An Education in Earned Value: Procurement Officers' Expanding Role

An Education in Earned Value: Procurement Officers’ Expanding Role

By Bill Damaré and John Peterson

As a result of heightened pressure from the Office of Management and Budget (OMB) and revised Federal Acquisition Regulations (FAR), the need for the professional purchasing community to understand the principles of Earned Value Management (EVM) and accept increased accountability during the acquisition process for federal information technology projects is higher than ever.
Ten years ago, procurement officers worked independently, answering requests from various departments by matching them with suppliers. They were facilitators in projects.

Today, procurement officers are integral players on the rosters of cross-functional teams composed of stakeholders from a number of different parts of the agency in a much more project-based strategy. Goals are established, teams are set up, and results are measured. It is a new ball game, and the professional acquisition community is expected to keep up.

In the federal government, one area where the pressure continues to rise is in the execution of major projects. In an August 4, 2005, memo sent to federal chief information officers, the OMB broadened its prescription for agencies to better manage IT projects’ cost, schedule, and performance by applying EVM systems.

“As we continue to realize the value of good project management, room for improvement remains in the execution of our IT projects,” Karen Evans, administrator for e-government and IT at OMB, wrote in the memo. “With the right tools and qualifications, managers will be better equipped to make decisions and carry out their missions.”

Because EVM will be the process by which IT projects will either advance or be revamped for a better chance for success, the necessity for all members of project teams—including acquisition professionals—to understand EVM is imperative. Implementing EVM will enable acquisition professionals to work in ways that further contribute to project success. With a swiftly approaching December 31, 2005, deadline for development of comprehensive policies for agencies’ use of EVM systems, the time to understand and plan for this requirement is now.

Why is There so Much Emphasis on Earned Value Management Now?

Earned Value Management is a methodology for determining the cost, technical, and schedule performances of a complex program or project by comparing work that is planned with work that is accomplished in terms of the dollar value assigned to the work.

Simply put, EVM answers the question, “How are we doing?” at any point in a project. The technique can be applied, at least in part, to the management of all capital projects, in any industry, while employing any contracting approach.
EVM was developed in the late 1960s by the Department of Defense (DoD) as a way of instituting a standard project reporting analysis and methodology. Not only did EVM provide a standard method for reporting project progress, but it also turned out to be the most accurate, and easiest to use, method for tracking this progress. While the DoD’s use of EVM has been well documented, the rapid expansion of EVM usage into other agencies has occurred only recently.

For the professional acquisition community, EVM necessitates earlier and deeper involvement in projects. It requires that projects be fully defined at the outset and designed with a bottom-up baseline plan, enabling measurement to take place during the entire period of performance, from one percent to 100 percent of the project’s life cycle. Procurement officers must work with contractors to ensure that contracts are developed with clear budget and time expectations.
With as little as 15 percent of the project complete, EVM provides accurate and reliable performance readings. Project managers can use readings to predict how much it will cost to complete the project within a narrow band of values. If early warning signs convey unacceptable readings to the project team, steps can be taken immediately to avoid the undesired results.

There are risks that need to be addressed even in less complicated projects. The core utility of EVM is containment of the cost risks associated with projects. One can assume that bad news never gets better with time. The earlier a project team knows that it has a problem on its project, the better chance it will have to mitigate that problem.

Consequently, it is vital that the program office, project manager, and acquisition community incorporate an earned value element into the acquisition process prior to contract award. From the outset, contracts must be structurally designed to include EVM requirements. Suppliers and subcontractors must be aware of the tasks and reporting expectations now required by the government.

Getting Started

The employment of EVM requires a three-dimensional measurement of project performance, ideally following the development of the Work Breakdown Structure (WBS) through the project’s close out. In order to understand EVM, it is essential to first understand the three key earned value components—planned value, actual cost, and earned value.

• Planned value is the amount you estimate the cost will be for a task’s planned schedule. It includes the authorized work, along with the authorized budget, within the authorized time frame. In total, this forms the project baseline.

• Actual cost is the actual amount of money paid for the work as it progresses. This includes invoices paid, labor costs, and materials purchased for the project.

• Earned value is the budgeted cost for work performed, or “Earned.” This represents the dollar amount of work that has actually been accomplished as of the current date.

As a result of the importance placed on the original planned value, it is imperative for acquisition professionals to define 100 percent of the project’s work scope during the contract writing stage. Building EVM requirements into contracts from the start ensures the contractor’s system meets contract EVM requirements and provides valid, accurate, and timely management information.

Monitoring and Analyzing Earned Value Project Metrics

Using EVM, project teams can accurately monitor and measure the performance of projects against a firm baseline. Measurements will take place at regular intervals—certainly monthly, but often weekly—where, as of a given point in time, the project team will determine its planned value, its earned value, and the actual costs incurred. These three dimensions provide a wealth of data reflecting the true health of projects.

Using the three dimensions of EVM, the project management teams can, at all times, monitor both the cost and the schedule performance status of their projects. Falling behind the planned schedule is one of the first indicators that the project is experiencing problems. This is an important red flag if the late tasks are critical to the success or progress of the project.

For any project, though, the most important outcome is the cost efficiency achieved. Cost overruns are more serious than falling behind the planned schedule. In the end, schedules will eventually be recovered. On the other hand, cost overruns are rarely (if ever) subsequently recovered by the project.
For both schedule and cost overruns, it is the responsibility of the professional purchasing community to call attention to these red flags so the project can be revamped to ensure the agency fulfills its EVM goals. As members of project teams, procurement officers will be accountable for acquisition items, and may be responsible for items that do not come in on time or on budget.

It Isn’t Easy Being Green

In addition to the tangible cost and schedule benefits of this methodology, EVM is currently one of the central requirements for “Getting to Green” on the President George Bush’s Management Agenda. A green rating means an agency has met all of OMB’s requirements, yellow means it has met some criteria, and red means it has serious problems. In order to be awarded green on the President’s Management Agenda scorecard, agencies must meet 90 percent of their goals for cost, schedule, and performance.

As such, EVM aligns closely with an agency’s investments. The investment review process goes hand in hand with the budgeting process and how decisions are made about what projects get funded and continue to receive funding.
With today’s demand for greater accountability in the government and the movement to adopt EVM for major complex projects, the concept has finally moved into the mainstream of government business. The success of acquisition professionals now depends on their ability to evaluate a contractor’s performance against a baseline. As a member of cross-functional teams, oftentimes working with multiple contractors during the acquisition process for projects, the procurement professional’s understanding of EVM concepts is critical.

Editor’s Note: Bill Damaré, Regional Vice President, Government Markets and John Peterson, Director of Contract Programs are both with ESI International, an Arlington, VA-based project/contract-management training and consulting company. For more information on ESI, visit: http://www.esi-intl.com.