The physical progress is computed on each phase, and then at the project level.
It is calculated only if all tasks in the phase/project have the option Physical progress set to Used for the earned value calculation. Otherwise the physical progress is always equal to 0%.
It is calculated according to the following formula:
Σ(initial cost * physical progress) / Σ(initial cost)
So the tasks must have an initial cost for the physical progress to be calculated.
This value is updated when the agent Update project dates runs and comes from all the tasks belonging to the phase/project.