CXO

Use earned value to determine project progress

Earned value metrics help you remove the guesswork in determining progress on your project in relation to a baseline. Here's an introduction to the business concept of earned value.


As a project manager, have you ever been asked how far along you were in a project? Of course you have. The question itself is vague, and so your equally vague answer of “we’re pretty close to schedule” sounds like an appropriate response. You might even have given the equally vague “we’re about half done” or “we’re 90 percent complete.”

If you don’t have a valid work plan, or if you’re not keeping your work plan up to date, you know that your answer is pretty much a guess. If you have a good work plan and you’re keeping it up to date, you should have a sense for how much work remains and what the projected end date will be. But are you 50 percent complete or 90 percent complete? How can you tell? By using earned value metrics, that’s how.

Enter earned value
Earned value calculations can provide a better sense for exactly where the project is against the baseline, as well as provide an early warning if the trends indicate that the project will be over budget or over its deadline. Project managers can use these calculations to know precisely how far along in a project they are, how much work remains to be done, what the expected cost and end date will be, and all sorts of other interesting and useful information.

Are you using earned value on your project today? Probably not. Chances are, you aren’t using earned value because your organization hasn’t adopted it. You may have never seen earned value at all, or at least not outside a training class.

History
Earned value metrics were established to remove the guesswork from determining where you are currently in relation to a baseline. In theory, this concept is elegant and interesting. Earned value hasn’t been around for hundreds of years; however, you can actually trace its beginning to the late 1800s and early 1900s, when managers attempted to make the factory floor and the production line as efficient as possible. The drive for efficiency required a foundation in metrics, and earned value was a way to gain additional data.

In the 1960s, the U.S. Department of Defense began to mandate the use of earned value on defense-related projects. As you might expect, if the government is contracting out projects worth billions of dollars, it wants project progress updates that consist of more then “we seem to be on target.”

Unfortunately, many business leaders believe that the standards laid out by the Defense Department are much too cumbersome and rigid, and that many of the earned value reporting requirements provide only incremental value, if any. This has taken what could be a valuable project management tool and turned it into a project burden. This perception of earned value as a burden may be one of the reasons that it has never taken off in private industry.

The basic concepts of earned value
Implementing earned value requires a tremendous level of discipline and common processes. It’s hard to apply earned value one project at a time, since no one else would understand what you’re doing and why. Let’s look at the foundations of earned value to get a better sense of how it can help you manage projects.

Earned value is a way of measuring progress
In any project, the value to be gained is based on completing the work. From a customer perspective, you might think that business value is achieved when the project is completed. If a project is canceled 90 percent through completion, the business value might be zero. However, earned value looks at this differently. With earned value, you’re earning the value of the project on an incremental scale as the project moves forward. When 50 percent of the work has been completed, then you can say that 50 percent of the value of the project has been realized (“earned”) as well.

The general idea behind earned value is to compare where you actually are against where you planned to be when you started the project. Let’s refine this idea a bit further. Let’s say you’re currently working on activities 49, 87, 88, 100, and 108 in your work plan, and that all of the dependent activities ahead of them have been completed. Earned value allows you to quantify all of the work that you’ve accomplished on the project, as well as all of the work that should have been done on the project thus far. Then, you can compare the work that has been done against the work that should have been done to determine if you’re on schedule, ahead of schedule, or behind schedule.

Likewise, given where you are today, earned value calculations allow you to determine the total cost of the work done so far, as well as the total cost of all the work you expected to have completed by now. Comparing these two numbers gives you a sense for whether you’re trending over budget, under budget, or on budget.

Utilizing both the schedule and cost metrics gives you more information as well. You may well be spending your budget faster than you anticipated, but what if you’re ahead of schedule as well? You may be spending more than you expected because your team is getting more work done than planned. That may be just fine with you.

Similarly, if your project is behind schedule, but you’re also behind in your spending, that may be fine as well. Perhaps factors beyond your control affected your progress; for example, if you weren’t able to get team members allocated as fast as you’d planned. So your project is behind schedule, as is your spending rate. If you have a critical end date, this may be a problem. If your end date is flexible, you may be fine, as long as you don’t overspend your budget.

Earned value gives you the information you need to make the right decisions
Earned value can help you determine precisely where you are on a project, against where you planned to be. It takes into account work completed against the level of work planned for completion and the actual expenditures against the planned expenses at any given time of the project. The value of this information is powerful. However, there’s a price to pay in terms of tracking and collecting the information as well.

In the next column in this series, I’ll look at the basic calculations in earned value.

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