Foundations of Good Earned Value Management

Carlos Ruiz

In this blog, I will cover the foundations of good Earned Value Management (EVM). EVM is a project management method that helps project managers measure project performance objectively. It helps answer three key questions about a project:

Where have we been?
Where are we now?
Where are we going?

First, I will explain the basic principles of EVM and fundamental pillars for its implementation. Then, I will provide some practical examples of how EcoSys Enterprise Project Performance (EPP) software helps you apply EVM easily, and to maximum effect.

Key Earned Value Management Terminology

Basic principles of EVM include measuring, forecasting and improving project performance. This is accomplished using three key dimensions:

Planned Value (PV) – is the authorized budget assigned to scheduled work. It defines the physical work that should have been accomplished at the status date.
Earned Value (EV) – is a measure of work performed at the status date expressed in terms of the budget authorized for that work.
Actual Cost (AC) – is the cost incurred for the work performed on an activity during a specific time period. In other words, it is the amount of money you have spent in accomplishing the work that the EV measured.

Using these three values, we can then determine the variances and performance indicators:

Schedule Variance SV = EV – PV
Cost Variance: CV = EV – AC
Schedule Performance Index: SPI = EV / PV
Cost Performance Index: CPI = EV / AC

System Architecture

Here is a typical system landscape supporting EVM:

The ERP system (SAP, JD Edwards, Oracle EBS, Baan or other) contains key information such as actual cost, timesheets, commitments, etc.
The Enterprise Project Performance system (EcoSys) becomes the central platform and EVM engine. You can bring together key data from other systems. Then, you can perform key functions such as budgets, change management, progress measurement, earned value analysis, forecasts and reporting.
The scheduling tool (Primavera P6, Ms Project, Safran or other) is the basis of key information. This includes information such as the WBS, activity codes, dates, resource allocation and percent complete.

Earned Value Management Processes

ISO 21508 provides guidance for practices of EVM in project and program management. It is applicable to any type of organization including public or private and any size or sector. It also applies to any type of project or program in terms of complexity, size or duration. The main processes are the following:

Project planning processes (Plan the work) with the PMB as the final deliverable.
Processes of execution of the plan (Work the plan) that generate the reports and support decision making.

Important! Not all processes are sequential. Return flows are marked in red.

Pillars That Support Earned Value Management

1. Define Scope

The first step is to clearly define the scope of the project through the Work Breakdown Structure (WBS). We also need to identify the groups and individuals responsible for performing that scope through the Organization Breakdown Structure (OBS).

At the intersection between the WBS and the OBS, we identify the Control Accounts (CAs). This is the control point where we integrate scope, schedule, budget and compare with the earned value. This is typically assigned to a Control Account Manager (CAM).

We will also need to analyze the information from different perspectives or alternative structures (ABS).

The following figure shows an example of one of our clients. In addition to monitoring the performance at each level of the WBS, they also wanted to analyze the performance of each discipline within the project. We can achieve this by creating the alternative “Discipline” structure and assigning a code to each work package.

2. Budget Over Time

The next step will be to create a time-phased budget for the project or performance measurement baseline (PMB).

In the case of Oil & Gas or EPC projects, it is common to have a detailed estimating template based on years of experience estimating a type of projects. You can import that information from Excel, or develop it directly in EcoSys.

We also need to define the start and end dates, and the curves for time-phasing the budget. This information is typically brought from a scheduling system via automated integration. In addition, EcoSys allows you to define this information at the WBS control level or at the cost item level.

In other cases, you may use a schedule-driven approach. This is where you develop a resource-loaded schedule. The dates, resources and resource assignments can be brought into EcoSys. You can then use the P6 Adapter or the Web Services API depending on your requirements.

Once the information is in EcoSys, you can apply the rate tables to obtain the time-phased budget or S-Curve. You can also enter or calculate indirect costs such as Overheads, G&A, Cost of Money, etc.

3. Actual Cost

Once project execution has begun, you need to start collecting the actual cost. This is where the automated integration with the ERP system is valuable. It gives you a reliable and well-understood import that follows the rules to categorize the incurred costs into the right cost elements and projects. In the figure below, you can see the integration with SAP using the EcoSys SAP Adapter.

In addition, there are often elements that have been incurred but have not yet reached the accounting system (accruals or provisions). You can either enter these manually in EcoSys or bring them in from an external system.

4. Progress Data

At the same time, it is best to collect progress data in the most objective and automated way possible. To achieve this, you will need to measure progress with different methods and from different sources.

The earned value techniques (EVTs) available in EcoSys are aligned with those defined in the PMI Practice Standard for EVM. You need to select the appropriate EVT based on the duration and characteristics of the work package.

Capturing Progress

Discreet Effort

Fixed formula (0/100, 50/50): Method that assigns a specified percentage to the start of the work package and the remaining percentage to the end of the work package. For this method, you will need the actual start and end dates from the schedule.
Weighted Milestones: Method that divides a work package into measurable segments each ending with an identifiable milestone. The project manager assigns a weighted value to each milestone. Then, these milestones are traceable with a milestone or activity in the schedule.

Percent Complete: The CAM determines the percent of completed work, which can be objective or subjective. The CAM should have Quantified Backup Data (QBD). You can also import the % complete from the % complete field from your scheduling tool.

Physical Measure or Weighted Quantities: Method that measures the actual units performed out of the total number of budgeted units established for that activity. You need to establish how the units will be measured in advance.

Apportioned Effort (AE)

A method for effort that is related in direct proportion to measured effort and by itself is not readily measurable or broken into discrete work packages. Typical uses of this method include quality assurance, inspection, as well as testing.

Level of effort (LoE)

Effort of a general or supportive nature that does usually produce measurable end products or an established relationship to other measurable effort. With LoE, EV=PV. Do not use in excess in order to avoid SPI distortions.

Automated Progress Measurement

In addition, you can automate the progress measurement by collecting data from the different systems in the organization:

The scheduling tool is the most common source for many of our clients. The start and end dates of the activities and the % complete are fed to the EVM tool.
Construction management systems to capture installed quantities. A main advantage of this technique is the elimination of subjectivity.
Design software for engineering deliverables based on progress milestones and the visualization of progress.
Information management systems to manage the completion of deliverables and deliverable packages.
Material management systems to measure the progress of procurement based on material receipts or contractual milestones.
The ERP system is the source of the cost incurred and the accruals.

In this case, you can use integrated earned value techniques by leveraging other Hexagon PPM solutions, such as: Smart 3D, Smart Materials, Smart Construction and SDx Projects.

If you would like more information on this topic, watch this webinar on The Digital Transformation of Progress Measurement .

Earned Value Analysis

Once you have the progress information available in the system, you can calculate the earned value and perform the productivity analysis in EcoSys. The system will generate CPI, SPI, TCPI and TSPI metrics, as well as independent EAC calculations, providing indications of how much the estimate at completion based on performance to date could be.

Forecasts

This finally leads us to forecasting. Like progress methods, there are also different forecast methods available in EcoSys. You can apply these forecast methods at different levels of the WBS. They allow you to automate the forecast based on information already existing in the system (Actual Cost + Open Commitment, Current Budget, Current CPI, Current Forecast). It also allows you to calculate a new EAC estimate entering manual values (Manual EAC, Manual ETC or Manual Factor).