The Role of Earned Value in Fixed Price

ProjectsDave Johnson

What is meant by Earned Value?

• Features of an Earned Value Management System (EVMS)• Development of a Performance Measurement Baseline (PMB)• Assignment and training of Cost Account Managers (CAMs)• Creating the five reporting formats that pull together measures of progress

versus actuals• Generating the reporting formats monthly and developing Corrective Action

Reports (CARs) where performance is out of threshold ranges• In a government contract requiring EVMS, all of the above is done with

government (or customer) oversight

• Today, I will be discussing a less formal and more responsive form of Earned Value – one where our company is the final “customer”

What is a Fixed Price Project?

• For today, Fixed Price will mean a Firm Fixed Price (FFP) contract with a customer to develop and deliver, in accordance with requirements and/or specifications:• A system, typically one with a substantial software development and/or integration

involved• A quantity of integrated hardware and software units that perform one or more

specialized functions• Features, Benefits, and Pitfalls

• We are free to satisfy the contract requirements in any way we wish • The customer cannot alter the requirements or terms of the contract without our

consent (and, presumably, an adjustment in compensation)• We are obligated to deliver what we agreed to regardless of what it may ultimately

cost our company

Some Background• What does it mean that our company is the ultimate “customer” in a FFP contract?• An example: a Senior Vice President (SVP) turned to me, the Project Manager, after

signing a multi-million dollar FFP contract and said:• Right now all of the funds on this contract are company profit • How much of this (my) profit do you need to deliver what we signed up for?

• If you are the Project Manager for a FFP contract, this point of view will help you focus – you must succeed• The SVP’s points are fair ones because the company has taken all the risk and failure

can take on two forms:• It takes more money than the contract has to successfully complete, costing your

company money, possibly above and beyond any profit loss• You are unable to complete, the company defaults, and may be obligated to pay

another company to successfully complete

Earned Value on such a Contract

• Typically, the cost (overhead) of executing Earned Value on a FFP contract is not included in developing the bid• Nonetheless, my claim is that you, as the Project Manager, cannot afford to

be without it• As Tim Lister once told a Risk Management Seminar, “Risk Management is

Project Management for Adults” – good advice, especially when your company’s funds are at risk• While we often characterize risks based on the major cause (e.g., technical,

schedule, cost) – all of them have cost impacts • Earned Value on a FFP contract is a major method of exposing and

managing project risk – risk that manifests itself in project cost

Some Earned Value Management Terms - #1• WBS – Work Breakdown Structure – the decomposition of the effort and

the tasks involved in meeting the contract requirements• BCWP – Budgeted Cost of Work Performed – the value of the work

accomplished, measured in terms of the budget• BCWS – Budgeted Cost of Work Scheduled – the value of the work

scheduled, measured in terms of the budget• ACWP – Actual Cost of Work Performed – the expenditures incurred to

perform the planned work • PMB – Performance Measurement Baseline – the allocation of the project

budget over the WBS and the project schedule, providing a baseline plan against which to compare our execution/performance

Some Earned Value Management Terms - #2• BAC – Budget At Completion – the budget to complete the project• EAC – Estimate at Completion – the expected cost to complete the

project• CV - Cost Variance = BCWP – ACWP (positive is good)• CPI – Cost Performance Index = BCWP/ACWP (>1.0 is good)• SV – Schedule Variance = BCWP – BCWS (positive is good)• SPI – Schedule Performance Index = BCWP/BCWS (>1.0 is good)• MR – Management Reserve – the amount of the project budget that you

set aside to deal with project risks; it is separate from your bid profit

What EVMS Terms Apply?

• When we bid the project, we likely• Decomposed the work into components or tasks, typically using a WBS• Estimated the effort that it would take to execute each WBS task• Estimated the schedule that it would take to complete each WBS task• Mapped the dependencies between the different elements of the WBS to ensure we could

account for impact due to delays• Added in both Management Reserve and Profit

• All of the above constitute our PMB and we can use all the EVMS measures – in other words, we know enough to make this work • We can decompose in more detail in order to ensure that we can effectively and

efficiently measure progress (value) and uncover risks• Traditional EVMS runs on a monthly reporting cycle, we should use finer measures –

like weekly (remember that all of our funds are at risk)

Inchstones vs Milestones

• Traditionally, progress is measured against schedule milestones• Difficulty arises if they are too infrequent or too granular• Inchstones – measures on the order of one to two weeks and involving less

than a handful of resources• Permits additional insights into progress and exposes potential stumbling

blocks that require management intervention• Rules for use:

• Apply common sense when identifying inchstones• Decide on the most appropriate progress measure for each• Recognize that the law of large numbers will generally smooth the detailed progress

data

Monthly EVMS Measures

• Formal tracking of EVMS measures occurs monthly and is also useful• Recognize that EVMS has cumulative measures as well as monthly ones for you to

examine• Be aware that actuals from subcontractors or procurement payment delays can skew

monthly data• Consequently, always compute monthly information by using the Current Month

Cumulatives minus the Previous Month Cumulatives• Rules for use:

• Compute the CV, CPI, SV, and SPI at every level you can • Determine where you have problems (e.g., CPI or SPI < 1.0) and determine the TCPI and/or TSPI

required to recover• Do not assume that you and your team will magically become more efficient or effective –

recognize that you have a management problem on your hands

Role and Responsibilities

• As Project Manager, you must use the inchstones and other EVMS data to make decisions and course corrections• Your team needs leadership from you to adapt to the realities of performing their

tasks and delivering• Rules to use:

• If progress is stalled in an area for more than one week, it is likely that the issue is management-related and you need to understand the issue and act

• Problems (especially significant ones) to not improve with age, so inform senior management in your company and seek their advice and counsel

• Be candid and open with your team about project progress, their efforts and accomplishments, and the challenges ahead (monthly at least)

• Find a way to demonstrate that you are as committed to project success as you expect them to be

Summary

• #1: Management Reserve is Essential • If it was not explicitly bid, then always extract a Management Reserve above

and beyond the profit amount that was bid • You can’t get anyone out of trouble without financial resources at your disposal

• #2: More Measurements are Better than Fewer• Higher fidelity in measurement of the work means earlier and more insight

into problems • Inchstones are better than milestones

• #3: Timeliness is Critical – Time is Money• You cannot effectively address and fix potential problems you don’t see quickly • Weekly or even daily measures rather than only monthly

Summary

• #4: Track Everyone and Everything• Assume that your team is performing and accounting for their progress fairly • Look for validation and be aware of any stalls as indicators of a management

problem• #5: Be Flexible

• Certain costs may exceed expected costs; look for offsets where you accumulate savings

• When a problem arises, be open to adjusting your plan and/or approach• #6: You are in Charge

• As the Project Manager, you need to make hard decisions and you need to make them quickly

• It does no good to have insight into a problem if you take no action to fix it

Summary

• Finally: Remember the Contract Type• Your company has assumed all of the risk of delivering in accordance with the

contract• Do not permit yourself or members of your team to agree to scope changes in the

hopes of a “better” relationship with the customer• Capture all interactions of this type, even informal requests for change, in

memoranda to the contracting officer – only the CO can determine whether something is in scope

• Keep your senior management informed and aware of your actions• Do not apologize for this behavior – the customer agreed to the same contract that

you and your company did and it constrains their behavior• Everything that you permit to occur that is out of scope is costing your company

money

Questions?