Earned Value Management Tutorial

Earned value management EVM

Earned value management EVM—Nguyen Vu Hung vuhung (Flickr.com)

We’ve all heard the term somewhere in a project management class or a PMP exam preparation book: EVA, Earned Value Analysis. According to the Project Management Body of Knowledge, earned value analysis is “an objective method to measure project performance in terms of scope, time and cost.”

In theory, these project management concepts sound great, but in actual practice we need additional guidance to apply these concepts to our projects. After all, how many of you actually draw a network diagram of your project schedule and conduct a forward and backward pass?
While commiserating with a group of project managers over their recent program “challenges,” I conducted an informal survey of their EVA knowledge. In my unscientific study, I found these project managers had heard the term EVA but didn’t know how or why EVA should be applied to their projects. None of the project managers in their organization uniformly applied EVA across their projects. I continued this informal survey with other project managers and found only a few understood EVA and actually applied it on their projects.

Who’s Afraid of Earned Value Management?

Earned value analysis is an excellent technique to assess project health and apply metrics to manage your project. Earned value analysis is also an effective way to communicate to your customer on the overall budget and schedule performance of the project. Earned value isn’t difficult to calculate if you can remember a few formulas and apply some simple mathematics.
EVA calculations are derived from measuring the characteristics of project health. Project health is often measured in time, cost and scope and is often referred to as the “Triple Constraint.” At the end of a week or reporting period, the project manager typically prepares a status report and summarizes the status of time, cost and scope into an easy to reference red, yellow or green status. The traffic light status approach is used to identify troubled projects that need management attention.
The problem with this status approach is it becomes very subjective to perception and influence. A project manager can walk into status meetings with a red status, and the status is magically turned to yellow or green a few hours before a sponsor review meeting. Even worse, a project can be reporting green each week and a day before the project launch date, the project suddenly turns red. Human nature attempts to rationalize multiple points of view into one status. During the evaluation process, there are no objective metrics to measure current health or forecast future performance. Fortunately, EVA provides an objective assessment of project health and includes early indicators of performance issues.
Earned value analysis is a point in time evaluation that measures project health by asking three key questions. Once you have answered these questions, the earned value metrics can be easily calculated:
  • How much work did your plan to complete? (Planned Value)
  • How much work did you actually complete? (Earned Value)
  • How much did it cost to complete the work? (Actual Cost)

Planned value (PV) represents the budgeted cost of all the tasks that were planned to start and finish at this point in time. Earned value (EV) represents the sum of all the budgeted costs of completed work at this point in time. Actual costs (AC) are the actual costs of the work produced. It is important to remember EV is based off the original project budget. EVA newbies often confuse the actual cost with the earned value figure. The following example depicts EVA in action.

 Assume a small four-week software enhancement is budgeted for $10,000. While reporting status during the third week, the project manager determines his team has only completed 50 percent of the work. Based on the project schedule, the team was supposed to complete 75 percent of the work during the third week. The project manager also noticed they’ve spend $9,000 to date on the project. What is the overall health of the project?

In this example, the planned value is $7,500. Based on the project schedule, the team should have been 75 percent complete. The planned value can be calculated by multiplying the planned percent complete by the project budget.

PV = Planned % Complete * Project Budget = 75% * $10,000 = $7,500

The earned value is determined by multiplying the actual percent complete by the project budget. The earned value determines that amount of value that has been delivered to the project to date.

EV = Actual % Complete * Project Budget = 50% * $10,000 = $5,000

Finally, the actual costs to deliver 50 percent of the project were $9,000. The actual costs are calculated by tracking the actual spend against the project budget.

AC = $9,000

By applying these calculations, we can determine cost and schedule variances. The cost variance (CV) measures the difference between the actual costs of work performed to the project budget. The schedule variance (SV) is a measure of the actual progress to the project schedule. These variances are described by two simple equations.

CV = EV – AC

SV = EV – PV

The cost variance for this project is $5,000 – $9,000 = -$4,000. The schedule variance for this project is $,5000 – $7,500 = -$2,500. When reviewing cost and schedule variances, the project manager wants the variances to be zero or greater. Positive variances indicate a cost savings or schedule efficiency. However, these should be examined to confirm the cost or schedule efficiency data is correct. In this example, the project has negative cost and schedule variances.

By reviewing these calculations, the project manager can quickly determine that the project had spent 90 percent of its budget only to only complete 50 percent of the work. The project is behind schedule and will be over budget at the end of the project. The project manager will likely need to reduce scope, extend the project schedule or obtain more funding to deliver the original software enhancement.

Two final calculations are made to determine the cost and schedule performance indices. The cost and schedule performance indices are helpful in communicating an objective assessment of project health to the project stakeholders. Each index represents a performance ration to either budget or schedule. The cost performance index (CPI) is a measure of a project’s earned value compared to the actual costs incurred. The schedule performance index (SPI) is a measure of actual progress to the project’s schedule. When reviewing these calculations, the indices should be as close to 1 or greater. If the number is equal to 1, then the project is on schedule. If they are greater then 1, then the project is ahead of schedule.

CPI = EV / AC

SPI = EV / PV

In the project example, the CPI is .55 and the SPI is .66. Both numbers are less than 1 and the project schedule and budget need to be examined. If the project continues at this rate, it will cost the company at total of $18,181 to complete a project that was originally budgeted for $10,000. To calculate the estimate at completion (EAC), divide the original budget by the cost performance index.

EAC = BAC/CPI

Who’s afraid of EVA now?

If you can answer three questions, subtract and divide then you can apply EVA to provide an objective assessment of project health. EVA requires project managers to track project actual start and finish dates while comparing actual costs to the project baseline. By adopting EVA on your projects, you will reinforce good project management principles.

When presenting the status of a project, the traffic light reporting process can be replaced with objective SPI and CPI calculations. If your customers and management still prefer to speak in traffic light terms, establish ranges using the SPI and CPI indices to determine the red, yellow or green status. A project with an SPI greater than .95 could be considered green or any project with a CPI lower than .85 is immediately red. If your project is 15 percent off its budget, you’ll need to gain significant efficiencies to bring the project back on budget. Establish your own ranges as appropriate and continue to use a consistent objective definition to summarize project status.

If project management had an instrument panel, I’d look for an SPI and CPI gauge to help direct my project’s next steps. The metrics provide an objective assessment of project health based on the project plan. If EVA is new to your organization, your customers, team members and senior management will need to be educated in interpreting EVA.

I explain to my customers and senior management that my job is to ensure the SPI and CPI numbers are as close to 1 as possible. If they are not equal to 1 or greater, then it is my job to explain the gaps and share my plan to bring the project back on track and successfully deliver. After some orientation and a few reporting periods, my customers started inquiring about their project’s SPI and CPI. They were equally interested in the objective evidence that indicated their project was on track.

After learning about EV, PV, AC, CPI, SPI and other acronyms, it can become confusing trying to remember how to track all these numbers and calculations. Fortunately, Microsoft Project tracks all this information for you and with a few clicks of the mouse and some simple division; you can add these metrics to your status report.

About Andrew Makar

Dr. Andrew Makar, PMP is a IT manager who actively promotes useful project management techniques that work in the real world. He is also an author, adjunct professor and lecturer on a range of project management topics.

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