CHAPTER 2

EARNED VALUE PROJECT MANAGEMENT OVERVIEW

2.1 Introduction

The Practice Standard for Earned Value Management was developed as a supplement to A Guide to the Project Management Body of Knowledge (PMBOK^® Guide). The purpose of this practice standard is to:

• Provide a standard for project management practitioners and other stakeholders that defines the essential aspects of applying earned value in project management.
• Provide a reference for the basic concepts and applications of earned value management that is consistent and globally applicable.

Earned value management is a management methodology for integrating scope, schedule, and resources; for objectively measuring project performance and progress; and for forecasting project outcome. The application of earned value in the early initiation and planning phases of a project increases the validity and usefulness of the cost and schedule baseline and is an excellent verification of the project scope assumptions and the scope baseline. Once established, these baselines become the best source for understanding project performance during execution. A comparison of actual performance (both cost and schedule) against this baseline provides feedback on project status and data, not only for projecting probable outcomes, but also for management to make timely and useful decisions using objective data.

A fundamental principle of EVM is that patterns and trends of performance, when compared against a soundly developed baseline, can be excellent predictors of the future project performance. Feedback is critical to the success of any project. Timely and targeted feedback can enable project managers to identify problems early and make adjustments that can keep a project on time and on budget. EVM is considered by many to be one of the most effective performance measurement and feedback tools for managing projects.

In addition to basic cost and schedule baseline development and performance feedback, EVM also emphasizes the importance of many other considerations necessary for project management, such as organizational structure, cost collection strategies, and the incorporation of approved project changes.

EVM provides organizations with the methodology needed to integrate the management of project scope, schedule, and resources. This standard uses the term project scope to mean the work that must be performed to deliver a product, service or result with the specified features and functions. EVM can play a crucial role in answering management questions that are critical to the success of every project, such as:

• Are we delivering more or less work than planned?
• When is the project likely to be completed?
• Are we currently over or under budget?
• What is the remaining work likely to cost?
• What is the entire project likely to cost?
• How much will we be over or under budget at the end of the project?
• What is driving the significant cost and/or schedule variances?

2.2 EVM and the Project Management Process

The practice of EVM is consistent with good project management as outlined in A Guide to the Project Management Body of Knowledge (PMBOK^® Guide). Figure 2-1 shows the relationship between EVM and the PMBOK^® Guide’s Project Management Process Groups and Knowledge Areas, and highlights the areas of project management to which EVM is fundamentally most applicable.

Project planning is mostly a matter of determining:

• What work must be done (scope) and in what pieces (work breakdown structure).
• Who is going to perform and manage the work (responsibility assignment matrix).
• When the work will be done (schedule).
• The cost and quantity of the labor, material, and related resources the work will require.

Project control focuses mostly on monitoring and reporting the execution of project management plans. Project control is a process for keeping work performance and results within a specified tolerance range of the work plan.

As a performance management methodology, EVM adds some critical practices to the project management process. These practices occur primarily in the areas of project planning, execution, and control, and are related to the goal of measuring, analyzing, forecasting, and reporting cost and schedule performance data for evaluation and action by the project team and other key stakeholders.

The structure of this Practice Standard for Earned Value Management will focus on these processes. For purposes of this practice standard, it is assumed that a project has been initiated, stakeholders have been identified, and the project and product requirements have been collected. Therefore, this practice standard begins with defining the scope after the requirements have been defined. Figure 2-2 illustrates the process flow that will be used to introduce the EVM topics discussed in this practice
standard.

2.3 Basic EVM Terminology

Throughout this practice standard, core terminology is used frequently and is fairly unique to earned value management. These terms are defined in greater detail in later chapters; however, an overview in this chapter may help with a basic understanding of this practice standard.

• Actual Cost (AC). The realized cost incurred for the work performed on an activity during a specific time period. This can be reported for cumulative to date or for a specific reporting period. May also be known as the actual cost of work performed (ACWP).
• Budget at Completion (BAC). The sum of all the budgets established for the work to be performed on a project, work breakdown structure component, control account, or work package. The project BAC is the sum of all work package BACs.
• Contingency Reserve. Budget within the performance management baseline that is allocated for identified risks that are accepted or for which contingent responses are devised. While not often used on ANSI-748-compliant projects [2], these contingency reserves can fund contingency plans, fall back plans, or address the residual risk that remains after the risk response planning process. Unlike management reserve, which is not in the performance measurement baseline (PMB) but is a part of the project budget base (PBB), contingency reserves are considered to be within the PMB. In commercial environments, the explicit use of contingency reserves in the EVM method is quite common. In more traditional and government-based EVM environments, 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 it will only be distributed when a risk occurs or a contingency plan is implemented. Because contingency reserve is a budget within the PMB that may be without identifiable scope, the application of contingency reserves on projects with an ANSI-748 compliance requirement may not be acceptable.
• Control Account. A management control point where scope, budget, actual cost, and schedule are integrated and compared to earned value for performance measurement. Each control account may be further decomposed into work packages and/or planning packages. Control accounts can belong to only one WBS component and one organizational breakdown component.
• Distributed Budget. The budget for project scope that has been identified to work breakdown structure (WBS) control accounts. This budget also has an identified responsible manager (control account manager). The distributed budget forms the basis for the planned value (PV).
• Earned Value (EV). The measure of the work performed, expressed in terms of the budget authorized for that work. Earned value can be reported for cumulative to date or for a specific reporting period. May also be known as the budgeted cost for work performed (BCWP).
• Estimate at Completion (EAC). The expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete (ETC).
• Estimate To Complete (ETC). The estimated cost to finish all the remaining work. Adding the ETC to the actual cost (AC) will result in the estimate at completion (EAC) at any level of the project.
• Management Reserve (MR). An amount of the project budget base (PBB) withheld for management control purposes. These are budgets reserved for unforeseen work that is within scope of the project. The use of management reserve requires special authorization from management. It is used in special circumstances where the project manager sees the need to change the performance measurement baseline, but doesn't change the project's budget as defined in the contract or project charter.
• Performance Measurement Baseline (PMB). An approved integrated scope-schedule-cost plan for the project work against which project execution is compared to measure and manage performance. The PMB is formed by the budgets assigned to control accounts plus budgets with identified scope that have not been distributed to control accounts (undistributed budget). The PMB is the equal to the distributed budget plus the undistributed budget. It does not include management reserve.
• Planned Value (PV). The authorized budget assigned to scheduled work as of a given reporting date. At any point in time, planned value defines the work that should have been accomplished. Planned value can be reported for cumulative work to date or for a specific reporting period. May also be known as the budgeted cost for work scheduled.
• Planning Package. Work and budget that have been identified to a control account but are not yet defined into work packages. This is a future effort for which detailed planning may not have been accomplished. Prior to beginning the effort within a planning package, work and budget must first be converted to one or more work packages.
• Project Budget Base (PBB). The starting point upon which original budgets are built. This represents the total budget for the project, including any management reserve and estimated costs for work that has been authorized but is not yet fully defined. When the project is chartered by a contract, this is known as the contract budget base (CBB).
• Summary Level Planning Budget (SLPB). A time-phased budget for future work that cannot be reasonably planned down to control accounts. Budget and scope held in SLPB should be moved to control accounts as soon as practicable, but before the work within them begins. Not all projects will use an SLPB, but it is an available tool in certain circumstances. May also be known as a summary level planning package (SLPP).
• Undistributed Budget (UB). The budget for project scope that has not yet been identified to WBS elements and, below those, to control accounts. This budget has not yet been distributed to a responsible control account manager (CAM). An undistributed budget is generally not time-phased.
• Work Package. The work defined at the lowest level of the work breakdown structure for which cost and duration can be estimated and managed. Each work package has a unique scope of work, budget, scheduled start and completion dates, and may only belong to one control account.
• Work Breakdown Structure (WBS). The work breakdown structure (WBS) is a hierarchical decomposition of the total scope of the work to be carried out by the project team to accomplish the project objectives to create the required deliverables. For EVM, the work breakdown structure is a deliverable-oriented hierarchical decomposition of the work to be executed by the project team in order to accomplish the project objectives. It organizes and defines the total scope of the project. See the Practice Standard for Work Breakdown Structures [3] for additional information.
• Work Breakdown Structure Dictionary. A document that provides detailed deliverable, activity, and scheduling information about each component in the work breakdown structure. See the Practice Standard for Work Breakdown Structures for additional information.

Figure 2-3 shows a sample chart that depicts many of these terms. Another depiction of the relationship between the budget elements is illustrated in Figure 2-4.

2.4 Basic EVM Concepts

Proper planning requires a firm grasp of product and project scope. During the planning process, emphasis is placed on gaining agreement among the key stakeholders regarding the project objectives. At this point, the scope of the project needs to be further elaborated, using a work breakdown structure, into executable and manageable elements called work packages. The work packages are organized in control accounts according to the project organization breakdown structure and responsibility assignment matrix. The control account manager is responsible for detailed planning of work packages within their control account.

Project work needs to be logically scheduled through the completion of the project, including the identification of critical milestones. The project schedule will show the timing of key accomplishments and interfaces, plus provide evidence that the project management plan supports the stakeholder agreement regarding project objectives. Scheduling cannot be executed without knowledge of resource availability and constraints. This is an iterative process until a balance is struck that meets project scheduling objectives within the identified resource limitations.

Once the work is logically scheduled and resources identified, the work scope, schedule, and cost need to be integrated and recorded in a time-phased budget known as the performance measurement baseline. This is the time-phased budget plan that will be used to measure project performance. In the planning process, the means for assessing physical work progress and assigning earned value is documented. In addition to routine project management planning, earned value measurement techniques are selected and applied for each work package based on scope, schedule, and cost considerations.

In the project execution process, EVM requires the recording of resource utilization (i.e., labor, materials, and the like) for the work performed within each of the work elements in the project management plan. In other words, actual costs need to be captured in such a way (both per the WBS and the calendar) that permits their comparison with the performance measurement baseline. Actual costs are collected at the control account level or below.

In the project control process, EVM requires physical work progress assessment and assessing earned value (using the selected earned value measurement methods). With this earned value (EV) data, the planned value (PV) data from the performance measurement baseline, and the actual cost (AC) data from the project cost tracking system, the project team can perform EVM analysis at the control account and other levels of the project work breakdown structure and report the EVM results as needed. In addition, this analysis can be used to develop corrective action plans for any discovered issues and update the forecast of expected project costs.

Project changes, either driven by stakeholders external to the project team or by the project team themselves, are implemented into the project baseline in a timely and accurate fashion using a change control system established for the program. The same care that was taken to initially establish the performance measurement baseline (PMB) needs to be continued to maintain a valid PMB throughout the life of the project.

In summary, EVM facilitates the planning and control of cost and schedule performance, thus improving project management visibility and understanding. The key practices of EVM for planning, executing, and controlling a project include:

1.   Define product and project scope and decompose work to a manageable level.

2.   Assign clear management responsibility for discrete work elements.

3.   Plan the activities of the project into a logical schedule.

4.   Develop a time-phased budget for each element of the WBS.

5.   Select EV measurement techniques for each work package prior to execution.

6.   Establish a performance measurement baseline based on the previous five steps.

7.   Develop a structure for collecting costs into the same accounts and time periods where performance is being measured.

8.   Determine earned value by objectively measuring the physical work progress according to the earned value technique selected for the work.

9.   Analyze cost/schedule performance.

10. Forecast cost /schedule performance.

11. Project the estimates at completion.

12. Report performance problems and take appropriate corrective action.

13. Maintain integrity of the PMB.

2.5 Considerations

While this practice standard assumes the implementation of EVM on a large project in order to provide all necessary information on EVM, this practice standard may be applicable to smaller scale projects as well. EVM is scalable, and implementing the approach depicted in the EVM system diagram in Figure 2-5 enables the basic concept of EVM to be implemented on projects of any size.

Alignment of the activities defined in the WBS into the project cost and scheduling subsystems is a project management practice. This also enables the project to undertake the following EVM core concepts:

• Measuring and comparing the value of the work performed (earned value) with the value planned and actual costs expended to accomplish that work as the project progresses.
• Developing forecasts, for example, EAC, ETC, VAC, etc.