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4.1.2.3T Earned Value
(4.1.2.3T.P1)
If you are a project manager, have you ever been asked how far along you were in a project? Of course you have. The question itself is vague, and so your equally vague answer of “we are pretty close to schedule” sounds appropriate. You might even have said “we’re about half done” or “we’re 90% complete”.
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? Who knows!
Enter Earned Value (4.1.2.3T.P2)
Earned Value Management was established to remove the guess work from determining where you are at in relation to a baseline. In theory, this concept is very elegant and interesting. Using it allows a project manager to know precisely how far along he is, how much work is remaining, what the expected cost and end-date will be, and all sorts of other interesting information.
History (4.1.2.3T.P3)
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 over budget or over its deadline.
The Basic Concepts of Earned Value Management (4.1.2.3T.P4)
EVM is a way of measuring progress.
In any project, the value to be gained is based on completing the work. From a client perspective, the business value is achieved when the project is completed. If a project gets canceled 90% through completion, the business value might be zero. However, earned value looks at this differently. With earned value, you are earning the value of the project on an incremental scale as the project is executing. When 50% of the work is completed, you could say that 50% of the value of the project has been realized as well.
The general idea behind EVM is to compare where you actually are against where you planned to be. EVM allows you to quantify all of the work that has been accomplished so far on the project. It also allows you to quantify all of the work that should have been done on the project so far. Then, you can compare the work that has been done against the work that should have been done to determine if you are on schedule, ahead of schedule or behind schedule.
Likewise, given where you are today, earned value calculations allow you to determine the total cost of the work done so far, as well as the budgeted cost of all the work you have completed by now. Comparing these two numbers gives you a sense for whether you are trending over budget, under budget or on budget.
Utilizing both the schedule and cost metrics gives you more information as well. You may well be spending your budget faster than you anticipated, but what if the reason is because you are ahead of schedule as well? That is, you may be spending more because your team may be getting more work done than planned. That may be fine. Likewise, if your project is behind schedule, but you are also behind in your spending, that may be fine as well. Perhaps you were not able to get the team members allocated as fast as you planned. So, your project is behind schedule, as is your spending rate. If you have a critical end-date, this may be a problem. If your end-date is flexible, you may be fine as long as you don’t overspend your budget.
Earned value gives you the information you need to make the right decisions.
Depending on which book you read, there are dozens (maybe hundreds) of earned value calculations. However, most of them involve combining a few basic earned value metrics into various permutations.
There are three metrics that form the building blocks for earned value – Earned Value, Actual Cost and Planned Value. Let’s look at each of these in more detail.
Earned Value (EV) (4.1.2.3T.P5)
The 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 the budgeted cost.) Look at the following example:
Today’s Date: March 31
|
Completed Activity |
A |
B |
C |
D |
|
Target Date |
March 10 |
March 15 |
March 31 |
April 5 |
|
Budgeted Cost |
20 |
10 |
15 |
5 |
|
Actual Cost |
20 |
5 |
20 |
10 |
Let’s say that you have completed activities A, B, C and D. Can you guess the simple formula for finding the earned value? You got it. It’s (20 + 10 + 15 + 5), which happens to be the convenient round number of 50.
You might ask how you calculate an activity if it were in progress. Actually you have some discretion to set the rules up-front. One option is to consider the activity as being zero percent completed until it is totally completed and then give 100% of the credit. In other words, when activity B starts, the EV is zero. When activity B ends, the EV is 10.
Another option is to give partial credit. For example, when activity B starts, the EV is zero. When the activity is in progress, you can give 50% credit, or an EV of 5. When the activity ends, you give it the full EV of 10.
Likewise, you can get more precise (say, giving credit in 10% increments), but each level of precision results in more work for marginally more accuracy.
EV is the basic measure of how much value the project has achieved so far. By itself, it does not tell you too much. So, you use it in combination with other calculations to determine your status.
Actual Cost (AC) (4.1.2.3T.P6)
To calculate this number, add up the actual cost for all the work that has been completed so far on the project. This could include the internal and external labor costs, as well as invoices paid (or perhaps purchase orders approved). If you have an automated financial system that will crank these numbers out, it is not too hard of a task. If you cannot capture all of the costs automatically, it could be very time consuming. If your project only consists of labor, then the cost and the effort will track along the same lines. If you have a lot of non-labor costs in your budget, then the project costs don’t directly tie to the labor used.
Let’s look at the example again.
Today’s Date: March 31
|
Completed Activity |
A |
B |
C |
D |
|
Target Date |
March 10 |
March 15 |
March 31 |
April 5 |
|
Budgeted Cost |
20 |
10 |
15 |
5 |
|
Actual Cost |
20 |
5 |
20 |
10 |
The actual cost for activities A through D is (20 + 5 + 20 + 10) or 55. You can see that the actual costs for the work completed are greater than the budgeted costs of the work completed. This could be a problem.
Again, if an activity is in progress, you could use the same options that were discussed in the EV to determine whether to include the actual cost, or some percentage allocation (0 through 100%).
Planned Value (PV) (4.1.2.3T.P7)
This is the sum of the budgeted estimates for all the work that was scheduled to be completed by today (or by any specific date).
Today’s Date: March 31
|
Completed Activity |
A |
B |
C |
D |
|
Target Date |
March 10 |
March 15 |
March 31 |
April 5 |
|
Budgeted Cost |
20 |
10 |
15 |
5 |
|
Actual Cost |
20 |
5 |
20 |
10 |
Now you have a little more information. Since today’s date is March 31, the planned value is A + B + C (20 + 10 + 15) or 45. You do not count activity D, since it was not scheduled to be completed by March 31.
Now let’s put these fundamental metrics together.
Today’s Date: March 31
|
Completed Activity |
A |
B |
C |
D |
Remaining Work |
|
Target Date |
March 10 |
March 15 |
March 31 |
April 5 |
July 31 |
|
Budgeted Cost |
20 |
10 |
15 |
5 |
500 |
|
Actual Cost |
20 |
5 |
20 |
10 |
? |
Schedule Variance (SV) (4.1.2.3T.P8)
The schedule variance (SV) tells you whether you are ahead of schedule or behind schedule, and is calculated as EV – PV. In the 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 work has been completed on this activity, 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 completed 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) (4.1.2.3T.P9)
The cost variance gives you a sense for how you are doing against the budget, and is calculated as EV – AC. If the Cost Variance is positive, it means that the budgeted cost to complete the work was more than what was actually spent for the same amount of work. This means that you are underbudget. If the CV is negative, you are over budget at this point. In the example above, the EV is 50. The AC is 55. Therefore, the cost variance is -5 (50 – 55), which implies you are over budget.
Schedule Performance Index (SPI) (4.1.2.3T.P10)
This is a ratio calculated by taking the EV / PV. This shows the relationship between the budgeted cost of the work that was actually completed 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 than 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.
Cost Performance Index (CPI) (4.1.2.3T.P11)
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 completed. It gives the burn rate for the project. If the calculation is less than 1.0, the project is over budget. In the 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 over budget when the project is completed.
Budget at Completion (BAC) (4.1.2.3T.P12)
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% over budget 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 the 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 the total budget is 550, this shows that you will be approximately 10% over budget.
