Earned Value and Goodhart's Law

Earned Value Management (EVM) is an approach to project management that emphasizes the value produced to date, as compared to the value the project was planned to have produced, either to date or when completed. To those possessed of an analytical temperament, EVM is an appealing way to assess the state of a project, because it defines a variety of metrics related to progress. For some kinds of projects EVM works well. But EVM applied to some other projects can be misleading — even dangerous financially. In this post I examine how general awareness of the metrics of EVM makes projects vulnerable to "gaming" of those metrics.

A brief look at the Earned Value Method

The earned value method of managing a project entails monitoring a set of metrics defined in advance by the project team. Choices can vary, but typical metrics include:

• Actual Cost (AC)
• Actual Cost of Work Scheduled (ACWS)
• Actual Cost of Work Performed (ACWP)
• Planned Cost of Work Scheduled (PCWS)
• Earned Value: Budget at Completion multiplied by Actual Percent Complete (EV)
• Planned value: EV according to plan (PV)
• Schedule Performance Index: (SPI = EV/PV)
• Cost Performance Index: (CPI = EV/AC)
• Budgeted Cost of Work Performed (BCWP)
• Budgeted Cost of Work Scheduled (BCWS)

As might be evident, the effectiveness of the method depends critically on the fidelity of cost and schedule estimates. [Ogunjobi 2024] Consider, for example, PCWS (the Planned Cost of Work Scheduled). For this metric to have much utility, the estimators have to get both cost and schedule right. For this reason, EVM works best when estimates are accurate — when the Tasks, the Technologies, and the Teams are familiar.

But there are other phenomena that limit the effectiveness of EVM. One is known as Goodhart's Law.

How Goodhart's Law de-fangs Earned Value Management

Goodhart's For some kinds of projects EVM works well,
but EVM applied to some other projects can
be misleading — even dangerous financiallyLaw is an observation about managing by metrics. When we make known the metrics' goals, we risk collapse of the metrics, in part because people try to "game" the metrics by shading or manufacturing the data to produce the goal result. [Goodhart 1975] See "Goodhart's Law and Gaming the Metrics," Point Lookout for March 8, 2023.

Here's an example of Goodhart's law in action. A common approach to using earned value to manage a project involves monitoring the Cost Performance Index (CPI=EV/AC) to keep it above 1.0. A project in that configuration is spending $1.00 to produce $1.00 of value, and is said to be "cost-efficient." However, if a project team knows that its CPI is running below that level, the team might take steps to elevate its CPI by advancing a particular activity so that it occurs in the present measurement period. Not just any activity will do. By choosing one that happens to contribute significant earned value at significantly lower cost, the team can elevate its CPI. Similarly, rescheduling so as to push into the future an activity that will depress CPI (at the expense of a future period) also leads to a misrepresentation of project health.

Last words

Ordinarily, we track only those metrics that provide some gauge of progress. But there are other uses for metrics, such as detecting the gaming of metrics.

Project teams that intend to use EVM to manage the project would do well to monitor additional metrics that signal gaming the metrics. For the examples above, a signal might be rescheduling tasks that result in CPI near the goal value of 1.0. Rescheduling that involves more than one task, and which involves only tasks that contribute to decreasing CPI are worthy of special attention.  Top    Next Issue

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Footnotes

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