Earned Value Management
Earned Value Management (EVM)
Upon successful completion of this lesson, you;
- Will be able to judge the health of the project using schedule and cost performance indexes
- Will learn to analyse the ‘S’ curves
- Will learn to forecast cost
- Will be able to arrive at the To Complete Performance Index (TCPI)
Effort required – 30 minutes
Key benefits of Earned Value Management
- It is simple – Just by monitoring two indexes (schedule performance index and the cost performance index), project stakeholders will be able to gauge the health of the project without spending much time.
- Right information at the right time – With the help of automated earned value management system, project managers will get almost real time project status information.
- Management by exception – Earned value management system helps the project managers to focus on the exceptions, thus saving valuable time.
- Forecasting ability – With the forecasting ability provided by earned value management system, project managers can be more proactive. This results in more preventive actions.
- Scalable – Earned value management can be implemented across locations. It can be implemented at a work package, sub-project, project, program and even portfolio levels.
Understanding the Basic building blocks of EVM
Before explaining the steps involved to implement EVM based project management, let me explain how EVM works quickly. Earned value management revolves around four basic measurements like;
- As per the project plan, how much work are we supposed to complete till now. This is known as Planned Value (PV).. This is also known as Budgeted Cost Of Work Scheduled (BCWS) till now.
- How much work did we actually complete till now?. This is known as Earned Value (EV). This is also known as Budgeted Cost Of Work Performed (BCWP)
- For the completed work, how much did we actually spend?. This known as Actual Cost (AC). This is also known as Actual Cost Of Work Performed (ACWP)
Calculating the Variances
Once we have these basic status data, it is very easy to calculate the Schedule Variance (SV), Cost Variance (CV), Schedule Performance Index (SPI) and the Cost Performance Index (CPI).
- Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
- Schedule Performance Index (SPI) = EV/PV
- Cost Variance (CV) = EV – AC
- Cost Performance Index (CPI) = EV/AC
Interpreting the Variances
Schedule Variance SV = EV-PV Schedule Performance Index (SPI) = EV/PV
- A Schedule Variance of zero (SV=0) indicates that work is progressing as per plan. In this case, both the planned value and earned value are equal.
- A Schedule Variance greater than Zero (SV > 0 ) indicates that the Earned Value (EV) is more than the planned value. Budgeted Cost Of Work Performed is more than the Budgeted Cost of Work Scheduled. This indicates ‘ahead of schedule’.
- If the Schedule Variance is less than zero (SV < 0), that indicates a negative schedule variance. This is because the Earned Value (EV) is lesser than the Planned Value (PV). Budgeted Cost Of Work Performed is lower than Budgeted Cost Of Work Scheduled. This indicates slippage in schedule.
- If the Schedule Performance Index (SPI) = 1, that also indicates that the work is progressing as per plan.
- If the Schedule Performance Index (SPI) > 1, that indicates ‘ahead of schedule’
- If the Schedule Performance Index (SPI) < 1, that indicates ‘schedule slippage’
Cost Variance (CV) = EV-AC Cost Performance Index (CPI) = EV/AC
- Cost Variance (CV=0) indicates that, the Actual Cost of Work Performed is equal to the Budgeted Cost Of Work Performed.
- If the Cost Variance is more than 0 (CV>0), that indicates that Actual Cost Of Work Performed is lower than the Budgeted Cost Of Work Performed. The actual cost incurred to complete the work is lower than the budgeted cost of that work.
- A Cost Variance, less than zero, or negative indicates that the Actual Cost of Work Performed is more than the Budgeted Cost of Work Performed. A negative cost variance always indicates cost overrun.
Broadly speaking, If the project manager can maintain the schedule and cost variances around zero throughout the project , then the project will get over on time within budget. In other words, if the project manager can maintain the Cost Performance Index (CPI) and the Schedule Performance Index (SPI) at around ‘1’ throughout the project, the project will get over on time within the budget allocated.
That is is the crux of Earned Value Project Management. As long as both the CPI and SPI can be maintained around 1, the project is safe. That makes Earned Value Project Management simple and powerful.
Earned Value Project Management simplifies project management for project managers. Monitoring project health boils down to tracking the Schedule Performance Index (SPI) and the Cost Performance Index (CPI). It is more like performing health checks frequently, so that action can be taken if there is any health issue. Though this is better than living in total oblivion, still the project managers will be operating in a reactive mode. They will still wait for the schedule performance index or the cost performance index to slip in order to take action. With the ability to forecast the target cost and the target schedule project managers can act proactively. They will be able to tackle schedule and cost related issues before they occur. Let me explain this further.
We need to understand one more term ‘Budget at Completion’ (BAC) before dwelling into forecasting. Budget at completion (BAC) is the total budgeted cost of the project from the start of the project till the end of the project. If all the conditions remain same, how much will it cost us, when the project gets completed?. That is the Estimate at Completion (EAC).
Estimate at Completion (EAC) = AC + (BAC – EV) / CPI
Let us work out one simple example
The diagram above depicts the status of a project as on a specific review date.
The total budget of the project is 100000. As per the plan, the project team was supposed to complete work worth 60,000 (Planned value) . Actually they completed work worth 50,000 only (Earned Value). For completing the work worth 50,000, they spent 65,000 (Actual Cost).
Schedule variance (SV) = (EV – PV) = 50,000 – 60,000 = -10,000
Schedule Performance Index (SPI) = EV/PV = 50,000 / 60,000 = 0.83
Cost variance (CV) = EV-AC = 50,000 – 65,000 = – 15,000
Cost Performance Index (CPI) = EV/AC = 50,000 / 65,000 = 0.76
Both the Schedule Performance Index (SPI) and the Cost Performance Index (CPI) are 0.83 and 0.76 respectively. The work has not progressed as planned and at the same time the completed portion of the work took more than the budgeted value. There is both schedule slippage and cost overrun as on the review date.
While this data is better than having no data about the project’s status, it would have better if the team was alerted in advance about this impending situation.
The total budget of the project or the Budget At Completion (BAC) = 100000
Estimate At Completion (EAC) = AC + (BAC – EV) / SPI = 65,000 + (100000 – 50,000) / 0.76 = 130,789.47
If all the conditions remain the same, this project will cost 130,789 instead of 100,000 when it gets completed.
How can we complete the project within 100000?
To Complete Performance Index (TCPI) = (Remaining Work / Remaining Funds)
Remaining work = BAC – EV = 100,000 – 50,000 = 50,000
Remaining funds = BAC – AC = 100,000 – 65,000 = 35,000
TCPI = Remaining work / Remaining funds = 50,000 / 35,000 = 1.42
For the remaining part of the project, if the project team can maintain the Cost Performance Index (CPI) at 1.42, still the project can be completed within the initial budget of 100,000.
How do we achieve this target CPI of 1.42 for the remaining work?
How can we complete the balance work without consuming the budget allocated to the tune of 1.42?. Cost Performance Index (CPI) = EV/AC. The team has to find out ways and means maintain the Actual Cost well below Budgeted Cost of Work to be completed. In other words, the team should be able to complete work worth 1.42 dollars for every dollar spent from now on, till the end of the project. Brainstorming with the relevant engineering and project management disciplines is the solution and the strategies may include;
- Sourcing cheaper material
- Cheaper labour
- Controlling waste / rework
- Request for additional budget
Earned Value Management Implementation
By now, you may agree with me that Earned Value Project Management enables the project managers to be more proactive than reactive. Being so, the next logical topic of interest would be about the implementation steps of Earned Value Management System.
Here are the logical steps for implementing Earned Value Management System;
- Define Work Breakdown Structure
- Define project organization (Organization Breakdown Structure – OBS)
- Integrate processes
- Identify overhead management
- Integrate WBS / OBS to create Control accounts
- Planning, Scheduling and Budgeting
- Scheduling work
- Identify products and milestones for progress assessment
- Establish the performance measurement baseline
- Authorize and budget by cost elements
- Determine discrete work and objective measures
- Sum Detail budgets to Control account
- Level of Effort planning and control
- Establish overhead budgets
- Identify management reserve and undistributed budget
- Reconcile to target cost goal
- Accounting considerations
- Record direct costs
- Summarize direct costs by WBS elements
- Summarize direct costs by OBS elements
- Record / Allocate Indirect costs
- Identify unit and lot costs
- Track and report material costs and quantities
- Analysis and management reports
- Calculate schedule variance and cost variance
- Analyse significant variances
- Analyse indirect cost variances
- Summarize performance data and variances for management reporting
- Implement corrective actions
- Maintain Estimates at Completion (EAC)
- Revisions and data maintenance
- Incorporate changes in a timely manner
- Maintain baseline and reconcile budgets
- Control retroactive changes
- Prevent unauthorized revisions
- Document performance measurement baseline changes