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What is Earned Value Management, in real terms?

Brian Ruff 07-19-2012

“We manage what we measure.” This is a commonly repeated phrase to describe the concept of management in business, regardless of the industry in which you work. However, if you just happened to have worked on any project, for any company, for any extended period of time you are no doubt aware of how quickly this ideal can break down when it comes into contact with that persistent, irritating thing known as reality.

When companies begin projects, many are masters of creating plans of one form or another. Microsoft Project is a ubiquitous tool (although an understanding of its capabilities and limitations usually is not). Project Managers spend countless hours composing plans that are organized into Project Management Institute (PMI)-grade phases with resources, comments about risk and simple cost information. When a project is “baselined,” ONLY the schedule is “locked in,” and good or bad performance is measured against how well we’re doing against said schedule. How much a project actually costs is managed by someone other than the Project Manager, often in Accounting. This approach is especially common in small or young companies (or young project teams) seeking to move quickly in a competitive world.

However, when planning turns to execution, impressive-looking project documents or Gantt Charts often become what Ursula Kuhn in her book Integrated Cost and Schedule Control in Project Management calls “expensive wallpaper.” This is because what is often missing between a project’s planning and execution phase is management deciding on how to answer an important question: “how are we going to figure out how we’re doing while we are doing it?” Of course, companies that are in control of their finances know how much they spend on projects. Project managers are told by their staff how close they are to being finished. But very often those two measurements of progress are disconnected. In these situations, when “crunch time” hits to complete work on time, schedule progress is everything – and cost is compensated for by the dedication of the people working more than eight hours per day to get the job done.

Several managers with whom I’ve worked have been fond of asking their Project Leads to imagine what would happen if an airplane functioned in this manner. How likely is a plane to reach its destination if its altimeter, fuel gauge, airspeed and compass were approximate or did not function together? As a child of the 1980’s, I’m reminded of the engine warning indicator in the movie Airplane! That simply flashed: “A Little Hot.”

In real terms, Earned Value Management (EVM) is a time-tested practice of developing accurate instrumentation for projects in flight. The key principle in implementing EVM for any project is simple: I will measure my progress for project work based on a monetary value that we agree any work is worth. This change in perspective means a Project Manager cannot simply report that a critical task is “50% complete.” He must report that a critical task has earned a dollar value against how much a task was budgeted to cost. Note that this is different from saying how much was really spent (i.e., in Accounting terms). How much is spent on project work is based on fixed rules of how an organization manages its books. What we are doing here is developing a set of rules to decide in advance on how valuable work accomplished truly is, in a way that can be compared to the accounting dollars spent – we’re comparing apples to apples.

Let’s take an example. A company is building a new cell phone. A critical component of the cell phone is completing the touch screen display. In an EVM-based project, we cannot say that we are “at 25% complete” for the display, and the accounting department has the complete cost based on our time sheets and invoices. We MUST have organized and planned our work in advance accurately enough to be able to say: “At this point in the project, the display is budgeted to have finished $250,000 worth of the $1 Million the display is supposed to cost to develop. We have earned $280,000 worth of dollar value progress based on the rules we have decided upon in advance (say that we decided for every 10 requirements we complete out of a total of 100, we will earn $100,000 in earned value – and we’ve finished 28). Good news, right? However, our invoices and time cards indicate that the actual cost for what we’ve done so far is $500,000 dollars. So while we might be able to report a sunny outlook that we are ahead of schedule, It’s clear we’re going to have problems – and it’s clearer much earlier in the project than if we hadn’t developed rules for how much value work earns in dollars during each part of the project.

Even in this short example, it’s easy to see that using EVM can appear to grow complicated – not so much in principle, but in all of the decisions necessary to organize and plan a project in a way that we can accurately measure its “flight path” in a monetary way. The American National Standards Institute and Electronic Industries Association (ANSI/EIA for short) have developed and refined a set of guidelines for organizing, planning, measuring and controlling an Earned Value Management System (EVMS). This has given way to guidelines from the National Defense Industrial Association (NDIA) and refinements made by other organizations, including the Association for the Advancement of Cost Engineering (AACE).

However, underneath the potential complexity is a very simple truth: projects that have even a fair amount of length and complexity need more than just best-laid plans. They need accurate gauges that measure their progress as they are happening in a way that course corrections can be made as early as possible. In real terms, Earned Value is a roadmap for projects to build reliable flight instrumentation that provides feedback before a crash.

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