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Deltek EPM™An earned value management system (EVMS) is a set of best business practices, processes, and tools for enterprise project planning and control. The process includes integration of scope, schedule, cost, a performance measurement baseline, and earned value.
EVMS provides a common-sense process for project management, considered by many companies and governments to be a best practice. It presents an excellent means to establish and maintain internal processes and controls as stipulated by section 404 of the Sarbanes-Oxley Act of 2002 (SOX) for project based companies. Additionally, EVMS supplies valuable project health indicators.
The basic EVMS process comprises the following key concepts:
The essence of earned value management is: a budget is established at the task level and as work progresses, the budget for each task is earned. This provides a metric to measure what was spent and the budgeted amount of the work completed (or earned value).
Earned value is a means of putting a dollar value on project status to enable companies to measure project health throughout the lifecycle of the project. It can also be described as the sum of the budgets for completed work.
Earned value for completed activities is equal to the total budget for those activities. For activities not yet begun, the earned value is zero. For activities in progress, there are a number of methods for objectively measuring earned value. The basic theory behind these methods is to multiply the budget by a “percentage complete” to get the earned value.
Earned value management also provides indices as early detection mechanisms, giving you time to implement effective corrective action.
These EVMS concepts are incorporated into a process guide defined in the American National Standards Institute ANSI/EIA-748 Standard on Earned Value Management. The process can be summarized as follows:
Spreadsheets alone are insufficient legal documentation proving your organization uses best practices. Companies which rely only on spreadsheets for project forecasting are in greater danger of noncompliance and criminal litigation. The best method to protect your organization and employees from criminal prosecution is a combination of earned value management and statistical forecasting software.
BearingPoint found the following deficiencies for project controls systems that use Microsoft Excel® as their reporting/controlling software when validating publicly traded companies for SOX section 404 compliance:
To reduce legal liability, statistical forecasting software should perform the following tasks:
Understand the true health of your project Determine accurate project completion costs Lend evidence and credibility to a forecast
Project managers often own responsibility for large projects. How is it possible for them to feel confident they have the most accurate information regarding all of their project? Measuring the health of projects by comparing a budget to actual costs without project status or earned value may misrepresent how well your projects are performing.
For example, if your project’s budget is $10 million dollars, and you have spent $9 million dollars, you appear under your target budget. But if you have only completed $5 million dollars worth of work, then your project has a $4 million overrun of costs. If this is the case, the project is behind schedule and the completed work costs much more than originally planned. Evaluating your projects with earned value management principles in addition to forecasting software may help determine whether a cost overrun is a “material” financial issue as defined by SOX.
Once a project is underway, it is the fiduciary responsibility of the project manager to continually improve the accuracy of the total project cost (also known as estimate at completion, or “EAC”). Factors including a better understanding of the project scope, complexity, and resources performing the work can help project managers in this effort. Assuming the total project cost will be the same as the original estimate is not an acceptable practice; this could reduce the profit margin on the project and, based on the terms of SOX, company officials could be held criminally liable. Therefore, it is important for all project managers to regularly reassess the cost-to-complete accurately and use trend analysis to verify their estimates.
There are a number of methods which can be used to determine the project cost-at-completion, including reevaluation of the remaining work and usage of statistical forecasts. The most accurate method to determine project cost-at-completion is thoroughly re-evaluating the remaining work and compensating for the performance-to-date of the project. However, this method is time-consuming, especially on large, complex projects.
Statistical forecasts are more practical for calculating completion costs because they use past project performance to estimate future project costs. If the project costs-to-date are higher than budgeted, looking at the baseline plan from the current time through completion will be misleading, since it represents improved performance. Unless there is an appropriate explanation how this improved performance can be achieved, a performance factor should be applied to the remaining work in order to properly project the final cost.
Average performance-to-date is calculated by dividing the cumulative earned value by the cumulative actual costs. The resulting value is the cost performance index (CPI). A CPI of less than 1.0 reflects unfavorable performance. For example, a CPI of 0.85 means that for every dollar spent, only 0.85 dollars worth of work is completed. Dividing the remaining budget by the CPI of 0.85 provides a cost estimate which reflects a more realistic scenario (where the performance-to-date is assumed to continue until the end of the project).
The schedule performance index (SPI) is a similar index which is calculated by dividing the earned value by the budget. An SPI of 0.85 means that for every dollar of budget, only 85¢ worth of work is completed.
Statistical forecasts created using indices like the CPI and SPI allow for very accurate forecasts because they consider both project status and past performance. They may provide early warning signs of project overruns and can be used to evaluate the accuracy of a manually entered EAC.
“Nearly 77% of companies will spend more on IT, business process change, corporate governance, and consulting this year as a direct result of SOX compliance. While most companies reported they would spend an average of 0.03% of total revenue on SOX-related activities in the next 12 months, conglomerates with widely different and independent business units have budgeted for up to 0.1% to 0.2% of total revenue. For a $5 billion company, that equates to $5M to $10M in incremental spending,” according to AMR Research1. The Department of Defense’s experience in more than 400 programs since 1977 indicates that, without exception, the cumulative CPI does not significantly improve during the period between 15% and 85% of contract performance; in fact, it tends to decline.2 In fact, results show that the average EAC based on the cumulative CPI was the lower end of the average [actual] cost at completion.3 |
People tend to be optimistic. Oftentimes, project managers announce, “I know the project has been over running in costs to-date, but I’m going to make it up.” Since statistics prove that few projects do make it up, how can project managers and senior management feel confident in project forecasts?
The to complete performance index (TCPI) is the ratio of the remaining work to the remaining cost. It indicates the level of performance which must be achieved to reach a particular estimate at completion. It is used to gain confidence in the reported forecast for the remaining work.
To validate a given forecast, the TCPI of a project should be compared to the CPI of the project to-date. Since the CPI of a project rarely improves once the project is greater than 20% complete, the TCPI should be very similar to the CPI achieved to date.
A TCPI that is greater than the CPI shows an improvement in performance and means that the forecast is not probable. Senior management should have confidence in a forecast where the TCPI is close to the value of the CPI.
No methodology or process will make projects profitable overnight. Combining EVMS principles and performance indicators provides you early warning signals, which allow you to apply effective corrective action. EVMS helps you reduce risk in a project’s outcome. It may not bring the project in on time, but you can identify what issue caused poor performance early enough to have the opportunity to change the outcome.
You can standardize the way projects are managed and reduce the likelihood of inaccurate information by using EVMS software. Removing the formulas from Excel spreadsheets and preventing each project from being managed as an island, you can transform your project management office from a cost center into a competitive advantage!
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