What is it and is it Practical?
Proper planning, measurement and control are keys to successful project management and begin with clearly identified constraints of time, cost and scope. You, as the project manager, must skillfully define requirements, estimate labor and costs, schedule the project, manage risk, control quality, all while walking and chewing gum at the same time. Easy, right? Yet for many of us to understand these principles and successfully implement them, is an extremely difficult and complex process – enter Earned Value Management (EVM).
EVM has successfully helped companies and government organizations to better produce projects while saving a substantial sum of money. EVM’s aim is to detect performance problems early. Simply put, EVM measures project performance against the project plan and when used properly, can give the project manager early warning signs to potential work progress and overall budget overruns. This article will attempt to give you a high-level understanding of EVM by discussing its use from project initiation through management to project conclusion.
The EVM Formulas:
If you break out in a cold sweat just thinking about calculations and formulas, here is a way to understand EVM without memorizing difficult and complex formulas. The basic calculations all refer to differences and ratios in respect to Earned Value:
- Difference between EV and your plan (PV) = Schedule Variance
- Difference between EV and your spending (AC) = Cost Variance
- Note: Remember, a positive variance is good for your project. It means you are ahead of schedule or under budget.
- Ratio of Earned Value to plan (PV) = Schedule Performance Index
- Ratio of Earned Value to cost (AC) = Cost Performance Index
- Note: Remember, a number greater than 1 means you are ahead of schedule or under budget.
Using the illustration below, we will demonstrate how to determine CPI and SPI or Cost Performance Index and Schedule Performance Index.
Note: Light Blue denotes amount of actual work accomplished. Dark Blue denotes the amount of work YET to be accomplished. The sum of the light blue and the dark blue are the total amount of work effort for each task.
First, A Few Calculations:
- Planned Value (Budgeted Cost of Work Scheduled or the Total amount of work effort for the sum of all tasks or YOUR PROJECT BUDGET) = 20+40+65+50 = $175
- Earned Value (Budgeted Cost of Work Already Performed or How much SHOULD it have cost you to this point in your project?) = 20+30+25+0=$75
- Actual Cost (of the work performed) = $100 (Number Gained from Accounting Dept – or how much did it ACTUALLY cost you to perform this work?)
Calculating Cost Performance Index (CPI)
- Cost Variance = 75 – 100 = -25 (The cost variance is the difference between the Earned Value and the Actual Cost. In the example above, our Accounting Dept gave us the “actuals” of $100, so there is a -$25 cost variance. We’re over budget by $25.)
- The Cost Performance Index is 75/100 = .75. The Earned Value Calculations conclude that, at this point in time, the project is over budget (notice the value is less than 1) for work accomplished, meaning, at this run rate, you will need $233.33 to complete the project rather than the initially budgeted $175.
Calculating Schedule Performance:
- Schedule Variance = 75 – 110 = -35 (The schedule variance is the difference between the Earned Value and the Scheduled Work completed at a certain point in time, noted here by a red “Date of EV Measurement” Line.
- Schedule Performance Index = 75/110 = .68 (meaning you’ve completed 68% of your project deliverables at this point in time. You’re behind schedule).
How do I Implement Earned Value on my Projects?
Project Initiation – The use of Earned Value requires your project to be fully defined from the bottom-up, at the beginning of the project. This is perhaps the most critical and most challenging aspect in exercising EVM. The best way to define your project is by beginning with a Work Breakdown Structure (WBS). Utilizing collaboration between all team members, the WBS will help you to create work packages that can then me broken down further and will help you to, not only define the project, but to identify the critical path(s), milestones and targets.
Create an EVM Baseline – Once you have clearly identified an accurate itemization of work to be performed and an estimate of planned costs- you are ready to baseline the EVM. The baseline’s objective is to ensure integrity of the performance measurement and is an essential step in correctly identifying any potential problems.
Continually Measure Performance & Cost Against Schedule & Budget – Periodically, you must measure the project’s current schedule & costs against your EVM Baseline. I’m sure that being the incredibly intelligent and successful PM that you are, you will show no variances- but humor me for a moment… What if you were to compare the baseline to your current schedule and budget, only to realize that the project is falling behind and costs are beginning to add up. Now what? In this case, you need to assess each behind-schedule task and evaluate its importance to the critical path. If the late task is on the critical path, or if it carries a high project risk, take immediate action to bring the late task back into the schedule and under budget control.
Is EVM Practical?
The objective of Earned Value Management is to implement EV data into the practice of daily project management- acting as a baseline for continuous monitoring, and leading to improvements in decision-making, based upon an informed analysis of real project status. While the concept itself is fairly straight forward, successful EVM requires action and cooperation from virtually every stakeholder that touches the project. I’ve no doubt you can imagine the difficulties that can arise from the extensive collaboration that would be required within some of your projects. EVM is a very powerful tool, and when used correctly, can help ensure project success, but it may not be practical within every project and every situation, keep it in your Project Toolbox and use where appropriate.
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