Term Paper on "Earned Value"

Term Paper 32 pages (8811 words) Sources: 1+

[EXCERPT] . . . .

earned value management affect profitability?

Earned value management (EVM) method is one of the most effective management techniques to emerge in the arena of management during the 20th century. While the technique originated in the late 1960s, its early use was exclusively in large defense programs. Today, though, project managers have discovered that it can be usefully employed in small projects as well as large ones, and its popularity on projects of all sizes is growing rapidly.

How Can Earned Value Management Improve Profitability?

Management reports, scheduling data, performance management information and much more inundates some project managers in ways that make sorting this flood of information out akin to drinking from a fire hose. Fortunately, some useful management techniques have emerged in recent years that can help in this regard. According to Frame (2003), "Given the plethora of data that are spewed out of the project planning and tracking machine, how can project staff make sense of the barrage of project performance facts and figures directed at them? Increasingly, they are turning to an approach called the earned-value management to help them better manage budget and schedule information" (p. 213). As Straight, Lawler and Schwartz (2003) emphasize, although earned-value management is not a new concept, its effectiveness in providing a wide range of useful oversight features in project management has become increasingly recognized in recent years. In fact, earned value management was used by the Department of Defense (DOD) during the 1960s as a central part of the Cost/Schedule Control Systems Criteria; the DOD subsequently refined revised the 35 criteria into the existing 32 criteria used in the earned value management system (What is earned value management?, 2008). According to these authors, "Now, earned-value management is being used in a wider variety of government contracts, and is spreading through the private sector as a valuable tool for project managers" (What is earned value management?, p. 2). The basic precepts of EVM are that (a) all project steps "earn" value as work is completed; (b) the earned value (EV) can then be compared to actual costs and planned costs to determine project performance and predict future performance trends; and - physical progress is measured in dollars, so schedule performance and cost performance can be analyzed in the same terms (Successfully presenting earned value, 2008).

The profitability that accrues to the use of the earned-value management system may or may not be readily discernible. For instance, Straight and his colleagues note that, "In short, by using an earned-value management system, managers can keep projects on track, take corrective action when needed, and achieve success in helping to meet the mission" (p. 37). While these performance measures do not always equate to increased profitability, it is reasonable to posit that improved performance and reduced costs will contribute to any organization's bottom line. The specific topic to be explored in the study therefore involves how earned-value management methods can be used by different types of organizations to increase their profitability through improved project management techniques. According to Frame (2002), "The earned value management (EVM) method is one of the cleverest techniques developed in the arena of management. Although it originated in the late 1960s, its early use was exclusively in large defense programs. Today, project managers have discovered that it can be usefully employed in small projects as well as large ones, and its popularity on projects of all sizes is growing rapidly" (p. 277).

Statement of the Problem

While many organizations of all sizes and types have enjoyed good success with the EVMS approach, there are some detractors as well. For instance, according to Lorell and Graser (2002), some contractors have complained in the past concerning the perceived problems associated with reforming the earned value management system and emphasized that the government implementation of Earned Value Management System (EVMS) reporting requirements mandated the collection of cost data on at least one level below what contractors would have done on a typical commercial program. Some authorities suggest that EVMS costs millions of dollars to set up and requires more than three times as many people than would be needed for the same type of work on a commercial program (Lorell & Graser).

Purpose of Study

The purpose of the dissertation is three-fold as follows:

To deliver a comprehensive and critical review of the relevant literature concerning project management in general and how earned-value management methods can improve the project management process.

To develop a series of case studies that are sufficiently illustrative of best practices in different settings to provide informed conclusions and recommendations.

To deliver a PowerPoint presentation based on the dissertation's findings that can be used by companies of all types that seek to implement earned-value management methods in their project management.

Research Questions

What are the fundamental principles of earned-value management and how are they used?

How can these earned-value management principles be applied to projects of different types and sizes to improve an organization's profitability?

What constraints exist to the implementation and administration of earned-value management techniques?

Are some types of projects better suited to earned-value management than others? If so, what types of projects are the best candidates for the use of earned-value management?

Importance of Study

Earned Value Management (EVM) is a project management system that combines schedule performance and cost performance to answer the question, "What did we get for the money we spent?" Earned Value has been used since the 1960's by the Department of Defense as a central part of the C/SCSC (Cost/Schedule Control Systems Criteria). Recently, the DOD revised the 35 criteria contained in the C/SCSC and produced the 32 criteria for EVMS (Earned Value Management Systems). These criteria have since been accepted by the American National Standards Institute/Electronic Industry Association as a new standard, called ANSI/EIA 748. Now, EVM is being used in a wider variety of government contracts, and is spreading through the private sector as a valuable tool for project managers (Basic concepts of EVM, 2008).

Scope of Study

Rationale of Study

One of the dangers involved in relying on cost data in isolation of other factors is the tendency of managers to make erroneous assumptions concerning project progress and budget status. As Frame (2003) emphasizes, "The fact that a status report shows that a project is under budget does not mean that project is doing well. The reported budget performance may reflect the fact that work is not being done, hence money is not being spent. The purported cost savings is chimerical (Frame, p. 213). Earned-value management techniques, though, can help overcome this constraint in developing a robust analysis of project and budget status. According to Frame, "Earned-value management was developed by cost accountants and is designed to help project staff keep better track of what is happening on their projects. It recognizes that cost data alone or schedule data alone can lead to distorted perceptions of performance" (2003, p. 213). Improving the manner in which organizations manage their projects, both large and small then, can help avoid unnecessary costs and streamline accounting process to improve a company's cash flow. As Frame also emphasizes, "Many companies with excellent products have gone out of business simply because they ran out of cash to pay the bills. Cash shortages can result if accounts receivable are not collected promptly, if a key customer disappears, if money is tied up in equipment, or if financial reserves are limited" (2003, p. 79). Finally, as Hall (2002), emphasizes, "Financial measures address the return on investment, direct costs compared to indirect costs, and resource allocations. Many government organizations use an accounting system to look at cost by product. Others have incorporated activity-based costing, earned value management, or economic value added activities into their methodology" (p. 7).

Overview of Study

This study uses a five-chapter format to achieve the above-stated research purpose. Chapter one of the study introduced the topic under consideration, a statement of the problem, the purpose and importance of the study, as well as its scope and rationale. Chapter two provides a critical review of the relevant and peer-reviewed literature, and chapter three presents the study's methodology, a description of the study approach, the data-gathering method and the database of study consulted. Chapter four is comprised of an analysis of the data developed during the research process and chapter five presents the study's conclusions, a summary of the research and salient recommendations for project managers of all types.

Definition of Key Terms

AC: Actual Costs (total amount spent on a task up to the current date).

BAC: Budget at Completion (overall approved budget for a task).

EV: Earned value.

EVM: Earned value management.

Percent Complete Task progress, related as either EV/BAC, or simply physical progress shown by the fill of a task bar.

Chapter 2: Review of Related Literature

Background and Overview.

The earned value approach was originally developed in the United States in the 1960s to help manage very large defense projects. Most of the effort in its development was driven… READ MORE

How to Reference "Earned Value" Term Paper in a Bibliography

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