ARTICLE TABLE OF CONTENTS
This is about the 50/50 rule in project management.
The Department of Defense and NASA use it.
So if you want to learn what the 50/50 rule is and how to use it, then you’re in the right place.
Let’s get started!
Understand the 50/50 Rule in Project Management
You may not be expecting to read this right off the bat, but Earned Value Management doesn’t always work.
At least, that’s what Ricardo Viana Vargas, Executive director of the Brightline Project Management Institute, found out.
He used earned value management (EVM) in a study of construction sites and discovered something surprising:
Although EVM was popular, it wasn’t always effective.
One of the main factors that made EVM successful was how well the project managers were trained to use it.
Anxiety over how to use EVM as a tool and lack of comprehension of EVM were major barriers to its effectiveness.
So, in the interest of making your next project a success story, let’s take a deep dive into earned value management and the 50/50 rule in project management.
First Things First: Earned Value Management
“Hold on,” you might be thinking, “what is earned value management in project management?”
That’s a good place to begin. For a concise and clear explanation, let’s go to Wikipedia.
According to Wikipedia, earned value nanagement is a technique for project management. It aims to measure project performance and tracks progress.
With EVM, you combine three aspects (the triangle) of project management:
If you want to put EVM into action, you’ll need to complete four steps:
First, break the work down into tasks. Use a work breakdown structure (WBS) to sort the tasks into a hierarchy.
Second, give each task a planned value. The value could be cost, or labor, or a combo of both.
Third, define what the earning rules for each step are. This is where the 50/50 Rule comes into play.
The fourth step is to complete the project and see how well you did. It might seem intimidating at first, but EVM is likely the easiest part of your project.
The 50/50 Rule Is a Fixed Formula
No, the formula wasn’t broken.
A fixed formula is a way to calculate discrete effort. Discrete effort consists of tasks related to completing specific end products or services, which can be easily planned and evaluated.
You can use fixed formula, weighted milestone, percent complete, or physical measurements. The 50/50 rule in project management falls into the fixed formula category.
What if a new project manager asks you what the 50/50 Rule is used for?
What would be your reply?
It should sound something like this:
The 50/50 Rule is a progress technique for how to determine the earned value (EV).
A work package’s progress technique determines how earned value is calculated. Earned value measures the performance of a work package.
The 50/50 rule assigns 50% of the value at the start and 50% when complete. It’s also called the EVT—for earned value technique—50/50 Rule.
Here’s an EVT 50/50 rule example:
You need to pave a 40-foot driveway.
After every 10 feet, you have to let the concrete dry.
Using the EVT 50/50 rule, you’d get 50% of the project’s earned value (EV) when you start pouring the first 10 feet.
The other 50% comes when the whole driveway is poured and dried.
50/50 Rule in Action
You should now be able to answer the question, “what is the 50/50 rule?”
Now, let’s see how it fits into the earned value formula.
We’ll do this with some earned value management examples. Consider the driveway project again.
Our budget at completion (BAC) for the project is how much we planned to spend on the driveway.
BAC in project management is used at the beginning of the project and is useful for calculating the Estimate at Completion (EAC) numbers after the project has started.
The total BAC we set aside is $4,000. That includes the concrete itself and the labor involved with pouring it.
Each 10-foot section is expected to cost $1,000.
To find out if the project is on track, we need to use a couple of simple formulas. A key one is the Earned Value or EV.
The EV equals the percent complete times the planned value, PV.
We have 10 feet of driveway poured.
Using the 50/50 rule, the project is 50% complete. The PV is $2,000.
The Earned Value is: 50% x $2,000 = $1,000
The EVM Triad (EV, AC, and PV)
Once you’ve got the EV for the project, you only have a piece of the picture.
The three most important pieces of data you need are the EV, the AC, and the PV.
The PV is your Planned Value.
AC is the project’s Actual Cost.
You can do wonders with these three. They let you calculate a lot of key figures in your Earned Value Management. Cost Variance is one of them.
Are you spending what you planned for, or have you overshot the mark? Cost Variance will tell you. Here’s how:
Cost Variance = EV – AC
We already determined our EV to be $1,000 based on the EVT 50/50 rule.
The actual cost of what we’ve done so far is how much we’ve actually paid out for the driveway. If we paid our contractors $1,000 for the concrete and the worker’s wages, we have a CV of zero.
Looking good so far.
Taming Performance Anxiety
You won’t be nervous about your project when you use these two measures of performance.
The first is your Cost Performance Index, known as CPI. This is a financial indicator that tells you if your spending is effective.
Here’s how you get CPI:
CPI = EV / AC
Our EV, remember, is $1,000. We’ve shelled out $1,000 for that work, and that’s our AC.
Divide the EV by the AC, and you come out with a CPI of one. Again, things look good. If the CPI was .75, it would mean we only got $.75 worth of work for every $1.00 spent on the project. Not so good.
The second measure is the SPI, or Schedule Performance Index. This one is all about the work. You can think of it as bang for your buck.
To get your SPI, use this formula:
SPI = EV / PV
Our EV is $1,000.
The PV is what you planned to spend on the work.
Since we set aside $1,000 per 10-foot section of driveway, our PV for one section is $1,000.
Divide $1,000 by $1,000 and you get 1, of course.
So we got $1,000 worth of work for $1,000. Right on.
You might be wondering why you should bother with EVM and the 50/50 rule in project management.
What’s the bottom line here?
You should use EVM and the 50/50 rule because they work.
Any Project Manager using EVM is in good company.
Who uses EVM in Project Management?
The Department of Defense, that’s who. They’ve been using it since 1967.
NASA uses it too. So, you could say EVM is rocket science.
The U.S. Department of Energy also got on board in the 1990s.
These and countless construction, engineering, and architecture firms around the world use EVM to keep their projects on track.
The Project Management Institute has issued 1.6 million certifications to date. To get that certification, you have to know EVM inside and out.
Why would you want to be certified?
Professionals who made it through the PMI’s certification program reported that they make 20% more than project managers without it. That means you could be making upwards of $112,000 a year, depending on where you work.
50/50 Rule: Terms You Should Know
AC/ACWP: Actual Costs or Actual Cost of Work Performed. AC is simply what you spent for the work that was done. It’s a tally of your cost of materials, labor, and other invoices that have been paid.
BAC: Budget at Completion. This is also called the total planned value. It’s what you budgeted to pay for the project, not what you’ve actually spent.
CPI: Cost Performance Index. Looks at the cost you budgeted for and the actual cost you paid. The CPI tells you how efficient and financially effective your project is.
CV: Cost Variance. CV is the difference between what was in the budget and what was actually spent. You’ll always want this figure to be at zero or higher.
EV/BCWP: Earned Value or Budgeted Cost of Work Performed. EV is what you expected to pay for the work that’s been done so far. It’s usually compared to the ACWP to figure out the Cost Variance.
EVM: Earned Value Management. A way to measure your project’s performance that takes in scope, time, and costs. It’s a technique used to assess your project’s progress compared to what was planned.
PV/BCWS: Planned Value or Budgeted Cost of Work Scheduled. PV is the amount of money you planned to spend on the work. It could be for the whole project or just a portion of the project.
SPI: Schedule Performance Index. SPI is an assessment of how well the project is going. It’s a ratio of earned value to planned value. Typically, this is a figure close to one, with higher values indicating that progress is ahead of schedule.
WBS: Work Breakdown Structure. A way to define the work involved in a project. It’s a breakdown of the total scope of the project into manageable segments that are easier to measure than the entire project as a whole.
50/50 Rule: Handy Formulas
Earned Value: EV = % complete x PV
Cost Variance Formula: CV = EV – AC
Cost Performance Index: CPI = EV / AC
Schedule Performance Index: SPI = EV / PV