CHAPTER 8

ESTABLISH PERFORMANCE MEASUREMENT BASELINE

8.1 Introduction

Establish Performance Measurement Baseline is the process of integrating the scope, schedule, and cost baselines into a single project baseline from which to manage and control project performance throughout execution. In addition to the scope, cost, and schedule elements, the performance measurement baseline (PMB) also incorporates undistributed budget (along with its corresponding work) and contingency reserves (alongside with the corresponding risks). The PMB does not include the management reserve. Chapter 6 defines the components of the project budget; the PMB is one aspect of that budget. This chapter discusses how to establish and manage the PMB. Inputs and outputs are shown in Figure 8-1.

The PMB is the basis for project control and, therefore, it should model, as accurately as possible, how the project work and corresponding budget is planned to be executed and earned over time. A poor quality PMB will lead to performance indicators with values that bear no useful relationship to the real status of the project and to the causes of performance variance.

For example, if the work is planned as a gross linear progression over a long period of time, but the physical execution follows an “S-shaped” curve reflecting a varying work rate, the schedule performance metrics are likely to produce a “behind schedule” status in the early stages of the work, even if it is being accomplished at a normal work rate. Likewise, it would produce a false “ahead of schedule” status in the later stages of execution.

8.2 Inputs

8.2.1 Scope Baseline

The scope baseline includes the project scope statement, the WBS, and the WBS dictionary, against which delivery will be compared.

8.2.2 Integrated Master Schedule

The integrated master schedule establishes the schedule start and finish dates for the project activities to be executed in the project.

8.2.3 Project Budget

The cost performance baseline, as defined in the PMBOK^® Guide, is the authorized time-phased budget, that is, the planned value (PV). It represents the expected rate at which the project work is to be accomplished. The time-phased budget baseline should not be mistaken for financial information, for example, when invoices are issued or accepted, and payments are authorized and issued. The budget and funding distributions will often differ throughout the life of the project.

8.2.4 Risk Register

The project management plan incorporates risk responses in various forms according to risk response plans. Some responses may require updating the project plan upfront, while others may require changing the plan according to specific emerging circumstances (or risk triggers). For example, a contingency plan may only be implemented when the probability of a high-impact risk increases significantly.

The implementation of risk responses, upfront or later in the project, will affect the expected rate at which the project work will be executed; therefore, the PMB must account for this factor. Information from the risk register, which may end up in the PMB includes the following:

.1 Agreed-Upon Response Strategies

Risk responses for both negative and positive risks can impact the scope, schedule, and cost of the project.

.2 Contingency Reserves

Contingency reserves are for identified risks that are accepted or for which contingent responses are devised. These reserves can fund contingency plans should they need to be implemented or can fund a necessary reaction to a risk after it occurs. Contingency reserves may be global to the overall project or can be allocated by life-cycle phase or other methods. Other types of risk response strategies (i.e., avoid/exploit, mitigate/enhance, and transfer/share) lead to changes to the project management plan and the PMB, and will already be part of the project scope and corresponding budget. Contingency reserves must be incorporated into the PMB.

The use of contingency reserves is a project risk management practice that is not explicitly applied in all existing EVM standards worldwide. Unlike management reserve (MR), which is not in the PMB but is a part of the project budget base (PBB), contingency reserves are considered to be within the PMB. While in commercial environments the explicit use of contingency reserves in the EVM method is quite common, in more traditional- and government-based EVM environments (such as ANSI-748-compliant projects) the only budget within the PMB that is outside of the WBS and is not time-phased is the undistributed budget (UB). In this case, contingency reserve can be treated as a special application of UB with the difference that that it will only be distributed when a risk occurs or a contingency plan is implemented. It is important to note that contingency reserve, while a common practice for EVM as applied in commercial and other international environments, may represent budget within the PMB that is not identified with scope, and thus would not be acceptable within an ANSI-748-compliant environment. Because this practice standard represents a global view of EVM, we will include the application of contingency reserve as an acceptable practice, which it may not be in the user's EVM environment.

It should be noted that, in any case, contingency reserves are not to be used for the purpose of masking overruns. Instead, these reserves are determined as a result of responding to specific identified risks and therefore are to be applied only toward those risks. While it is expected that the contingency reserve will be consumed to accommodate those risks as they occur or as contingency plans are implemented, there can be situations when the risk is greater than initially estimated and extra budget will be needed, requiring a change request. In the opposite case, when there is an overestimation of risk, there will be budget remaining in the contingency reserve at the end of the project, which may not be applied to mask overruns elsewhere in the PMB.

The Practice Standard for Project Risk Management [7] provides additional information regarding the use of contingency reserves. For a more detailed discussion on the use of reserves in EVM, refer to Appendix E.

.3 Contract Decisions

Transferring or sharing risk via a contract, as a form of risk response, will lead to the involvement of third parties. This will have an impact on how the project work will be accomplished and how the budget consumption will occur and be monitored. The use of EVM to monitor the performance of subcontracted work requires proper consideration in the PMB. For example, the visibility of work accomplishments and budget consumption will depend on the type of contract and the terms agreed upon with the suppliers.

8.3 Description

8.3.1 Project Management Plan Integration

The project management team analyzes, consolidates, and integrates the information from the scope, schedule, and cost baselines. The information from the risk registers and risk response plans is incorporated into the baseline information, as appropriate.

The granularity of the PMB can be progressively elaborated throughout project execution in an iterative process as the project scope, schedule, and cost estimates are refined into greater detail (see Figure 8-2).

8.3.2 The Project Budget Base (PBB)

The project budget base is defined in Chapter 2. The PBB is established and maintained by project management and it is revised only by appropriately authorized changes and with the concurrence of the customer and other relevant stakeholders as established for the project.

8.3.3 Management Reserve

In most projects, and certainly in major projects, there is considerable uncertainty regarding the magnitude of future events or difficulties, beyond project management team responsibility. To accommodate this uncertainty, a certain amount of the PBB can be identified as management reserve (MR).

The management reserve is part of the PBB, but it is not time-phased and is not part of the performance measurement baseline (PMB). As for contingency reserve, management reserve should not be used to mask performance-related overrun conditions. Rather, it is intended to budget responses to unforeseen risks within the project charter's statement of work.

8.3.4 Performance Measurement Baseline

The performance measurement baseline (PMB) is the budget and schedule against which project performance is measured. It is formed by budgets and is assigned to control accounts, summary level planning budgets, and undistributed budgets. It equals the PBB minus the management reserve. The PMB is maintained by project management, and all changes within the PMB are approved by the project manager.

.1 Undistributed Budget

Undistributed budget (UB) refers to project work that has not yet been incorporated into the WBS during planning (and therefore not yet time-phased). It is a temporary holding account for newly authorized work and budget. In practice, this means that the UB is budget that has not yet been assigned to a control account or to an SLPB. At all times, it must be possible to identify the work that is associated with the UB.

.2 Summary Level Planning Budgets

Desirably, all planned resources, including the resources issued from the undistributed budget to the PMB, should be distributed to control accounts if at all practicable. However, because of the size, criticality, or multiple phases of the project, budgets may be authorized to a higher WBS element level (i.e., above the control account), with corresponding work scope and schedule identified on a project work authorization document—these are the summary level planning budgets (SLPB).

These summary level planning budgets and their corresponding high-level tasks in the WBS (i.e., the summary level planning packages), are assigned to control accounts as soon as sufficient definition of the work is available.

.3 Control Account Budgets

Control account budgets and their corresponding work are assigned and time-phased in accordance with an approved schedule and within control accounts, and may include both direct and indirect costs. Control accounts are time-phased according to the rolling wave concept (see 8.3.5), which requires detailed planning of work packages for as specified number of EV reporting time periods before the scheduled start of the work.

The sum of the budgets in a control account is the budget at completion (BAC) for that control account. The time-phased budget spread of all the resources required to accomplish the control account scope of work is called the planned value (PV). Therefore, the sum of all work package budgets plus the sum of all planning package budgets must equal the control account total budget, in each EV reporting period (typically one month) both incrementally and at completion.

8.3.5 Rolling Wave Planning

Rolling wave planning is an iterative planning technique in which the work to be accomplished in the near term is planned in detail, while the work in the future is planned at a more general level. To accomplish this, a planning window is established during which all planning packages are decomposed into detailed work packages (or summary planning budgets into control accounts). This process continues throughout the project until all planning packages are eventually decomposed into work packages.

8.4 Outputs

8.4.1 Performance Measurement Baseline

The performance measurement baseline (PMB) must include, but is not limited to the following elements:

• Schedule start and completion dates for each work package and planning package in the WBS
• Budget for each work package and planning package, and its time-phased distribution, decomposed by the resources allocated
• Time-phased distribution of the quantities of the resources allocated to each work package and planning package
• Description of the risks covered, including: their value, the time period to which they refer and possibly the resource types considered (for example, a cost reserve may include separate limited amounts for external services and for internal resources)
• List of constraints and assumptions regarding work progress, corresponding budget, and resource consumption.

The time-phased information in the PMB should be consistent with the detailed project schedule information at the activity level (for example, the expected time-phased consumption of a specific resource in a work package can be derived from the sequence of its interrelated activities where that resource is allocated).

The information in the PMB must be in sufficient detail to ensure that actual results are properly monitored, recorded, and compared against the planned results. As the project unfolds over time and the project plan is refined into more detail, and as risk reserves are used and converted into work scope and resources, the PMB must be maintained to accurately reflect the expected project outcome as formally approved by the stakeholders.

8.4.2 Project Funding Requirements Updates

The project funding requirements may need to be updated in line with the budgetary decisions made to establish the PMB. This is accomplished in many different ways, and often the funding methodology can be quite different in a government versus a commercial environment.

8.4.3 Project Document Updates

Project documents that may be updated include, but are not limited to the following:

• Scope-related documentation
• Project schedule and time estimates
• Project budget and resource estimates
• Risk register
• Stakeholder register
• Communications management plan

8.4.4 Contract Decisions (Revised)

Establish Performance Measurement Baseline requires agreements with suppliers to ensure that actual progress, cost, and time results are properly monitored for the purpose of the earned value management calculations. For example, assessing the physical progress of subcontracted work requires an adequate level of visibility (how and with what frequency) of the supplier's activities. The supplier must adhere to these requirements and may negotiate extra resources or support from the buyer and this must be reflected in the contract.

8.4.5 Formal Acceptance

There must be only one shared vision of how the project is expected to evolve throughout the life cycle until completion—that is, the performance measurement baseline. A commitment from all stakeholders to this shared vision is a key factor for the success of a project.

8.5 Considerations

8.5.1 Method for Scheduling Level of Effort Work

A project often requires that a certain type of work is executed continuously over a long period of time in a predictable recurring manner, for example, weekly management meetings. Other types of work may also be expected to occur over a reasonably long period of time, but in a less predictable manner, for example, technical support executed “on demand.”

This type of ongoing work needs to be planned for in a way that does not distort the earned value performance indicators, and allows for proper monitoring of progress. For less predictable ongoing work, special care must be taken in any attempt to distribute the resources in a nonuniform manner, which often requires further decomposition of the scope.

Regardless of the method used to deal with this type of work, proper consideration of the impact on the performance indicators is required and the underlying assumptions must be clear when interpreting them. The effort required and the feasibility of monitoring actual results and replanning the project must also be taken into consideration.

8.5.2 Method for Allocating Indirect Costs

Organizational indirect costs (sometimes referred to as “overheads”) are often aimed at supporting the execution of various projects within a portfolio or program, especially in project-oriented organizations. In this type of environment, allocating the correct amount of indirect costs to a project is important for the purpose of controlling the organization's efficiency, profitability, and competitiveness. For example, an underestimated amount of indirect costs may lead to a project that appears to generate a profit to the organization, whereas a loss is being incurred. Likewise, an overestimated overhead may lead to prices that are not competitive, thereby leading to a loss of feasible business opportunities. Reducing the amount of unallocated indirect costs to a residual level in a project-based business model is essential for the effective management of each project and of the organization's overall business.

Indirect costs should be properly allocated and budgeted as appropriate within the PMB. These indirect budgets may be held separately or allocated within each control account, per organizational policies. Thus the entire budget for the project should be a summation of both direct and allocable indirect costs. The responsibility for budgeting and managing indirect costs should be assigned explicitly to an individual or organizational group.

8.5.3 Impact of Different Types of Resources and Costs

When the PMB is established, it is important to take into consideration the measurement methods selected (see Chapter 7), as these will affect when EV performance is taken. The time phasing of PV in turn will be reflected in the PMB. Comparison between the EV and PV will determine the schedule performance and any misalignment may impact this metric.

8.5.4 Method for Incorporating Contingency Reserves into the PMB

When developing the PMB, the amount of contingency reserves needed (see 8.2.4.2), and where it will be held, must be determined. There are various methods and alternatives specific to organizations and project types. Many applications of EVM using software tools in an ANSI 748 environment may not have the capability to establish and maintain visibility of contingency reserve. However, as discussed earlier, contingency reserve is a common management tool in many environments. Contingency reserve is a reserve based on a risk analysis of the baseline (see Appendix E, Integration of Risk Management and EVM). In some environments, contingency reserve is considered a “funding reserve” owned by the customer for allowance of a project's cost growth in a cost plus contracting environment. However, in this practice standard, contingency reserve is a reserve within the PMB managed by the project manager for the incorporation of realized risks. The value of contingency reserve may be established by identification of discrete risks within the PMB or may be based on a statistical risk assessment. Regardless, the contingency reserve allows for adjusting the PMB, that is, it provides additional flexibility due to the realization of project risks. Like management reserve, it is permissible for there to be remaining contingency reserve at project completion. In this case, it is unused, removed from the PMB, and the budget at completion is set to the cumulative EV (PV). When the decision is made by the project manager to utilize contingency reserve during the project's execution, it is added to future baseline periods in response to realized risks. It is not permissible to adjust past baselines, as this could be viewed as the revision of a baseline for the intent of masking variances. The establishment of contingency reserve should be made under the cognizance of the project manager, and, subsequently, the application of contingency reserve to control accounts should follow a disciplined process under the control of the project manager (much like the application of management reserve).

8.5.6 Integration of Subcontractor Baselines

As referred to in 8.4.4, proper contractual agreements with suppliers are essential to ensure that subcontracted work is reflected appropriately in the PMB. The PMB must be aligned with the way in which information will be used to monitor progress and measure actual costs for the subcontracted work. The supplier's level of maturity, culture, and expertise in using earned value management will impact the contract. The contractual requirements for earned value must be feasible, discourage resistance, encourage suppliers to provide accurate information about progress, and stimulate the supplier's performance. The suppliers may or may not use EVM to control the internal performance of their work, but they must provide the necessary information for EVM to be implemented at the project level (i.e., with regard to the buyer's perspective).

8.6 Bicycle Project Example

In our bicycle example (see Figure 8-3), the total project scope in the WBS has a budget of $277,040. This is the distributed budget and no undistributed budget is being considered. The spread of this budget over the planned schedule forms the planned value (PV) in the earned value method.

Based on risks that are under the control of the project management team, and which were identified, analyzed, and responded to, a contingency reserve of $22,960 (cost) and of 10 days (time) was planned to fund contingency plans and reactions to accepted risks as necessary. The project budget plus the contingency reserve form the performance measurement baseline (PMB) against which the project performance will be measured. The PMB for building the bicycle therefore totals $300,000, spread over a period of time of 220 days.

A management reserve of $30,000, representing 10% of the PMB, was constituted by management to account for risks for which the project management team is not accountable (sometimes referred to as “unknown unknowns”). The management reserve plus the PMB forms the project budget base (PBB), also called the contract budget base (CBB) when the project is run under a contract.

8.7 Summary

Establishing the performance measurement baseline (PMB) provides the reference against which performance is measured. The PMB must be an accurate model of how the project is expected to be implemented over time, integrating scope, cost, time, and risk-planning elements. It provides an agreed-upon basis for the purpose of performance measurement for project monitoring and controlling. Once the PMB is approved, performance measurement can begin.

The process of establishing the PMB must take into account some important considerations to ensure that it can effectively incorporate future project changes, the progressive detailing of the project plan (rolling wave), and the way in which risk is being managed. Level-of-effort activities, indirect costs, and different types of resources must be properly considered and incorporated into the PMB. Resource consumption must be properly accounted for to ensure the correct calculation of the project actual cost so it is comparable to the project earned value. The PMB must also incorporate subcontracted work, requiring adequate contractual agreements with suppliers with regard to the collection and use of earned value management information, as appropriate.