Earned value management keeps engineering projects on track

June 2013 » Features » BUSINESS STRATEGIES
Metrics indicate a project's direction and provide an early warning of cost and schedule problems
Javier Sloninsky

Earned value management (EVM) was conceived as a method of measuring performance in a way that makes it easy to understand final outcomes based on the current trajectory of a project or program. Using cost and schedule performance and analysis of how these metrics interact, EVM techniques have been employed to great effect in the industrial and manufacturing sectors for many years to measure efficiency in producing output.

Initially, EVM gained significant traction with the U.S. Government, specifically the Department of Defense. As the industry standard defined by the American National Standards Institute (ANSI) EIA-748, EVM must be implemented for control of project performance during the project execution phase on all projects with a total project cost greater than $20 million.

However, EVM techniques are not well understood by the wider business management community and have historically been viewed as low-level metrics employed by engineers as part of the planning process. This is changing as business leaders begin to recognize their value not only in terms of measuring productivity and forecasting results but also in being able to better predict project outcomes, take corrective actions, and increase the probability of success.

Building on earned value
The concept of earned value (EV) is to put a number on what has actually been accomplished at any given point. It provides a measure of project performance by comparing work completed against work planned as of a particular date. This approach relies on the ability to determine the physical amount of work performed, what has actually been produced for the amount of money spent, and looks to whether it is being produced at the rate originally planned. EVM builds on fundamental EV metrics, such as cost and schedule performance, and uses them to automatically calculate independent estimates at completion. The latter are objective forecasts of the total cost of the project based on actual performance trends, which are calculated by measuring project progress against the agreed plan.

For example, one of the most common tasks for engineers is developing piping plans, which are required for almost any type of new structure. If a piping plan has a budget of 100 engineering hours, and engineers have worked 50 hours but only completed 30 percent of the work, then half of the budget has been burned with only 30 percent of the work complete. If that current trend were to continue — it takes another 50 percent of the budget to complete 60 percent of the work — then ultimately only 60 percent of the work will be complete but 100 percent of the budget will have been burned.

Although this approach might sound simplistic, it should be considered that large projects will have thousands of piping plans being developed simultaneously. Furthermore, the concept of EVM can be applied to almost any activity including site surveys, preparing equipment specifications, line drawings, and architectural plans. Even obtaining permits can benefit from EVM analysis, given that a series of steps must be accomplished and that any delays will have a direct impact on an organization not just in terms of cost, but also in terms of time and labor hours.

Rules of credit
Another important concept that goes hand in hand with EVM is progress measurement, whereby an organization agrees to a set of objective discrete steps with its contractors and suppliers. These steps are known as rules of credit or milestones, and are applied within EVM to automatically signify percent complete.

Returning to the piping plan example, each plan would be defined as a deliverable or work package under EVM, with progress measured using the agreed rules of credit such as create initial draft (10 percent), submit for quality review (30 percent), incorporate comments and revise (20 percent), arrive at final valuation (remaining 40 percent). These are all weighted steps that determine completion and allow organizations to use their experience to know with certainty when these deliverables or work packages are complete, or how far along they are at any given point in time.

EV and progress measurement can also help mitigate the impact of the invoicing process. Vendors and contractors often will be working on an hourly basis and invoicing monthly, or on completion of a project phase. Therefore, measuring what is being spent month to month would not necessarily highlight any overruns or work accomplished. If the project management team is reliant on seeing their actual expenditures to measure their progress, they might get a nasty surprise further down the line.

For example, if a contractor is working a $100,000 contract and the agreed rules of credit indicate that it is 70 percent complete, then the value of work done (i.e. the EV) is $70,000. However, if EV is not applied and the contractor sends in a monthly invoice for $20,000, there is $50,000 of work done outstanding that will be invoiced the following month. That $50,000 is called an accrual, and although it might be reported back to accounting, applying EV ensures the project management team knows that the total cost will be $70,000 and predict whether the project will complete on target.

EVM and project controls
The main benefit of EVM is that it improves predictability. It allows an organization to establish what has been completed against standard rules of credit, and then use the level of performance (or productivity) achieved to provide a more realistic assessment of where a project is heading versus looking at percent of budget spent.

EVM helps to identify areas of underperformance in need of correction. This can be the difference between finishing a project successfully or incurring considerable penalties — whether financial or otherwise. If an organization is not happy with what is being forecast, it can set targets for improvement, with milestones it can monitor against. Should an acceptable level of performance fail to be achieved, it can then take remedial action — reducing project scope or streamlining delivery (sometimes called value engineering) for example, or even making the decision not to proceed with a project.

All of these factors are part of the project controls cycle. Designed to protect margins and drive profitability through successful project delivery, project controls include standardized approaches, processes, and reporting — from initial estimating and budgeting, through forecasting, measuring progress, controlling change, reconciling actual expenditures, and project close out.

A project controls solution is a business-driven technology providing a centralized repository for all project costs and standardized cost control structures with project-specific flexibility. They bridge the gap between the traditional silos of spreadsheets, ERP/accounting software, and scheduling tools to provide the visibility into metrics and performance necessary to make proactive decisions to improve performance during delivery. They also make it much easier to evaluate performance across multiple projects, assign resources, and assess a rolled-up portfolio view of performance.

Informed decision making
Ultimately, project controls should provide the ability to measure, forecast, and improve performance across an entire project portfolio. These three elements are critical and should serve as a philosophical basis for organizations of any size looking to adopt a standardized approach across the enterprise.

Naturally, the level of EVM applied will vary by organization. However, every organization needs at least a solid platform for budgeting, forecasting, and change management. They may be using templates for work breakdown structures (WBS) and progress measurement rules, or they may have standard reports and views enabling them to see performance over time, as well as cumulatively.

Decision making can be aided by tailoring terminology to match organizational culture, for example, referring to CPI (cost performance indices) as "earned over burned" so that the key implications are not lost due to technical speak. In practice, EV quickly becomes a core part of business practice when non-EV key performance indicators (KPIs) are already in place. For example, risk ratings, project scores, and schedule KPIs can sit side by side in a rolled-up dashboard, enabling project management teams to provide EVM on costs, hours or quantities, document variance analysis, and justification beyond reporting trends and variance.

EVM is simple at a granular level, but can be rolled up to provide broader indication of productivity for work completed to date. What's more, it allows organizations to make certain assumptions based on whether performance can improve, or even potentially decrease in the future and set some best- and worst-case scenarios.

Senior management has always been interested in scenario analysis tools and obtaining better predictive outcomes, but what has really changed with EVM and the emergence of project controls solutions is the ability to present this information in business terms, within an organizational context, and to relate it directly to the impact on the bottom line and profitability.

Javier Sloninsky is the managing director and CEO of EcoSys, a provider of enterprise project controls and portfolio management software for industries including energy and utilities, transportation, engineering and construction, government, and IT. He has more than 16 years of leadership and hands-on experience in the commercial software industry. Before co-founding EcoSys in 2000, Sloninsky served as a product manager at Eagle Ray Software Systems (acquired by Primavera Systems, now part of Oracle).


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