Introduction to Earned Value Management
Earned Value Management is a comparison of the actual costs of work executed with the budget costs of work executed.
For example, every company has some sort of tracking system to indicate how it is performing from a time and cost perspective. A good system must provide status and therefore, the necessary visibility into progress.
When using time only to track project progress, the periodically updated schedule is compared to the baseline schedule to determine whether activities are ahead or behind their original planned dates.
By comparing planned versus updated schedules does not provide an overall picture of the schedule progress for the entire project. However, Activities ahead of schedule could be a result of overspending to accelerate the activities.
To determine the status of the project, there would be two scenarios
- The actual cost to date is higher than budget
- Does this indicate cost overrun? Is the project spending more to accomplish what was planned?
- or, is the project ahead of schedule and a higher actual cost is a result of more work being completed ahead of what was planned?
- The actual cost to date is lower than budget
- Does this indicate cost underrun? Is the project actually saving money?
- or, is the project behind schedule and a lower actual cost is a result of less work being completed than planned?
Earned Value Management divides into three components:
- The budget of work scheduled – Planned Value (PV)
- The Earned Value of work completed – Earned Value (EV)
- The actual cost of work completed – Actual Cost (AC)
Planned value is the budget cost for work that should be completed up to a given point in time (i.e project completion period). In other words, It is the relation between the planned schedule including budget cost value with respect to the completion date.
It is also known as the Budgeted Cost of Work Scheduled (BCWS).
Earned value is the actual cost for work completed up to a given point in time (i.e project completion period). In other words, It is the relation between the budget cost values to the actual schedule with respect to the completion date.
It is also known as the Budgeted Cost of Work Performed (BCWP).
The actual value is the total cost spent for actual work completed up to a given point in time (i.e project completion period). In other words, It is the relation between the actual cost values to the actual schedule with respect to the completion date.
It is also known as the Actual Cost of Work Performed (ACWP).
The graph provides a summary of EVM data components represented by three line graphs:
- Planned Value or Budget Costv(in blue) for schedule work.
- Earned Value or Budget cost of work executed (in green), and
- The actual cost of work executed (in red).
From the above graph, Can we determine the status of the project schedule performance or cost performance?
Planned Value Vs. Earned Value
By reviewing the Planned Value (PV) against Earned Value (EV), one can compare the budget cost of work scheduled to the budgeted cost of work performed.
This is a comparison of how much work should have been completed versus how much work has been completed. This provides an indication for Schedule performance.
In this scenario, the project has accomplished less work than was planned as of the time. In other words, the project has a negative schedule performance.
Earned Value Vs. Actual Cost
By reviewing the Earned Value (EV) against Actual Cost (AC), one can compare the budget cost of work performed to the actual cost of work performed.
This is a comparison of how much work should have been spent on work accomplished versus how much was actually spent to complete the work. This provides an indication for cost performance.
In this scenario, the project is spending more than it was budgeted for work that has been completed to date. In other words, the project has a negative cost performance.
From the two comparisons,
- The project is producing less work than initially scheduled – an indication of negative schedule performance.
- The project is expenditure is more than budgeted for work accomplished – an indication of negative cost performance.
Forecasting other performance metrics
Along with the schedule and cost performance, Earned Value Management uses a formula to forecast other performance metrics ar each analysis date, including
- Estimate at Completion (EAC)
- Schedule at completion (SAC) and
- New completion Date
In determining the performance status of the projects, three key components are examined:
- Schedule and cost baseline or Planned Value (PV)
- Accomplishment or Earned Value (EV)
- Actual cost or Expenditure
Benefits of Using EVM’s
- It is a single management control system that provides reliable data.
- lt integrates work, schedule, and cost into a work breakdown structure.
- The associated database of completed projects is useful for comparative analysis.
- The cumulative (CPI) provides an early warning signal.
- The schedule performance index provides an early warning signal.
- The CPI is a predictor of the final cost of the project.
- EVMS uses an index-based method to forecast the final cost of the project.
- The “to-complete” performance index allows the evaluation of the forecasted final cost.
- The periodic (e.g., weekly or monthly) CPI is a benchmark.
- The “management by exception” principle can reduce information overload.
In conclusion, Every organization implements many of the concepts; few of them integrated those concepts into a unified status. This provides the best opportunity to meet project schedule and cost objectives while achieving the technical requirements.
Also Read: What is Earned Value Management and its Uses