work • Step 3: Plan and Schedule Work • Step 4: Estimate Work and Procurement • Step 5: Determine Performance Metrics and Thresholds • Step 6: Create Performance Measurement baseline and Mgmt Control Executing • Step 7: Record Direct Costs Controlling • Step 8: Monitor EV Performance Against Baseline (Control Step) • Step 9: Forecast Final Required Costs (Variance Reporting Step) • Step 10: Manage Scope Through Change Control

25. Earned Value Framework Steps to Success: ControllingStep 8: Monitor EV Performance Against Baseline (Control Step) • Next Calculate all Earned Value components • Determine cost and variances from baseline • Determine three Required Values (PV budget, AC (Actuals) EV for the work accomplished to date • Tip: EV is based on a % of your budget – “We have actually completed “$” worth of work • Calculate Variances, indices and factors from baseline • Variances (SV, CV, SPI) • Performance Indexes (CPI, SPI) -- ratio expressions of the Schedule and Cost Variances • PMs should focus on exceptions using thresholds determined during planning • Management by Exception (Lessons Learned) • Cannot simply review parent tasks or phases • What if there is a negative task and a positive tasks. • Both will need attention • How critical is the task? Is it on the critical path or is it a high risk task? • Start at the higher levels of the plan and work your way down • Cost overruns are typically non-recoverable.

26. Earned Value Terminology Steps to Success: Controlling Basic EV - Summary

27. Earned Value Terminology Steps to Success: Controlling Variance Calculations

28. Earned Value Terminology Steps to Success: Controlling Variance Calculations

29. Earned Value Terminology Steps to Success: ControllingPerformance Indices

30. Earned Value Terminology Steps to Success: Controlling Performance Indices

31. Calculation Example • You have a project to build a new fence. • Fence is four sided (all sides are equal) • Each side is to take one day to build • Each side is budgeted for US $1,000 • The sides are planned to be completed sequentially (one after the other) • Today is end of day three Using the project status chart below, calculate EV, etc. When completed, check your answers on the answer sheet on the following page.

32. Calculation Example

33. $60K $50K $40K $30K $20K $10K 1w 2w 3w 4w 5w 6w 7w 8w 9w 10w Compare Actual Performance with the Baseline Plan Earned Value on Bottom: Wk 2: Management Attention Corrective Action Legend: Planned Value Earned Value Actual Costs Wk 1: Negative Cost Variance (EV-AC) Wk 1: Negative Schedule Variance (EV-PV)

34. $60K $50K $40K $30K $20K $10K 1w 2w 3w 4w 5w 6w 7w 8w 9w 10w Compare Actual Performance with the Baseline Plan Earned Value now on top: Wk 5: Positive Cost Variance (EV-AC) Wk 5: Positive Schedule Variance (EV-PV) Legend: Planned Value Earned Value Actual Costs EARLY MANAGEMENT ATTENTION……

35. $60K $50K $40K Legend: Planned Value Earned Value Actual Costs $30K $20K $10K 1w 2w 3w 4w 5w 6w 7w 8w 9w 10w EVM – Early Attention to Issues Avoids this Problem BIG VARIANCE AT COMPLETION

36. Tracking the CPI & SPI Early Management Attention can result in improvement 10/06 11/06 12/06 01/07 02/07 03/07

37. Earned Value Framework Steps to Success: Controlling Step 8: Monitor EV Performance Against Baseline (Control Step) • Variance analysis should address: • Separate discussion of CV, SV (current and cum) and VAC • Clear description of reason for variance • Quantity variances (e.g., price vs. usage) • Be specific, not general • Corrective action • Technical, schedule, and cost impacts • Impact to estimate at completion • What is a significant variance? • % variance (e.g., >10%) • $ variance (e.g., >$50,000) • Critical path element • Risk/complexity • impact to other elements • Top 10, Top 20, etc. • Owner

38. Earned Value Framework Steps to Success: Controlling Step 8: Monitor EV Performance Against Baseline (Control Step) Potential Causes of Unfavorable (-) Schedule Performance • Manpower shortage • Revised Execution Plan • Supporting organization behind schedule • Late Vendor deliver • Delayed customer feedback / decision • Rework • Work more complete than anticipated • Design Review comments extensive • Unclear Requirements • Scope Creep Potential Causes of Unfavorable (-) Cost Performance • Work more complex than estimated • Design review comments extensive • Rework • Unclear Requirements • Scope Creep (Gold Plating) • Increased Market costs for labor or material • Overhead Rate Increases Potential Causes of Favorable (+) Cost Performance • The opposite of unfavorable cost performance

39. Earned Value Framework Steps to Success: Controlling Step 8: Monitor EV Performance Against Baseline (Control Step) • Corrective Action- How to bring the task back in line • Crashing • Goal: Gain the greatest amount of schedule compression with the least amount of cost • Looks at cost and schedule tradeoffs • Add Resources to the tasks in the critical path (internal or external) • Reduce project scope • Review changing the sequence of tasks • Often causes costs to increase • Which is the most important of the triple constraints to your stakeholders? (Cost, Schedule, Quality) • Fast Tracking • Starting two tasks at the same time that were previously scheduled to start sequentially • Can increase risk and might cause the project team to rework tasks • Develop a process to “Reuse” code – This actually can reduce defect risk • Example: We are six months into a million dollar project. • CPI = 1.2 (we are getting 1.2 dollars for every dollar spent • SPI = .89 (we are progressing only at 89% of what was planned) • What can be done? • Replace a more expensive member from the project team? (This would improve cost not schedule and add risk) • Bring in an additional programmer to work on the next two tasks. (Most effective choice)

40. Earned Value Framework Steps to Success: Controlling Step 9: Forecast Final Required Costs • This step is in place to forecast the final required costs based on actual performance • Keep management apprised so corrective action can take place • Actual performance results are sunk costs. These are unrecoverable • Any improvements in performance must come from future work. • EAC indicates where the cost is heading • Earned value provides the capability to quickly and independently forecast total funds required to complete the project (ETC) • ETC is a forecast for completing the total project. • Considers the performance to date plus future estimates • Variance Reporting

41. Earned Value Framework Steps to Success: Controlling Step 9: Forecast Final Required Costs

42. Project Earned Value AnalysisSample Dashboard 1.50 140 130 1.20 1.10 0.90 0.80 0.70 0.60 0.50 1.50 140 130 1.20 1.10 0.90 0.80 0.70 0.60 0.50 Behind Schedule and Under spent Ahead of Schedule and Under spent Target SPI = 0.71 CPI = 0.86 CPI Target SPI = 0.48 CPI = 0.81 ========== 07/15/05 08/25/05 ===== SPI = 0.61 CPI = 0.74 06/28/05 Ahead of Schedule and Over spent Behind Schedule and Over spent 0.30 0.50 0.70 0.90 1.10 1.30 1.40 1.60 SPI

43. Project Earned Value AnalysisMS Project 2003 Variance Report Example

44. Let software tools do the number crunching

45. Earned Value Framework Steps to Success: Controlling Step 9: Forecast Final Required Costs • MS Project (2003) Earned Value tools (downloads) • Help>Performing Earned Value Analysis • You will be taken to MS Project Download Template Page • Manage costs during the project life cycle (Article) • Use these strategies to ensure that your project stays within your budget. • Goal: Monitor costs (Article) • Examine your current, actual, remaining, and baseline cost totals in Project 2003. • Goal: Adjust costs to keep the project on budget (Article) • After you identify a budget problem, learn to take corrective action with Project 2003. • Project earned value analysis (Template) • Track time-phase expenses for projects by using this template. • Cost analysis with Pareto chart (Template) • Use this statistical method to identify the most critical cost problem areas to improve. • Project resource plan (Template) • Use this template to communicate project resource planning information to all key project stakeholders.

46. Project Earned Value AnalysisMS Project 2003

47. Project Earned Value AnalysisMS Project 2003 Trend Analysis

48. Project Earned Value AnalysisMS Project 2003 Trend Analysis

49. Earned Value Framework Steps to Success: Controlling Step 10: Manage Scope Through Change Control • Integrated Change Control • Without a CC process performance baselines become invalid • Changes and new work due to issue management should be added to the schedule. • All change requests must be addressed quickly • Accept or reject by Change Control Board, Steering Committee or Sponsor • PMs should have authority to say no to changes • All changes should be documented • No Gold Plating! • Single most important factor to a sound EVM process and implementation

50. Earned Value Benefits