Preparing the Project Team for Earned Value


Preparing the Project Team for Earned Value

From the bicycle example and the equations presented in Table 6-4, it is somewhat evident what must be done to prepare the project team for earned value. The most critical steps are:

  • Prepare a complete WBS for the project. Without a complete WBS, the PMB cannot be adequately prepared. Earned value is measurement of accomplishment against a baseline. Without the baseline, there can be no meaningful measurement. In the chapter on estimates, we discussed in detail how to decompose the sponsor's value estimate into the WBS. In the earned value system, the sponsor's value estimate becomes the planned value of the project.

  • Set up the project rules for sizing the cost accounts work packages. Work packages are the smallest units of work on the WBS and are collectively rolled into cost accounts. Cost accounts are typically the lowest level on the WBS where formal cost tracking and allocation are made. Sizing the cost account means deciding how large in dollars a cost account should be before it is too large for effective management and needs to be subdivided into multiple cost accounts. There are no fixed rules. On some smaller projects, $50,000 or less may be a cost account; however, on larger projects, so small an amount may be impractical. The project manager and the project team make these decisions.

  • Provide a means to collect and report actual cost. Collecting and reporting actual cost is the most difficult part of applying earned value. Outside of the contractor community that serves the Department of Defense, there are few businesses that invest in the means to collect actual cost beyond direct purchases. Most projects are run with salaried labor for which project-level timekeeping is not available. Without actual cost, there is little that can be done with the quantitative metrics of earned value, although the concept of focusing on accomplishment remains valid.

  • Set up the project rules for claiming earned value credit. Earned value credit rules must be set up in advance and made known to the cost account and work package leaders.

Dollar Sizing the Cost Account

Apart from any qualitative management considerations regarding effective control of cost accounts, there are some quantitative implications to "large" and "small" accounts. The quantitative implications arise from the variance estimates that are a direct consequence of the distance between the most pessimistic dollar value and the most optimistic dollar value of a cost account probability distribution. The larger the account, the greater is the pessimistic-optimistic distance and the greater is the amount at stake in dollars.

The concept of larger dollar risk with larger cost accounts is intuitive but has a statistical foundation. The statistical foundation can provide guidance to the project manager regarding practical approaches to subdividing cost accounts to mitigate risk. It turns out that the same phenomenon occurs in scheduling with "long" tasks. Indeed, when you think about it, planning involves not only sizing the cost accounts for dollars, but also sizing for schedule. In fact "right sizing" for dollars may well lead the project manager toward "right sizing" for schedule. Because of the coupling between right sizing for cost and right sizing for schedule, we will defer the quantitative discussion until Chapter 7.

Rolling Wave Planning

We have all faced the planning problem where activities in the future, beyond perhaps a near-term horizon of a few months or a year, are sufficiently uncertain that we can only sketch out the project plan beyond the immediate horizon. Such planning has a name: rolling wave planning. Rolling wave planning simply means that the detail down to the cost account is done in "waves" or stages when the project activities, facilities, tools, staffing, risks, and approach become more known. In effect, rolling wave planning is conditional planning. The "if, then, else" direction of the project in the future depends on outcomes that will only become known as the project proceeds.

Whether the large cost account is a result of rolling wave planning or is simply a planning outcome of the WBS and the schedule network, the statistical implications are similar. The quantitative aspects of rolling wave planning are discussed with the material on schedule planning in Chapter 7.

Project Rules for Claiming Earned Value Credit

There are three rule systems generally applied to earned value systems: (1) all or nothing, such as was applied in the bicycle project example; (2) some number of discrete steps like 0, 50, or 100%; and (3) continuous estimates of credit from 0 to 100% complete with any number in between being acceptable. Practice has shown that the continuous method dilutes the value of the earned value method since the tendency to be "90% complete" for most of the timeline is very prevalent.

Of course it is not enough to simply have a rule without also considering when a work package task begins and ends. When does the clock begin running and the expenses start accumulating for the actual cost, and, just as important, when does the accumulation of expenses end so that a variance can be calculated? Just looking at the project network diagram to find the task dependencies may not be enough, though the network diagram is the place to start. Table 6-5 offers a few definitions that are helpful in establishing the earned value measurement system.

Table 6-5: Earned Value Claim Rules

Claim Parameter

Application

Explanation

Task started

Time-Centric Earned Value

Predecessor events that establish the prerequisites of the task are done and the current task has begun expending effort.

Task completed

Time-Centric Earned Value

All work necessary to complete the successor dependencies is complete and the business value of the task is accomplished.

All work performed

EAI Standard Earned Value

All work necessary to complete the successor dependencies is complete and the business value of the task is accomplished.

Partial credit for work performed

EAI Standard Earned Value

All work necessary to meet the standing criteria for partial credit is complete and the business value of the task up to the partial complete level is accomplished.

Standard units of work

Either Earned Value System

A "standard" unit of work measured in business value such that each WBS work package is measured in so many standard units. Earnings accrue for each unit completed.

The Earned Value Claims Process

In point of fact, a process should be established for claimants to make their claims for value earned. Typically, the project manager holds a "value review" each period to receive the value claims for evaluation. By means of web-based project tools, video- and teleconferences, e-mail, and actual meetings, there is usually ample opportunity to receive this information. Once received, the earnings claims must be validated and accepted. Applying the claim rules may change the earnings claim as originally submitted. Once the claim is validated, the actual cost from the P&L can be applied to the work package deliverables. Then variances are calculated and forecasts are made.

If the forecast is not favorable, the project manager can take several different actions depending on the severity of the variance:

  • Plan to mitigate the variance with offsetting positive variances in other work packages.

  • Rebaseline the remaining project by re-estimating the remaining work using the history of past work to obtain a more realistic ETC and EAC. The estimating techniques discussed in other chapters would come into play at this point.

  • Correct root cause problems that might be centered in staffing, training, tools, methods, facilities, vendors, specifications and procedures, or the like that are impacting performance on the PMB.

Rebaselining the Performance Measurement Baseline

The time may arise when the PMB no longer represents the plan that the project team is working to complete and the variances being reported are therefore not meaningful. In that event, the project manager, in consultation with the project sponsor, will rebaseline the project. Some rules should be decided in advance regarding how rebaselining is to be done. The following are the usual steps:

  • Make a clear demarcation of the scope that is to be baselined in the second baseline.

  • For the scope in the first baseline, set EVbaseline1 = PVbaseline1. All unearned planned value goes to the second baseline and applies to the scope moved to the second baseline. Note that setting the planned value equal to the earned value at the end of PMB 1 resets the schedule and value variance to $0. The cost variance remains unchanged in PMB 1 and for the project as a whole.

  • The planned value moved to the second baseline is then decomposed into a second WBS and a second PMB is fashioned. The second WBS does not need to be structured the same as the first WBS, but the scope that moves should be mapped from WBS1 to WBS2.