Earned Value Management Affect Profitability?

¶ … earned value management affect profitability?

Earned value management (EVM) method is one of the most effective management techniques to emerge in the arena of management during the 20th century. While the technique originated in the late 1960s, its early use was exclusively in large defense programs. Today, though, project managers have discovered that it can be usefully employed in small projects as well as large ones, and its popularity on projects of all sizes is growing rapidly.

How Can Earned Value Management Improve Profitability?

Management reports, scheduling data, performance management information and much more inundates some project managers in ways that make sorting this flood of information out akin to drinking from a fire hose. Fortunately, some useful management techniques have emerged in recent years that can help in this regard. According to Frame (2003), "Given the plethora of data that are spewed out of the project planning and tracking machine, how can project staff make sense of the barrage of project performance facts and figures directed at them? Increasingly, they are turning to an approach called the earned-value management to help them better manage budget and schedule information" (p. 213). As Straight, Lawler and Schwartz (2003) emphasize, although earned-value management is not a new concept, its effectiveness in providing a wide range of useful oversight features in project management has become increasingly recognized in recent years. In fact, earned value management was used by the Department of Defense (DOD) during the 1960s as a central part of the Cost/Schedule Control Systems Criteria; the DOD subsequently refined revised the 35 criteria into the existing 32 criteria used in the earned value management system (What is earned value management?, 2008). According to these authors, "Now, earned-value management is being used in a wider variety of government contracts, and is spreading through the private sector as a valuable tool for project managers" (What is earned value management?, p. 2). The basic precepts of EVM are that (a) all project steps "earn" value as work is completed; (b) the earned value (EV) can then be compared to actual costs and planned costs to determine project performance and predict future performance trends; and - physical progress is measured in dollars, so schedule performance and cost performance can be analyzed in the same terms (Successfully presenting earned value, 2008).

The profitability that accrues to the use of the earned-value management system may or may not be readily discernible. For instance, Straight and his colleagues note that, "In short, by using an earned-value management system, managers can keep projects on track, take corrective action when needed, and achieve success in helping to meet the mission" (p. 37). While these performance measures do not always equate to increased profitability, it is reasonable to posit that improved performance and reduced costs will contribute to any organization's bottom line. The specific topic to be explored in the study therefore involves how earned-value management methods can be used by different types of organizations to increase their profitability through improved project management techniques. According to Frame (2002), "The earned value management (EVM) method is one of the cleverest techniques developed in the arena of management. Although it originated in the late 1960s, its early use was exclusively in large defense programs. Today, project managers have discovered that it can be usefully employed in small projects as well as large ones, and its popularity on projects of all sizes is growing rapidly" (p. 277).

Statement of the Problem

While many organizations of all sizes and types have enjoyed good success with the EVMS approach, there are some detractors as well. For instance, according to Lorell and Graser (2002), some contractors have complained in the past concerning the perceived problems associated with reforming the earned value management system and emphasized that the government implementation of Earned Value Management System (EVMS) reporting requirements mandated the collection of cost data on at least one level below what contractors would have done on a typical commercial program. Some authorities suggest that EVMS costs millions of dollars to set up and requires more than three times as many people than would be needed for the same type of work on a commercial program (Lorell & Graser).

Purpose of Study

The purpose of the dissertation is three-fold as follows:

To deliver a comprehensive and critical review of the relevant literature concerning project management in general and how earned-value management methods can improve the project management process.

To develop a series of case studies that are sufficiently illustrative of best practices in different settings to provide informed conclusions and recommendations.

To deliver a PowerPoint presentation based on the dissertation's findings that can be used by companies of all types that seek to implement earned-value management methods in their project management.

Research Questions

What are the fundamental principles of earned-value management and how are they used?

How can these earned-value management principles be applied to projects of different types and sizes to improve an organization's profitability?

What constraints exist to the implementation and administration of earned-value management techniques?

Are some types of projects better suited to earned-value management than others? If so, what types of projects are the best candidates for the use of earned-value management?

Importance of Study

Earned Value Management (EVM) is a project management system that combines schedule performance and cost performance to answer the question, "What did we get for the money we spent?" Earned Value has been used since the 1960's by the Department of Defense as a central part of the C/SCSC (Cost/Schedule Control Systems Criteria). Recently, the DOD revised the 35 criteria contained in the C/SCSC and produced the 32 criteria for EVMS (Earned Value Management Systems). These criteria have since been accepted by the American National Standards Institute/Electronic Industry Association as a new standard, called ANSI/EIA 748. Now, EVM is being used in a wider variety of government contracts, and is spreading through the private sector as a valuable tool for project managers (Basic concepts of EVM, 2008).

Scope of Study

Rationale of Study

One of the dangers involved in relying on cost data in isolation of other factors is the tendency of managers to make erroneous assumptions concerning project progress and budget status. As Frame (2003) emphasizes, "The fact that a status report shows that a project is under budget does not mean that project is doing well. The reported budget performance may reflect the fact that work is not being done, hence money is not being spent. The purported cost savings is chimerical (Frame, p. 213). Earned-value management techniques, though, can help overcome this constraint in developing a robust analysis of project and budget status. According to Frame, "Earned-value management was developed by cost accountants and is designed to help project staff keep better track of what is happening on their projects. It recognizes that cost data alone or schedule data alone can lead to distorted perceptions of performance" (2003, p. 213). Improving the manner in which organizations manage their projects, both large and small then, can help avoid unnecessary costs and streamline accounting process to improve a company's cash flow. As Frame also emphasizes, "Many companies with excellent products have gone out of business simply because they ran out of cash to pay the bills. Cash shortages can result if accounts receivable are not collected promptly, if a key customer disappears, if money is tied up in equipment, or if financial reserves are limited" (2003, p. 79). Finally, as Hall (2002), emphasizes, "Financial measures address the return on investment, direct costs compared to indirect costs, and resource allocations. Many government organizations use an accounting system to look at cost by product. Others have incorporated activity-based costing, earned value management, or economic value added activities into their methodology" (p. 7).

Overview of Study

This study uses a five-chapter format to achieve the above-stated research purpose. Chapter one of the study introduced the topic under consideration, a statement of the problem, the purpose and importance of the study, as well as its scope and rationale. Chapter two provides a critical review of the relevant and peer-reviewed literature, and chapter three presents the study's methodology, a description of the study approach, the data-gathering method and the database of study consulted. Chapter four is comprised of an analysis of the data developed during the research process and chapter five presents the study's conclusions, a summary of the research and salient recommendations for project managers of all types.

Definition of Key Terms

AC: Actual Costs (total amount spent on a task up to the current date).

BAC: Budget at Completion (overall approved budget for a task).

EV: Earned value.

EVM: Earned value management.

Percent Complete Task progress, related as either EV/BAC, or simply physical progress shown by the fill of a task bar.

Chapter 2: Review of Related Literature

Background and Overview.

The earned value approach was originally developed in the United States in the 1960s to help manage very large defense projects. Most of the effort in its development was driven by the U.S. Air Force. During the heyday of defense contracting in the 1950s and 1960s, it became apparent to the Defense Department that as projects get larger and more complex, it becomes increasingly difficult to track what is happening on them. This problem is compounded by the fact that these large projects are being carried out in multiple contractor organizations, each of which employs its own peculiar planning and control system (Frame, 2002).

By the early 1960s, it became increasingly apparent that the Defense Department was no longer able to track the efforts of its contractors with accuracy. It decided that contractors on large, complex projects should be required to report their project efforts in a consistent fashion. It worked to develop rules for reporting project progress and in 1967 issued Department of Defense Instruction (DODI) 7000.2, known also as the Cost/Schedule Control System Criteria (C/SCSC). In 1972, the Defense Department issued its Joint Implementation Guide, which gave practical advice on how to implement DODI 7000.2.The focus of the earned value system was the development of consistency and management discipline in contractor organizations in five areas:

Organization. Instructions are provided on the development of work breakdown structures and organizational breakdown structures.

Planning. Key planning requirements are highlighted -- for example, the establishment of performance baselines.

Accounting. Requirements are specified for the collection and maintenance of cost accounting data.

Analysis. Guidance is offered on use of earned value techniques for reporting budget variance, schedule variance, and EAC.

Reporting. Instructions are given on reporting project status through cost performance reports (CPRs), which are required on very large projects, or cost and schedule status reports (C/SSRs), which are less burdensome to generate than CPRs and are required on smaller projects.

In the 1990s, the earned value approach as promulgated by the Defense Department underwent a number of modifications. In 1991, DODI 7000.2 was superseded by DODI 5000.2, which was in turn was superseded by DOD Regulation (DODR) 5000.2-R in 1996. The Joint Implementation Guide was revised and replaced by a document titled Earned Value Management Implementation Guide in 1997. The current version of the earned value management system is designed to be less bureaucratic than its predecessors. It focuses less on mandating certain actions and more on providing guidelines (Frame, 2002).

According to Straight, Lawler and Schwartz (2003), earned-value management is not a new concept; however, the newly revised Office of Management and Budget (OMB) Circular a-11, Preparation, Submission, and Execution of the Budget may represent the first opportunity many government managers have had to work with these techniques. In this regard, Frame (2002) advises that, "In the 1990s, the earned value approach as promulgated by the Defense Department underwent a number of modifications. In 1991, DODI 7000.2 was superseded by DODI 5000.2, which was in turn was superseded by DOD Regulation (DODR) 5000.2-R in 1996. The Joint Implementation Guide was revised and replaced by a document titled Earned Value Management Implementation Guide in 1997" (p. 290). The current version of the earned value management system that is in place was intended to be less bureaucratic than its predecessors and concentrates less on mandating certain actions and more on providing guidelines (Frame, p. 290).

Because of the big-project focus of the Defense Department's approach to earned value management, coupled with many managers' unfamiliarity with the process, organizations outside of the defense community were unaware of its potential usefulness on nondefense projects. This situation began to change in the late 1980s. The earned value approach can be used effectively on small projects when bureaucratic requirements -- such as those found in DODI 7000.2, DODI 5000.2, and DODR 5000.2-R -- are stripped away. Today, most project management leaders in high-performing organizations acknowledge the great contribution the earned value method can offer them in planning, executing, and controlling their projects (Frame, 2002).

For federal agencies, Circular a-11 requires the use of an earned-value approach them to monitor and manage their capital asset projects' information technology, buildings, structures, major rehabilitation, land, vehicles, furniture, and equipment. In addition, Circular a-11 requires agencies to submit, as part of their annual budgets, a capital asset plan and business case (see proforma Exhibit 300 at Appendix ____) for each capital asset project. Completing the exhibits requires calculating the earned value for each project (Straight et al.). In this regard, Circular a-11 states that, "Earned value management (EVM) is a project (investment) management tool effectively integrating the investment scope of work with schedule and cost elements for optimum investment planning and control. The qualities and operating characteristics of earned value management systems (EVMS) are described in American National Standards Institute (ANSI)/Electronic Industries Alliance (EIA) Standard -748-1998, Earned Value Management Systems, approved May 19, 1998. It was reaffirmed on August 28, 2002" (p. 579).

Table 1.

Performance Management Thresholds

Contract Total Estimated Value, Then-Year $ (Note 1)

EVM Implementation (Notes 2,3,4,5,6,7,8)

CPR

Data Item

Note 9)

IMS

Data Item (Note 9)

CFSR

Data Item

Note 10)

CWBS

Data Item

Note 11)

Subcontractor Flow Down

50M and greater

Required

Reporting thresholds for a subcontract must flow down consistently from the contract

20M and greater but less than $50M

Required

Required if CCDRs are required; optional otherwise (at discretion of PM or Cost Working IPT)

Less than $20M

Optional (at discretion of PM)

Required if PM elects to require EVM

Required

Required if CCDRs are required; optional otherwise (at discretion of PM or Cost Working IPT)

Notes Regarding Preceding Performance Management Thresholds Table

Note 1. Thresholds are in then-year dollars and refer to total estimated contract value including options.

Note 2. For procurements equal to or greater than $20M but less than $50M, the contractor must comply with the guidelines in ANSI/EIA-748, but a validated Earned Value Management System (EVMS) is not required.

Note 3. For procurements equal to or greater than $50M, the contractor must have a validated EVMS that complies with the guidelines in ANSI/EIA-748.

Note 4. Integrated Baseline Reviews (IBRs) are required whenever Earned Value Management (EVM) is required (contracts equal to or greater than $20M).

Note 5. The application of EVM is discouraged on Firm-Fixed Price (FFP) (including FFP with economic price adjustment) contracts, subcontracts, intra-government work agreements, and other agreements, regardless of dollar value. In cases where cost/schedule visibility is required, such as for development work equal to or greater than $20M, the program manager must obtain a waiver for individual contracts from the Milestone Decision Authority. The program manager will prepare a business case that includes rationale for why a cost reimbursable or fixed price incentive contract is not an appropriate contractual vehicle. Considerations for applying EVM in these situations may be found in the DoD Earned Value Management Implementation Guide (EVMIG).

Note 6. The application of EVM to work efforts that are not discrete in nature (non-schedule based), such as level of effort, time and materials, and services, should be considered on a case-by-case basis. In cases where the nature of the work does not lend itself to the meaningful use of EVM, it may be appropriate to waive the EVM requirement. When EVM is waived, the program manager will implement an alternate method of management control.

Note 7. The application of EVM on cost or incentive efforts less than $20M is optional and is a risk-based decision that is at the discretion of the program manager. A cost-benefit analysis should be used as a basis for the decision to implement EVM. Considerations for applying EVM in these situations may be found in the DoD EVMIG.

Note 8. The application of EVM is not required on contracts of less than 12 months in duration.

Note 9. A Contract Performance Report (CPR) (Data Item Description (DID) number DI-MGMT-81466A) and an Integrated Master Schedule (IMS) (DID number DI-MGMT-81650) are required whenever EVM is required (contracts equal to or greater than $20M).

Note 10. No specific application thresholds for Contract Funds Status Reports (CFSRs) are established; however, application to contracts of less than $1.5M in then-year dollars should be evaluated carefully to obtain only the minimum information required for management control. CFSRs should not be applied to FFP contracts or contracts of less than 6 months in duration.

Note 11. A product-oriented Work Breakdown Structure (WBS), in accordance with the DoD WBS Handbook (MIL-HDBK-881A) and the Contract Work Breakdown Structure (CWBS) DID (DID number DI-MGMT-81334C), is mandatory when EVM is implemented and a CPR and an IMS are required. For contracts that require Contractor Cost Data Reports (CCDRs), the CWBS will be developed, approved, and maintained in accordance with DoD 5000.04-M-1, Cost and Software Data Reporting Manual, and the CWBS DID (EVM contract requirements checklist, 2008).

The Electronic Industries Alliance (EIA) has issued a standard for EVMSs (EIA-748-a, January 2002), in accordance with the American National Standards Institute (ANSI). According to their organizational Web site, "The Electronic Industries Alliance (EIA) is a national trade organization that includes the full spectrum of U.S. manufacturers. The Alliance is a partnership of electronic and high-tech associations and companies whose mission is promoting the market development and competitiveness of the U.S. high-tech industry through domestic and international policy efforts. EIA, headquartered in Arlington, Va., comprises nearly 1,300 member companies whose products and services range from the smallest electronic components to the most complex systems used by defense, space and industry, including the full range of consumer electronic products" (EIA, 2008, p. 2).

The EIA standard identifies seven fundamental principles of an EVMS, applicable to all projects, regardless of size. (the EIA standard provides additional guidelines applicable to large, complex, or high-risk programs.) the seven principles, grouped into the three EVMS components, are as shown in Table ____ below:

Table ____.

Seven fundamental principles of an earned value management.

Develop a baseline project plan.

Plan the scope of all work from the beginning of a project to its completion.

Break down the project work scope into finite pieces that can be assigned to a responsible person or organization for control of technical, schedule, and cost objectives.

Integrate project work, schedule, and cost objectives into a performance measurement baseline plan against which accomplishments can be measured.

Periodically calculate earned-value cost and timing of work completed relative to the baseline plan.

Use actual costs incurred for the work performed.

Objectively assess accomplishments at the work performance level.

Take appropriate project and management actions.

Analyze significant variance from the plan, forecast impacts, and prepare an estimate to completion based on performance to date and work to be performed.

Use EVMS information in management processes.

These typical approaches used to apply these seven fundamental EVMS principles are discussed further below.

Baseline Project Plan

The project plan is the foundation of an EVMS. Without a good plan, a project manager cannot monitor project performance against cost. Planning is so important that the first three principles of the ELA standard address it. Circular a-11 provides a basic plan for a capital asset project in Exhibit 300, which includes the following topics:

Summary of spending for project stages.

Project description.

Project justification.

Performance goals and measures.

Program management.

Alternatives analysis.

Risk inventory and assessment.

Acquisition strategy.

Project and funding plan.

Description of performance-based system, specifically, the EVMS software used to monitor and manage project performance.

Original baseline.

Proposed baseline changes.

Actual performance and variance from OMB-approved baseline.

Additional business case criteria for information technology.

Enterprise architecture.

Business.

Data.

Application and technology.

Security and privacy.

Government Paperwork Elimination Act.

Earned Value

Once the baseline plan is in place, the project manager can periodically calculate earned value -- cost and timing of work completed relative to the baseline plan. Two EIA principles address this EVMS component:

Use actual costs incurred for the work performed.

Assess objectively accomplishments at the work performance level.

The use of actual cost for a specific period of time (the monthly cost report) is commonly done for most projects; such a monthly cost report, though, may fail to match the work performed. When the project is behind or ahead of schedule, there may be a large variance between the cost reported for a month in comparison to the value of the work scheduled and accomplished for that month (Frame, 2002). One of the particularly beneficial features of an automated EVMS is that it explicitly makes expenditure and work comparisons against planned levels, and gives an early warning signal of problems. The value of the work performed is tracked against the originally planned schedule just as the costs are tracked against budget (Frame, 2002). Other substantive benefits of the EVM approach are discussed further below.

Benefits of Earned Value Management.

In a typical spend plan analysis, physical progress is not taken into account when analyzing cost performance. Instead, a project's actual costs to date are simply compared to planned costs, often with misleading results; however, if physical progress is taken into account, the results may differ (Successfully presenting earned value, 2008). According to Frame (2002), "EVM expands on the two-dimensional analysis -- 'Has this project spent more or less money than planned?' -- by adding the third dimension -- 'What did we get for the money we spent?'" (p. 287). For example, suppose a task has a planned value (PV) of $1,000, and actual costs (AC) of $1,000. It appears this task has perfect cost performance, and is in good shape to finish on-budget are as shown in Figure ____ below; however, if the project's physical progress is taken into account, the results may differ.

Figure ____. Planned value of $1,000 compared to physical progress.

Source: Successfully presenting earned value, p. 2.

Besides more accurate project status assessment, EVM makes it easy for a project manager to analyze both schedule and cost performance in a variety of ways. Using a limited set of basic task information, it is possible not only to determine how a project has been performing, but to predict future performance trends as well. After Earned Value and Planned Value are known, they can then be used to determine schedule and cost variance, and calculate performance efficiency. The Schedule Performance and Cost Performance Indices not only monitor current project performance, they can also be used to predict future performance trends.

EVMS Comparisons

Figure 1 is an example of the types of comparisons that can be made with an EVMS. The figure shows three lines. One is the budgeted cost for work scheduled (BCWS) and another is the actual cost for work performed (ACWP). Those two concepts are straightforward. The third line is the budgeted cost for work performed (BCWP), or the monetary value of the work actually completed during the period. As much as possible, value should be objectively determined based on the project's reaching a specific milestone or event. When the work effort is not conducive to this type of measurement, then a subjective evaluation may be used. These three measures -- BCWS, ACWP, and BCWP -- are the basic measures of an EVMS.

BCWS.

Taking a closer look, the BCWS is the plan for the work of the project. It shows how project spending is expected to vary over time. For those expenses, a certain value of work -- equal in value to the expenditure amount -- is expected. If everything is perfect, all three lines will fall on the same track. If everything is not perfect, the ACWP and BCWP lines will diverge from the BCWS line; those differences become the variance of the costs and schedule. The distance between the actual cost and the budgeted cost is the cost variance, while the distance between the budgeted cost and the value of the completed work (BCWP) is the variance between the value of the work scheduled and the value of the work actually accomplished.

From the graph, it can be seen that the project is now in its fourth month, and like all too many other projects, it is over budget and behind schedule. It looks quite good in the first month, but by the second month, we can see that the actual cost exceeds the budgeted cost. Also, it can be seen that the amount of work accomplished is falling behind schedule. The graph also shows the next month's budget. Each of the variances shown on the graph can be calculated by formulas to measure the exact amounts. For the project shown, in the fourth month, the BCWS equals $62,000, while the ACWP equals $69,000 and the BCWP equals $60,000.

Project and Management Actions

The EIA standard contains two final fundamental EVMS principles:

Analyze significant variance from the plan, forecast impacts, and prepare an estimate to completion based on performance to date and work to be performed.

Use EVMS information in management processes.

As discussed, a basic EVMS addresses both financial and work deviations. Each of these deviations can be expressed in index or percentage terms.

From these numbers above, the cost variance can be calculated by subtracting the actual cost (ACWP) from the budgeted costs of work performed (BCWIP). This equals a $9,000 overrun ($60,000-$69,000). Similarly, the schedule variance can be calculated by subtracting the budgeted cost of the work scheduled (BCWS) from the value of the completed work (BCWP). In this case, that results in a $2,000 shortfall ($60,000-$62,000).

Both of these deviations can be expressed in index terms as well. Some managers may simply prefer an index measure, but it is useful in all cases because it can directly provide the percentage variation. Under the Federal Acquisition Streamlining Act of 1994, any deviation over 10% is considered serious and must be reported to OMB.

Continuing with this example, there is a cost performance index of.87, or only 87% of the work performed was accomplished with the actual budget expended (60,000/69,000). The schedule performance index percentage is 97, or 3% under work plan (60,000/62,000).

Budget Adjustment Index

Combining the actual cost of the work to date and the value of the completed work provides a notion of a budget adjustment index. It indicates how much additional budget will be required to complete the work if the project continues on the same track. In this example, the budget adjustment index is 1.15, meaning that a budget increase of 15% will be required to finish the work [(69,000/60,000) x 100]; however, the 15% addition to the budget does not mean that the work will be finished on time.

OMB Circular a-11 deems a financial or work variation significant if it exceeds 10%. So it is vital that managers analyze any variances and forecast their impacts on program completion in terms of both cost and schedule.

As noted above, the budget adjustment index, which is one method to estimate the completed cost of the work based on performance to date and the remaining work to be performed. This method is based on the concept that says if it took 15% more than planned to get to the current point, it will probably continue to take an additional 15% more than planned to complete the project. Another commonly used method to develop an estimate to completion is to add the current actual cost to the remaining projected cost. This method assumes that the work estimates in the future will be accurate whether or not they were in the past, while the budget adjustment method assumes that the same error pattern found in the past will continue in the future.

Calculating deviations from the project plan and developing an estimate to completion are relatively easy. It may be more difficult, however, to identify the causes of the deviation and the necessary corrective actions. Each project is unique and deviations will depend on the circumstances. The following are examples of corrective actions:

Revise agency strategy.

Negotiate contract changes/incentives.

Increase contract funding.

Reduce contract work requirements.

Encourage vendors to improve internal operations.

Terminate contracts.

The final basic EIA standard is to use the EVMS information in the organization's management process. EVMS information makes it possible to develop better budgets for the outlying years of ongoing projects, and it also provides lessons learned for planning new projects. Typically, most of the monthly reports and analyses of deviations will be done by a contractor working on the project, which is perfectly appropriate. A contractor can also provide views on the impact on project completion in terms of cost and schedule, including an estimate for completion. However, management decisions must be an internal effort based on the EVMS results and the overall management of the organization. Doing so is where the EVMS has the largest long-term payoff.

In sum, each capital asset project undertaken by a federal agency must support the agency's goals. OMB developed a Capital Programming Guide in July 1997 to help agencies with managing capital assets and complying with OMB Circular a-11. In the guide, OMB asks "three pesky questions" that the agency needs to answer to ensure proper planning for capital assets:

Does the investment support core/priority mission functions that need to be performed by the federal government?

Does the investment need to be undertaken because no alternative private-sector or governmental source can better support the function?

Does the investment support work processes that have been simplified or otherwise redesigned to reduce costs, improve effectiveness, and make maximum use of commercial off-the-shelf technology?

These and similar questions are also included in OMB Circular a-11 (see except of Appendix 300C at Appendix ____).

OMB requires that an integrated team answer the questions supporting a capital asset project and carry out the project once approved. The team members are to come from program, budget, procurement, and logistics personnel (including information technology managers, as appropriate) and are to plan, budget, buy, and manage capital assets.

Once planned, the work must be broken into pieces (work breakdown schedule) and assigned to an individual or organization for control of the objectives in the areas of cost, schedule, and technical objectives. The elements of the work should be consistent with standard industry cost categories and must be integrated into a performance baseline measurement plan so accomplishments can be monitored against the plan. Managers must ensure that changes are not made to the baseline without good reason.

The actual costs incurred in doing the work must be recorded. A contractor on the project often does this task, but project managers must review these reports, and be especially cautious when considering the objective assessment of the work performed to date. Managers must also calculate (or critically review) the deviation from the plan, forecasting its impact, and take corrective action as appropriate, for example, by adjusting the budget or the work scope (Straight et al.).

Finally, managers must incorporate the benefits of the EVMS in the general management processes of the organization. Doing so will provide superior management of capital asset projects in the future. In short, by using an EVMS, managers can keep projects on track, take corrective action when needed, and achieve success in helping to meet the mission of their agency (Straight et al.).

The 50-50 Rule for Measuring Work Performance.

The manner in which the earned value approach operates can be discerned by examining one method cost accountants have developed to measure work performance, the so-called "50-50 rule." According to Frame (2002), "Using the 50-50 rule is quite straightforward. At the moment a task begins, we assume we have achieved half its value, where value is measured by the budgeted cost of the task. Thus for a $1,000 budgeted task, we assume that $500 in work has been accomplished the moment the task begins. We do not assume that the full value of the work has been achieved until the task actually ends. Thus once our hypothetical $1,000 task has been completed -- whether it is completed early, late, or on time -- we say we have achieved $1,000 worth of work" (p. 277).

The utility of the 50-50 rule in measuring work performance can be seen in Figure ____ below which presents the Gantt chart for a very simple four-task project. To keep the arithmetic simple, each task has a budgeted value of $100..

Figure ____. The 50-50 rule in action.

Source: Frame, 2002, p. 278.

As can be seen in Figure __ above, Task a begins on time, and when it begins, it is assumed that $50 worth of work has been accomplished. Task 1 finishes on schedule, and upon its completion, the full $100 value of the task has been achieved is noted.

Task B. begins on time, so it is assumed that $50 of work has been completed. At the time of its scheduled finish, work remains to be done, so the books are not closed on it. It is noted that the task has achieved its full $100 value only when it has been completed.

Task C. begins late. The accomplishment of any work until the task actually begins is not recorded. At that time, the achievement of $50 in work is recorded. The task slips its deadline. Not until it actually finishes is it recorded that it has achieved its full $100 value.

Finally, it can be seen that task D. begins late and that it is still incomplete. Consequently, it is reported that it has achieved only half its $100 value, or $50. In making a status report, EVMS managers compute that as of today, they have achieved $350 worth of work out of a planned $400 of effort. The measure of the $350 of work performed is called earned value (Frame, 2002). The fact that $350 of work out of a planned $400 of work has been achieved suggests that the organization has reached 87.5% of our target. As Frame emphasizes, though, "Note that we have said nothing about how much it cost us to accomplish our work. Let's assume that a tally of time sheets and invoices tells us that we spent $700 to achieve $350 of work. Thus for each dollar actually spent, we attained 50 cents of value. If this project has a $10,000 total budget and if we continue to get 50 cents of value for each dollar spent, the final cost of this project will reach $20,000!" (Frame, 2002, p. 279).

This simple example demonstrates the power of the earned value approach. It gives us a method for calculating the percentage of the job that has been achieved. It also lets us measure the "burn rate" of our expenditures, thereby allowing project managers to calculate the budget impact of their performance. Earned value computations can be carried out at any level of the work breakdown structure (WBS): project performance can be examined from the perspective of the whole project down to the level of individual work packages (that is, the lowest level of the WBS). In other words, the earned value approach allows project managers to conduct integrated cost and schedule control analyses analytically (Frame, 2002).

Identifying Trends.

Earned value analysis can also be used to identify general trends in work performance as shown in Figure ____ below.

Figure __. Earned Value Analysis over Time.

Source: Frame, 2002, p. 287.

Figure __ above shows trends in actual costs (ACWP), earned value (BCWP), and planned costs (BCWS). If everything is going exactly according to plan, the lines reflecting these three measures should be collinear (represented by a single line). Deviations of the ACWP line from the earned value line indicate cost variance. Deviations of the BCWS line from the earned value line indicate schedule variance.

Figure ____ above also shows that in the early months of this project, there are abundant cost and schedule variances. Both ACWP and BCWS are substantially larger than BCWP, indicating negative variances; however, over time, the size of these variances shrinks, and by month 8 the variances have virtually disappeared, indicating that the project is finally under control. The use of these types of charts can provide project managers with a useful overview of project status at a glance. If the chart indicates that the project is generally faring well, there is no need to burden managers with detailed tables of numerical data. If the chart indicates problems, this might suggest a review of more detailed data (Frame, 2002). According to this EVM proponent, "The earned value approach was originally devised to provide government contractors and government program managers with guidance on how to track progress on large, complex projects. Because the fully developed earned value system is governed by detailed instructions that create a substantial administrative burden, the assumption has been that this approach is appropriate only on projects in the range of $100 million or larger. Using it on smaller projects would be like trying to kill a mosquito with a shotgun" (emphasis added) (Frame, 2002, p. 288).