Earned value management systems (EVMS)

"you too can do earned value management"

Chance Reichel, PMP, Boston University Corporate Education Center

Introduction

Project Management presents many tools and techniques for the management of the successful project. One of the most regarded of these tools would be Earned Value Analysis. Unfortunately, it seems as if this phrase or title, “Earned Value Management” is met and greeted with dread instead of the thought of usefulness.

Maybe the less than full embrace can be attributed to following scenario. The project scenario is you, the project manager, have a client that contracted with your firm to produce 5 Gizmos. You created a plan to produce the five Gizmos during this year. In fact the plan calls for 100 hours to be spent for each assembled Gizmo. The year has come and gone and the five Gizmos were produced. At year end you check with the finance department to inquire about the total number of hours spent to produce the five Gizmos. Finance informs you that 400 total hours were expended to create the five Gizmos. At first blush, you, the project manager, are filled with a sense of accomplishment, in fact dazzling accomplishment as you finished the planned five-hundred hour production of Gizmos in 400 hundred hours, saving the company 100 hours that may be applied to other projects in need. Then, a sense of less-than-great feeling is recognized from deep within, why? What’s wrong with this picture?

Maybe it is the fear of the unknown that gives Earned Value a less than stellar review by many in the field. Information, which is power, can help hold project fear at bay. Therefore, this paper sets out with the fundamental expectation of providing the reader with basic information about Earned Value that will allow the reader to embrace the positive of EVMS without cringing in fear.

What is Earned Value Analysis?

Earned Value Analysis (EVA) is a method that allows the project manager to measure the amount of work actually performed on a project beyond the basic review of cost and schedule reports. EVA provides a method that permits the project to be measured by progress achieved. The project manager is then able, using the progress measured, to forecast a project’s total cost and date of completion, based on trend analysis or application of the project’s “burn rate”. This method relies on a key measure known as the project’s earned value.

Oftentimes the term “earned value” is defined as the “budgeted cost of worked performed” or BCWP. This budgeted cost of work performed measure enables the project manager to compute performance indices or burn rates for cost and schedule performance, which provides information on how well the project is doing or performing relative to its original plans. These indices, when applied to future work, allow for to project manager to forecast how the project will do in the future, assuming the burn rates will not fluctuate, which oftentimes is a large assumption.

Earned Value Analysis Requirements

In order for the Earned Value Analysis to be accurate, a good solid project plan must be created. In today’s marketplace it seems as if all clients are from the great state of Missouri. That is to say, Missouri’s nickname is “The Show Me State”. If I had a dollar for ever time I heard a client say “Plan, you don’t need a plan, I need to see work being done!” well, I would be deep in financial riches! What is the old saying? “Without a plan, any route will do”. That temperament or environment is not conducive to project management and reporting project status to stakeholders. The project plan, especially the Scope Statement is the foundation to solid earned value practice.

The Project Management Institute’s (PMI®) A Guide to the Project Management Body of Knowledge (PMBOK® Guide). defines the Scope Statement as follows:

The narrative description of the project scope, including major deliverables, project objectives, project assumptions, project constraints, and a statement of work, that provides a documented basis for making future project decisions and for confirming or developing a common understanding of project scope among the stakeholders. (PMI, 2004, p. 370)

I especially appreciate the phrase, “that provides a documented basis for making future project decisions and for confirming or developing a common understanding of project scope among the stakeholders” as that informs me of the meaning and importance of the Scope Statement.

In order to develop that common understanding of the project work, another key project deliverable should be created: the Work Breakdown Structure (WBS). The WBS is defined in the PMBOK® Guide as a deliverable-oriented hierarchical decomposition of the work to be executed by the project team to accomplish the project objectives and create the required deliverables. It organizes and defines the total scope of the project. Each descending level represents an increasingly detailed definition of the project work.

There is a saying in project management that “if it’s not included in the WBS, it’s not included in the project!” A WBS is a direct representation of the work scope in the project, documenting the hierarchy and description of the tasks to be performed and relationship to the product deliverables. The WBS breaks down all authorized work scope into appropriate elements for planning, budgeting, scheduling, cost accounting, work authorization, measuring progress, and management control. The WBS must be extended to the level necessary for management action and control based on the complexity of the work.

As one can plainly see, project planning is a necessity for project success and the incorporation of earned value analysis on your project. Now that basis for EVA has been established, let’s focus on three primary areas of information needed to compute EVA.

EVM Foundational Concepts

As introduced above, Earned Value Management Systems allow the project manager to answer the following three questions, as they relate to the project:

  1. Where have we been?
  2. Where are we now?
  3. Where are we going?

In Earned Value Management, unlike in traditional management, there are three data sources:

  • – the budget (or planned) value of work scheduled
  • – the actual value of work completed
  • – the “earned value” of the physical work completed

Earned Value takes these three data sources and is able to compare the budgeted value of work scheduled with the “earned value of physical work completed” and the actual value of work completed.

Planned Value

Planned Value describes how far along project work is supposed to be at any given point in the project schedule and cost estimate. Cost and Schedule baseline refers to the physical work scheduled and the approved budget to accomplish the scheduled work. Together, they result in an important value: Planned Value (PV). PV can be looked at in two ways: cumulative and current.

Cumulative PV is the sum of the approved budget for activities scheduled to be performed to date. Current PV is the approved budget for activities scheduled to be performed during a given period. This period could represent days, weeks, months, etc.

PV, also known as Budget Cost of Work Scheduled (BCWS), can be defined as:

  1. Define Scope: What you are tasked to do (Scope Statement)
  2. Assign Scope: Breakdown scope into manageable parts (WBS)
  3. Schedule Scope: Time-phased, logic driven with critical path (Project Schedule)
  4. Budget Scope: develop cost (budget) for all approved scope (Performance Measurement Baseline)
  5. Baseline: Snap-shot in time, frozen. What performance measurement will be based upon.

Actual Costs

Actual Cost (AC), also called actual expenditures, is the cost incurred for executing work on a project. This figure tells you what you have spent and, as with Planned Value, can be looked at in terms of cumulative and current. Cumulative AC is the sum of the actual cost for activities performed to date. Current AC is the actual costs of activities performed during a given period. This period could represent days, weeks, months, etc. AC is also called Actual Cost of Work Performed (ACWP).

Earned Value

To report the accomplishments of the project, you must apply Earned Value (EV) to the figures and calculations in the project. EV is the quantification of the “worth” of the work done to date. In other words, EV tells you, in physical terms, what the project has accomplished. As with PV and AC, EV can be presented in a Cumulative and Current fashion. Cumulative EV is the sum of the budget for the activities accomplished to date. Current EV is the sum of the budget for the activities accomplished in a given period. Earned Value is also called Budgeted Cost of Work Performed (BCWP).

Planned Value (PV) is determined by the cost and schedule baseline. Actual Cost (AC) is determined by the actual cost incurred on the project. Earned Value (EV) tells you, in physical terms, what the project accomplished.

Variance Analysis

PMI’s PMBOK® Guide defines a variance as “a quantifiable deviation, departure, or divergence away from a known baseline or expected value” (PMI, 2004, p. 379). As the project planning components become known, the scope and quality, schedule, and cost estimate. The project manager will review with the project’s sponsor or client to seek approval. When approval is granted the project has established a planning baseline or time-phased cost plan. Also, the project manager will be provided with financial information from accounting that will expressed the actual cost incurred on the project s work is performed, then the project manager will seek information from the team that will state the budgeted cost of work performed on the project, or earned value. After those three values are established, a variance analysis can be performed. There are two basic expressions of variance, schedule variance and cost variance.

Schedule variance

Schedule Variance status does indicate the dollar value difference between work that is ahead or behind the plan and reflects a given measurement method

Schedule Variance status does not address impact of work sequence, address importance of work, reflect critical path assessment, indicate amount of time it will slip, identify source (labor & material) of difference, indicate the time ahead/behind (or regain) schedule, nor indicate the cost needed to regain schedule.

The formula utilized to express schedule variance is project earned value minus the project planned value as of the date of examination. (SV = EV – PV) If the variance is equal to 0, the project is on schedule. If a negative variance is determined, the project is behind schedule and if the variance is positive the project is ahead of schedule.

Cost Variance

The cost variance is defined as the “difference between earned value and actual costs. (CV = EV – AC)” (PMI, 2004, p. 357) Sometimes this formula is expressed as the difference between budgeted cost of work performed and actual cost work performed. If the variance is equal to 0, the project is on budget. If a negative variance is determined, the project is over budget and if the variance is positive the project is under budget.

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Performance Indexes

Another analysis that can be done by using EVMS is that of Performance or establishing the project’s burn rate. Two examination of performance are available to the project manager, Schedule Performance Index (SPI) and Cost Performance Index (CPI).

Schedule Performance Index

The SPI is defined by PMI’s PMBOK® Guide as “a measure of schedule efficiency on a project. It is the ratio of earned value (EV) to planned value (PV). The SPI is equal to earned value divided by planned value, SPI = EV/PV. An SPI equal to or greater than one indicates a favorable condition and a value of lass than one indicates an unfavorable condition.” (PMI, 2004, p. 374 For example, should your calculation show a SPI of 1.1, that translate to your project recognizing $1.10 for every $1.00 spent to date on your project. Assuming your SPI efficiency remains through out the reminder of work; your project will finish ahead of schedule.

Cost Performance Index

The CPI is defined by PMI’s PMBOK® Guide as a “measure of cost efficiency on a project. It is the ratio of earned value (EV) to actual costs (AC). The CPI is equal to the earned value divided by the actual costs, CPI = EV – AC.” (PMI, 2004, p. 356 A CPI equal to or greater than one indicates a favorable condition and a value of less than one indicates an unfavorable condition. For example, should your calculation show a CPI of $0.90, which translates to your project recognizing $0.90 for every $1.00 spent to date on your project. Assuming your CPI efficiency remains the same throughout the reminder of work; your project will be over budget.

Potential Causes of Favorable Cost Performance

  • Efficiencies being realized
  • Work less complex than anticipated
  • Fewer revisions and rework
  • Favorable Market Fluctuations in the Cost of Labor or Material
  • Overhead Rate Decreases

Potential Causes of Unfavorable Cost Performance

  • Work more complex than anticipated
  • Design review comments extensive
  • Rework
  • Unclear Requirements
  • Scope Creep
  • Unfavorable Market Fluctuations in the Cost Labor or Material
  • Overhead Rate Increases

Estimates to Complete

Now it is time to learn how to analyze the future or what is expected to happen on a project given the progress measurements reported to date. Anticipating future progress requires determining when the project will be completed and how much it will cost to complete it.

To complete our analysis, we will look at the Estimate at Completion (EAC) and the Budget at Completion (BAC). The Estimate at Completion (EAC) is the actual cost to date plus an objective estimate of costs for remaining authorized work. The objective in preparing an EAC is to provide an accurate projection of cost at the completion of the project. The Budget at Completion (BAC) is the sum of all budgets allocated to a project scope. The Project BAC must always equal the Project Total PV. If they are not equal, your earned value calculations and analysis will be inaccurate.

      Item             Questions
Planned Value (PV) How much work should be done?
Earned Value (EV) How much work was done?
Actual Cost (AC) How much did the work cost?
Budget at Completion (BAC) What is the total job budgeted to cost?
Estimate at Completion (EAC) What do we expect the total job to cost?

The EAC is the best estimate of the total cost at the completion of the project. The EAC is a periodic evaluation of the project status, usually on a monthly basis or when a significant change happens to the project. EACs are developed with varying degrees of detail and supporting documents. A comprehensive EAC is usually prepared annually or if there are any major changes in the project. The EAC should be reviewed on a monthly basis by the Control Account Manager (CAM) or those responsible. The EAC is developed for projects as well as Control Accounts and Work Packages. There are multiple ways to develop an EAC. The technique selected is based upon the dollar value of the project, the risk, accounting system available and the accuracy of the estimates.

One common formula for determining the EAC is expressed as budget at completion divided by the current CPI of the project. (EAC = BAC/CPI)

The above presented formulas are the foundation to performing Earned Value Analysis and utilizing an Earned Value Management System.

In summary, here are five basic ground rules for effective Earned Value Management:

  1. Organize the project team and the scope of work, using a work breakdown structure. Each task should have a single WBS number and organizational code.
  2. Schedule the tasks in a logical manner so that lower level schedule elements support subsequent elements and the top level milestones.
  3. Allocate the total budget resources to time-phased control accounts.
  4. Establish objective means for measuring work accomplishment. Budget should be earned in the same way that it was planned.
  5. Control the project by analyzing cost and performance variances, assessing final costs, developing corrective actions, and controlling changes to the integrated baseline.

The reader should acknowledge that the discipline of Earned Value Management is more complicated and more complex than the information presented in this paper summary. This paper is intended to be an opening position for the reader to begin to build and assemble a knowledge base for Earned Value Management. Good luck in your personal EVM endeavors and remember, it all begins with a sound project plan and you too, can do earned value management!

References

Project Management Institute. (2004) A Guide to the Project Management Body of Knowledge (PMBOK® Guide). (Third ed.) Newtown Square, PA: Project Management Institute

Project Management Institute. (2005) Practice standard for earned value management (PMI Global Standard) (2005 ed.) Newtown Square, PA: Project Management Institute

Government Electronics and Information Association. (2002) Earned value management systems Approved: May 19, 1998. Reaffirmed: August 28, 2002. ANSI/EIA-748-A-1998

United States Department of Energy (2005) Earned value management application guide, version 1.6. January 1, 2005. Office of Engineering and Construction Management.

© 2006, Chance Reichel, PMP
Originally published as a part of 2006 PMI Global Congress Proceedings – Seattle Washington

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