Earned Value Management (EVM) (also known as variance analysis) is the best project control technique for early detection of performance variances. It was initially developed for the United States government to better manage contract payments to vendors. Ever since, it has grown in popularity and acceptance across many industries, and now is regarded as the preferred project control technique by PMI. However, it has not been accepted as standard practice in all industries, and it is usually a technique found in organizations or industries that are relatively mature in their management processes.
The type of questions project managers usually are asked are:
What is the progress or status of the project? How is your project performing?
No one really is interested to know the details and the day to day activities. Customers/clients and sponsors will want to know the progress because this is what ties more to the money spent or earned on a project.
In this post we'll have a quick review of EVM so that an awareness of the fundamental concepts will help you in your project controlling and performance reporting endeavors.
Assess cost performance and schedule performance together—The main value of EVM is that it enables you to measure and track both schedule and cost performance together. Evaluating project performance on just one of these indicators does not always give you the true picture and does not allow you to detect variances as early.
Each work package has a planned value—The planned value of any work package is the budgeted cost of the work scheduled to complete the work package. The important point here: Estimate the cost of each work package in your schedule. Also, this means that the project as a whole has a baseline schedule and budget.
At any point, the project has an “earned” value—The earned value of a project is the budgeted cost of the work actually completed. In other words, how many work packages (or partial work packages) have been completed at this time? The value is expressed in budgeted cost terms, not actual costs. This enables you to perform cost analysis by comparing budgeted versus actual costs for the work completed. The important point to consider: Be aware of the costs you expected to incur for the work that has been completed.
In other words, PV is the total cost of the work you are supposed to accomplish at a point of time as per the schedule.
BAC is the Budget at Completion.
Notice that the formula uses the Planned % Complete, and not the actual % Complete.
Budget at Completion (BAC): $100,000
Planned % Complete after 4 months: 40%
Applying the formula, Planned Value (PV) = 40% X $100,000 = $40,000
Thus the cost of the work planned to be accomplished after 4 months is expected to be $40,000, this is what you should have spent after 4 month/50% completion.
Let us move on now to Earned Value (EV).
In other words, it is the total of planned/budgeted cost of the work accomplished at a point of time.
Another formula that can be used sometimes is
Applying the formula, Earned Value (EV) = 30% X $100,000 = $30,000
Notice that although you were expecting a value of $40,000 after 4 months, but the value earned of the accomplished work is $30,000, which indicates you are behind of what you originally planned. This is still though not the actual cost, which I will talk about next.
In other words, it is the amount of money you spent on the project to date.
The Actual Cost (AC) = $35,000 + $10,000 = $45,000
Notice that after 4 months, you have actually spent $45,000 (AC) to perform work of the value of $30,000 (EV), where you should have spent and produced work of the value of $40,000 (PV). So you can tell that after 4 months, you are above budget by $5,000 so far (AC > PV), and that you are behind schedule from what you have planned (EV < PV).
Now let’s review the other key terms and concepts that comprise EVM. The table shown below summarizes these key elements:
As you may have noticed, EVM takes the planned value (PV), or what you planned to do at an estimated cost, and compares it against the estimated cost of the work performed (EV) and against the actual cost of work performed (AC), or what actually got done. These metrics provide a wealth of information about whether the project tasks are taking longer than they should (schedule variance, or SV), or whether they are actually requiring more work effort to complete (cost variance, or CV). In addition, the estimate-at-completion metric (EAC) helps you forecast final project performance and determine if any corrective action needs to take place.
Let's take another example to illustrate how EVM could be used for performance reporting. In this example, the report provides EVM data for the fourth reporting period. At this time, the Planned Value = $75K, the Actual Costs = $100K, and the Earned Value = $60K. On this project, we can tell the following by analyzing this report:
• There has been a cost variance from the start. It could be the actual resource costs have been higher.
• Also, for the first three weeks, the project was ahead of schedule. More work was completed than planned. This was a likely factor for the actual costs being higher too.
• During the past reporting period, something has occurred that delayed progress. The project is now behind schedule (and the cost variance has increased significantly).
Many of the project management software tools, such as Microsoft Project, include these EVM calculations. To be useful, the schedule must include all assigned resources, individual resource costs, and current progress measurements. The figure below depicts EVM metrics for the fourth time period on a sample project:
This was a brief overview of EVM. In the next post we shall continue with EVM .
The type of questions project managers usually are asked are:
What is the progress or status of the project? How is your project performing?
No one really is interested to know the details and the day to day activities. Customers/clients and sponsors will want to know the progress because this is what ties more to the money spent or earned on a project.
Conventional Project Performance technique
If you had a budget of $10,000
(Planned/budgeted) for a project, and you spent $5,000 (Actual) so far,
knowing that you spent half of your budget does not tell you much about
the performance of your project, as it lacks an adequate indicator of
progress; how much work did you finish by spending 50% of your budget?
Are you expecting to finish the work with the remaining budget? The
conventional way of project management looking at only Budgeted vs
Actual costs has not been able to address such questions and provide
adequate indicator of project progress.
Earned Value Management System
In order to overcome the shortcomings of
the conventional technique of measuring project performance, a new
system was developed; the Earned Value Management system, and is
now considered a commonly used method in project management to help
project managers to assess and measure project performance and progress.
Earned Value Management system measures project performance by introducing the earned value concept. Earned value
is a value assigned to work which was accomplished during a particular
time period. This value can be stated in any appropriate measurable unit
such as hours or dollars. Going back to our example at the beginning of
this post, in addition to the budgeted cost of $10,000 and actual cost
of $5,000, if the amount of work accomplished was 40% of the total
planned work, this gives it an earned value of $4,000. Thus, we have
spent 50% of the budget to complete 40% of the work, which provides an
indication that we are behind schedule, and that it is likely we will be
over budget by the time we finish the project if we kept performing the
same way on the project.
Earned Value thus provides progress
information that can be compared to the planned budget and actual cost
to provide additional insight into project status.
In this post we'll have a quick review of EVM so that an awareness of the fundamental concepts will help you in your project controlling and performance reporting endeavors.
Assess cost performance and schedule performance together—The main value of EVM is that it enables you to measure and track both schedule and cost performance together. Evaluating project performance on just one of these indicators does not always give you the true picture and does not allow you to detect variances as early.
Each work package has a planned value—The planned value of any work package is the budgeted cost of the work scheduled to complete the work package. The important point here: Estimate the cost of each work package in your schedule. Also, this means that the project as a whole has a baseline schedule and budget.
At any point, the project has an “earned” value—The earned value of a project is the budgeted cost of the work actually completed. In other words, how many work packages (or partial work packages) have been completed at this time? The value is expressed in budgeted cost terms, not actual costs. This enables you to perform cost analysis by comparing budgeted versus actual costs for the work completed. The important point to consider: Be aware of the costs you expected to incur for the work that has been completed.
Basic Elements of Earned Value Management (EVM)
EVM uses three basic elements to track project progress and measure performance:- Planned Value (PV)
- Earned Value (EV)
- Actual Cost (AC)
Planned Value (PV)
Planned Value (PV) is the total cost of work scheduled/planned at a point of time. It is also referred to as Budgeted Cost of Work Scheduled (BCWS). The PMBOK defines PV as being the authorized budget assigned to work accomplished for an activity or WBS component.In other words, PV is the total cost of the work you are supposed to accomplish at a point of time as per the schedule.
Planned Value (PV) formula
BAC is the Budget at Completion.
Notice that the formula uses the Planned % Complete, and not the actual % Complete.
Example of Planned Value (PV)
You have a project to build a billing solution, the project is expected to last 10 months, and you have estimated the total cost to be $100,000. Using Microsoft Project, you have calculated that the % Complete of the project is supposed to be 50% after 4 months. What is the planned value (PV) after 4 months?Budget at Completion (BAC): $100,000
Planned % Complete after 4 months: 40%
Applying the formula, Planned Value (PV) = 40% X $100,000 = $40,000
Thus the cost of the work planned to be accomplished after 4 months is expected to be $40,000, this is what you should have spent after 4 month/50% completion.
Let us move on now to Earned Value (EV).
Earned Value (EV)
Earned Value (EV) is the value of the work that has been accomplished to date. It is also referred to as Budgeted Cost of Work Performed (BCWP).In other words, it is the total of planned/budgeted cost of the work accomplished at a point of time.
Earned Value (EV) Formula
Another formula that can be used sometimes is
Example of Earned Value (EV)
Using the same above example, using Microsoft Project, after 4 months you found out the Actual % Complete = 30%, and not 40% as planned. What is the Earned Value (EV) of the work you have accomplished after those 4 months?Applying the formula, Earned Value (EV) = 30% X $100,000 = $30,000
Notice that although you were expecting a value of $40,000 after 4 months, but the value earned of the accomplished work is $30,000, which indicates you are behind of what you originally planned. This is still though not the actual cost, which I will talk about next.
Actual Cost (AC)
Actual Cost (AC) is the total actual cost incurred in accomplishing the work to date. It is also referred to as the Actual Cost of Work Performed (ACWP).In other words, it is the amount of money you spent on the project to date.
Actual Cost (AC) Formula
Actual Cost (AC) has no formula; it is just what has been spent to date.Example of Actual Cost (AC)
For the above example, after reviewing the costs incurred after 4 months, you found that you have recorded $35,000 of labor cost and $10,000 of different expenses for the project. What is the Actual Cost (AC)?The Actual Cost (AC) = $35,000 + $10,000 = $45,000
Notice that after 4 months, you have actually spent $45,000 (AC) to perform work of the value of $30,000 (EV), where you should have spent and produced work of the value of $40,000 (PV). So you can tell that after 4 months, you are above budget by $5,000 so far (AC > PV), and that you are behind schedule from what you have planned (EV < PV).
Now let’s review the other key terms and concepts that comprise EVM. The table shown below summarizes these key elements:
As you may have noticed, EVM takes the planned value (PV), or what you planned to do at an estimated cost, and compares it against the estimated cost of the work performed (EV) and against the actual cost of work performed (AC), or what actually got done. These metrics provide a wealth of information about whether the project tasks are taking longer than they should (schedule variance, or SV), or whether they are actually requiring more work effort to complete (cost variance, or CV). In addition, the estimate-at-completion metric (EAC) helps you forecast final project performance and determine if any corrective action needs to take place.
Let's take another example to illustrate how EVM could be used for performance reporting. In this example, the report provides EVM data for the fourth reporting period. At this time, the Planned Value = $75K, the Actual Costs = $100K, and the Earned Value = $60K. On this project, we can tell the following by analyzing this report:
• There has been a cost variance from the start. It could be the actual resource costs have been higher.
• Also, for the first three weeks, the project was ahead of schedule. More work was completed than planned. This was a likely factor for the actual costs being higher too.
• During the past reporting period, something has occurred that delayed progress. The project is now behind schedule (and the cost variance has increased significantly).
Many of the project management software tools, such as Microsoft Project, include these EVM calculations. To be useful, the schedule must include all assigned resources, individual resource costs, and current progress measurements. The figure below depicts EVM metrics for the fourth time period on a sample project:
This was a brief overview of EVM. In the next post we shall continue with EVM .
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