Earned Value Management: An Introduction and Short Tutorial

1. Earned Value Management:An Introduction and Short Tutorial Wayne Baggett

2. Outline • What is Earned Value? • Government Requirements • Small Project Usage • Why Use Earned Value? • Earned Value in a Nutshell • Conclusions

3. What is Earned Value? How does Dilbert know this?

4. What is Earned Value? • Project Management Technique • Integrates technical performance requirements, resource planning, and cost accounting with schedule • Provides insight into project status • Provides “early warning signals” for problems • Provides a disciplined means of managing the project

5. Government Requirements • OMB Circular A-11, Exhibit 300 (2004) • Requires EVMS for all major acquisitions • Agencies must have ANSI-compliant EVMS in place by December 31, 2005 • EVMS data must be used to identify problems and provide realistic final cost estimates as a part of decision packages • Federal Acquisition Regulations (2005) amended to require contractor-maintained EVMS

6. Government Requirements • These requirements apply to large projects or programs; DOD requires • Contract Value ≥ $50M: validated ANSI-compliant EVMS, structured reports and reviews, ongoing surveillance • $50M > Contract Value ≥ $20M: ANSI-compliant EVMS (validation not required), tailored reports and reviews, ongoing surveillance • Contract Value < $20M: EVMS optional, ongoing surveillance • Very rigid, heavily constrained system at this level

7. Small Project Usage • Small projects provide “the best opportunities for earned-value employment” • Consider its use for “… all in-house funded developmental projects where a firm commitment is made to management.” • “Software projects can especially benefit from the employment of a simple earned-value approach.” (Fleming and Koppelman, “Earned Value Project Management: A Powerful Tool for Software Projects,” Crosstalk, July, 1998, p. 19.)

8. Small Project Usage • The Personal Software Process (PSPSM) and Team Software Process (TSPSM) use EVM • PSP has practitioners estimate task efforts and track their actual efforts • Tasks estimated are very small – about 10 hours each • Data are used to improve future estimates • TSP expands the use of EVM to the project level • Use of PSP and TSP helps projects meet their commitments (Tuma, D. and Webb, D., “Personal Earned Value: Why Projects Using the Team Software Process Consistently Meet Schedule Commitments,” Crosstalk, March 2005, p. 17.) PSP and TSP are registered service marks of Carnegie Mellon University

9. Small Project Usage • Several projects at STScI have used EVM: • Most used a tailored version of EVM • JWST S&OC development • FOS, PPS, PRDS • JWST FITS Writer development • INS Master Schedule development • DMS Automated Test System development

10. Why Use Earned Value? • Obligates planning to the level of task management • Less likely to overlook work • Provides objective measures of progress • Allows early detection of budget and schedule problems • Allows an objective projection of eventual project cost and schedule

11. Key to Earned Value Determine the value for every task prior to starting work!

12. Guidelines for Setting/Earning Value • Use a consistent unit of measurement that makes sense for the project • Dollars – required for large gov’t projects • Hours – useful on small projects; PSPSM • Arbitrary number – not recommended, but still used • Consider task duration • Select Earned Value Methods that are as objective as possible

13. Objectivity Earned Value Methods

14. Current Date $13,000 under budget! Example: Planned vs. Actuals

15. BAC=$200 PV PMB EV AC SV=EV-PV=($30) CV=EV-AC=($17) Example: Earned Value

16. Earned Value Concepts • Planned Value (PV) – planned cost of doing the scheduled work (formerly BCWS) • Earned Value (EV) – planned cost of the work completed (formerly BCWP) • Actual Cost (AC) – actual cost of the work completed (formerly ACWP) • Performance Measurement Baseline (PMB) – the time-phased budget plan against which performance is measured

17. Earned Value Concepts (cont.) • Schedule Variance (SV) – measures how project is doing relative to the schedule SV = EV – PV Positive Ahead of Sched., Negative  Behind Sched. • Cost Variance (CV) – measures how project is performing; productivity measure CV = EV – AC Positive Efficient, Negative  Inefficient

18. Earned Value Concepts (cont.) • Budget Variance (BV) – measures how project is doing against the budget BV = PV – AC Positive  Under Budget, Negative  Over Budget • Budget At Completion (BAC) – sum of the planned value plus the Undistributed Budget

19. EAC=AC + ETC=$233 VAC=BAC-EAC=($33) ETC=(BAC-EV)/CPI=$146 Example: Earned Value SPI=EV/PV=0.70 CPI=EV/AC=0.81

20. Earned Value Concepts (cont.) • Schedule Performance Index (SPI) – measure of schedule compliance: is work being done at the planned rate? SPI = EV/PV <1  Slower than planned, >1  Faster than planned • Cost Performance Index (CPI) – productivity measure: is the work costing what was expected? CPI = EV/AC < 1 Inefficient, > 1  Efficient

21. Earned Value Concepts (cont.) • Estimate To Complete (ETC) – estimate of the effort required to complete the project from the current date ETC = (BAC – EV)/CPI • Estimate At Completion (EAC) – the estimated total cost of the project EAC = AC + ETC

22. Earned Value Concept Summary

23. Costs of EVMS • Marginal cost of using EVMS is estimated at less than 1% to a few% of total contract cost • Based mainly on large DOD contracts with experienced EVMS users • Some costs are unnecessary according to EVMS criteria, but effort is put into those activities anyway • Expect costs to be higher at STScI due to inexperience in using EVM and our culture • Mitigated by our implementation Christensen, David S., “The Costs and Benefits of the Earned Value Management Process,” Acquisition review Quarterly, Fall, 1998, p. 373.

24. Benefits of Earned Value • It is a single management control system that provides reliable data. • It integrates work, schedule, and cost using a work breakdown structure. • The associated database of completed projects is useful for comparative analysis. • The cumulative cost performance index (CPI) provides an early warning signal. • The schedule performance index provides an early warning signal. Christensen, David S., “The Costs and Benefits of the Earned Value Management Process,” Acquisition review Quarterly, Fall, 1998, p. 373.

25. Benefits of Earned Value • The CPI is a predictor for the final cost of the project. • It uses an index-based method to forecast the final cost of the project. • The “to-complete” performance index allows evaluation of the forecasted final cost. • The periodic (e.g., weekly or monthly) CPI is a benchmark. • The management by exception principle can reduce information overload. Christensen, David S., “The Costs and Benefits of the Earned Value Management Process,” Acquisition Review Quarterly, Fall, 1998, p. 373.

26. “The most common problem product teams face is unreasonable schedule pressure. … When teams are forced to work to unreasonable schedules, they are unable to make useful plans. Every plan they produce misses management’s edicted schedule and is therefore unacceptable. As a result, they must work without the guidance of an orderly plan. Under these conditions, the team will generally take much longer to complete the project than they otherwise would.” Watts Humphrey, “Pathways to Process Maturity: The Personal Software Process and Team Software Process,” SEI Interactive, June 1999.