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Implementing Earned Value Management in a Design Consultancy

John Mathew
JohnMathew
Product Director
BST Global
Earned Value Management (EVM) is a technique well-suited for professional services organizations, yet many design consultancies struggle to harness it. However, through thoughtful use of process and technology, your consultancy can make EVM stick – and enjoy improved project delivery. To help you succeed in this, here are five process and technology tips for implementing EVM in your consultancy:   1. Establish a project work breakdown structure.  A key component to EVM is establishing a work breakdown structure (WBS) for every project. Consider establishing WBS standards for the different types of projects you deliver, aligning with project deliverables. To best support EVM, a project WBS should go down to the level that Planned Revenue, Earned Revenue, and Actual Effort will be tracked.   2. Establish a project schedule.  To utilize EVM to track schedule performance, you need to establish project schedules. These schedules should reflect WBS sequencing, and how resources will be utilized to deliver the project. Additionally, these schedules should be divided into time periods (e.g. months, weeks, days) at a granular enough level for tracking schedule performance.   3. Calculate and baseline Planned Revenue.  After establishing the project WBS, determine Planned Revenue across the WBS. An integrated project management and accounting system with the right combination of project-centric capabilities can help you achieve this. To support EVM, a system should capture project labor and expense pricing terms, and leverage these terms along with a project resource plan to calculate Planned Revenue. At a minimum, Planned Revenue needs to be established by WBS element, in order to utilize EVM to track project financial performance. If tracking project schedule performance is also an objective, then Planned Revenue should also be forecasted across the same time periods by which the project schedule is established.   4. Track Earned Revenue and Actual Effort.  Once project execution begins, track Earned Revenue and Actual Effort as labor and expense charges are posted to the project WBS. Here too, a project-based business system can assist, if it tracks these metrics in conjunction with timesheets, expense reports, and other project charges.   5. Track project performance and adjust Earned Revenue.  As Earned Revenue and Actual Effort accrue on a project, use additional EVM metrics to assess financial and schedule performance and determine when corrective action is necessary. In conjunction with this analysis, Project Managers may need to adjust Earned Revenue in alignment with project progress. An EVM-enabled business system supports this by allowing project managers to update the physical percent complete of an entire project or specific elements of the project WBS. This percent complete assessment is then used to adjust the Earned Revenue via the following equation:   Earned Revenue = Planned Revenue x Physical Percent Complete   By following these tips, EVM can play a central role in driving better project delivery in your firm. By understanding how traditional EVM metrics apply to your business model, and incorporating these metrics into your project management processes and systems, your firm can take significant steps towards better financial and schedule performance across its project portfolio. Author’s Note: This is the fourth article in a four-post series on the use of Earned Value Management in professional services organizations.

Advanced Earned Value Management Metrics for Design Consultancies

John Mathew
JohnMathew
Product Director
BST Global
Ben Franklin’s proverbial words “time is money” have special meaning for design consultancies, as successful delivery of professional services involves navigating the intersection of project schedules and project finances. Earned Value Management (EVM) provides direction at this intersection by offering a variety of metrics to assess project health and drive project performance. Let’s build on EVM’s three basic metrics and explore nine financial and scheduling metrics that your consultancy can leverage today.   Financial Metrics 1. Budget Variance As the difference between Earned Revenue and Actual Effort on a project, this metric compares how much money has been spent to how much revenue has been earned and provides insight into whether the project is under-budget (positive value) or over-budget (negative value). 2. Effort Performance Index This ratio of Earned Revenue to Actual Effort measures how efficiently a project is earning revenue compared to expenditure. An index less than one indicates an over-budget condition. 3. Effort at Completion Dividing Planned Revenue by the Effort Performance Index provides a projection of how much money will be spent at project completion. 4. Budget Variance at Completion The difference between Planned Revenue and Effort at Completion projects where a project will end up in comparison to its overall budget.   Scheduling Metrics 5. Schedule Variance The number of time periods (e.g. days, weeks, or months) between the current time period and when Planned Revenue matches the current Earned Value position, this offers an assessment of whether a project is ahead of schedule (i.e. Earned Value ahead of Planned Value) or behind schedule. 6. Schedule Performance Index The ratio of Earned Revenue at a point in time to the Planned Revenue at the same point provides a normalized assessment of whether a project is ahead of schedule (greater than one) or behind (less than one). 7. Planned Duration This metric indicates the number of time periods a project is expected to span. 8. Duration at Completion Dividing the Planned Duration by the Schedule Performance Index will give you a projection of how many time periods will have elapsed at project completion. 9. Schedule Variance at Completion The difference between Duration at Completion and Planned Duration, this is a projection of whether the project will complete ahead or behind schedule.   Closing Thoughts Different consultancies have different needs, including which combination of financial and/or schedule metrics are useful. As you identify the mix of metrics for your firm, consider goals and variance thresholds for each selected metric. For example, if Effort Performance Index is important, define the upper and lower limits that dictate whether a project needs further focus and attention. By defining these thresholds, you can start to establish how EVM will fit into your firm’s project management methodology. In my next post, I’ll share tips on harnessing the metrics outlined above, in conjunction with process and technology, to implement EVM in a design consultancy. Author’s Note: This is the third article in a four-post series on the use of Earned Value Management in professional services organizations.

Basic Earned Value Management Metrics for Design Consultancies

John Mathew
JohnMathew
Product Director
BST Global
“We’re on schedule, but it looks like we’re going to exceed our budget." "We’re running a bit behind, but we’re going to come in under budget.” For design consultancies, providing updates like these is essential to managing expectations while delivering project-driven professional services. If you want to make this more of a reality in your organization – it’s all about Earned Value Management (EVM). EVM is built on three metrics: Planned Value, Earned Value, and Actual Cost. Think of these metrics in terms of your project budget and schedule. Planned Value represents how you expect to earn your project budget over the duration of the project. Earned Value represents what you actually earn as the project progresses. Actual Cost represents what you spend to do project work throughout the project. At first glance, these terms might seem pretty straightforward, but let’s translate them into even more meaningful terms for a professional services firm. 1. Planned Value = Planned Revenue Planned Value provides the baseline for tracking project performance in EVM, representing the value a project is expected to deliver over its duration. In the context of consulting projects, Planned Value represents the revenue a project is expected to earn through completion, adding up to the overall project fee or budget. In other words, Planned Value is Planned Revenue. Planned Revenue may be expressed as an overall figure for an entire project, or it can be divided across a project’s work breakdown structure (WBS). Additionally, Planned Revenue can be spread across time periods (e.g. weeks or months), to represent the timing of when a project is expected to earn revenue based on anticipated completion of project deliverables. 2. Earned Value = Earned Revenue The second metric of EVM is Earned Value. For design consultancies, this is more aptly termed Earned Revenue, as the metric represents the revenue a project earns as work is performed and milestones are achieved. There are multiple ways to earn revenue on a project. Revenue may be earned when the project team charges hours or expenses to the project. Hours charged on a timesheet may be converted into revenue via contracted labor multipliers or bill rate schedules. Expense charges – like travel, printing, or subcontractor expenses – may be converted into revenue via contracted expense multipliers or unit pricing rate schedules. Revenue may also be earned as project managers assess percent complete across the project WBS. These assessments are often done a monthly basis, and often stem from progress to-date and how much work remains. Regardless of how it’s calculated, Earned Revenue is often governed by Planned Revenue, which in turn is tied to contract terms. For instance, if the contract dictates a lump sum or fixed fee, Earned Revenue cannot exceed this amount. A similar limit applies for projects that have cost plus (i.e. time and materials) contracts up to a predetermined maximum amount. 3. Actual Cost = Actual Effort The final core EVM metric, Actual Cost, is the market (or retail) value of cost a project incurs as work is performed. This metric provides consultancies with a way to compare how much effort has been expended on a project in relation to the Planned Revenue and Earned Revenue on the project. As such, in a professional services context, this metric is better termed Actual Effort. In many ways, Actual Effort accrues on a project similar to the way Earned Revenue accrues. Actual Effort is the result of labor or expense charges being posted to a project, with these charges being converted into Actual Effort via contracted labor and expense pricing terms. However, there are two significant differences between Actual Effort and Earned Revenue. First, Actual Effort cannot be calculated or adjusted by percent complete assessments – Actual Effort is purely a function of the labor or expense charges posted to the project. Second, Actual Effort is not bound by Planned Revenue. As your team continues to work on a project, Actual Effort continues to accrue, even if Earned Revenue is capped by Planned Revenue limits. Another way to understand Actual Effort comes from its relationship to Direct Cost. While Direct Cost represents the cost to a consultancy for services delivered, Actual Effort represents the market value of services delivered. And while some consultancies may incorporate Direct Cost into their project management methodology to measure project multipliers or other margin-based metrics, Direct Cost is not core to EVM. Closing Thoughts In order to leverage EVM effectively, a design consultancy must translate EVM’s three core metrics to fit the unique way professional services projects are contracted and delivered. With this understanding, a firm can take the next step of defining additional metrics and thresholds that leverage these core metrics – enabling better insight into project status and helpful early warning indicators of project issues. I’ll discuss this next step in the third post of this EVM series. In the meantime, please share your EVM questions and/or experiences in a comment below! Author’s Note: This is the second article in a four-post series on the use of Earned Value Management in professional services organizations.