Earned value

According to Fleming and Koppelman (1996) the concept of earned value has been around for at least a hundred years, first used on the factory floors in the late 1800s. The usage of earned value enables the prediction of final costs and final schedule re-sults, within a certain range, for the actual project. Since 1967, every new major systems project implemented by the United States Department of Defense (DoD) has been required to use the Cost/Schedule Control Systems Criteria, or C/SCSC for short, which is a set of 35 requirements embedding the earned value concept. Over 700 major DoD contracts since 1977, where C/SCSC (and thus earned value) has been used has shown that you can, as early as 15-20% into the project, predict the final costs and time requirements within a predictable range of val-ues.

Fleming and Koppelman (1996) suggests a simplified version of earned value to be used for virtually any project who relates planned costs to actual expenses and don’t have a clue about what they got for what they spent. I agree with them and sug-gest that you can use the concept for any size of project and with any type of development model, even iterative.

Earned value project requirements

The earned value concept requires the following:

1. An appropriate defined scope of the project (whole pro-ject or iteration), or work to be done, which enables you to tell what’s in the scope and what’s not. This is preferably made with a work breakdown structure, WBS, down to the necessary level of granularity. For cost-reimbursable contracts, the buyer defines the top two or three levels of the WBS. For fixed-price contracts the contractor defines all of the WBS. The work should be defined down to dis-crete work tasks that can be managed and easily deter-mined complete not complete.

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2. The work segments defined in the previous step must be planned and scheduled. Typically, CPM¹ is appropriate to accomplish this. If several contractors and subcontractors are used, their schedules must of course be in accordance with a master schedule.

3. Responsibility for each work segment should be assigned and resources will need to be estimated and budgeted for all work segments within the defined project scope. When estimating, refrain from adding reserve time. Do this later when all of the work segments have been estimated.

Thus, the so called Cost Account Plan should contain the following:

a. Statement of work (scope).

b. Schedule (start/stop dates for each task).

c. Budget (in dollars or hours or units).

d. Responsible person.

e. Responsible department.

f. Type of effort (recurring or non-recurring).

g. Division into discrete work packages.

h. Method used to measure earned value performance (milestone, formula, percent complete, standards, apportioned).

4. Establish a baseline of the estimated, scheduled and budgeted work segments in the previous step, not includ-ing any reserves, from which project or iteration perform-ance can be measured. The baseline should be under

1 Critical Path Method

figuration management to enable traceability back to the original baseline. All changes to the baseline have to be reviewed, controlled, and approved or rejected. The base-line is needed to be able to tell how much of the project is finished, to be able to compare completed work against actual work and actual costs.

5. Monitor iteration/project performance against the base-line and forecast final results. Also manage basebase-line changes to maintain the baseline current.

An example

Assume you have a one-year $100,000 project scheduled with an expenditure rate of $25,000 per quarter. At the end of the first quarter the actual expenditures are $22,000 and thus $3,000 under the planned effort. From these values you can’t really tell whether the project is behind schedule or underrunning costs.

By adding the earned value dimension, which measures the value of the actual work accomplished, we can tell much more about the actual status of the project. Let’s say that the work segments completed at the end of the first quarter had an earned value of $20,000. Then we can immediately tell that we

are $5,000 behind the planned work of $25,000. Since the actual expenditures to accom-plish the work are $22,000 we can also tell that we have a cost overrun of 10%. So, with

earned value we are able to tell that the actual project is

running late and

overspending. See the figure to the left.

Figure 7. Earned value example.

$

1Q

25 000 Planned 22 000 Spent

20 000 EV

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Testable requirements

Peter B. Wilson (2000) suggests the use of testable requirements with earned value. A testable requirement is defined as a re-quirement that someone is able to write one or more test cases for that would validate whether the requirement has or has not been implemented correctly.

As an example you plan to implement 80 testable requirements in 500 labor hours during the first month of the project. When the month has passed 475 labor hours has been expended and 72 of the requirements have been implemented correctly. This gives you an earned value of (72/80) * 500 = 450 labor hours. So in this case you overspent 25 labor hours.

Schedule and cost performance indices

Schedule performance index, or SPI, is determined by the follow-ing formula:

Earned Value SPI =

Planned Value

This value tells you how much of the work planned to be ac-complished actually was acac-complished. A SPI < 1.0 is a warning signal. The SPI can be a valuable tool for use in conjunction with critical path analysis to forecast the expected completion date for the project.

Cost performance index, or CPI, is determined by the following formula:

Earned Value CPI =

Actual Costs

This value tells you how much work was accomplished for every project dollar spent. A CPI < 1.0 is a warning signal. The CPI can be used to forecast a statistical range of estimated final costs to complete the project.

Forecasting final cost and schedule

A realistic bottoms-up estimate of the remaining tasks is the most desirable forecasting method, but CPI and SPI can be used to produce statistical forecasts of final required funds to com-plete the project.

Statistical range of cost-to-complete forecasts:

Total budgeted funds Low end forecast =

(Best case) CPI

Total budgeted funds High end forecast =

(Most likely) CPI * SPI

The To-Complete Performance Index, or TCPI, can be used to de-termine what performance level it will take to accomplish all remaining effort to achieve some specified management objec-tive.

Earned Value of work remaining TCPI =

Funds remaining