Applications and extensions of the earned value analysis method

Introduction

The Earned Value Analysis Management Method (often referred to as EVM or EVA) integrates three critical elements of project management: scope management, cost management and time management. It requires the periodic monitoring of actual expenditures and physical scope accomplishments. EVM supports the periodic evaluation of project performance against the time schedule and cost plan, and allows forecasting of project cost and schedule at completion.

EVM provides early indications of expected project results based on project performance and highlights the possible need for corrective action. As such, EVM allows the project manager and project team to adjust project strategy based on cost and schedule requirements, actual project performance and trends, as well as the environment within which the project is being conducted.

This powerful tool uses cost as the common measure of project cost and schedule performance. It allows the calculation of cost and schedule variances, performance indices, and forecasts of project cost and schedule at completion. It allows the measurement of cost in dollars, hours, worker-days, or any other similar quantity that can be used as a common measurement of the values associated with project work.

This paper presents the major aspects of EVM, and provides logical extensions and practical applications of this important method in project management.

Background

A basic form of EVM can be traced back to industrial engineers on the factory floor in the late 1800s (Fleming & Koppelman, 2000; Kim, 2000). Around 1967, EVM was introduced by agencies of the U.S. Federal Government as an integral part of the Cost/Schedule Control System Criteria (C/SCSC) and used in large acquisition programs. Use of EVM in industry and support by popular project management software packages have been limited but growing in recent years. To encourage wider use of EVM in the private sector, the U.S. Federal Government decided to discard C/SCSC by the end of 1996 and is turning toward a more flexible Earned Value Project Management System (EVPMS). Project Management Institute's PMBOK Guide (PMI, 1996) provided the basic terminology and formulas of EMV. The terminology was simplified and more details on Earned Value Management (EVM) were provided in the 2000 edition of the PMBOK Guide (PMI, 2000). This paper uses the simplified terminology and relates it to previously used terminology. The paper provides extensions and applications of EVM using the simplified terminology.

Exhibit 1. Planned Value

Planned Value

Exhibit 2. Planned Value and Actual Cost

Planned Value and Actual Cost

Exhibit 3. Planned Value, Actual Cost, and Earned Value

Planned Value, Actual Cost, and Earned Value

Key Components of EVM

The Earned Value Analysis method uses the following project parameters to evaluate project performance:

Planned Value (PV): This is the time-phased budget baseline. It is the approved budget for accomplishing the activity, work package, or project related to the schedule. It can be viewed as the value to be earned as a function of accomplishments up to a given point in time. A graph of cumulative PV is often referred to as the S-curve (because, with a little imagination, it looks like an S). This was previously called the Budgeted Cost of Work Scheduled (BCWS).

Budget at Completion (BAC): This is the total budget baseline for the activity, work package, or project. It is the highest value of PV, and the last point on the cumulative PV curve.

Exhibit 4. Variances

Variances

Actual Cost (AC): This is the actual cost spent to accomplish an activity or project and to earn the related value up to a given point in time. This was previously called the Actual Cost of Work Performed (ACWP).

Earned Value (EV): This is the earned value for the work completed to a point in time. It represents the amount budgeted for performing the work which was accomplished by a given point in time. This was previously called the Budgeted Cost of Work Performed BCWP.

Performance Measurement

Cost performance is determined by comparing the Earned Value (EV) to the Actual Cost (AC). Schedule performance is determined by comparing the Earned Value (EV) to the Planned Value (PV). Calculating the variances and the performance indices allows us to do this.

Variances

The following equations are used to calculate the variances, generally based on cumulative data:

The Cost Variance (CV) is a measure of the conformance of actual cost of work performed to the budget:

CV = EV - AC

The Schedule Variance (SV) is a measure of the conformance of actual progress to the schedule:

SV = EV - PV

In the above equations, “0” indicates performance is on target. A negative value indicates poor performance. A positive value indicates good performance.

The average PV per time period is often referred to as the Spend Rate. A better name may be the planned accomplishment rate or the PV Rate. SV can be translated to time units by dividing SV over the average PV per time period. The result is the SV in time units or the Time Variance (TV):

TV = SV / PV Rate (i.e., TV = SV / Spend Rate)

The above can also be performed and reported graphically as shown in Exhibit 4.

Graphs of variances over time provide valuable indicators of trends in project performance and impact of any corrective actions.

Performance Indices

The following equations are used to calculate the performance indices, generally based on cumulative data:

The Cost Performance Index is a measure of the conformance of actual cost of work performed to the budget:

CPI = EV / AC

The Schedule Performance Index is a measure of the conformance of actual progress to the schedule:

SPI = EV / PV

In the above equations, “1” indicates performance is on target. More than “1” indicates good performance. Less than “1” indicates poor performance. As such, the performance indices can be thought of as efficiency ratios.

The inverse of the equations given above has also used to facilitate the use of the indices in forecasting.

Graphs of performance indices over time provide valuable indicators of trends in project performance and impact of any corrective actions. These graphs can be very effective in project reviews.

The Critical Ratio

The Critical Ratio is the product of CPI and SPI. It can also be called the Cost-Schedule Index (CSI), and has been used as an indicator of the overall project health (Meredith & Mantel, 2000; Lewis, 2001):

CR = CPI x SPI

A CR of “1” indicates that the overall project performance is on target. This may result from both CPI and SPI being close to target, or if one of those indices is indicating poor performance, then the other must be indicating good performance. This allows some tradeoffs to reach the desired goals.

A CR of more than “1” indicates that the overall project performance is good. This may result from both CPI and SPI being better than target, or if one of those indices is indicating poor performance, then the other must be indicating outstanding performance. This allows extensive tradeoffs to reach the desired goals.

A CR of less than “1” indicates that the overall project performance is poor. This may result from both CPI and SPI being worse than target, or if one of those indices is indicating good performance, then the other must be indicating extremely poor performance. This limits the use of effective tradeoffs and highlights significant difficulty in attempting to reach the desired goals.

A graph of the critical ratio over time provides a quick indicator of trends in the overall project performance and impact of any corrective actions. These graphs may be effective in project reviews.

Forecasting

Project decisions are mainly concerned with the future. Therefore, forecasting is an extremely important aspect of project management. EVM is particularly useful in forecasting the cost and time of the project at completion, based on actual performance up to any given point in the project.

Forecasting of Cost at Completion

EVM has been widely used to estimate the total cost of the project at completion and the cost to complete the remainder of the project, based on actual performance up to any given point in the project. The following equations are used to calculate these forecasts:

Several assumptions can be used to calculate the Cost Estimate at Completion. The 2000 edition of the PMBOK Guide (PMI, 2000) gives the following formula for the Estimate at Completion (EAC), based on cumulative data, and based on the assumption that past performance and efficiency will continue into the future:

EAC = AC + (BAC - EV) / CPI

The above equation can be appropriately simplified as follows:

EAC = AC + (BAC - EV) / CPI

= AC + BAC / CPI - EV / CPI
= AC + BAC / CPI - AC
= BAC / CPI

Thus:

EAC = BAC / CPI

The Variance at Completion (VAC) gives an indication of the estimated cost underrun or overrun at the end of the completion of the project:

VAC = BAC – EAC

In the above equation, “0” indicates that the project is forecasted to be completed on budget. A positive value indicates a forecasted underrun. A negative value indicates a forecasted overrun.

Heinze (1996) provides the following additional formula for calculating EAC:

EAC = BAC / CPI x SPI

Based on the above definition of the critical ratio (CR), and further defining EACs as the EAC adjusted for schedule performance, the above equation can be restated as follows:

EACs = BAC / CR

The above formula may be mathematically questionable. However, it acknowledges that cost performance and schedule performance are inseparable. As examples (1) project schedule can be crashed at an additional cost, or (2) less experienced resources may be used on the project, reducing the cost and possibly extending the duration. As such, this formula may provide a better indication of forecasted project cost at completion.

Forecasting of Completion Time

Using the same logic, EVM can be used to calculate the project's total Time Estimate At Completion (TEAC) and the Time Variance At Completion (TVAC), based on the baseline Schedule At Completion (SAC) and actual performance up to any given point in the project (Anbari, 1997). The following equations can be used to calculate these forecasts. These terms and equations have been used implicitly, but have not been documented as such in popular textbooks on the subject:

Time Estimate at Completion:

TEAC = SAC / SPI

Time Variance at Completion:

TVAC = SAC – TEAC

Project Forecasting

Forecasting in project management may well be a self-defeating prophecy. Large deviations usually attract management's attention and result in corrective action. Small deviations are usually left alone. By quantifying such deviations, EVM helps focus management's attention on projects or work packages that need most attention. As a result, EVM supports effective management of projects and work packages collectively, and enhances the management of the enterprise's project portfolio.

Further Extensions and Applications

Using the above definitions, the following is derived:

% Complete = EV / BAC

% Spent = AC / BAC

Taking the ratio of the above two equations:

% Complete / % Spent = (EV / BAC) / (AC / BAC)

= EV / AC

Thus:

CPI = % Complete / % Spent

Similarly:

CPI = Planned Unit Cost / Actual Unit Cost

The above formulas provide a more intuitive understanding of CPI based on information readily available in many organizations.

EVA can be applied to projects of various sizes. It can be applied at various levels of a project's Work Breakdown Structure (WBS) and to various cost components, such as labor, material, subcontractors, and other cost components.

Comprehensive Example

A project has a baseline budget of $100,000, and a baseline schedule of 40 weeks. The baseline indicates that by the end of week 20 the project is planned to be 50% complete. As of the end of week 20, it is reported that 40% of the project work has been completed at a cost of $60,000. Using the EVM method:

BAC = $100,000

SAC = 40 weeks

% Complete = 40%

% Spent = AC / BAC = $60,000 / $100,000 = 60%

PV = 50% x $100,00 = $50,000

AC = $60,000

EV = 40% x $100,00 = $40,000

CV = EV - AC = $40,000 - $60,000 = - $20,000

SV = EV - PV = $40,000 - $50,000 = - $10,000

CPI = EV / AC = $40,000 / $60,000 = 0.67

CPI = % Complete / % Spent = 40% / 60% = 0.67

SPI = EV / PV = $40,000 / $50,000 = 0.80

CR = CPI x SPI = 0.67 x 0.80 = 0.53

EAC = BAC / CPI = $100,000 / 0.67 = $150,000

VAC = BAC – EAC = $100,000 - $150,000 = - $50,000

EACs = BAC / CR = $100,000 / 0.53 = $187,500

TEAC = SAC / SPI = 40 weeks / 0.80 = 50 weeks

TVAC = SAC – TEAC = 40 weeks - 50 weeks = - 10 weeks

Conclusion

EVM helps focus management's attention on projects that need most attention and enhances the enterprise's project portfolio management. EVM provides important information for project or work packages decision-making. Its effectiveness and acceptance may depend on better understanding of its capabilities and limitations. Simplification of EVM calculations and its successful application in industry are important to the growth of its effective use.

References

Anbari, F.T. 1997. Quantitative Methods for Project Management. New York: International Institute for Learning.

Fleming, Q.W., and Koppelman, J.M. 2000. Earned Value Project Management, Second Edition. Newtown Square, PA: Project Management Institute.

Harrison, F.L. 1992. Advanced Project Management: A Structured Approach, Third Edition. England: Gower Publishing Company Limited.

Heinze, Kurt. 1996. Cost Management of Capital Projects. New York: Marcel Dekker, Inc.

Kerzner, H. 2001. Project Management: A Systems Approach to Planning, Scheduling, and Controlling, Seventh Edition. New York: John Wiley & Sons.

Kerzner, H., Anbari, F.T., Cleland, D.I., and Zeitoun, A. 2001. Project Management IQ, Release 3.2. New York: International Institute for Learning.

Kim, E.H. 2000. A Study on the Effective Implementation of Earned Value Management Methodology, Ph.D. Dissertation. Washington, DC: The George Washington University.

Lewis, J.P. 2001. Project Planning, Scheduling, & Control: A Hands-On Guide to Bringing Projects In On Time and On Budget. Third Edition. New York: McGraw-Hill.

Meredith, J.R., and Mantel, S.J. 2000. Project Management: A Managerial Approach. New York: John Wiley & Sons.

Project Management Institute. 1996. A Guide to the Project Management Body of Knowledge (PMBOK Guide). Upper Darby, PA: Project Management Institute.

Project Management Institute. 2000. A Guide to the Project Management Body of Knowledge (PMBOK Guide). Newtown Square, PA: Project Management Institute.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

Proceedings of the Project Management Institute Annual Seminars & Symposium
November 1–10, 2001 • Nashville, Tenn., USA

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