Project Earned Value Management
“So, how is your project going?” This is a question project managers are frequently asked by the project sponsor, customer and other stakeholders. One technique used by project managers to explain progress is to plot the plan spend curve and the actual cost expenditure curve as shown in the diagram below. The curve looks good, but what can we tell about the health of this project based on this graph? Is our project team accomplishing the planned work and doing it for less money? Or is the team behind schedule? The point is this curve does not provide sufficient information to properly communicate how the project is going.
To provide the essential information about project progress we need to apply Earned Value Management (EVM). Current performance is the best indicator of future performance, and, therefore a useful way to forecast cost or schedule overruns during project implementation. The most comprehensive trend analysis technique is Earned Value where we monitor the project plan, actual work, and work completed value to see if a project is on track. Earned value is the most effective technique for providing information on project performance. It communicates scope, schedule and cost status information to project stakeholders. Properly used, earned value provides timely information on the project health. The fundamental principle behind EVM is WHAT DID WE GET FOR WHAT WE PAID.
For Earned Value to work we need to establish the project scope, create a Work Breakdown Structure and assign a budget to each work package. Next we create a schedule showing the calendar time it will take to complete the work. This overall schedule is then baselined (this is the planned value) and is used to measure performance throughout our project. As each work package is completed (earned) it is compared with planned value, showing the work achieved against the schedule. A variance to the plan is recorded as time or schedule variance of which there will usually be some, but hopefully within what we can tolerate.
The aim is to highlight cost and schedule issues early, thus provide the maximum time to restore the situation or minimise the impact. To this end there are three key project performance measures associated with EVM:
- Planned Value (PV). Also called Budgeted Cost of Work Scheduled (BCWS), PV is the project expenditure that we anticipate over the life of the project. When graphed it’s usually an S-curve in shape, recognising that expenditure is less in the beginning, and the end, and is at its maximum during the middle period of our project.
- Actual Cost (AC). Also called Actual Cost of Work Performed (ACWP), AC is the aggregate cost that is actually spent on a project as it’s implemented.
- Earned Value (EV). Also called Budgeted Cost of Work Performed (BCWP), EV is the work that has actually been done, but costed using the authorised budget.
EV employs the following project performance measures:
- Cost Variance (CV). As the name suggests, cost variance calculates the difference between the cost actually incurred and the planned cost. It shows whether our project has gone according to our budgeted cost or not. CV = EV – AC. If CV is negative, it means that actual cost of performing the work is more than planned (ie, AC > PV).
- Cost Performance Index (CPI). This ratio shows cost performance. CPI = EV / AC where an index of less than 1 means that actual costs are more than were budgeted, and an index of more than 1 means that actual costs are less than anticipated.
- Schedule Variance (SV). This measures whether our project has taken more or less time than we planned. SV = EV – PV where a negative figure means our project is behind schedule and a positive figure means its ahead of schedule.
- Schedule Performance Index (SPI). This ratio shows schedule performance. SPI = EV / PV where an index of less than 1 means behind schedule and more than 1 means ahead of schedule.
- Estimate at Completion (EAC). Used to find the estimated cost of our project at completion, based on present performance. EAC = BAC/CPI. BAC is Budget At Completion.
- Estimated time to complete (ETC). Used to find the approximate time to complete the project, based on present performance. ETC = Original Duration/ SPI.
- Critical Ratio (CR). Single measure of overall performance todate. CR = CPI x SPI. A CR of 1.00 indicates that overall the project performance is on target.
Earned Value Terminology and Formula
EVM accuracy depends on the timeliness and reliability of input data. However, EVM has no measurement of quality, which could mean that we have done all the work on time and within budget, but the product doesn’t meet specifications or isn’t fit for use.
Example. Consider this cable laying project where: E = A x B, F = C x D, G = B x C, and the second column in each instance is for the running totals to be calculated and preferably graphed to more easily recognise progress.
If we were to complete the table, the project performance for this cable-laying project is not good. At eight weeks this 15 weeks’ $15,000 project is already overspent by $5,080, is more than one week behind schedule, with a predicted total cost of $27,777 (ie, $15,000/0.54) and a duration of 25 weeks (ie, 15 weeks/0.6).
These predictions of cost and duration for this cable-laying project assume that the project continues without remedial action, which in this instance would need to be dramatic if the project is to be completed within the original 15 weeks at a cost of $15,000. Perhaps the only solution now if the project is to continue is to considerably increase the budget and extend the completion date, or rigorously de-scope the project, but whatever action is taken, the hapless PM will doubtlessly be castigated, since variances of this size should have been detected and acted on much earlier.
Example Earned Value Graph
Various combinations of these project performance curves are possible, some of which are shown in the following graphs. Of course, if all is going exactly to plan all EVM performance curves would coincide – something we’ll probably never experience.
Earned Value Performance Curves
Since EVM performance indices (CPI and SPI) measure deviations from the plan, they can be used to indicate whether the risk process has been effective in addressing uncertainty and controlling its effects on project performance.
EVM – Performance Indices
Plotting the trend of CPI and SPI over time against thresholds gives useful information on the type of risk exposure faced by the project at any given point and possible action to be taken.
SPI and CPI Relationship
Why isn’t EVM used more often? There are two things we have to do to use EVM – establish a baseline and track progress. Unfortunately, it’s these two things that many organisations don’t do well. In the absence of either one of these basics, we won’t get far with EVM. But given these basics EVM works for all kinds of organisations that have projects to plan and a need to deliver those projects on time and on budget. EVM doesn’t take quality into consideration. It may be possible that our project is scoring high on earned value performance scale, but the quality of work is below par. Quality is an important criteria in any project, and unfortunately it is not considered in EVM.