Culture Check on using Earned Value in Organization

To EV or not to EV
Prepared by. G.Kabbara
Date: November 15th 2016

Are we ready in the organization for EV?
•Before we embark on an EV program we
need to make an assessment if we will be
able to successfully complete this project;
and to use EV in the company.

Where are we in the PROJECT MATURITY
MATRIX?

• If we are not at least a level 3 maturity level we should not be using
Earned Value. (EV).
• An analogy:-
• If you are learning to dive you would dive off a board close to water surface to
learn the basics. Once your become proficient, you would move to a 3 meter
diving height, then later to a 10 meter diving height to learn advanced skills.
• If you are new to diving you would not start with the 10 meter diving height
unless you are looking to fail!

•The same applies to the use of earned value
analysis. If you don’t have a project organization
with maturity level of 3 or higher, trying to apply
EVA will only lead to failure.

EV in Action
Lets however proceed to understand EV simply

Lets look at a sample project
• This project has an authorized budget of $1,000,000 to be completed
in 1 year. (4 quarters).
• The planned cost for the first quarter is $300,000
• And Actual cost spent at the end of the 1st Quarter is $300,000

Traditional Cost Management
250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Using a traditional
cost management
approach, at the end
of the first quarter
the project manager
would display the
cost performance for
the benefit of
management.

250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k
The approved spend
plan called for an
expenditure of
$300,000 for the first
quarter and actual
results thus far show
an expenditure of
exactly $300,000.

250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k
One could conclude
without further
review that the
project was
performing exactly to
its financial plan:
$300,000 planned
and $300,000 spent.

250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k
•Perfect cost performance.
•Life is good.

250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k
A fairly typical, but
unfortunately potentially
deceptive, approach to
understanding project cost
performance.

250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k
In fact, looking at the
data as displayed
nobody could really
determine the projects
true cost performance.
To Determine the project’s true
cost performance, one would
need to compare the physical
schedule results in the same
format as the cost displays.

On the Road to EV
• There lies the beauty of Earned Value “EV”.
• EV project management requires an integrated baseline plan which relates
the defined scope of work to the budgeted costs.
• Let us now contrast the display with an earned value performance chart.
• Here the total budget of $1,000,000 will be made up from detailed bottom-
up planning that allows for performance to be measure throughout the life
of the project.
• There are ten milestones to be accomplished, and each milestone will have
a weighted value of $100,000. Each time a milestone is completed the
project will earn $100,000.

Earned value performance 1st Quarter.
250
500
750
Authorized Budget
$1,000,000
Planned
Cost =
$300k
Actual Costs =
$300k

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
This chart reflects
actual physical
earned value of only
two milestones
completed,
representing an
earned value of
$200,000, against the
planned value of
$300,000

• The earned value also consist of two elements
• The scheduled work which was completed
• The original budget for the completed work.

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
We can immediately
see that the project
is running behind the
work it set out to do
during the first
quarter.
It had planned to
accomplish $300,000
in and work, but had
accomplished only
$200,000.

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
The project is
running a negative
$100,000 schedule
variance.
Which is defined as
the earned value
($200,000) less the
planned value
($300,000) which
equals schedule
variance (-$100,000)

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
Also the cost actuals
of $300,000, an
amount greater than
the earned value of
physical work
performed of
$200,000.

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
Conclusion
The project has spent
$300,000 in actual costs
to achieve only $200,000
worth of earned value.
An earned value cost
variance is defined as the
earned value
accomplished ($200,000)
less the actual costs
($300,000) which equals
the cost variance (-
$100,000).

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
This is an “Overrun” of
costs. This project can be
said to be running a
negative $100,000 cost
variance.

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
Thus the delicate
relationships reflected
with these actual cost &
schedule performance
relationships can now be
used to predict the final
costs & schedule results
of the project.

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
The Project is in
trouble.
But one could not have
discerned that condition
using a traditional cost
management approach.

250
500
750
Authorized Budget
$1,000,000
Planned
Value =
$300k
Actual Costs =
$300k
Earned Value =
$200k
It is only when earned
value brings in the three
dimensions of
performance that we can
tell that the project is
experiencing problems.
Such issues need to be
addressed immediately in
order to avoid adverse
cost overruns & schedule
slippages.

The fundamental differences
Traditional Project Cost Management
Planned Funds = $300K
Actual Costs = $300K
Variance from an expenditure plan = (OK)
With a plan versus actual costs
comparison there is no way to
ascertain how much of the
physical work has been
accomplished.
Only has significance as a
reflection of whether a project
has stayed with the funds
authorized by management.

This only reflects funding
performance, not true cost
performance. Yet most projects
today typically represent their
cost performance using similar
reporting.

Earned Value Project Management
Planned Value = $300K
Earned Value = $200K
Variance from the planned schedule =(-$100K)
The “true” cost variance = (-$100K)
Now looking at Project
performance using EV.
This displays three dimensions of
data:
1) The planned value of the
physical work authorized
2) The earned value of the
physical work accomplished
3) The actual costs incurred to
accomplish the earned value.

As you can see 2 critical variances
may be ascertained.
1) The project is experiencing a
negative schedule variance of -
$100,000 from its planned work.
Put in another way one third of
the work the project set out to do
was not accomplished in the
timeframe being measure. The
team is clearly behind its planned
schedule.

The Schedule variance in
conjunction with Critical Path
Method (CPM), provides
invaluable insights into the true
schedule status of the project.

The second critical variance 2)
Is the relation ship of value of the
work done, the earned value, to
the funds expended to
accomplish the work.
A total of $300,000 was expended
to accomplish only $200,000
worth of work. Thus the project
has experienced a cost overrun of
minus $100,000 for the work
performed to date.

This negative cost trend is of
critical importance to the project,
for experience has indicated that
such overruns of costs do not
correct themselves over time.
In fact, cost overruns
tend to get worse.

The actual cost & schedule
performance results can also be
used independently or jointly
forecast the final results of the
project with amazing accuracy.

Project Manager Needs to know
• As a given point in time, we need answers to these questions:
1. What work is scheduled to have been completed?
2. What was the cost estimate for the work scheduled?
3. What work has been accomplished?
4. What was the cost estimate of the completed work?
5. What have our costs been?
6. What are the variances?

Project Manager Needs to know
Planned Value
Earned Value
Actual Cost
CPI & SPI
• As a given point in time, we need answers to these questions:
1. What work is scheduled to have been completed?
2. What was the cost estimate for the work scheduled?
3. What work has been accomplished?
4. What was the cost estimate of the completed work?
5. What have our costs been?
6. What are the variances?

THE THREE DIFFERENT TYPES OF PROJECT
MANAGEMENT OFFICES
• 1. Supportive PMO
• 2. Controlling PMO
• 3. Directive PMO

1. Supportive PMO
• The Supportive PMO generally provides support in the form of on-
demand expertise, templates, best practices, access to information
and expertise on other projects, and the like. This can work in an
organisation where projects are done successfully in a loosely
controlled manner and where additional control is deemed
unnecessary. Also, if the objective is to have a sort of "clearing-house"
of project management information across the enterprise to be used
freely by project managers, then the Supportive PMO is the right
type.

2. Controlling PMO
• In organisations where there is a desire to "rein in" the activities,
processes, procedures, documentation, and more - a controlling PMO can
accomplish that. Not only does the organisation provide support, but it
also requires that the support be used. Requirements might include
adoption of specific methodologies, templates, forms, conformance to
governance, and application of other PMO controlled sets of rules. In
addition, project offices might need to pass regular reviews by the
controlling PMO, and this may represent a risk factor on the project. This
works if a) there is a clear case that compliance with project management
organisation offerings will bring improvements in the organisation and how
it executes on projects, and b) the PMO has sufficient executive support to
stand behind the controls the PMO puts in place.

3. Directive PMO
• This type goes beyond control and actually "takes over" the projects by providing the project
management experience and resources to manage the project. As organisations undertake
projects, professional project managers from the PMO are assigned to the projects. This injects a
great deal of professionalism into the projects, and, since each of the project managers originates
and reports back to the directive PMO, it guarantees a high level of consistency of practice across
all projects. This is effective in larger organisations that often matrix out support in various areas,
and where this setup would fit the culture.
• The best type is very specific to the organisation, culture, and history of what works and what
does not. But the objectives are - more or less - to:
• Implement a common methodology
• Standardise terminology
• Introduce effective repeatable project management processes
• Provide common supporting tools
• Ultimately, the objective is to improve levels of project success within the organisation

EIA-748 Guidelines
• Guideline 1 – Define Work Scope (WBS) .................................................................... 4
• Guideline 2 – Define Project Organization (OBS) ........................................................ 5
• Guideline 3 – Integrate Processes .............................................................................. 6
• Guideline 4 – Identify Overhead Management ............................................................ 7
• Guideline 5 – Integrate WBS/OBS to Create Control Accounts ................................... 8
• 2.2 Planning, Scheduling, and Budgeting .......................................................................10
• Guideline 6 – Schedule with Network Logic .............................................................. 10
• Guideline 7 – Set Measurement Indicators ............................................................... 12
• Guideline 8 – Establish Budgets for Authorized Work ............................................... 14
• Guideline 9 – Budget by Cost Elements .................................................................... 18
• Guideline 10 – Create Work Packages, Planning Packages ..................................... 20
• Guideline 11 – Sum Detail Budgets to Control Account ............................................ 22
• Guideline 12 – LOE Planning and Control ................................................................. 23
• Guideline 13 – Establish Overhead Budgets ............................................................. 24
• Guideline 14 – Identify Management Reserve and Undistributed Budget .................. 26
• Guideline 15 – Reconcile to Target Cost Goal .......................................................... 28

EIA-748 Guidelines
• Accounting Considerations
• Guideline 16 – Record Direct Costs
• Guideline 17 – Summarize Direct Costs by WBS Elements ...................................... 30
• Guideline 18 – Summarize Direct Costs by OBS Elements ....................................... 31
• Guideline 19 – Record/Allocate Indirect Costs .......................................................... 32
• Guideline 20 – Identify Unit and Lot Costs ................................................................ 33
• Guideline 21 – Track and Report Material Costs and Quantities ............................... 34
• 2.4 Analysis and Management Reports ..........................................................................36
• Guideline 22 – Calculate Schedule Variance and Cost Variance .............................. 36
• Guideline 23 – Identify Significant Variances for Analysis ......................................... 37
• Guideline 24 – Analyze Indirect Cost Variances ........................................................ 39
• Guideline 25 – Summarize Information for Management .......................................... 40
• Guideline 26 – Implement Corrective Actions............................................................ 41
• Guideline 27 – Revise Estimate at Completion (EAC) ............................................... 42
• 2.5 Revisions and Data Maintenance ..............................................................................44
• Guideline 28 – Incorporate Changes in a Timely Manner .......................................... 44

EIA-748 Guidelines
• Guideline 29 – Reconcile Current to Prior Budgets
• Guideline 30 – Control Retroactive Changes
• Guideline 31 – Prevent Unauthorized Revisions
• Guideline 32 – Document PMB Changes

Earned value cost & schedule performance
indices: The SPI and CPI

References used for presentation
• Articles on Earned Value
• Earned Value Project Management – Fourth Edition
• AAICP

Culture Check on using Earned Value in Organization

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