Practical Project Management

Budget versus actual cost is not enough information to properly analyze project performance. Earned value places schedule status in dollar amounts for proper project analysis. It is much easier to compare budgeted dollars to earned dollars than to compare budgeted dollars to a subjective percent complete of the entire project. It is this comparison that gives early warning signs to the project's health before the actual costs are above the total budget. Therefore, an earned value management software system is the best place to retrieve valuable information needed for reliable analysis of your project's health.

We continue to work at a breakneck pace in order to satisfy our customers and remain competitive. Our companies undoubtedly live and die by the success and failure of the projects we so carefully nurture. By using earned value throughout our projects, we can identify, address, and resolve problems early. This way, we can continue to work towards the improved management of those projects and greater business success as we move through the 21st century.

Evaluating an Earned Value Software System

When evaluating earned value management software, you want to make sure that the software product you are evaluating contains the functionality required to answer the questions outlined in this paper. Make sure you ask the vendor the following questions:

• Does this software integrate with my scheduling software?
• Does this software support multiple performance measurement techniques that allow me to objectively measure performance on my activities?
• Is there a clear distinction between a baseline and a forecast in the system?
• Can I maintain and report on multiple, time-phased forecasts?
• Can each forecast use a separate set of rates to perform "what-if" analysis?
• Can I calculate foreign currencies?
• Can rate escalation be stored separately from the base rate, and can it be adjusted for all resources in a single place?
• Does this software calculate statistical forecasts based on past performance?
• Does this software support different productivity rates per resource and per month when calculating FTE?
• Does this software calculate forecasted FTE based on past performance?
• Does this software allow me to enter and report on funding?
• Does this software contain pricing functions that allow me to globally adjust costs?
• Are earned and actual hours stored in the system in a manner that allows me to calculate price and usage variances?
• Is the result of the earned value calculations stored time-phased? (This will keep my earned value in previous periods from changing if the budget changes).

Glossary of Key Terms

• Activity Effort that occurs over a time period and generally consumes resources. Another term for Activity is Task.
• Actual Cost A cost sustained in fact, on the basis of costs incurred, as distinguished from forecasted or estimated costs.
• Actual Cost of Work Performed (ACWP)
• The sum of the costs actually incurred in accomplishing the work performed.
• Apportioned Effort Effort directly related to some other measured effort.
• Baseline A customer review conducted to determine with a limited sampling that a contractor is continuing to use the previously accepted performance system and is properly implementing a baseline on the contract or option under review.
• Budget A time-phased plan of operations for a given period.
• Budget at Complete (BAC) Sum total of the time-phased budget. Another term for Budget at Complete is Performance Measurement Baseline.
• Budgeted Cost of Work Performed (BCWP) The sum of the budgets for completed work and the completed portions of open work. It is a measure used in cost control that allows you to quantify the overall progress of the program in monetary terms. BCWP is calculated by multiplying the physical percent complete by the planned cost. Another term for BCWP is Earned Value.
• Budgeted Cost of Work Scheduled (BCWS) The sum of the budgets for all planned work scheduled to be accomplished within a given time period.
• Cost Account A cost account is usually defined as the intersection of the program's work breakdown structure (WBS) and organizational breakdown structure (OBS). In effect, each cost account defines what work is to be performed and who will perform it. Cost accounts are the focal point for the integration of scope, cost, and schedule. Another term for Cost Account is Control Account.
• Cost Account Manager (CAM) A member of a functional organization responsible for cost account performance and for the management of resources to accomplish such tasks.
• Cost Overrun The amount by which a contractor exceeds or expects to exceed the estimated costs and/or the final limitations (the ceiling) of a contract.
• Cost Performance Index (CPI) The cost efficiency factor representing the relationship between the actual costs expended and the value of the physical work performed. The CPI is calculated as BCWP/ACWP.
• Cost/Schedule Control Systems Criteria (C/SCSC) Thirty-five defined standards which have been applied against private contractor management control systems since 1967 in order to ensure that government cost reimbursable and incentive type contracts are managed properly. C/SCSC is now known as the Earned Value Management System (EVMS).
• Cost Variance (CV) The numerical difference between the earned value (BCWP) and the actual cost (ACWP). The CV is calculated as BCWP - ACWP.
• Direct Costs Those costs (labor, material, and other direct costs) that can be consistently related to work performed on a particular project. Direct costs are best contrasted with indirect costs that cannot be identified to a specific project.
• Discrete Effort Tasks that have a specific measurable end product or end result. Discrete tasks are ideal for earned value measurement.
• Earned Hours The time in standard hours credited to work as a result of the completion of a given task or a group of tasks.
• Earned Value (EV) The sum of the budgets for completed work and the completed portions of open work. It is a measure used in cost control that allows you to quantify the overall progress of the program in monetary terms. EV is calculated by multiplying the physical percent complete by the planned cost.
• Earned Value Management System (EVMS) The EVMS guidelines incorporate best business practices for program management systems that have proven to provide strong benefits for program or enterprise planning and control. The processes include integration of program scope, schedule and cost objectives, establishment of a baseline plan for accomplishment of program objectives, and use of earned value techniques for performance measurement during the execution of a program.
• Estimate at Complete (EAC) A value expressed in either dollars and/or hours to represent the projected final costs of work when completed. EAC is calculated by adding the actual cost of work performed to the estimate to complete. The EAC is calculated as ETC + ACWP.
• Estimate to Complete (ETC) The value expressed in either dollars or hours, developed to represent the cost of the work required to complete a task. ETC is calculated by subtracting the budgeted cost of work performed from the budget at complete. The ETC is calculated as BAC - BCWP.
• Full Time Equivalents (FTE) Also known as equivalent staffing units, FTEs are typically expressed as persons per month.
• Funding Profile An estimate of funding requirements.
• Indirect CostResources expended which are not directly identified to any specific contract, project, product, or service such as Overhead and G&A.
• Labor Rate Variances Difference between planned labor rates and actual labor rates.
• Level of Effort (LOE) Work that does not result in a final product (e.g., liaison, coordination, follow-up, or other support activities) and which cannot be effectively associated with a definable end product process result. Level of effort is measured only in terms of resources actually consumed within a given time period.
• Organizational Breakdown Structure (OBS) A functionally oriented structure indicating organizational relationships and used as the framework for the assignment of work responsibilities. The organizational structure is progressively detailed downward to the lowest levels of management.
• Original Budget The initial budget established at or near the time a contract was signed or a project authorized, based on the negotiated contract cost or management's authorization.
• Overhead Costs incurred in the operation of a business that cannot be directly related to the individual products or services being produced.
• Overrun Costs incurred in excess of the contract target costs on an incentive type contract or the estimated costs on a fixed fee contract. An overrun is that value of costs that is needed to complete a project, over that value originally authorized by management.
• Performance Measurement Baseline (PMB) The time-phased budget plan against which project performance is measured. It is formed by the budgets assigned to scheduled cost accounts and the applicable indirect budgets. For future effort, not planned to the cost account level, the PMB also includes budgets assigned to higher-level CWBS elements. The PMB does not include any management or contingency reserves, which are isolated above the PMB.
• Performance Measurement Techniques (PMT) Performance measurement techniques (PMTs) are the methods that Cobra uses to estimate earned value. Different methods are appropriate to different work packages, either due to the nature of the work or to the planned duration of the work package. Cobra supports all commonly used PMTs. Another term for Performance Measurement Techniques is Earned Value Methods.
• Program Manager An individual who has been assigned responsibility for accomplishing a specific unit of work. The project manager is typically responsible for the planning, implementing, controlling, and reporting of status on a project.
• Replanning Actions performed for any remaining effort within project scope. Often the cost and/or schedule variances are zeroed out at this time for history items.
• Schedule Performance Index (SPI) The planned schedule efficiency factor representing the relationship between the value of the initial planned schedule and the value of the physical work performed, in other words earned value. The SPI is calculated as BCWP/BCWS
• Schedule Variance (SV) An indicator of how much a program is ahead or behind schedule. The SV is calculated as BCWP - BCWS.
• To Complete Performance Index (TCPI) The projected performance which must be achieved on all remaining work in order to meet some financial goal set by management.
• Variance at Complete (VAC) The algebraic difference between Budget at Complete and Estimate at Complete.
• What-if Analysis The process of evaluating alternative strategies.
• Work Breakdown Structure (WBS) The WBS is a product-oriented breakdown structure of hardware, software, services, and program-unique tasks that organizes and defines the product to be produced, as well as identifying the scope of work to be accomplished to achieve the specified product. A WBS element may be an identifiable product, a set of data, or a service.
• Work Package Detailed short-span tasks, or material items, identified by the performing contractor for accomplishing work required to complete a project. A work package represents a further breakdown of the work defined by the cost account. In traditional EVMS systems, the criteria for defining work packages is as follows:
  - Each work package is clearly distinguishable from all other work packages in the program.
  - Each work package has a scheduled start and finish date.
  - Each work package has an assigned budget that is time-phased over the duration of the work package. - Each work package either has a relatively short duration or can be divided into a series of milestones whose status can be objectively measured.
  - Each work package has a schedule that is integrated with higher-level schedules.

References

Beach, Jr., Chester Paul. A-12 Administrative Inquiry. Report to the Secretary of the Navy. Washington DC: Department of the Navy, 1990.

Chaos. The Standish Group International,1995.

Christensen, David S., Ph.D. "The Cost and Benefits of the Earned Value Management Process." www.dau.mil/pubs/arq/98arq/chrisevm.pdf (Fall 1998).

Christensen, David S., Ph.D. "Cost Overrun Optimism - Fact or Fiction?" Acquisition Review Quarterly March 1993.

Christensen, David S., Ph.D. Project Advocacy and the Estimate at Completion Problem. Journal of Cost Analysis Spring 1996.

Cooley, Kevin. Project Management: Why Do We Need It and What is It? Stamford, CT: META Consulting Group, Inc., 2000.

Fox, J. Roldan. Arming America: How the US Buys Weapons. Boston, Mass: Harvard University, 1974.

Gansler, Jack. "New ANSI Standard on EVMS Guidelines, ANSI/EIA-748-1998, Published." http://www.acq.osd.mil/pm/newpolicy/indus/ansi_announce.html (17 October 1999).

Mayer, Kenneth R. The Political Economy of Defense Contracting. New Haven, CT: Yale University, 1991.

2002 © WST Corporation. Cobra is a registered trademark of WST Corporation. All rights reserved.
All other product names are trademarks or registered trademarks of their respective companies

Ruthanne Schulte, PMP, is employed at Welcom as a product manager for their leading earned value management software package called Cobra. She has been employed with Welcom since 1990 and has held positions such as an implementation consultant, software developer, and product architect. Schulte holds a BS Degree in Civil Engineering from Texas A&M University.
She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it
http://www.welcom.com./

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