Monday, July 12, 2010

Effective Use of Earned Value Management - Part 2

In Part 1 of this series on Earned Value Management (EVM), we looked at the what and why of earned value management.  In Part 2, we will look at the how.  This is important for any CFO to understand as it gives them a measurable way to gauge the health of the projects under their control.  Many steering committees get bogged down by details provided by well-meaning project managers.  In order to understand what is critical to a project, you should insist on a one-page view of the project covering the highlights and the financial health (including total cost of ownership metrics and benefit tracking key performance indicators).  EVM metrics, as we shall see, will provide you with enough executive-level data points to understand where your projects are at and, more importantly in the case of schedule or budget over-runs, challenge your managers on how to get them back on track and under-budget.
The process that we will elaborate will be based on the simple outline of
·      Build the project plan
·      Calculate Planned Value
·      Track Progress Using Earned Value and Actual Costs

Build the project plan

As projects are initiated, you should insist that your project managers build project management plans.  While the Project Management Institute provides for a specific and robust definition of a project management plan (hint: it’s more than just a Gantt chart), for our purposes here, we are just going to focus on the project schedule. 

The project schedule must have some specific elements in order to be able to measure EVM.  Generally speaking, project schedules must have the tasks identified to complete the project.  I like to see tasks identified where individual accountability can be assigned.  Each task should also have an estimated effort.   I like to see tasks identified that take no less than 8 hours and no more than 5 business days.   There are not right or wrong answers when it comes to defining project tasks or duration.  You should use a fine enough granularity to accurately report status.  If you need to report status weekly, your tasks should be daily or even hourly.

Ideally, use project management software to build the project plan, however don’t let the lack of a tool stand in the way of progress.  Very robust project schedules can be built using your favorite spreadsheet program.  Depending on the environment, this is sometimes my preferred method since it allows the team to move forward without be encumbered by a specific tool’s methodology.

A very simple example,
Task NameFinish DateEffort (hours)Resource
Task 11/1015Tom
Task 21/112Ken
Task 31/1525Jim
Task 41/1716Ken
Task 51/198Jim
Task 61/202Jim
Task 71/2320Tom
Task 81/2516Jim
Task 91/268Ken

 One final note: once the project plan is created and everyone feels comfortable with the tasks, due dates, durations and assignments, baseline the plan. Any changes to the plan should be formally approved as part of a steering committee so everyone understands if there are impacts to dependencies.

Calculate Planned Value

Now that the project plan is complete and baselined, we can calculate the planned value. Typically, the task’s value will be the estimated work required to complete (hence, if a task takes 15 hours to complete, it's value is 15 hours). If the task uses billable resources, you might use the actual planned cost (hours times rate). For this exercise, we’ll use estimated work as the planned value.

Track Progress

As your project managers begin to track progress, there are a few things to keep in mind:
A) You receive credit for a task when you complete it.  In EVM, there is no credit for 90% complete. It either is or is not complete.
B)  As your project progresses, you should be earning value according to the planned schedule.  This is why it is critical to baseline the project plan and ensure that dates are not changed after the baseline occurs.  Having the baseline is what tells you where you are at on the schedule.

Let's look at our example: A
s of January 18, we’ve completed tasks 1 to 3 but are only 50% of the way done with task 4 (no credit for this!). 
Our planned value was
–        15 + 2 + 25 + 16 = 58
Our earned value is
–        15 + 2 + 25 = 42

Task NamePlanned ValueEarned Value
Task 11515
Task 222
Task 32525
Task 416
Task 58
Task 62
Task 720
Task 816
Task 98

For many projects, tracking planned and earned value is sufficient. Just having the data above will allow you to make better decisions as a leader.  Too often I have seen steering committees make decision based on a red-yellow-green indicator of project health without really understanding what those values mean. 

For other projects (such as outsourced projects and consulting engagements), cost management is also important.  To get there, we need to add one element to our example;
Costs actually incurred and recorded in accomplishing the work performed within a given time period

Our planned value was
–        15 + 2 + 25 + 16 = 58
Our cost value is
–        11 + 1 + 23 = 35

Task NamePlanned ValueActual Cost
(Hours spent doing work)
Task 11511
Task 221
Task 32523
Task 416
Task 58
Task 62
Task 720
Task 816
Task 98

Note: If resources are used that have different hourly costs, you would track with $$ instead of time.

Conclusions to be drawn?
  • We are behind schedule (schedule varience % = (Earned Value - Planned Costs)/Planned Value = -27.6%)
  • We are under budget (cost varience % = (Earned Value - Actual Costs)/Earned Value =  16.7%)

The problem does not appear to be that we underestimated the work that needs to be done; rather that we overestimated the availability of the resources.

In summary, EVM provides an objective measurement of work accomplishment and CFOs should consider using it to track projects for which they are the sponsor or key stakeholder.

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