Practitioners Versus Accountants on Earned Value

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Categories: ROI

Most of my regular readers know I like to take accountants to task for pretending to be able to deliver cost performance or estimate-at-completion information to decision-makers based on generally accepted accounting principles. But that door swings both ways: Earned value practitioners are also guilty of trying to further their technical agenda using the resource managers' arguments and analysis, which, in my opinion, is profoundly flawed.

The most prominent of these tactics is to try to justify the cost--or even the existence--of the project management office by running some sort of ROI analysis. This is simply illogical if for no other reason than the ROI calculation pertains to assets, not capabilities.

Less notorious but every bit as pernicious is the tendency of earned value practitioners and accountants to compare the time-phased budget's basis of estimate document with its associated actual costs at the line-item level.

In the earned value world, comparing budgets to actuals is worse than useless: It's actually misleading.

And yet, some practitioners seem to think that if such an analysis were simply done at a very detailed level, it would suddenly become relevant. It doesn't.

Oh, they may try to make some lame argument about the need to benchmark the estimators' work, but this assertion lacks validity that can be demonstrated in the following scenario:

A US$100,000 task is estimated to require US$25,000 in heavy equipment and US$75,000 in labor. At task end, US$74,000 was spent in heavy equipment and US$25,000 was spent in labor. An earned value management system correctly--would not raise the red flag for cost performance, but the system that compares budgets to actuals would erroneously report a severe problem--never mind that the task came in under budget.

Any management information system that reports a phantom cost performance problem isn't good for very much.

Next up:  The absurdity of maintaining milestone lists in lieu of real schedules.

Posted by MICHAEL HATFIELD on: July 10, 2009 11:18 AM | Permalink

Comments (3)

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Glen B. Alleman

An EVMS would certainly report this as a problem. The Work Package for the labor would be severely under spent and the equipment Control Account which usually absorbs the sunk cost of equipment at the end of the period of performance would be severely over spent.

Please consult your Earned Value Management System Description, you know the one approved by DCMA and the one you use every month to submit you Contract Performance Report (CPR) to the government. It will assuredly have detailed instructions on how to manage labor accounts and ODC and materials accounts. This way you can avoid this situation in real life.

Glen B. Alleman
VP, Program Controls

William Goelkel
Michael, To further explore your example, let’s say the organization has resources totaling $200,000 available for projects: $100,000 in labor, $100,000 in heavy equipment. They authorize two $100,000 projects: Project A and Project B. Manager A estimates $25,000 in heavy equipment and $75,000 in labor: your example. Consequently, Manager B is told she has to plan her project using the remaining $25,000 in labor and $75,000 in heavy equipment. She does so, but finds she cannot complete it because most of the heavy equipment scheduled for her project is still working on Project A. So most of the labor assigned to Project B is idle, as is 67% of the labor scheduled for Project A. I fear neither Manager B nor executive management is going to agree this is not a severe problem. I do share your opinion ROI isn’t the most important measure of a project’s value. I’d vote for discounted cash flow, as advocated by Mark Denne. Bill Goelkel

Bernadine Douglas, MS, PMP
While the project did come in under budget, it would not seem realistic that the report from this management information system wouldn't flag several questions:

- What reliability would the estimates be from the source who estimated this project for their next project to be estimated, similar type of project or not?

- What type of resources were these estimates based on--entry level, and then the work was done by senior level resources--was that an intentional subterfuge?

- Was it just a lucky happenstance that the resources delivered under expectations? What was the quality outcome?

- Where was the equipment purchased and what characteristic about it that made the cost difference from the estimate? Should that supplier be used again?

- Does that equipment now provide a better value and sets the standard for future projects?

And many more questions could come to mind.

I think phantom problems would be highlighted and addressed from any report showing this information.

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