Introduction
This article explains earned value management and explores how the metric can be used to improve project and business processes.
Experienced project managers utilize a technique called earned value management (EVM) to assess a project’s progress over time. Earned value management allows project teams to understand the health and performance of their projects and is also a good metric to share with management.
Earned Value Management (EVM) is a method for integrating scope, schedule, and resources for measuring project performance. It compares the amount of work or effort that was planned with what was actually earned and spent to determine if cost and schedule performance are as planned. (Project Management Body of Knowledge)
By comparing planned value or the ideal progress of the project, to the earned value, or the value of the project to date based on work or effort expended, a project manager can detect early if the project is going awry. If the schedule performance index is less than 1.0, then the project is in danger of going over schedule. If the cost performance index is less than 1.0, then the project is in danger of going over budget. By monitoring and reviewing these metrics, a project manager may report these statistics to management. Management, may in turn, determine whether to continue with or cancel the project. The process may be revised for future projects of similar type by learning from the statistics gathered and modifying expectations.
Earned value technique
Earned value is a technique for monitoring project performance. In most organizations, projects are measured against a budget by looking at actual dollars spent with an estimate by the project manager as to how far along the project is as a percentage complete. In most cases, this percentage complete is a guess based on the amount of dollars spent and does not take into consideration re-estimates on what it will take to complete the project. Earned value will give project managers more accurate measurement of project status. Key to earned value is the percentage complete.
Using percentage complete
There are two constants in project management—people will take all of the duration given to them to complete their task and people are terrible estimators. Understanding these two constants will assist a project manager in determining how to measure performance on the project.
Measuring performance solely as a percentage complete has inherent risks. For example, if a task has a planned duration of 10 days, with 30 hours worth of work effort, and 5 days have passed, typically the performer will state that s/he is 50% complete. The problem is that is the project manager cannot tell from this 50% status if the duration or the work effort is 50% complete.
As a best practice, several variables need to be considered—work effort expended, remaining work effort left to perform the task, and a re-assessment of remaining duration. By providing these variables, a more accurate percentage complete and an assessment of the schedule impact can be derived.
In our example above, after 5 days, only 10 hours of work have been performed and the re-estimate is an additional 30 hours needs to be performed in order to complete, but the performer feels confident s/he will be able to finish the task in the remaining 5 days. Instead of 50% complete, the task is actually only 25% complete and the schedule, at present, is not going to be impacted.
A project schedule and resource plan is only as good as an organization’s ability to adjust to changes and obtain an accurate assessment of work that has been completed. A work authorization system and accurate time tracking system can facilitate the collection of work performance and flow of information to the project manager so he/she can respond quickly to changes that occur.
Key terms in earned value technique
Planned value (PV)
The planned value is the baseline value for the task. So if the project manager planned to spend 10 hours on task X, at a rate of $50 per hour, the planned value is $500. In addition, any material expenditure or fixed cost planned should be included, so if the project manager expects to purchase Z for $100, the planned value on task X is now $600.
Actual cost (AC)
The actual cost is the actual expenditure to date, including labor and materials. For task X, 5 hours were spent, plus you purchased Z for $100, so the actual cost to date would be $350.
5 hours x $50/hour=$250
Fixed costs=$100
Total actual cost=$350
Earned value (EV)
Earned value (EV) is defined as the physical work accomplished plus the authorized budget for this work. The sum of the approved cost estimates (which may include overhead) for tasks completed during a given period.
Earned value is a measurement of what has been completed against the plan. For example, if the task owner spent 5 hours working on task X, the project manager may want to assume the task is 50% complete. However, what is missing is the assessment of any remaining work on the task, which gives the project manager an adjustment to the original plan. If the task owner spent 5 hours working on task X and estimated that there are only 5 hours of remaining work, then one can effectively state that the task is 50% complete. However, if it was determined that the task owner originally estimated poorly and that s/he still had 10 hours of remaining work, the performance on that task would be different. So in this case, the task owner only completed 33% of the original estimated plan of 10 hours, or 3.33 hours, multiplied by $50 per hour or $166.5 plus the $100 for the material. The earned value on task X would be $266.50.
Now, assume that the original plan of 10 hours was supposed to be spread out over 10 days, where the task owner was expected to spend one hour per day on task X and the task owner was expected to purchase Z on day 2. After day 5, the planned value of task X would be $350 ($250 labor & $100 material). Your actual costs are $350 as stated above and you earned value is $266.50. Where does task X stand? By utilizing earned value technique, we will calculate two additional values—cost variance and schedule variance.
Without calculating earned value on task X, the project manager may be deceived into thinking that everything is just fine. The planned value equals the actual costs, so the project must be on target.
Cost variance (CV)
Cost variance is a measure of cost performance. Cost variance is calculated as earned value minus actual costs. For the example above, the cost variance would be $266.50 - $350 or $-83.35. A negative number represents an over budget situation.
Schedule variance (SV)
Schedule variance is a measure of schedule performance. Schedule variance is calculated as earned value minus planned value. For our example above, the schedule variance would be $266.50 - $350 or $-83.50. A negative number represents a behind schedule situation.
After applying earned value analysis, the project manager now knows that the project is not fine. It is both behind schedule and over budget.
Project XYZ – Performance as of today
|
Task |
Total Planned Value |
Planned Value |
Actual Costs |
Earned Value |
|
Task X |
$ 600 |
$ 350 |
$ 350 |
$ 266.50 |
|
Task Y |
$ 400 |
$ 400 |
$ 450 |
$ 400 |
|
Task Z |
$1200 |
$ 600 |
$1200 |
$1200 |
|
Task AA |
$1000 |
$1000 |
$1200 |
$ 900 |
|
Total |
$3200 |
$2350 |
$3200 |
$2766.50 |
In the table above, the total budget for the project is $3200. As of today, the project should have spent $2350, but the actual costs are $3200 and the earned value on the project is $2766.50. In total, the schedule variance is $416.50, which means, in total, the project is ahead of schedule, while the cost variance is $-850.00 or over budget.
There are two additional tools that earned value provides which help project managers re-forecast project costs. They are cost performance index (CPI) and schedule performance index (SPI).
Cost performance index (CPI)
Cost performance index is a measure of cost efficiency. Cost performance index is calculated as earned value divided by actual costs. The example above, the cost performance index would be $266.50/$350 or 0.76. Basically this means that for every dollar spent, you received $0.76 worth of cost performance. This is an indication of a cost issue on the project.
Schedule performance index (SPI)
Schedule performance index is a measure of schedule efficiency. Schedule performance index is calculated as earned value divided by planned value. For our example above, the schedule performance index would be $266.50/$350 or 0.76 again. This also means that for every dollar spent you are only receiving $0.76 of schedule performance. A SPI that is less than one (1) is an indication of a schedule issue on the project.
Consider a project that has a CPI of 0.76, as stated above. If the project manager considers the performance of the project to date to be representative of the future performance on the project, a $100,000 budgeted project with a current accumulated Earned Value of $20,000 and a current actual costs of $26,316 can be re-forecasted using the following formula:
Estimate to complete (ETC) = (BAC – EV)/CPI or $105,263
The re-forecasted budget for the project is $26,316 + $105,263, or $131,578.
Reporting Progress
In many cases, project managers will provide earned value management metrics to their sponsors in order for them to view and assess project progress. Project managers may calculate earned value manually, however, many portfolio and project management solutions provide comprehensive earned value assessment in real-time. If the project team members enter in their actual hours against tasks, then the project manager can view project progress and earned value in real-time. The keys to using earned value successfully are:
-Realize that each task is measured independently
-Tasks must be defined clearly and budgeted
Actual Total Time for ALL TASKS
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By tracking these values, the project manager can more readily identify projects in danger of running behind schedule and over budget and can make adjustments along the way. Sponsors may more easily determine if a project will succeed or need to be quashed.