If you have been into project management for a while you must be aware of the types of inquiries from the clients and the management.
All the time, they will be asking about the status of the project, the progress of the project, how much you have completed, and how much work is remaining, etc.
Clients are not interested in daily reports; they need a broader status and progress report which helps them visualize the money spent on the project and the value of work completed.
In the past, project managers used to have only two parameters: planned expenditure and the actual expenditure.
This information only helped them compare how much was planned to be spent and how much has been spent to date.
This information was incomplete because it did not give any idea about the completed work. Moreover, it was also not possible to relate the completed work with the amount of money spent on it.
In simple terms, getting the cost performance of the project was not possible.
This is where Earned Value Management (EVM) came onto the scene, which helped project managers overcome the shortcomings of traditional project management methods.
Earned Value Management is sometimes also known as Earned Value Analysis (EVA).
Earned Value Management came into the limelight in the sixties when the US Air Force started using it in their programs. Since 2005, it has become a part of general federal project risk management, and these days Earned Value Management is a mandatory requirement for US government contracts.
Earned Value Management has many advantages over traditional project management.
The traditional method focuses on planned and actual expenditure while the Earned Value Management makes you aware of actual accomplishments and gives you a clear insight into the project.
Earned Value Management helps you analyze the cost performance, schedule performance, cost variance and schedule variance.
Earned Value Management is also discussed in the PMBOK Guide in detail.
As per the PMBOK Guide,
“Earned Value Management (EVM) in its various forms is a commonly used method of performance measurements. It integrates project scope, cost, and schedule measures to help the project management team assess and measure the project performance and progress.”
Earned Value Management has three basic elements:
- Planned Value (PV)
- Earned Value (EV)
- Actual Cost (AC)
Planned Value is the scheduled cost of work planned in a given time. Planned Value is also known as Budgeted Cost of Work Scheduled (BCWS).
Earned Value is the amount of money earned from completed work in a given time. Earned Value is also known as Budgeted Cost of Work Performed (BCWP).
Actual Cost is the actual amount of money spent to date. Actual Cost is also known as Actual Cost of Work Performed (ACWP).
With the help of these three elements, you can calculate the following variances and performance index:
- Schedule Variance
- Cost Variance
- Schedule Performance Index
- Cost Performance Index
Schedule Variance is the difference between Earned Value (EV) and Planned Value (PV).
Schedule Variance = Earned Value – Planned Value
SV = EV – PV
Cost Variance is the difference between Earned Value (EV) and Actual Cost (AC).
Cost Variance = Earned Value – Actual Cost
CV = EV – AC
Schedule Performance Index
Schedule Performance Index is the ratio between Earned Value (EV) and Planned Value (PV).
Schedule Performance Index = (Earned Value) / (Planned Value)
SPI = EV/PV
Cost Performance Index
Cost Performance Index is the ratio between Earned Value (EV) and Actual Cost (AC).
Cost Performance Index = (Earned Value) / (Actual Cost)
CPI = EV/AC
Earned Value Management in Forecasting
Earned Value Management helps you in forecasting as well. With the help of Earned Value Management you can forecast the following:
- Estimate at Completion
- Estimate to Complete
- Variance at Completion
- To Complete Performance Index
Estimate at Completion
Estimate at Completion is the total expected budget for the project.
In four different situations you can calculate the Estimate at Completion. Please refer my blog post on Estimate at Completion for more details.
Visit: Estimate at Completion
Estimate to Complete
Estimate to Complete is the amount of money from a given point which tells you how much it will cost you complete the rest of the work.
Estimate to Complete can be calculated in three different scenarios. Please refer my blog post on Estimate to Complete to read about it in more detail.
Visit: Estimate to Complete
Variance at Completion
Variance at Completion tells you how much you are under budget or over budget when the project completes. It is the difference between the Budget at Completion and the Estimate at Completion.
Variance at Completion = Budget at Completion – Estimate at Completion
VAC = BAC – EAC
To Complete Performance Index
To Complete Performance Index is the estimate of the cost performance required by the project to meet the project’s budget goal.
TCPI can be calculated by dividing the remaining work by the remaining funds.
TCPI = (Remaining Work)/(Remaining Funds)
There are two cases in which you can calculate the TCPI.
Case I: If you are under budget
TCPI = (BAC–EV)/(BAC–AC)
Case II: If you are over budget
TCPI = (BAC–EV)/(EAC–AC)
So you see how the Earned Value Management helps you in analyzing the project performance and forecasting.
(Don’t worry, if you don’t get any of the above concepts. I have discussed all of them in different blog posts, just follow the link given below the each topic)
Benefits of Earned Value Management
There are immense benefits of Earned Value Management for project managers, sponsors, clients and organizations.
EVM gives you better control over the project constraints such as scope, cost and schedule. You can identify the problems in the early stages of the project and manage them proactively. For the client, they will have a better view on the project’s insight and they will be confident about the success of the project.
The following are a few benefits of Earned Value Management:
- It improves planning processes and relates time-phased budgets to the project tasks.
- It shows you the project’s status and progress and helps you in measuring the project’s cost and schedule performance.
- It improves communication and project visibility which helps prevent scope creep.
- It informs you if you’re deviating from any performance measurement baseline such as scope, cost and schedule baseline.
- It helps you identify the potential risk areas.
Earned Value Management is one of the few techniques in the PMBOK Guide that involves mathematical calculations. Therefore, many PMP aspirants find it difficult and ignore it. However, if you understand the concept of Earned Value Management, these calculations are not really as difficult as they appear to be.
Earned Value Management helps you analyze the project’s performance and predict the forecast. It shows you the current status of the project, tracks actual progress with the planned progress, answers various performance related queries such as whether you are under budget or over budget or whether you are ahead of schedule or behind schedule, etc.