Earned value management is a project management tool used to measure the success of a given project at a certain point of time with the use of criteria such as scope, schedule and budget. It takes a critical look at factors such as whether the project is ahead or behind budget, whether the project is ahead or behind schedule or whether the actual work is getting done. Founded in the 1960's, earned value management has become a standard for US government departments when projects are undertaken, with most of them making it a mandatory tool for measuring the success and effectiveness of a project.
In short, "Earned Value Management (EVM) helps project managers to measure project performance. It is a systematic project management process used to find variances in projects based on the comparison of worked performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting. The project baseline is an essential component of EVM and serves as a reference point for all EVM related activities. EVM provides quantitative data for project decision making."(Dwivedi, n.d.)
Terms and concepts used in earned value management
Earned value management is driven by 3 main concepts. They are, according to (Price, n.d.), scope (tasks), schedule (time) and budget (cost). There are three principal metrics used in earned value management to determine the success of a project. According to (Marshall, 2007), they are,
"1. Budgeted cost of work performed
(BCWP or EV) = Earned Value
2. Actual cost of work performed
(ACWP or AC) = Actual Cost
3. Budgeted cost of work scheduled
(BCWS or PV) = Planned Value".
Another metric that can be added to the primary metrics of EVM is Budget at Completion (BAC), which in turn gives out the total cost of the project. Formulas are available to determine the primary data sets that have been described above.
Planned Value(PV), or the amount of work scheduled to be done as per the initial time phased baseline can be calculated using the formula of,
PV=BAC*Percentage(%) of planned work
Earned value(EV), or the percentage of the original budget that has been earned because of the work that has been actually completed, can be calculated using the formula of,
EV=BAC*Percentage(%) of actual work
Actual Cost(AC), which can be calculated once all the actual costs incurred are summed up
Using the above primary metrics or data points, a set of derived metrics can be calculated.
Cost Performance Index (CPI) can be defined as the ratio between EV and AC
CPI=EV/AC
If CPI value is equal to 1, it indicates that the activity is on budget
If CPI value is smaller than 1 (CPI<1), it indicates a cost overrun
If CPI value is larger than 1 (CPI>1), it indicates a better than planned cost performance
Scheduled Performance Index (SPI) can be defined as the ratio between EV and PV
SPI=EV/PV
If SPI is equal to 1, it indicates that the activity is on schedule
If SPI is smaller than 1 (SPI<1), it indicates a schedule overrun
If SPI is larger than 1 (SPI>1), it indicates that the activity is ahead of schedule
Scheduled Variance (SV), indicates the difference between work performed and work scheduled
SV = EV-PV
Cost Variance (CV), indicates the difference between the amount of money that was actually spent against the work that was actually performed
CV = EV-AC
Estimate at Completion (EAC), indicates the estimated cost that would be incurred to complete the project
EAC = BAC/CPI
Advantages and disadvantages
Earned value management has become the preferred choice for most US government departments and agencies when it comes to determining the effectiveness and success of a given project. However that does not mean it is without it flaws. First we shall examine some advantages of earned value management that help it garner such accolade amongst project managers across the US. According to (Clayton, n.d.), earned value management has four principal advantages that set it apart from the rest of project management tools.
"A Single System
Perhaps the biggest benefit to implementing EVM is that it is a single system that can track the project in terms of work, time and money; Project managers do not have to learn multiple systems. EVM can measure the amount of work actually completed; forecast the cost and completion date; compare the actual performance of the project versus the plan; and track the project's budget in real time.
Variance
Variance is an examination used in EVM of what caused a difference between the projected baseline and the actual performance. This can be measured on three different levels: estimated to planned, planned to actual and estimated to actual. The process for determining variance depends on many factors including the industry, the parameters used and standards. Always verify the data when analyzing variance. It is critical to have complete, accurate information when performing the calculations. The difference discovered in calculations can show you how far away the project is from "normal." It can also help track down the root of the problem.
Performance Indices
The schedule performance index (SPI) and the cost performance index (CPI) are both advantageous tools in EVM. These metrics can help determine the current status of the project, be early warning signals if the project goes off track and estimate the total cost and time frame. The SPI measures all of the work completed on the project and calculate whether the project will meet, beat or miss its planned finish date. The CPI is considered by most project managers to be the most valuable EVM metric. This measures cost efficiency for the work completed. Simply put, it can tell you if your project is under or over budget at any point during the process.
Flexibility
When the results of the metrics used in EVM show that changes are needed, the project manager can adjust the work or budget to help bring the future performance of the project back in line with projections. The metrics can also pinpoint where any troubles are within the project. The project manager can then take preventive efforts to reduce the possibility of those troubles occurring again. Most importantly, EVM allows for these changes to be made in a flexible, timely manner at any point during the project's development and implementation."
Given the advantages it is clear why project management has such a high degree of trust from project managers when measuring performance of a project. However as with most project management tools it is not without its collection of faults.
One of its principal disadvantages is that it does not take quality in to consideration. Earned value management tests whether the project is under budget or if the work is ahead of schedule, however the quality of the work that is being produced goes unchecked. Since quality is an important aspect of the overall product, earned value management does a lackluster task of keeping a tab on the overall quality. According to (Price, n.d.), quality is not the only weakness of earned value management.
"EVA uses the planned schedule and budget along with what has actually occurred to develop three values that indicate the relative health of a project. These values are: Planned Value (PV), which is the budgeted cost of tasks that should be complete; Earned Value (EV), which is the total budgeted cost of complete tasks; and Actual Cost (AC), which is the total expenditures to-date.
Example: The project budget is $100,000. Sixty percent of the tasks should be complete, so PV is $60.000. Only 50 percent of the tasks are actually complete, making EV $50,000. AC is $65,000.
EVA Variances
EVA calculates two variances: cost variance (CV) = EV - AC, and schedule variance (SV) = EV - PV.
Using the values in Section 1, CV is minus $15,000. It has cost $65,000 to complete $50,000 of planned work. SV is minus $10,000. The project is behind schedule by $10,000 worth of work.
EVA Indexes
Two indexes indicate the performance of the project. Cost performance index (CPI) = EV/AC. Schedule performance index (SPI) = EV/PV. Using the data in Sections 1 and 2, CPI is 0.77 and SPI is 0.83.
If the indexes are equal to one, the project is on schedule/on budget; less than one, the project is behind schedule/over budget; and greater than one, the project is ahead of schedule/under budget.
CPI Issues
Once a project is over/under budget, CPI remains essentially the same for the remainder of the project, unless EV or AC changes significantly. CPI is dependent on AC for accuracy. If AC does not include all appropriate costs and payments, CPI can be unreliable.
SPI Issues
EVA cannot tell a critical task from a noncritical task. SPI may be misleading when an ahead-of-schedule noncritical task overshadows a behind-schedule critical task. The SPI may indicate a healthier project than actual reality.
Why Not EVA?
Project managers give many reasons for not using EVA, including expense to implement, requires EVA software, involves many others in many departments, divulges more information than desired and it is too complex.
If the project scope, schedule or budget is ill-defined, its goals and outcomes are vague, the Work Breakdown Structure (WBS) is incomplete, the AC collection system does not report costs timely, management exerts undue influence or distraction, or the time to properly setup data is not available, EVA may be a waste of time."
Earned value management and its relevance to project management
Since its inception earned value management has had a specific interest in the ability to manage a project effectively and efficiently and to make maximum use of the resources available to the project manager. By taking in to account cost/budget, schedule and scope, it allows project managers to make sound decisions when all matters have been considered. It also allows flexibility to the management to make radical new decisions in case some adverse and unexpected changes occur to the scope or any other important metric. However the most important aspect of earned value management can be considered as its ability to allow management to always measure the success and effectiveness of a project at a given point of time, thus allowing management to make any changes if any are required to redirect the project along the intended path, which is also the view echoed by (Kerby & Counts, n.d.).
"EVM is a tool that integrates the cost, schedule and technical
requirements of a project. It requires discipline in all aspects of the project; it requires
that the organization performing the tasks to plan the work and then to work to that plan.
Obviously, some problems will occur that could not be predicted and therefore will not
be a part of the initial plan; however, good planning does allow a manager to better
mitigate those issues and concerns that are known. The use of EVM also helps the
project manager in determining the current project status by answering questions such as: Are we on schedule? Are we on cost? Do the costs reflect the true accomplishments?
What are our variances? An added advantage of EVM is the identification of trends that
helps a manager better predict where the project or a particular element is headed and a
better method to establish a realistic Estimate At Completion (EAC) for the project. In
essence, EVM gives personnel more reliable information to make better management
decisions"
Case Study
A non-profit organization has commissioned Invictus Technologies to build the organization a website in order to carry their message across to a wider audience. After negotiations, the organization has agreed to a budget of $100,000 to complete the project. Invictus Technologies has agreed to hand over the product to the non-profit organization in 10 weeks. They have also decided to adopt Earn Value Management as its preferred project management tool to ensure the project is completed within the designated time and within the pre-agreed to budget.
Assessment
Answer the following questions based on the case study that has been given.
What are the principal factors Invictus Technologies should consider when adopting Earned Value Management as their project management tool?
What are the 3 main metrics of earned value management?
After 6 weeks, Invictus Technologies have calculated that the actual progress they have made is 70% and that the scheduled progress for that time period should be 60%. The actual cost they have incurred up to week 6 is $75,000.
Calculate the Planned Value for week 6
Calculate the Earned Value up to week 6
What is Scheduled Variance? Calculate the scheduled variance for week 6 and determine whether the project is ahead or behind schedule and by how much.
What is Cost Variance? Calculate the cost variance for week 6 and determine whether the project has a cost overrun or if the project is under budget.
Calculate the Scheduled Performance Index (SPI) and state your observations.
Calculate the Cost Performance Index and state your observations.
Calculate the Cost Estimate at Completion and Variance at Completion.
Calculate Estimate Time to Complete
State your observations on the project.
Answers
The principal factors Invictus Technologies should consider when earned value management selected as the preferred project management tool are Scope, Schedule and Budget.
The three main metrics of earned value management are Actual Cost, Earned Value and Planned Value.
Calculations are listed below. The formulas that will be used are, PV=BAC*Percentage (%) of planned work, EV=BAC*Percentage (%) of actual work.
PV = BAC*Percentage (%) of planned work
PV = $100,000*60%
PV = $60,000
EV = BAC*Percentage (%) of actual work
EV = $100,000*70%
EV = $70,000
Scheduled Variance indicates the difference between work performed and work scheduled.
SV = EV - PV
SV = $70,000 - $60,000
SV = $10,000
Project is ahead by $10,000 (1 week).
Cost Variance indicates the difference between the amount of money that was actually spent against the work that was actually performed.
CV = EV - AC
CV = $70,000 - $75,000
CV = -$5,000
Project has a Cost Overrun of $5,000.
SPI = EV/PV
SPI = $70,000/$60,000
SPI = +1.16
Activity is ahead of schedule.
CPI = EV/AC
CPI = $70,000/$75,000
CPI = 0.93
Project has a cost overrun.
Cost Estimate at Completion
EAC = BAC/CPI
EAC = $100,000/0.93
EAC = 107,526.88
Cost Variance at Completion
VAC = BAC - EAC
VAC = $100,000 - $107,526
VAC = $7,526
ETC = Original Estimated Duration/SPI
ETC = 10 Weeks/1.16
ETC = 8.62 Weeks
The Project will have a cost overrun of $7526 but will be completed 1.4 weeks ahead of schedule.
