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Earned Value Management |
First published Aug 07 |
Tom Carlos (PMP) |
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There are “lucky” project managers whose projects were completed “on time” and “within budget.” But I am guessing they are in the minority. Everyone else has probably faced a situation where one of the following statements is true:
I am betting that the managers of these projects used analysis tools that are considered “two-dimensional.” “Budget” and “Actual” are the two dimensions. But in looking at a broader picture, there is a much needed third dimension- one that reflects “performance and efficiency.”
“Performance and efficiency” indicate whether or not we are actually completing the intended tasks and producing the expected project deliverables within the designated budget and schedule. To examine this concept, let’s look at the following case study.
Would you agree with John’s assessment of the project?
If you answered “No” or “I do not have enough information to support that claim” you’re right on track. And to understand why that is the correct answer, let’s dig further into the problem.
To answer this question, John calls each programmer and gathers the following information:
Programmer |
Budgeted Time |
Actual time spent |
Invoices Submitted |
Percentage of all tasks completed |
Bob |
20 hours |
15 hours |
$1,500 |
60% |
Sue |
20 hours |
25 hours |
$2,500 |
75% |
Roger |
20 hours |
5 hours |
$500 |
10% |
Mike |
20 hours |
30 hours |
$3,000 |
50% |
Jill |
20 hours |
15 hours |
$1,500 |
80% |
Total time and costs incurred |
|
90 hours |
$9,000 |
|
Table 1
Without going any further John can see the project has encountered a serious problem. Collectively, the programmers show 90 hours of work. However, no one programmer can make the claim that they have completed 90% of their assigned task (and final deliverable).
John scratches his head and is dumbfounded when it comes to understanding
(1) What has happened and
(2) What to do next.
So he asks an associate for help and she comes to the rescue.
Margie introduces John to a project management tool called Earned Value Management (EVM). In fact, she gives him an article that has the following definition:
Earned Value Management - The process of considering scope, schedule, and resources, measured against a project’s actual performance. It compares the planned amount of work to the completed tasks, to the projects’ cost, to determine if the cost, schedule, and work completed (thus far) are all in synch and in accordance with the plan. This analysis will show past performance and will estimate future efforts to complete the project (with the desired results).
The article provided by Margie also contains a table that shows all the terms, definitions, and formulas needed to conduct EVM analysis. Refer to Appendix 1.
At this point, John feels overwhelmed and has no idea how to apply the EVM terms and formulas to his project. So with Margie’s help, they slowly begin the analysis by defining the terms and plugging in the known figures.
Symbol |
Description |
Formula |
Explanation |
PV |
Planned Value |
None |
The estimated value of the work planned to be done thus far. In this case, the project’s PV is the estimated cost of $10,000 because we estimated the project would be completed within a week. |
AC |
Actual Costs |
None |
The total costs incurred to date, based on timesheets, invoices, other expenses, etc. In this case $9,000 |
EV |
Earned Value |
Sum of all (Task Budget * % Completed) |
The estimated value of (intended) work completed thus far, as it relates to the expected deliverables. |
Table 2
PV (Planned Value) and AC (Actual Cost) are easily derived. PV is based on what should have been completed thus far. For multi-period projects, it will seldom equal the full budget figure. The idea is to calculate a figure that represents “the amount of intended work; the work performed (thus far) in relationship to the assigned tasks.” In reality, EVM analysis will be done over several periods and the value for PV will be constantly changing.
To derive EV, multiply the budget figure by the percentage of all tasks completed (see Table 1). For example, Bob was given 20 hours to complete 4 subtasks. He estimated that 60% of the subtasks are completed. You multiply $2,000 by 60% and this gives a value of $1,200. So you can clearly see that Bob’s (real) work does not equal the actual cost of $1,500. As a result, Bob has fallen behind (in schedule and cost) based on this one calculation.
To calculate EV for the entire project, simply add the individual EV values for each programmer. Refer to Table 3.
Term |
Value |
Notes |
PV |
$10,000 |
Our budgeted figure |
AC |
$9,000 |
Total invoices submitted thus far |
EV |
$5,500 |
($2,000 * 60%) + ($2,000 * 75%) + ($2,000 * 10%) + ($2,000 * 50%) + ($2,000 * 80%) |
Table 3
Again, we can see that the group as a whole has fallen behind on their work. They have submitted $9,000 as the cost but produced only $5,500 of (Earned) value. So at this point in time, the project appears to be $3,500 over budget. And we also know the project is behind schedule (because the tasks were not completed within the 1 week time frame).
The Performance Index figures help us quantify efficiency. They are also used in subsequent EVM calculations.
Symbol |
Description |
Formula |
Explanation |
CPI |
Cost Performance Index |
EV/AC |
I am (only) getting (blank) cents performance out of every $1 spent |
SPI |
Schedule Performance Index |
EV/PV |
I am only progressing at (blank) % of the rate originally planned |
Table 4
By plugging in our known values for PV, AC, and EV, we can calculate CPI and SPI.
Term |
Value |
Notes |
CPI |
61.11% |
Using (EV/AC); ($5,500 / $9,000) |
SPI |
55.0 % |
Using (EV/PV); ($5,500 / $10,000) |
Table 5
Based on these results, John can see that his team is working at an average of 61.11% performance efficiency. The 55% SPI index tells him that the project will most likely need another week for completion.
John then asks Margie; “Based on this information can we calculate the project’s final cost?” So Margie rolls out the next set of terms and calculations.
Symbol |
Description |
Formula |
Explanation |
BAC |
Budget At Completion |
|
The original budget for the total job |
EAC |
Estimate At Completion |
(See Appendix 1) |
The amount "currently expected" for the total project cost |
ETC |
Estimate To Complete |
EAC-AC |
From this point on, how much MORE do you expect the cost will be to finish the job |
VAC |
Variance At Completion |
BAC-EAC |
How much over or under budget will the project come in at |
CV |
Cost Variance (in dollars) |
EV-AC |
Negative is over budget, Positive is under budget |
SV |
Schedule Variance (in dollars) |
EV-PV |
Negative is behind schedule, Positive is ahead of schedule |
Table 6
BAC is the original budget total. For this project, it is $10,000.
Calculating a value for EAC can be tricky. There are four different methods for calculating EAC. Each method can yield a different result. Since Bob employs the principle of “conservatism” and wants the “worst case scenario” he uses the formula the yields the highest figure. (Refer to the Appendix 1 for all EAC formulas).
ETC is an easy calculation. This figure represents the additional costs from this point forward in order to finish the project.
Term |
Value |
Notes |
BAC |
$10,000 |
The original budget |
EAC |
$16,363 |
Using (BAC/CPI); [$10,000/.611] |
ETC |
$7,363 |
Using (EAC-AC); ($16,363 - $9,000) |
VAC |
- $6,363 |
Using (BAC-EAC); ($10,000 - $16,363) |
CV |
- $3,500 |
Using (EV-AC) with answer in dollars; $5,500 - $9,000 |
SV |
- $4,500 |
Using (EV-PV) with answer in dollars; ($5500 - $10,000) |
Table 7
At this point in time, the project appears to be $6,363 over budget (VAC). It will be next to impossible to hit the original target figure of $10,000. The current EAC value assumes that the programmers will continue working at the same pace.
The Cost (CV) and Schedule (SV) variances indicate that the project is “over budget” and “behind schedule.”
John is shaking his head in disbelief. Not only is his project struggling to meet the original estimates, but he must now report the bad news at the next steering committee meeting. He knows that the management team will not be able to follow the calculations shown above. So he needs to simplify the reporting to three simply values.
Symbol |
Description |
Formula |
Explanation |
PE |
Planned Earned |
EV/BAC |
Project % Complete (as it relates to time and deliverables) |
PS |
Percent Spent |
AC/BAC |
Project % Spent (as it relates to cost) |
CSI |
Cost Schedule Index |
CPI * SPI |
The overall efficiency rating. The further CSI is from 1.0, the project will have difficulties in recovering. |
Table 8
Using the known values, John calculates PE, PS, and CSI.
Term |
Value |
Notes |
PE |
55% |
Using (EV/BAC); ($5,500 / $10,000) |
PS |
90% |
Using (AC/BAC); ($9,000 / $10,000) |
CSI |
.336 |
Using (CPI * SPI) |
Table 9
The values for PE and PS do not surprise John. He has seen these figures before. But CSI is surprising. This value is far from “1” and indicates the seriousness of the project’s inefficiency.
The formulas provide a mathematical analysis of performance. Unfortunately, they cannot explain “why” the inefficiencies have occurred. For this, John will need to examine the work of each programmer in order to understand why they are all running over the allotted time for each task. Hopefully, he can correct the problems.
The other issue to consider is that the task lengths were severely underestimated. Interviews with the programmers may show that they in fact are working to the best of their ability. The problem may have occurred in the original project estimates.
There is much more to EVM than discussed in this article. But you are now aware of the third dimension of a project’s financial analysis. All three dimensions are key elements that must be considered when analyzing project performance.
Appendix 1 - The spreadsheet below summarises the situation with this project.
Appendix 2
EVM Terms, Definitions, and Calculations
Symbol |
Description |
Formula |
Explanation |
PV |
Planned Value |
|
(Also known as BCWS - Budgeted Cost of Work Scheduled) The estimated value of the work planned to be done thus far. |
AC |
Actual Costs |
|
(Also known as ACWP – Actual Cost of Work Performed)The total costs incurred to date, based on timesheets, invoices, other expenses, etc |
EV |
Earned Value |
Sum of all (Task Budget * % Completed) |
(Also known as BCWP – Budgeted Cost of Work Planned)The estimated value of (intended) work completed thus far, as it relates to the expected deliverables |
CPI |
Cost Performance Index |
EV/AC |
I am (only) getting ____ cents performance out of every $1 spent |
SPI |
Schedule Performance Index |
EV/PV |
I am only progressing at ___% of the rate originally planned |
BAC |
Budget At Completion |
|
The original budget for the total job |
EAC |
Estimate At Completion |
Four options; see below. |
The amount "currently expected" for the total project cost |
EAC (#1) |
|
BAC/CPI |
Used if no variances from the BAC have occurred |
EAC (#2) |
|
AC + ETC |
Used when original estimate is fundamentally flawed |
EAC (#3) |
|
AC + BAC - EV |
Used when the current variances are atypical |
EAC (#4) |
|
AC + [(BAC-EV)/CPI] |
Used when current variances are typical |
ETC |
Estimate To Complete |
EAC-AC |
From this point on, how much MORE do you expect the cost will be to finish the job |
VAC |
Variance At Completion |
BAC-EAC |
How much over or under budget will the project come in at |
CV |
Cost Variance (in dollars) |
EV-AC |
Negative is over budget, Positive is under budget |
SV |
Schedule Variance (in dollars) |
EV-PV |
Negative is behind schedule, Positive is ahead of schedule |
PE |
Planned Earned |
EV/BAC |
Project % Complete (as it relates to time and deliverables) |
PS |
Percent Spent |
AC/BAC |
Project % Spent (as it relates to cost) |
CSI |
Cost Schedule Index |
CPI * SPI |
The overall efficiency rating. The further CSI is from 1.0, the project will have difficulties in recovering. |
Tom Carlos has over 20 years of cumulative experience in business, technical, and training environments. He is a Certified Project Management Professional (PMP) and member of the Sacramento Valley PMI Chapter. For other articles on similar subjects, you can visit www.carlosconsulting.com or contact him at tom@carlosconsulting.com.
Project Perfect is a project management software consulting and training organisation based in Sydney Australia. Their focus is to provide creative yet pragmatic solutions to Project Management issues.
Project Perfect sell “Project Administrator” software, which is a tool to assist organisations better manage project risks, issues, budgets, scope, documentation planning and scheduling. They also created a technique for gathering requirements called “Method H” ä , and sell software to support the technique. For more information on Project tools or Project Management visit www.projectperfect.com.au
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