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  

Are your projects always (or almost always) late and over budget? Are your project teams plagued by turnover, burnout, and high defect rates? Turn your culture around. Read 52 Tips for Leaders of Project-Oriented Organizations, filled with tips and techniques for organizational leaders. Order Now!

Footnotes

Your comments are welcome

About Point Lookout

Thank you for reading this article. I hope you enjoyed it and found it useful, and that you'll consider recommending it to a friend.

This article in its entirety was written by a human being. No machine intelligence was involved in any way.

Point Lookout is a free weekly email newsletter. Browse the archive of past issues. Subscribe for free.

Support Point Lookout by joining the Friends of Point Lookout, as an individual or as an organization.

Do you face a complex interpersonal situation? Send it in, anonymously if you like, and I'll give you my two cents.

Related articles

More articles on Project Management:

Seeing Through the Fog

When projects founder, we're often shocked — we thought everything was moving along smoothly. Sometimes, with the benefit of hindsight, we can see that we had — or could have had — enough information to determine that trouble was ahead. Somehow it was obscured by fog. How can we get better at seeing through the fog?

Scheduling as Risk Management

When we schedule a complex project, we balance logical order, resource constraints, and even politics. Here are some techniques for using scheduling to manage risk and reduce costs.

Ten Approaches to Managing Project Risks: I

Risk management usually entails coping with losses if they do occur. Here's Part I of a concise summary of the options for managing risk.

Ten Approaches to Managing Project Risks: III

Project risk management strategies are numerous, but these ten strategies are among the most common. Here are the last three of the ten strategies in this little catalog.

Seven Planning Pitfalls: I

Whether in war or in projects, plans rarely work out as, umm well, as planned. In part, this is due to our limited ability to foretell the future, or to know what we don't know. But some of the problem arises from the way we think. And if we understand this we can make better plans.

See also Project Management for more related articles.

Forthcoming issues of Point Lookout

Coming August 27: Contributions in Team Meetings: Content

Most meetings are structured around a linear agenda, if they are structured at all. But the order of the agenda might not be the order that optimizes productivity. This first post in a series about contributions to meetings considers alternative frameworks for structuring team meetings. Available here and by RSS on August 27.

And on September 3: Contributions in Team Meetings: Advocating

An agenda in the form of an ordered list of topics might not provide an appropriate framework for a given meeting. For example, if A depends on B, and B depends on A, we must find a way to discuss A and B together in some orderly fashion. Here are some alternatives to linear, ordered agendas. Available here and by RSS on September 3.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenaXXxGCwVgbgLZDuRner@ChacDjdMAATPdDNJnrSwoCanyon.com or (650) 787-6475, or toll-free in the continental US at (866) 378-5470.

Get the ebook!

Past issues of Point Lookout are available in six ebooks:

• Get 2001-2 in Geese Don't Land on Twigs (PDF, )
• Get 2003-4 in Why Dogs Wag (PDF, )
• Get 2005-6 in Loopy Things We Do (PDF, )
• Get 2007-8 in Things We Believe That Maybe Aren't So True (PDF, )
• Get 2009-10 in The Questions Not Asked (PDF, )
• Get all of the first twelve years (2001-2012) in The Collected Issues of Point Lookout (PDF, )

Are you a writer, editor or publisher on deadline? Are you looking for an article that will get people talking and get compliments flying your way? You can have 500-1000 words in your inbox in one hour. License any article from this Web site. More info