Learn About Earned Value Management (EVM)

Have you ever been asked how far along you were on a project? Of course you have. If you do not have a valid schedule, or if you are not keeping the schedule up-to-date, you know that your answer is pretty much a guess. If you have a good schedule and you are keeping it up-to-date, you should have a sense for how much work is remaining and what the projected end-date is. But are you 50% complete? Or 90% complete? It is not always easy to know.

Earned value metrics were established to remove the guess work from determining where you are at in relation to a baseline. Using it allows a project manager to know precisely how far along he is, how much work is remaining, what the expected cost will be, and all sorts of other interesting information.

Are you using earned value on your project today? Probably not. You are not using earned value because your organization has not adopted it. Implementing earned value on your project requires a tremendous level of discipline and a common set of processes. It is hard to apply earned value one project at a time, since no one else would understand what you are doing and why. It required an organization focus.

History

Earned value has not been around for hundreds of years. You can actually trace its beginning to the late 1800s and early 1900s, as managers attempted to make the factory floor and the production line as efficient as possible. The drive for efficiency requires a foundation in metrics and earned value was a way to measure things more precisely.

In the 1960s, the US Department of Defense began to mandate the use of earned value on defense related projects. As you might expect, if the government is contracting out projects worth hundreds of millions or billions of dollars, they want project progress updates to consist of more than “we seem to be on target.” Earned value calculations can provide a better sense for exactly where the project is against the baseline and provide an early warning if the trends indicate that the project would be overbudget or over its deadline.

EVM is based on just three core values.

• Actual cost (AC). The actual cost of work completed as of a point in time.
• Planned Value (PV). The budgeted cost of work you planned to complete as of the same point in time.
• Earned Value (EV). The budgeted cost of the work actually completed as of the same point in time.

Earned Value is calculated by adding up the budgeted cost of every activity that has been completed. (Remember, this is not the actual cost of the work activities. This is thebudgeted cost.) Look at the following example:       

 Today’s Date is March 31

Let’s say that as of March 31 you have actually completed activity A, B, C and D. Let’s calculate AC, PV and EV.

• AC is the actual cost of the work completed. This is 55 (20 + 5 + 20 + 10).
• PV is the budgeted cost of the work planned to be completed. This is 45 (20 + 10 + 15). Note that Activity D is not counted since it was not planned to be completed as of March 31.
• EV is the budgeted cost of the work completed. This is 50 (20 + 10 + 15 + 5).

These three numbers seem to be interesting, but by themselves they do not tell you too much. So, we need to combine and compare the values to determine our status against schedule and budget. 

There are many ways to build and manage a schedule. Here we are discussing Earned Value Management. Let’s recap where we ended last week.

 Today’s Date is March 31

Let’s say that as of March 31 you have actually completed activity A, B, C and D. Let’s calculate AC, PV and EV.

• AC is the actual cost of the work completed. This is 55 (20 + 5 + 20 + 10).
• PV is the budgeted cost of the work planned to be completed. This is 45 (20 + 10 + 15). Note that Activity D is not counted since it was not planned to be completed as of March 31.
• EV is the budgeted cost of the work completed. This is 50 (20 + 10 + 15 + 5).

Now let’s put these fundamental metrics together in ways that provide value about the current status of schedule and budget.

Schedule Variance (SV)

The Schedule Variance (SV) tells you whether you are ahead of schedule or behind schedule, and is calculated as EV – PV. In our example above, the EV is 50 (20 + 10 + 15 + 5) and the PV is 45 (20 + 10 + 15). Note that the difference is activity D. Since this activity is completed, it is included in the EV. However, since it was not scheduled to be completed by March 31, it is not included in the PV.

The Schedule Variance is 5 (50 – 45). If the result is positive, it means that you have performed more work than what was initially scheduled at this point. You are probably ahead of schedule. Likewise, if the SV is negative, the project is probably behind schedule.

Cost Variance (CV)

The Cost Variance gives you a sense for how you are doing against the budget, and is calculated as EV – AC.  In our example above, the EV is 50. The AC is 55. This means that the budget for the work completed was 50 but it actually cost 55 to complete the work. Therefore, the Cost Variance is -5 (50 – 55). If the Cost Variance is positive, it means that the budgeted cost to perform the work was more than what was actually spent for the same amount of work. This means that you are fine from a budget perspective. If the CV is negative, you may be overbudget at this point.

Schedule Performance Index (SPI)

This is a ratio calculated by taking the EV / PV. This shows the relationship between the budgeted cost of the work that was actually performed and the cost of the work that was scheduled to be completed at this same time. It gives the run rate for the project. If the calculation is greater that 1.0, the project is ahead of schedule. In the example above, the SPI is equal to (50 / 45) or 1.11. This implies that your team has completed approximately 11% more work than what was scheduled. If that trend continues, you will end up taking 11% less time to complete the project than what was scheduled. That is a good thing.

Cost Performance Index (CPI)

This is the ratio of taking the EV / AC. This shows the relationship between the Earned Value and the actual cost of the work that was performed. It gives the burn rate for the project. If the calculation is less than 1.0, the project is overbudget. In our example, the CPI is (50 / 55) or .91. A CPI of .91 means that for every $91 of budgeted expenses, your project is spending $100 to get the same work done. If that trend continues, you will end up overbudget when the project is completed. 

Budget at Completion (BAC)

This calculation can be in terms of dollars or hours. It is the Actual Cost (AC) plus the budgeted cost of the remaining work. If the Cost Performance Index (CPI) is not 1.0, it means that you are spending at a different rate than your plan, and this needs to be factored in as well. So, the better formula for the Budget at Completion (BAC) is the AC + (Budgeted Cost of Work Remaining / CPI). In other words, if you are running 10% overbudget to get your work done so far, there is no reason to believe the remaining work will not also take 10% more to complete, and your final budget at completion would be 10% over as well.

In our example above, the AC is 55 and the Budgeted Cost of Work Remaining is 500. The estimated budget at completion would be 55 + (500 / .91) or approximately 604.5. Since our total budget is 550, this shows that you will be approximately 10% overbudget.

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