EVM: An Ideal Formula?

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Introduction

Time is money. When any organization is working on a project where cost is a critical component or results are not guaranteed, time cannot be wasted. Because of this, it is important for such organizations to ensure that the project’s value measures up to the efforts being invested in it. Earned Value Management (EVM) has developed from a specialized formula for the US Government to an extremely beneficial tool in the project metrics of project management and measuring how well a project develops and utilizes costs against time.

This paper will examine how earned value management functions as a tool for business in not only measuring the progress and performance of a product but other facets, such as employee development as well. Various works of peer-reviewed literature will help to provide a holistic view of EVM. First, substantial background information will be developed regarding EVM in order to understand just how this system of management works. Stephen Hays Russell of Weber State University excellently lays out the fundamentals of EVM. Once the fundamentals have been established, it is important to examine how EVM still functions in the world of aircraft engineering and defense, where the concept was initially developed; a stronger understanding of the method’s original intent will lead to a greater understanding of how EVM was able to be adapted for other situations. With all of the founding information in place, exploration of other facets can be observed. These include the different fields in which EVM functions, various issues that occur within the method, and the psychology behind the appeal of EVM. This will all be in support of the idea that if the ultimate goal is to see how well something improves against time, then the use of the Earned Value Management technique is extremely effective as a means of measuring real-time project performance and progress.

EVM at a Glance

Although it has found itself to be an extremely practical tool in the world of business and project management, EVM does not claim its roots here. In fact, EVM initially began as a tool for the US Government in the Department of Defense. It was believed to have served the function of being a financial specialty, examining how defense projects would best be developed and not be hindered by unexpected costs or a lack of unperceived value. Because of this, it is understood that “the earned value concept was developed to correct serious distortions in assessing a project’s cost performance generated by comparing actual costs with a time-phased budget.” (Russell, 2009, p. 157) This time-phased budget is something many organizations use in order to predict what funds would be needed and how they can be best distributed, especially in an environment where time cannot be wasted by trial-and-error methods. As one can imagine, this model would already serve well in the business world, where competition is high and both time and money are tightly correlated. The team of Morteza Bagherpour, Abalfazl Zareer, Siamak Noori, and Mehdi Heydari take this and note that “the proposed thus is able to measure performance of production process….before the final stages of a project or product implementation phase.” (Bagherpour et al, 2008, p. 420) Because of this, it is found that EVM asks the two fundamental questions of how long it would take to complete a project and what might it cost upon completion. (Byung-Cheol and Reinschmidt 2011)

EVM can be broken down into smaller fundamental elements in order to gain the most comprehensive understanding of its purpose. Russell (2009) continues to provide this fundamental information by noting the four crucial components needed in order to make the EVM formula work. He lists them as a baseline plan that defines the project in total, the tasks planned to be accomplished at Time, The budgeted value of the tasks accomplished by Time, and the Actual costs of time. (p. 158) So, once a project manager has all of these details fully fleshed out, the use of the EVM formula not only becomes simplified but can more accurately predict a specific outcome and what resources are needed to finish the project so that it is something of value. He cites an end goal, claiming that “EVM is able to provide a true picture of a project’s cost performance by accounting for differences between work accomplished and work scheduled.” (Russell, 2009, p. 161) In the layman’s terms, this means that someone managing a project, or those involved with the project can look objectively and see where something is and where it needs to be; if certain elements are not up to par, then the manager can take the necessary action to find a solution. It acts as a constant source of feedback, solving problems as they occur rather than turning out to fix mistakes and wasting valuable time.

Another resource that excellently empowers our understanding of EVM is Mary K. Pratt’s Earned Value Management: What is it, how it works and why your project needs it. Pratt takes her readers further into the ways in which EVM fits the business model. She not only fulfills a general understanding of the EVM formula but provides fundamental insight as to how the formula can fulfill a large scope of needs. At its core, she argues that “when used properly, EVM helps team members, project managers and their bosses accurately gauge progress against an established project plan.” (Pratt, 2006, p. 48) And so, through her perspective, it becomes clear that EVM as a tool doesn’t only serve those in charge of managing a project, but everyone involved in the project. It adds to a team mentality that impacts the psychology of those involved in the project, an element that will be explored later. Unlike certain realms of science that leave theory development up to testing until failure, this method of management doesn’t leave things up to high hopes and guesswork; it provides the efficiency of the answers needed here and now. If this is the case, then the added benefit of EVM is that predictability becomes more fluid even as the process changes. With this in mind, Pratt (2006) supports fully the ways in which EVM sets projects up for a successful outcome by seeing all of the details when you need them because all of the elements of a project are completely under the management’s control. (p. 49) The concluding thought on the fundamentals of EVM, then, is that it empowers the project from multiple perspectives, and empowerment very often leads to success.

EVM in its Natural Habitat: Understanding its Function in Air Logistics and Defense

As mentioned earlier, EVM began as a tool developed by the US Department of Defense. It would come as no surprise then, that EVM has found its place in many military operations, notably the air force. Satya S. Chakravorty provides an excellent piece of literature that outlines the role that EVM plays in air logistics, taking a tightly developed formula and adding the element of triangulation to augment it towards a specific purpose. Triangulation is a mathematical tool that uses angles in order to determine location and distance between two points. It is noted that “historically, triangulation has played an essential role in geodesic surveying by reducing complex topography of the Earth’s surface into a collection of triangles.” (Chakravorty, 2013, p. 47) Given that the Earth is three dimensional, and aircraft are often suspended in air, then the use of triangulation becomes increasingly important, as aircraft development relies on this method and cannot be hindered by estimated values and ambiguous assumptions. It needs specificity and is often so sensitive a procedure that invaluable time cannot be wasted.

So there arises the question: what role does EVM play in this formula and the project of developing aircraft? After all, triangulation is a mathematical formula most commonly used in engineering and science, while EVM has most commonly been seen as a financial and management tool. However, in the development of something as particular as air logistics, as well as something as complex as national defense, it is safe to assume that more than one element or field of expertise is needed. It is noted that “In order to perform exceptionally or to be recognized as a world-class machine, leadership must relentlessly pursue perfection by focusing its continuous process improvement efforts.” (Chakravorty, 2013, p. 51) This is where EVM comes into play, as it is the formula that helps leaders in the development of this aircraft that is the “project” as EVM understands it. By being able to see how well the air logistics of a particular project fits into the laws of triangulation, and how well triangulation is used to determine the values of these air logistics, a project manager for an aircraft can more accurately see places that more financial investment. As a result, money that is being invested in national defense is being more efficiently allocated. National defense itself is a portion of the government that requires an astronomical budget, and so the peace of mind in knowing where this defense is in comparison to where it needs to provide the safety for something that needs to run smoothly to do so.

EVM in the ‘Real World’

Now that there is a strong understanding of EVM as a tool, exploration of how it now functions in everyday business, projects, and other investments can occur. As supported by previously reviewed literature, EVM has become a fundamental tool in overall management. Its high level of adaptability allows EVM to find success in many corners of society. Part of this adaptability is in the general components of EVM that are relatable to many different fields, whether they are in science, and technology or business and finances. When examining what it takes to predict a project's success and how the system of EVM functions in that success, Professor Kim Sang-Chul (2009) notes two primary components to highlight. They are the schedule performance index (SPI) and the cost performance index (CPI). (p. 1700) These indexes feed into the fundamental understanding of EVM, as they chart progress for the two elements of performance that are cared about the most: time and money. Furthermore, they are two very general concepts that play an important part in management regardless of the field that management exists in.

One such field that fits closely with EVM’s initial purpose is that of engineering. Obviously, air logistics and aircraft development fall easily under this category. However, that particular specialty became the link between EVM’s intended purpose as a financial specialty for national defense and opened doors to other uses. Engineers frequently use EVM as a tool to measure specific projects, especially new ones and determine how to best manage time and money. (Byung-Cheol and Reinschmidt 2010) It is discussed that engineers frequently find that “earned value is the answer to the question, ‘up to this point, has the project made the planned progress for the money that has been spent?’” (Power Engineering, 2005, p. 89) Engineering as a field is a very pragmatic practice; in order for the project to be complete, everything needs to be in working order as it is being worked upon, otherwise, it eventually becomes too challenging to move forward. Although these same ideals don’t work in every facet of society, they widely fit into realms that provide society with immediate and tangible results.

In this same vein, there is the world of electrical construction, which is another broad service that finds its place in an individual’s day to day life. Awan S. Hanna discusses in-depth how EVM can be used for the benefit of this field in his own article, Using the Earned Value Management System to Improve Electrical Project Control. He points out the idea that fundamentally:

Electrical construction projects can gain significant benefit from EVMS for the following reasons: 1) electrical construction is labor intensive; therefore, labor tracking can significantly improve the chances of success on a project; 2) Electrical construction work is ‘last-in-line’ and contractors are frequently impacted by the tasks performed previously during construction; EVMS can identify the location and intensity of impacts during the early stages of a project. (Hanna, 2012, p. 450)

Therefore, the idea is supported that if a project involves something with hands-on, tangible results, then EVMS can be the most beneficial method for completing a project.

One such field that an individual might not expect EVM to find a place is that of human resources. Since EVM has often been regarded as a formula for a project’s value in time and money, one would not initially see how the value of an employee could be implemented. However, estimated value management is beginning to find other uses as well, not just for projecting cost values but the value in employees as well. As Scott W. Lester, Jennifer Mencl, Cheryl Maranto, Kristina A. Bourne, and Timothy Keaveny (2010) point out, there are similar elements between the estimated value of time and money in a project and the predicted value of an employee under these same components that are highly relatable. Researchers in management have noted that ‘there is a need to standardize the definition of professional competency and to identify those who possess the knowledge, skills, and abilities required for navigating current and future business arenas.’” (Lester et al., 2010, p. 284) And so, by standardizing the value of an employee in this regard, managers can see how much value such an employee will be regarding potential products and how they can reduce the time and money invested in order to move forward more efficiently. So, EVM suddenly doesn’t just become a management tool, but a life skill as well.

Finally, there is the realm of business management, where one might easily expect time and money to be highly valued. This is because, as Kim Yong-Woo and Glenn Ballard point out “EVM comes from MBR thinking, but that project control based on MBR is not appropriate for managing works at the operational level.” (p. 227) So it can be assumed that EVM can, in fact, serve businesses at a higher level by focusing MBR management by focusing on the foundations of the business. Paul Kauffman, Charles Keating, and Carol Considine (2002) further support this by noting that precision is paramount to controlling costs, so any way that higher management can focus on operations to do this is highly beneficial. (p. 19) In a capitalist society, where the success of businesses greatly impacts the success of a community, EVM then becomes highly involved in the community’s health.

Reoccurring Issues with EVM

Not every tool is perfect. In fact, when developing a theory on anything, the more infallible the idea is, the less likely people are to believe that it is true. In his article, Two Issues Concerning the Use of Earned Value Management, Arnold M. Ruskin discusses the various problems that arise when using EVM. What’s more important, however, is to understand how these issues can be overcome to utilize EVM in the most optimal way possible. The primary element that he brings to light is the impracticality that every solution can be solved as it arises; it’s irrational to think that certain consequences don’t need to be pondered over and addressed before the project begins. He highlights a very important note that “by the time 15% or 20% of the project has been completed, 80% to 85% of the ‘decision space’ has been foreclosed and drastic revisions in project approach are generally no longer available within the agreed-upon budget or schedule.” (Ruskin, 2004, p. 27) He reminds readers that, even before a project is nearly a quarter into completion most of the issues cannot be solved as they are addressed. If this is the case, then by the time a significant amount of time and money have been invested in the project, and the simplest option is to backtrack and solve these issues. This ends up taking time that is either wasted or simply not prepared for.

Several other issues that arise in the EVM process are actually addressed by Seyed Taha Hossein Mortaji, Morteza Bagherpour and Siamak Noori in their article, Fuzzy earned value management using L-R fuzzy numbers. Since ‘fuzzy numbers’ are a set of possible values within the realm of one real number, Mortaji and his peers address the overall set of open-ended possibilities that can come from the use of the EVM formula, something that is not quite desired in fields that rely on specificity and details. First, from this knowledge they note that “percent complete in EVM often has ambiguity and precise estimation of it is difficult.” (Mortaji et al., 2013, p. 324) So it can be concluded that fuzzy numbers further complicate the matter by never giving management a fully accurate percentage of completion for a project; if one never knows quite where he is at, then one can’t easily compare that to where he needs to be. This takes the element of control out of the equation for EVM when it is so highly valued. Second, there is the problem that a fuzzy number set plays a large role in the EVM process, but “it has difficulties such as: overestimation effect, dependency problem, conservatism, and dependence on individual judgment to determine alpha value.” (Mortaji et al., 2013, p. 331) So what’s brought to light is not only the general interference that fuzzy numbers have in determining accuracy with EVM but the many smaller interferences that lie within that umbrella; the need to address all of these smaller concerns would only take up more of this time that is so highly valued.

What what’s important to walk away with is not an underlying doubt to the use of the EVM process, but rather empowerment in the skepticism of it. By being able to address these issues and concerns, conflicts that keep EVM from working to its fullest potential, project managers can become more aware and find means to work around them. Perhaps, in this case, EVM is not a definitive solution. However, it is still a heavily reliable tool that can assist in the bigger picture of project completion.

Why We Place Value on Our Earnings

There is a certain psychological appeal to EVM. After all, being able to visually see a project’s development improve and compare to costs well acts as a positive reinforcement for one’s efforts. Furthermore, having a tangible piece of evidence that can determine the expected outcome of a project offers peace of mind for organizations to move forward more efficiently. Matthew L. Dixon and Kalina Christoff point out that “decisions are made by estimating the value of each option and then selecting the option with the higher expected value. (Dixon and Christoff 2012) The wonderful thing about EVM is that it can point out these options that lead to a higher expected value, providing project managers with more positive outcomes that lead to a higher sense of accomplishment.

Conclusion

When examining these different facets of EVM and the other components that feed into its work, it is not difficult to see just how beneficial a tool it is in project management. not only does it work well as a tool for measurement, but it also stimulates certain desires in the human brain that give the model a deeper sense of purpose. It provides a project and its managers with tangible evidence as to what the predicted outcomes will be, the adequacy of its progress, and what financial and strategic steps need to be taken in order to move forward. Because of its adaptability and tangible evidence, Earned Value Management has proven itself as an effective means for measuring project performance and progress. Its growing popularity serves the tool to become a regularly integrated part of society. As it continues to grow, the hope would be that EVM continues to serve the needs of many different organizations in society, who serve the people in turn, creating a more successful environment for everyone.

References

Bagherpour, M., Zareei, A., Noori, S., & Heydari, M. (2010). Designing a control mechanism using earned value analysis: an application to production environment. International Journal Of Advanced Manufacturing Technology, 49(5-8), 419-429. doi:10.1007/s00170-009-2406-z

Byung-Cheol, K., & Reinschmidt, K. F. (2010). Probabilistic Forecasting of Project Duration Using Kalman Filter and the Earned Value Method. Journal Of Construction Engineering & Management, 136(8), 834-843. doi:10.1061/(ASCE)CO.1943-7862.0000192

Kim, B., & Reinschmidt, K. F. (2011). Combination of Project Cost Forecasts in Earned Value Management. Journal Of Construction Engineering & Management,137(11), 958-966. doi:10.1061/(ASCE)CO.1943-7862.0000352

CHAKRAVORTY, S. S. (2013). BUILDING A WORLD-CLASS MACHINE. Industrial Engineer: IE, 45(6), 46-51.

Dixon, M. L., & Christoff, K. (2012). The Decision to Engage Cognitive Control Is Driven by Expected Reward-Value: Neural and Behavioral Evidence. Plos ONE,7(12), 1-12. doi:10.1371/journal.pone.0051637

Earned Value. (2005). Power Engineering, 109(11), 96-98.

Hanna, A. S. (2012). Using the Earned Value Management System to Improve Electrical Project Control. Journal Of Construction Engineering & Management,138(3), 449-457. doi:10.1061/(ASCE)CO.1943-7862.0000426

Kauffmann, P., & Considine, C. (2002). USING EARNED VALUE METHODS TO SUBSTANTIATE CHANGE-OF-SCOPE CLAIMS. Engineering Management Journal, 14(1), 13.

Kim, Y., & Ballard, G. (2010). Management Thinking in the Earned Value Method System and the Last Planner System. Journal Of Management In Engineering,26(4), 223-228. doi:10.1061/(ASCE)ME.1943-5479.0000026

Lester, S. W., Mencl, J., Maranto, C., Bourne, K. A., & Keaveny, T. (2010). The Impact of Passing the Professional in Human Resources Exam on Early Career Success for Undergraduates Entering the Human Resource Field. International Journal Of Selection & Assessment, 18(3), 282-290. doi:10.1111/j.1468-2389.2010.00511.x

Mortaji, S., Bagherpour, M., & Noori, S. (2013). Fuzzy earned value management using L-R fuzzy numbers. Journal Of Intelligent & Fuzzy Systems, 24(2), 323-332.

Pratt, M. K. (2006). Earned Value Management. Computerworld, 40(14), 48-49.

Ruskin, A. M. (2004). Two Issues Concerning the Use of Earned Value Measurements. Engineering Management Journal, 16(3), 26-30.

Russell, S. (2009). Earned Value Management. Air Force Journal Of Logistics, 33(1), 156-161.

Sang-chul, K. (2009). Project success indicators focusing on residential projects: Are schedule performance index and cost performance index accurate measures in earned value?. Canadian Journal Of Civil Engineering, 36(11), 1700-1710. doi:10.1139/L09-101