Earned Value Management


Definition: Earned Value Management (EVM) is a technique for measuring project progress in an objective manner. It integrates technical scope, schedule, and cost for definitized contract work [1].

Keywords: contractor performance, earned value, earned value management system, performance-based earned value, performance measurement, planned value

MITRE SE Roles & Expectations: MITRE systems engineers (SEs) are expected to sufficiently understand the principles and elements of EVM to monitor and assess contractor performance, and use its results as the basis for recommending program changes.

Background

Monitoring contractor performance consists of measuring and evaluating the contractor's progress to assess the likelihood of meeting program and contractual requirements for cost, schedule, and technical viability [2]. Performance measurement is part of performance management, a process for making course corrections to achieve an organization's goals by using performance information to adjust resources and activities. The focus of performance management is the future: What do you need to be able to do, and how can you do things better? Managing performance is about managing for results [3].

A widely used practice for monitoring contractor performance by managers and systems engineers is reviewing and assessing Earned Value Management (EVM) results. In the 1990s, many U.S. Government regulations were eliminated or streamlined. However, EVM not only survived the streamlining, but emerged as a financial analysis specialty that has since become a significant branch of project management and cost engineering for both government and industry. Today, more and more civilian agencies are requiring EVM in their contracts to better manage and ensure successful outcomes. In accordance with OMB Circular A-11, Part 7, agencies must use a performance-based acquisition management system, based on ANSI/EIA Standard 748, to measure achievement of the cost, schedule, and performance goals [4].

Basic Concepts of Earned Value Management

EVM is a technique used to track the progress and status of a project and forecast the likely future performance of the project. EVM integrates technical scope with the time-phased cost or budget required to complete the scope to facilitate integrated management of program planning and execution [1]. It can result in meeting the technical scope within cost and schedule parameters, reducing or eliminating schedule delays, and reducing or eliminating cost overruns [1]. The basic elements of the EV are depicted in Figure 1 [5]. Specifically, earned value (EV) consists of three dimensions: (1) The plan or budgeted cost of work scheduled (BCWS), (2) The performance or budgeted cost of work performed (BCWP) and, (3) The cost of performance or actual cost of work performed (ACWP). These three data elements are used as the basis for computing and analyzing project performance.

Basic EVM Concept of Total Contract Performance
Figure 1. Basic EVM Concept of Total Contract Performance

Monitoring Contractor Performance Using EVM

For purposes of monitoring contractor performance, EVM is useful because it provides quantitative or earned value data that can be used to assess how well the contractor is performing. It also provides an early warning of performance problems.

Earned value data such as schedule and cost variances stem from a comparison of:

  • The planned budget and the amount of budget earned for work accomplished
  • The budget earned with the actual direct costs for the same work.

Schedule and cost indices provide information such as cost over/under runs, schedule delays/or ahead of schedule, etc. Other EV data elements that can be used to measure/monitor contractor performance are the schedule performance index (SPI) and the cost performance index (CPI). The SPI is defined as:

equation

or the ratio of the BCWP over the BCWS. The SPI is a pure dimensionless quantity, insensitive to inflation that measures schedule efficiency. A value above 1.00 indicates that the work performed to date is ahead of schedule. In other words, the SPI is an index measuring the efficiency of time utilization.

CPI is an index showing the efficiency of resource utilization and is defined as [6]:

equation

or the ratio of BCWP to ACWP. CPI is an earned-value metric that measures cost efficiency where a value above 1.00 indicates that the work performed to date cost less than originally planned. A possible reason for CPI > 1 may be a high employee turnover rate. High turnover slows the pace of projects and the associated labor costs because there are gaps in the work stream due to employee departures and training issues.

The CPI and SPI are statistically and mathematically related because they share one variable in common: BCWP.

equation 3

Thus, if all of the variation in the data is dominated by BCWP, then the SPI and CPI will exhibit high correlation.

The SPI and CPI performance metrics compare baselines to actuals.

EVM Case Scenario

The best way to illustrate EVM is through an example [4]:

Scenario: Building an aquarium budgeted at $5,500 by the end of November. At the end of November, spent $5,600 and only accomplished $4,900 worth of work.

EV calculation: BCWS = $5,500, BCWP = $4,900, ACWP = $5,600; Cost Variance = -$700; Schedule Variance = -$600

EV Analysis: In the month of November, spent $5,600 but only accomplished $4,900 worth of work; therefore there is a cost overrun of $700 as well as a delay in schedule of $600.

The preceding EV data elements can be used to compute the schedule and cost variance as follows:

Schedule variance = BCWP – BCWS

Cost variance = BCWP – ACWP

This example is depicted in Figure 2.

EVM example
Figure 2. EVM Example

The next step for the MITRE systems engineer would be to review these results and determine whether action is needed. Because EVM assesses the combined interaction of scope, schedule, and cost, an unfavorable EVM report tells the SE that if these three variables remain fixed and there is no change in how project performance is achieved, the project is at risk to achieve the three objectives. Remember the balloon analogy—if you push in one spot, another must give.

If the EVM results indicate action is needed, as they are in this example, the SE should review options to discuss with the government program manager. These options include:

  • Accept the schedule delay and find the additional funding to cover the cost overrun and schedule delay.
  • Recommend changing either the scope, schedule, or budget for the program or project. When this option is chosen, it is frequently for expediency. This is one of the reasons why we often see projects delivered on time and within budget with a reduction in the originally specified functionality (scope).
  • Recommend changing an underlying condition that is causing the unfavorable EVM results. These include:
    • Scope: Requirements have increased beyond those manageable by the allocated schedule and cost. Suggest returning to the original scope or adjusting the cost and schedule accordingly.
    • Schedule: Consider how the schedule was determined. Was it by an engineering analysis and a work breakdown structure, or, as sometimes happens, was it determined by an imposed date? Suggest structuring a realistic schedule or adjusting the scope and cost accordingly.
    • Cost: Consider the productivity of the team and whether unrealistic assumptions were made in the original plans. Consider adding experienced, exceptionally capable staff. However, keep in mind that, in general, increasing staff significantly usually will not erase lost productivity. Suggest adjusting the schedule and cost to accommodate actual productivity, or reduce scope to match the productivity.

Situations vary and any of these three approaches might be appropriate. For example, sometimes the solution must be implemented quickly, and expediency can override the option of digging into the underlying conditions of the unfavorable EVM results.

Value of EVM

A sound EVM implementation provides the following contractor performance data: [7]

  • Relates time-phased budgets to specific contract tasks and/or statements of work
  • Objectively measures work progress
  • Properly relates cost, schedule, and technical accomplishment
  • Allows for informed decision making and corrective action
  • Is valid, timely, and can be audited
  • Allows for statistical estimation of future costs
  • Supplies managers at all levels with status information at the appropriate level
  • Derives from the same EVM system used by the contractor to manage the contract.

The EV technique enhances the cost performance analysis of a project. Traditional cost analysis centers on the actual cost of the completed work. Therefore, much progress has been done to collect the actual costs through time charge and accounting systems that exist on practically all projects. What EV brings to the process is a measure of the amount of work that has been done in a unit of measure that is consistent and comparable with costs [8].

Best Practices and Lessons Learned

  • EVM does not measure the quality and technical maturity of the evolving work products. Other project mechanisms should be used to assess product quality and maturity as well as the appropriateness of the scope and conformance to requirements. See the Data-Driven Contractor Evaluations and Milestone Reviews and Planning and Managing Independent Assessments articles in this guide for additional information. Performance-based earned value (PBEV) is an enhancement to the EVMS standard for measuring technical performance and quality. It is based on standards and models for systems engineering, software engineering, and project management [9]. Ultimately, aside from cost and schedule, the PBEV adds the technical element into the mix.
  • EVM data are reliable and accurate if and only if the following occur [9]:
  • The indicated quality of the evolving product is measured
  • The right base measures of technical performance are selected
  • Progress is objectively assessed.
  • Use EVM to mitigate risk by analyzing the results. For example, if targets are not being met, are they realistic? Which activities are making the greatest impact? What factors in the project or organizational culture contribute to results? Performance measures tell you what is happening but they do not tell you why it is happening. See the How to Develop a Measurement Capability article and the Risk Management topic in this guide for additional information.
  • Contractor source selection certification considerations: EVM certification compliance may be contained in the Request for Proposal (RFP). However, not all RFPs require EVM compliance. Depending on what is written in the RFP regarding EVM, the contractor's EVMS can be evaluated by ensuring that its EVMS is American National Standards Institute/Electronic Industries Alliance (ANSI/EIA) 748 compliant. The ANSI/EIA 748 standard defines 32 criteria, which is intended to provide guidance, structure, and process direction for the successful operation of EVMS. These 32 criteria provide a basis for evaluating a contractor's EVMS. The best way to ensure that the contractor meets this standard is for the contractor to acquire an EVMS certification from the Defense Contract Management Agency or from a third-party vendor. In the absence of EVMS certification, a contractor's EVMS can be evaluated based on its EVMS plan that includes the 32 ANSI/EIA criteria. See the Acquisition Management Metrics article in this section for additional information.
  • Contractor proposal considerations: The contractor's proposal should demonstrate understanding of EVM by containing knowledge of industry standards and applying them specifically to the project. The EVMS should align with the integrated master schedule (IMS). The control account details should represent the work breakdown structure that drives the discrete deliverables that can be associated with cost and responsible resources. The EVM training listed on the IMS should specifically be tailored to the project. The IMS is the impetus to effective planning and scheduling. It contains planned events and milestones, accomplishments, exit criteria, and activities from contract award to the completion of the contract. It also allows for critical path analysis, forecasting, and a baseline plan. This scheduling aspect has to be linked to EVM in order for EVM analysis to be accurate and effective. See the article on Integrated Master Schedule/Integrated Master Plan Application in this section for additional information.
  • EVM is not an effective tool for level-of-effort (LOE) activities. For non-schedule based contracts (i.e., contracts composed primarily of LOE), EVM may not be effectively implemented due to a lack of measurement on work efforts that cannot be segmented. With that said, the LOE method can be used for measuring EV; however, it is primarily reserved for tasks that are time-related rather than task-oriented (i.e., tasks that have no measurable output). The LOE method has no schedule variance; therefore, it should not be used for any tasks with a schedule that might slip or be variable [1].
  • Evaluate the EVMS effectiveness: Ultimately, the measurement of a successful EVMS depends on the customer's ability to use the information generated from the system and to evaluate the contractor's ability to manage the project [9]. The EVMS can be costly to maintain, so it is important to periodically consider its effectiveness and whether changes should be made. Recent U.S. government policy initiatives have been introduced to better facilitate customer insight into contractor performance. The reduced reporting threshold is down to $20 million, and policy revisions related to the integrated baseline review will have a significant impact on the administration and performance of contracts [10].

References & Resources

  1. Society of Cost Estimating and Analysis (SCEA), 2002, "Tracking cost and schedule performance on project," Earned Value Management Systems (EVMS).
  2. United States Government Accountability Office, May 2005, Performance Measurement and Evaluation: Definitions and Relationships, GAO-05-739SP.
  3. The MITRE Institute, "Introduction to Enterprise Business Strategy," Performance Management.
  4. Executive Office of the President, Office of Management and Budget, August 2009, Circular No. A-11 Preparation, Submission, and Execution of the Budget.
  5. The MITRE Corporation, October 11, 2005, Earned Value Management: A Quick Review for Busy Executives, Slide 17.
  6. Tutorials Point, Earned Value Management: Cost Variance, viewed 26 February 2010.
  7. Ernst, K. D., October 2006, Earned Value Management Implementation Guide, p. 2.
  8. Wilkens, T. T., April 1, 1999, Earned Value, Clear and Simple, p. 4, Los Angeles County Transit Authority.
  9. Solomon, P., August 2005, "Performance-Based Earned Value," CrossTalk: The Journal of Defense Software Engineering.
  10. Johnson, C., April 2006, "Implementing an ANSI/EIA-748-Compliant Earned Value Management System," Contract Management.

Additional References & Resources

  • McKinlay, Mary, April 2006, "Why Not Implement EVM?" International Cost Engineering Council, ICEC Cost Management Journal.
  • USAID, Earned Value Management.
  • Seigle, Jeff, May 19, 2006, Earned Value Management Demystified Version 2.0, The MITRE Corporation.
  • The MITRE Corporation, "Contractor Evaluation," MITRE Systems Engineering Competency Model.

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