Leveraging Earned Value Management Concepts

Earned Value Management (EVM) (otherwise known as variance analysis) is the best project control technique for early detection of performance variances. The technique was developed nearly 40 years ago for the United States government to better manage contract payments to vendors. Ever since, it has grown in popularity and acceptance across many industries, and now is regarded as the preferred project control technique by PMI. However, it has not been accepted as standard practice in all industries, and it is usually a technique found in organizations or industries that are relatively mature in their management processes. Thus, we could spend an entire chapter on a technique that may not be part of your organizational culture yet. In addition, if you work in these process mature environments, you are less likely to be reading this book, and you will likely have many additional resources to address the details of earned value.

Still, there is tremendous value in a quick review of EVM. An awareness of the fundamental concepts will help you in your project controlling and performance reporting endeavors.

• Assess cost performance and schedule performance together The main value of EVM is that it allows you to measure and track both schedule and cost performance together. Evaluating project performance on just one of these indicators does not always give you the true picture and does not allow you to detect variances as early.
• Each work package has a planned value The planned value of any work package is the budgeted cost of the work scheduled to complete the work package. The important point here: Estimate the cost of each work package in your schedule. Also, this means that the project as a whole has a baseline schedule and budget.
• At any point, the project has an "earned" value The earned value of a project is the budgeted cost of the work actually completed. In other words, how many work packages (or partial work packages) have been completed at this time? The value is expressed in budgeted cost terms, not actual costs. This allows you to perform cost analysis by comparing budgeted versus actual costs for the work completed. The important point to consider: Be aware of the costs you expected to incur for the work that has been completed.

tip

Earned Value Management (EVM) is the best project control technique for early detection of project performance variances.

Before we introduce an example EVM graph, let's review the other key terms and concepts that comprise EVM. Table 10.1 summarizes these key elements.

Table 10.1. Earned Value Management Elements

Element	Definition	Notes
Planned Value (PV)	Budgeted cost of work scheduled.	Performance baseline.
Earned Value (EV)	Budgeted cost of work performed.	For the work performed, what was the budgeted cost?
Actual Costs (AC)	Actual costs of work performed.	For the work performed, what were the actual costs?
Cost variance (CV)	Earned Value Actual Costs CV = EV AC	A negative number means you are over budget.
Schedule variance (SV)	Earned Value Planned Value SV = EV PV	A negative number means you are behind schedule.
Cost Performance Index (CPI)	CPI = Earned Value (EV) / Actual Costs (AC) Numerical representation of project cost performance.	CPI < 1 means your project is costing you more than you planned. CPI > 1 means you are taking less money to do the project.
Schedule Performance Index (SPI)	SPI = Earned Value (EV)/Planned Value (PV) Numerical representation of project schedule performance.	SPI < 1 means your project behind schedule. SPI > 1 means you are ahead of schedule.
Budget at completion (BAC)	Total baseline project budget.
Estimate at completion (EAC)	EAC = BAC / CPI	Based on current cost performance, what will your total cost be?
Estimate to complete (ETC)	ETC = EAC AC	Subtract Actual Costs from at Completion to get estimated remaining costs.

EVM takes the planned value (PV), or what you planned to do at an estimated cost, and compares it against the estimated cost of the work performed (EV) and against the actual cost of work performed (AC), or what actually got done. These metrics provide a wealth of information about whether the project tasks are taking longer than they should (schedule variance, or SV), or whether they are actually requiring more work effort to complete (cost variance, or CV). In addition, the estimate-at-completion metric (EAC) helps you forecast final project performance and determine if any corrective action needs to take place.

caution

A negative performance index value is not favorable. It means that you're behind schedule or over budget, respectively.

To illustrate how EVM could be used for performance reporting, please refer to Figure 10.3.

Figure 10.3. Depicts EVM metrics for the fourth time period on a sample project.

In this example, the report provides EVM data for the fourth reporting period. At this time, the Planned Value = $75K, the Actual Costs = $100K, and the Earned Value = $60K. On this project, we can tell the following by analyzing this report:

• There has been a cost variance from the start. It could be the actual resource costs have been higher.
• Also, for the first three weeks, the project was ahead of schedule. More work was completed than planned. This was a likely factor for the actual costs being higher too.
• During the past reporting period, something has occurred that delayed progress. The project is now behind schedule (and the cost variance has increased significantly).

Many of the project management software tools, such as Microsoft Project, include these EVM calculations. To be useful, the schedule must include all assigned resources, individual resource costs, and current progress measurements.