13.10 Earned Value Management (EVM)

Earned Value Management (EVM) is a program management tool that integrates the technical, cost, and schedule parameters in order to measure contract performance against a baseline plan.  EVM is an outgrowth of the work done with Program Evaluation and Review Technique (PERT) and C/SCSC modeling.  EVM emerged in the 1980's as a project management control methodology.  Then in 1989 the Undersecretary of Defense for Acquisition made EVM a program management requirement and was one of the few government business practices to survive the acquisition reform movement.  Ownership of EVM criteria was transferred to industry in the late 90's with the adoption of ANSI/EIA-748 which addressed nine management practices.  As such EVM is a cost measure, performance measure and a time measure. 

Earned Value Management, or EVM, is a widely accepted industry best practice for project management that is being used across the DOD, the Federal government, and the commercial sector. It is the use of an integrated management system that coordinates the work scope, schedule, and cost goals of a program or contract, and objectively measures progress toward these goals. EVM is a tool used by program managers to:

• Quantify and measure program/contract performance;
• Provide an early warning system for deviation from a baseline;
• Mitigate risks associated with cost and schedule overruns; and
• Provide a means to forecast final cost and schedule outcomes.

EVM has not always been consistently applied or used to manage programs.  When PMs use EVM in its proper context as a tool to integrate and control program performance, the underlying EVM system and processes become self-regulating and self-correcting.  PMs should lead this effort.  The success or failure of EVM and ultimately, the success of the program itself, depends heavily on whether the PM fully embraces EVM and uses it on a daily basis.

Earned Value can be defined as "the value of work accomplished against the planned budget over a specified period of time."

The contractor's management control system must provide cost, schedule and performance data that:

• Relates time-phased budgets to specific contract tasks;
• Objectively measures work progress;
• Properly relates cost, schedule, and technical accomplishments;
• Allows for informed decision-making and corrective action;
• Is valid, timely, and able to be audited;
• Allows for statistical estimation of future costs;
• Supplies managers with status information at the appropriate level; and
• Is derived from the same management systems used by the contractor to manage the contract.

EVM improves visibility of project management by requiring that work progress be quantified through "earned value," an objective measure of how much work has been accomplished on the contract. EVM requires the contractor to plan, budget, and schedule authorized effort in time phased increments that form a performance measurement baseline (PMB). As work is accomplished, the earned value concept allows comparisons to be made against the plan which identifies schedule and cost variances.  The development of a PMB requires the following to be accomplished:

Table 13-2  Performance Measurement Baseline Development Steps

The task of defining the contract work or scope is accomplished through the use of a work breakdown structure (WBS) which is essentially a "family tree" subdivision of work to successively lower levels of detail. Table 13-3, extracted from MIL-STD-881A, Work Breakdown Structures for Defense Material Items defines three levels of identification. The PMO, in conjunction with the contractor, determines the upper levels of this WBS, which serve as the summary level for reporting purpose.

Table 13-3  Work Breakdown Structure Level Identification

The contractor extends this structure to the cost account and work package levels (Figure 13-8). At that level, organizational elements are actually assigned to do the work. The work package must have discrete starting and completion points (schedule) which are compatible with upper level schedules. The work package must be the responsibility of a single organizational unit.

Figure 13-8 Work Breakdown Structure Extended to the Cost Account and Work Package Levels

The EVM process is comprised of the following seven steps:

1. Define the work,
2. Plan the work,
3. Execute the work plan,
4. Collect the performance results (data),
5. Measure performance,
6. Analyze deviations or variance, and
7. Take corrective action (if corrective action is required you need to return to step 2 and manage any changes through change or configuration control procedures).

An important step to understand is Step 6:  Analyze Performance.  Below are a couple of examples or ways to look at and analyze performance but in order to understand the charts you need to understand some of the EVM terminology used here:

• BCWS = Budgeted Cost of Work Scheduled = What you planned to do.
• BCWP = Budgeted Cost of Work Performed = What has been accomplished.
• ACWP = Actual Cost of Work performed = Actuals.
• BAC = Budget at Complete = Total budget (sum of time phased budgets).
• ETC = Estimate to Complete = Estimated cost to complete program from now on.
• EAC = Estimate at Complete = Projected final cost of program.

Figure 13-9 Earned Value Management (EVM) Examples

The schedule variance (SV), compares the budgeted value of work accomplished (earned value) to the budgeted value of the work scheduled to be done, i.e., a difference from the plan expressed in budget ($) terms.  From the example above you can see that Test was supposed to be completed by the tenth month but as yet has not been completed, thus there is a schedule variance.

The cost variance (CV), compares the earned value against the actual costs generated to do the work, i.e., the amount of cost under or overrun from the plan for the work accomplished.  From the example above, to date $14 of work was scheduled, $13 was spent, but only $10 was earned, leaving a negative cost variance.

Planned or scheduled value of work, earned value, and the actual cost of work performed provide an objective measure of performance, thus enabling a performance trend analysis to be done and cost estimates at completion to be developed at various levels of the contract. 

EVM provides a static, high-level view of a programs performance based on historical information.  Thus the current condition may be better or worse than what the data is showing.  Contractors and program managers need to be intimately familiar with all aspects of their program in order to understand current performance.

The new DOD policy requires EVM on:

Cost/incentive contracts equal to or over $50 million:

• Compliance with ANSI/EIA-748,
• EVM system formally validated and accepted by cognizant contracting officer,
• Contract Performance Report (DI-MGMT-81466A),
• Integrated Master Schedule (DI-MGMT-81650),
• Integrated Baseline Reviews,
• CWBS (DI-MGMT-81334B), and
• CFSR (DI-MGMT-81468).

Cost/incentive contracts equal to or over $50 million:

• Compliance with ANSI/EIA-748,
• No formal EVM system validation
• Contract Performance Report (DI-MGMT-81466A) (tailoring recommended),
• Integrated Master Schedule (DI-MGMT-81650) (tailoring recommended),
• Integrated Baseline Reviews,
• CWBS (DI-MGMT-81334B), and
• CFSR (DI-MGMT-81468).

Cost/incentive contracts under $20 million:

• EVM optional based on risk assessment,
• Requires cost-benefit analysis, and
• Requires program manager approval.

Firm-fixed price contracts:

• EVM discouraged regardless of dollar value,
• Requires business case analysis, and
• Requires milestone decision authority approval. 

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