Earned Value Management: What is its significance to Project Management?

By Piyush Bhatia 21-Dec-2022
Earned Value Management: What is its significance to Project Management?

Projects are a fundamental part of every business organisation. As a project manager, you function as an integrator who brings together all the different teams and silos working to complete the project.

According to the Project Management Institute (PMI), every project is guided by three main guardrails - schedule or time frame, scope of work, and budget. Project management professionals need to manage these three constraints effectively while ensuring the best outcome. For this, you need to monitor the status of the project ensuring maximum possible adherence to the three constraints.

What is Earned Value Analysis?

Earned value refers to the value assigned to work performed within the scope, schedule and budget of your project. Depending on the nature of this work, it can be quantified in monetary terms, hours or medium of execution. This is what makes Earned Value Analysis (EVA) so important for organisations and project managers. EVA is a technique used by project managers to monitor and control the outcome of the project.

There are many benefits of EVA that you can see as your project progresses.

  1. It gives you the ability to track the cost of the project accurately and compare the budget against the actual cost of executing the project to measure differences and discrepancies.
  2. It provides visibility towards more productive parts of the project.
  3. It measures the performance of your project using data and numbers, taking your project’s scope, schedule and cost as the baseline. This allows you to predict and control the future of not only your current project but for future projects as well.
  4. The data and numbers used to measure performance don’t leave ambiguity about the performance of your project and the cause-effect relationships that exist.

What is Earned Value Management?

In 1966, when the US Air Force mandated earned value along with other planning and control requirements of Air Force programs, earned value management (EVM) became a fundamental approach to project management. Back then, it was known as Cost/ Schedule Planning Control Specification (C/ SPCS). Today about half a century later, the name has changed to EVM, but the purpose and concept of earned value remain the same.

Earned Value Management is an overarching concept that encapsulates 32 guidelines that define the requirements a management system must meet by the end of the project.

The main goals of earned value analysis are:

  1. Relating time-phased budgets to specific tasks or work result statements.
  2. Providing the basis of capturing progress assessments against the constraints set by the PMI.
  3. Relating technical, scheduling and cost-related performance.
  4. Providing valid, measurable and informative data in a timely fashion for proactive management analysis and action.
  5. Supplying managers with a realistic summation of data and results to enable effective decision making.

To apply EVM to an existing project, three key components need to be understood.

1. Planned Value (PV): Planned Value is the value of the authorised budget assigned to the work scheduled. In simpler terms, it is the budget assigned to the activities and the period within the scope of the analysis. The PV is always exclusive of any management reserve. It is also known as the Budgeted Cost of Work Scheduled (BCWS). The cumulative Planned Value is also known as Performance Measurement Baseline (PMB), therefore the PV for a completed project is the same as the Budget At Completion (BAC).

2. Earned Value (EV): Earned Value is the value associated with the actual work performed within the stipulated time frame. EVA uses PMB to calculate EV for the part of the project that has been completed so far. Additionally, for every element of the Work Breakdown Structure (WBS), EV can help measure the work performance. Therefore, EV helps you understand the current performance of your project and predict long-term trends within and beyond project performance. It is also called the Budgeted Cost of Work Performed (BCWP).

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3. Actual Cost (AC): Actual Cost refers to the real cost realised or incurred due to the work performed on a given day. It includes cost elements such as direct costs, indirect costs, working hours etc. All of these values can be derived from invoices, account books and other sale or purchase-related documents. AC is short for ACWP, which stands for Actual Cost of Work Performed. One thing to note is that while PV and EV are measured in a given range, the AC does not have an upper limit. As a project manager, you should try to keep your AC within the range determined within the EV and PV. It becomes a matter of concern if your AC exceeds both these figures.

Other common terms used while calculating earned value are

  • Budget at Completion (BAC): This is the total budget of your project, including the parts of the budget that remain undistributed but excluding management reserves.
  • Estimate at Completion (EAC): This is a current forecast of the total cost of the project, calculated before the completion of the project.
  • Estimate to Complete (ETC): This is another estimate, taking into consideration any additional costs that would be required to finish the project.
  • Variance at Completion (VAC): This takes into account the difference in the budget compared to the actual expenses undertaken during the project’s progression.

Benefits of Earned Value Management:

EVM helps project managers to measure project performance and understand variance and costs involved. The main benefits of EVM are:

  1. It focuses on project performance measurement using a data-driven approach to performance measurement, the project manager uncovers issues related to scope, cost and schedule estimates.
  2. It is easy to understand and makes it easy to identify areas where there are shortcomings which can then be fixed going forward.
  3. It provides a realistic glimpse of the project status.
  4. It helps project managers to establish future trends and prepare for any obstacles.
  5. It allows you to correct problems that exist or that might arise going forward.

Breaking Down the Project Into Phases:

The guidelines to be followed for EVM calculation can be broken down into five sections or phases.

1. Organisation:

This phase includes establishing the constraints of the project. One of the main responsibilities of the project manager during this phase is establishing a Work Breakdown Structure (WBS), defining the tasks to be performed and their relation with the pre-defined deliverables. You also need to define the Organisation Breakdown Structure (OBS) to identify who will be responsible for which task in which department, thus delegating and defining responsibilities within the WBS. Thus the organisation phase helps define what (WBS) needs to be done and who (OBS) needs to do it.

2. Planning, Scheduling and Budgeting

During this phase, the project manager needs to go over the basic requirements for planning the project in phases, scheduling deadlines for each phase, and allocating a budget to each phase of the project. The resources that you estimate at this phase are called the BCWS or Budgeted Cost of Work Scheduled. The total budget that is phased out and allocated to different parts of the project is also called the Performance Measurement Baseline or PMB, or Planned Value.

All projects start with a level of uncertainty. You can never be 100% sure of how your project execution will progress, so you need to have some room to accommodate slight delays, errors and feedback. For this reason, project managers also set aside additional funds known as a management reserve.

3. Accounting Considerations

In this phase, you need to calculate the correct Actual Cost of Work Performed (ACWP). This should be in line with the way work is planned and budgeted. The AC must be captured at the appropriate time, aligned with the delivery or completion schedule of important products and/ or resources. A common practice is to collect the material costs in the same month the BCWP is collected to avoid ‘booking lag’, a very common source of misleading cost variance.

4. Analysis and Management Reports

This phase needs intense attention to variation in costs and scheduling, documenting cause, impact and correction, and, if needed, calculating a new EAC (Estimate at Completion). The project manager and data analysts and strategists on the team go through the data collected through the project to identify root causes of variance, their impact on the current and future work effort and take corrective action. Project managers must carefully review cost and schedule variances during every reporting cycle, as they are essential while calculating EAC.

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5. Revisions and Data Maintenance

The last phase emphasises the implementation of changes directed by the client, which sometimes includes orders to stop work (SWOs). It also includes implementation of project planning, analysis and implementation of changes internally. This phase is pretty much mandatory for proactive, meaningful EVM with a regularly changing baseline.

How to Carry Out Earned Value Analysis For Your Project:

At any point during the project, you can calculate the EV and cross-check your accounts for data on the AC up to that point in the project. Also, calculate the PV that was budgeted for the same work.

Calculate the two variances - cost variance (CV = EV - AC) and schedule variance (SV = EV - PV). Check if the results you get are negative or positive. This should help you conclude how your project is going.

  • If CV is negative, it means your project is going over-budget.
  • If SV is negative, it means you are running behind schedule.

Next, calculate the Scheduled Performance Index (SPI = EV/AC) and Cost Performance Index (CPI = EV/AC). This should help you understand if there is a performance issue so far.

  • If SPI is less than 1.0, the project is running behind schedule. An SPI of 0.5 will mean you are functioning at only 50% efficiency and need to boost your working speed.
  • If CPI is less than 1.0, you are exceeding your budget. If your CPI comes to 0.8, it means you are only 80% efficient on cost performance.

Based on the values that you can determine - SV, CV, SPI and CPI - you will see where your project is lacking and things that are not going as planned. This will help you to make decisions that can bring your project back on track.

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You can also calculate project completion estimates based on the current progression of your project. This can be done by figuring out your Estimate at Completion or EAC. EAC = ETC + AC. ETC can be calculated based on the flow and patterns of your project at the time of completion.

At times, nothing that can be done to rescue the project and set it on its decided course. If you know there is no feasible way to save the project, it is best to close the project and inform all the stakeholders accordingly. If the project can still be rescued, recalculate and create a new estimated baseline and replace it with the original PMB.

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Piyush Bhatia

Piyush is a highly-accomplished PMP Certified Project Manager Trainer with a verifiable track record of managing complex IT and Financial projects. He has extensive experience in the implementation of Business Analysis tasks, Client Management, Financial Accounting, and Risk Management.

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