Earned Value Management EV – Project management

Posted: April 11, 2011 in Project Management
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History:

Earned Value has been in use since the 1960s when the Department of Defense adopted it as a standard method ofmeasuring project performance. The concept was actually developed as early as the 1800s when it became desirable tomeasure performance on the factory floor. Today, it is both embraced and shunned, often in response to prior experience orstories told “in the hallway.”

What is Earned Value (EV)?

A method for analysis of project performance? Is it something that is gained through some progress (ex: completed activities)? Or a measure of progress? Say for instance, a Uniform consistent basis for project performance. Let’s take a closer look:

  • EV improves cost control & provides a reliable indicator of project health.
  • EV metrics also enable forecasting to predict Estimate to Complete (ETC) and Estimate at Completion (EAC).
  • EV compares the budgeted cost of work performed (earned) to the budgeted cost of work scheduled (planned) and to the actual cost of work performed (actual).
  • EV trending helps to identify troubled projects early in the lifecycle before they fail (even though time & money spent seem to indicate “progress”).
  • Note:  Other tracking measurements include:  % Complete compared to planned % Complete; Actuals compared to planned Actuals, # Test Cases completed versus # planned, etc.
  • aka EVA = Earned Value Analysis, aka EVM = Earned Value Management

What are the elements of EV?

Figure 1– Traditional cost analysis

Earned Value provides the basis for cost performance analysis. If you want to know what’s happening to the cost of yourproject BEFORE it is completed, you need to know what the planned cost at any time was and also what the cost of thecompleted work is. Referring to Figure 1, should this project manager be happy or concerned? It seems that the actual costsare considerably below the planned cost. This appears to be good news. However, unless you look at the planned cost of thecompleted work, you don’t really know if this is good news or not. That is exactly the missing information that Earned Valueprovides.

Figure 2– Earned value elements

In order to understand Earned Value thoroughly, we must become familiar with all the elements of the Earned Value method. Figure 2 provides an overview of these elements. While many people shy away from the acronyms used to label these elements, they quite accurately describe the elements. The project management practitioner should be familiar with the formal acronyms.

The BCWS is the Budgeted Cost of Work Scheduled. Quite literally, it represents the budgets of the activities that areplanned or scheduled to be completed. In the discussion of how to apply Earned Value, we shall see how this is developed and why the BCWS curve has the traditional S-curve shape.The ACWP is the Actual Cost of Work Performed. Again, quite literally, it represents the actual cost charged against theactivities that were completed. Later we shall see how we deal with activities that are in progress but not yet completed.

The BCWP is the Budgeted Cost of Work Performed. This is the traditional Earned Value that we speak of. It represents theplanned or schedule cost of the activities that are completed. The distinction between the BCWS and the BCWP is that theformer represents the budget of the activities that were planed to becompleted and the latter represents the budget of theactivities that actually were completed.

These are the three major components of Earned Value. At any point in time, we have the planned work, the actual work andthe cost of the actual work. This allows us to make the full analysis of our project progress and performance. Some of theother, related terms shown in Figure 2, include the Budget At Completion (BAC), the Estimate At Completion (EAC), theSchedule Variance (SV) and the Cost Variance (CV). We will learn more about these in the discussion on how to applyEarned Value.

EV Challenges

  • Time:  Formal EV using off the shelf tools is the ultimate but it takes significant time from PM’s, Development, Testing, Management (Bottom Up estimating @ work package level, WBS maintenance, merging WBS’s, Time Entry precision from everyone charging, working the various exceptions with tasks/resources, etc.)
  • Cost:  Formal EV increases project costs, so estimates must include EV activities and the customer must pay for it.
  • Quality:  Resources who are charging to the project aren’t always accurate (ie. Actuals, % Complete, revised ETC hours, revised End Dates).  Another issue is missing data.
  • InfraStructure:  Tools, procedures and resources are needed to support formal EV.  For example, estimation tools must be configured to align with WBS tasks (not just monthly totals as with IFP tool on the AT&T account).

These challenges are manageable, but many organizations are not practicing EV because of these restrainers.  It’s estimated that less than 30% of all PM’s use EV on their projects.

Here is an example of a very simple excel sheet calculation devised to monitor and evaluate key projects data. (EV):

  1. Planned (hours/value)
  2. Actual
  3. EV
  4. Cost variance
  5. Schedule variance

For more on this topic, please connect with us or subscribe to our blog.

Joe Zaarour, PMP

Source: T Wilikins, J Zaarour, IBM GBS

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