Cost overruns have become a common theme among large-scale projects. The construction of the International Space Station, for example, was originally planned with a $36.75 billion budget, but its final costs amounted to $105 billion, a 186% hike from its planned value. It was also wrapped up six years later than planned.
No project manager wants to be at the helm of disastrous projects that stray off their course. This is when you turn to the project management discipline to find a way out. Earned value management is a tried-and-true method that can help you solve this problem.
What is Earned Value Management?
Earned value management (EVM) is a project management methodology that integrates schedule, costs, and scope to measure project performance. Based on planned and actual values, EVM predicts the future and enables project managers to adjust accordingly.
In turn, Earned Value Management Systems (EVMS) refer to the software, processes, tools, and templates used for EVM.
Another important terminology used in this context is earned value analysis (EVA). EVA is a quantitative technique used to evaluate project performance by computing schedule and cost variances.
EVM uses EVA as one of its tools, but is larger in scope: While EVA stops with the computation part, EVM is all about using that data in trends analysis and forecasting. EVM is a project management function—so it deals with both the data itself and the actions taken in light of that data.
EVA, EVM, and EVMS have a fascinating origin story: In the 1960s, 35 criteria were drafted for the U.S. government’s contractor management systems to follow. Later in the 1990s, the American National Standard Institute (ANSI) and the Electronic Industries Association (EIA) developed these into 32 guidelines for EVMS, resulting in the ANSI/EIA 748 standard. For technology systems used in several U.S. government agencies such as the Department of Defense (DoD) and National Aeronautics and Space Administration (NASA), this has now become the gold standard.
At the same time, the EIA 748 standard is not required to implement EVM. All those criteria and the rules around them have contributed to a perception that EVM is difficult and onerous. The good news is that EVM metrics are actually quite straightforward and your EVM process can be implemented with as much or as little rigor as your particular projects require.
Benefits of Earned Value Management
According to a detailed study by Fleming and Koppelman, once you’re 20% into a project, your current performance can be used to predict the future of the project with a plus or minus 10% deviation. This powerful predictive capability is made possible by EVM, making it one of the best project cost control measures available.
Earned value management is a power tool with many benefits, enabling you to:
- Map work with costs, reducing unknowns into quantifiable factors.
- Compare and benchmark the current status against the project baseline and identify critical paths.
- Create a data-based framework to take actions and make decisions for the future.
- Intervene fast and ahead of time (for example, you can tweak project scope and budgets, rollback functionalities, procure more resources, invest in better technologies, set customer expectations, etc.).
- Provide visibility and create accountability in stakeholders through clear metrics.
- Provide insight into the big picture at both project and portfolio levels.
Earned Value Management Core Concepts
EVM can be intimidating to some project managers, due to the many terminologies associated with it. So, let’s break this down into easy-to-digest smaller concepts first. Each of these concepts plays a key role in improving project performance.
Planned Value (PV)
Planned value is the budgeted cost for work scheduled (BCWS). PV varies based on the scope of work in consideration and the point where you’re at in the overall schedule.
PV = Total project cost * % of planned work
For example, let’s say, the PV for your 5-month project is $25,000:
PV for the complete project = $25,000
PV at 2 months = $25,000 * 40% = $10,000
You can also calculate PV for a time period, say, month 2 to month 4 = $25,000 * 60% = $15,000.
Actual Costs (AC)
Actual costs, also referred to as actual cost of work performed (ACWP), is relatively straightforward. If you are using a robust project cost management software, tracking actual costs should not be a challenge. However, it’s important to remember to include several hidden costs—material, resource, hardware, software licenses, overheads, etc.
You can look at AC cumulatively, accounting for all the activities done from the beginning of the project to date, or over a specific time period.
In our example, let’s assume, AC at the end of 2 months = $15,000
Earned Value (EV)
Now, this is where EVM gets interesting. You’ve made a plan to finish some amount of work and budgeted accordingly. But, from experience, you know that there is bound to be some discrepancy from your estimate. At the end of 2 months, you may have planned to complete 40% of your work, but let’s say you managed to just finish 30%.
The question, then, is, what’s the budgeted cost for this work? EV, also called as budgeted cost for work performed (BCWP), gives you the answer.
In our example:
EV = Total project cost * % of actual work = $25,000 * 30% = $7,500
Planned value, actual cost, and earned value numbers are fundamental to variance calculations. At this point, the project manager wants to know how far off we are from the project baseline. This can be determined through schedule and cost variance.
Schedule Variance (SV)
Schedule variance is a quantitative indicator of your divergence from the initial planned schedule. A negative SV indicates that we are behind schedule, a positive SV indicates that we are ahead of schedule, and zero means that we are exactly on schedule.
SV = EV – PV
In our example, SV at 2 months = $7,500 – $10,000 = -$2,500
SV% = (SV/PV) *100 = (-$2,500/$10,000) *100 = -25%
This implies that we are 25% behind schedule. It’s interesting to note that we aim to understand schedule, a time component, from the perspective of costs. To arrive at these costs though, we needed to know the scope of work planned and completed. This is how the three pillars—scope, time, and cost come together in EVM.
Cost Variance (CV)
Cost variance is a quantitative indicator of your divergence from the initial planned budget. A negative CV indicates that we are over budget, a positive CV indicates that we are under budget, and zero means that we are exactly on budget.
CV = EV – AC
In our example, CV at 2 months = $7,500 – $15,000 = -$7500
CV% = (CV/EV) *100 = (-$7,500/$7,500) *100 = -100%
This implies that we are 100% over budget.
Again, this is an instance of how scope, time, and cost come together to give you a clear picture of where you stand at the moment in your project.
Another way of looking at project performance, apart from variance, is through indexes. Here again, we have two parameters—schedule and cost index.
Schedule Performance Index (SPI)
SPI gives a sense of project performance from a schedule perspective.
SPI = EV/PV; SPI > 1 indicates the project is ahead of schedule and SPI < 1 indicates the project is behind schedule. In our example, SPI = $7,500/$10,000 = 0.75, indicating the project is only going 75% as per the original plan or it’s 25% behind schedule.
Cost Performance Index (CPI)
CPI gives a sense of project performance from a cost perspective. CPI = EV/AC; CPI > 1 indicates the project is under budget and CPI < 1 indicates the project is over budget.
In our example, CPI = $7,500/$15,000 = 0.5, indicating the project expenditures are only at 50% of the plan.
5 Fundamentals of Earned Value Management
Earned value management is all about measuring and benchmarking against a well-defined plan. Therefore, you can only perform this in organizations with a certain key elements in place. The 32 guidelines defined under the EIA-748 standard discuss, in detail, the fundamental processes and systems for the implementation of EVM. These guidelines are outlined as part of five broad principles. But again, the level of detail and overhead to implement should vary based on factors including organizational maturity, project size and complexity, and contractual requirements. Let’s review these principles.
1. Organization and Scope of Project
We start by identifying the ‘what’ element of the project with requirements collection and scope definitions. The five guidelines documented as part of this principle recommend us to create three important documents:
- Work breakdown structure (WBS): Create a WBS dividing high-level deliverables into smaller work packages. This graphical representation of the work we have set out to complete gives clarity on the scope.
- Organization breakdown structure (OBS): Create an OBS, a form of an organization chart, which shows the people, teams, and departments that are involved in a project, along with their hierarchy, roles, and responsibilities. OBS addresses the ‘who’ element.
- Responsibility assignment matrix (RAM): Interpose the WBS and OBS to create a RAM, defining exactly which task will be performed by whom. Each of these mappings or control accounts will be measured in future stages.
2. Planning, Scheduling, and Budgeting
The objective of the guidelines in this principle is to help define the project baseline in concrete terms. These are the parameters against which the project will be monitored and controlled throughout the lifecycle.
The WBS is a good starting point for the planning stage. We ensure that multiple activities are grouped under a single work package and multiple work packages are grouped under a single control account. Each account will have an account manager who will monitor its progress (in reality, the same person could manage multiple accounts).
At this point, we define the “when” element, defining both high- and low-level milestones and assigning clear due dates to each activity.
Then, we move on to time-phased budget allocation, apportioning the total budget at the level of each activity inside a work package. This includes costs, such as labor, material, and subcontracting. We also assign methods of progress measurement to each work package, which will decide how EV will be calculated at a later point for a task-in-progress.
The sum of all budgeted work is called as the performance measurement baseline. Additionally, project managers allocate management reserves for unexpected scope increases.
3. Accounting for Actual Costs
A set of six guidelines discusses the process of cost calculation. The focus of this activity is simple—to measure the actual costs. But it’s important to have systems in place that can track costs at a work package level, otherwise it’ll be difficult to measure progress accurately. Also, it’s possible that you may be incurring/paying out the actual costs only a few months later, but a portion of it has to be allocated much earlier to calculate the earned value. To avoid these booking lags, the guidelines emphasize on accounting for accruals.
4. Analyzing and Reporting on Project Performance
The calculations of PV, EV, AC, along with variances and indexes are described in detail in this section with six guidelines. The idea is to consistently report these numbers such that team members, senior leaders, and customers have visibility into project progress.
But the focus is as much on identifying the corrective actions to be taken as the measurement against the baseline and reporting numbers. The guidelines recommend defining variance thresholds; when the cost performance reports indicate a threshold breach in a control account, one can drill down to spot the problematic tasks.
5. Revisions and Data Maintenance
The five guidelines under this section acknowledge that the project baseline is not rigid, especially when problem areas are uncovered in the middle of a project. But you cannot revise a baseline every time you overspend or there is a delay in a task. Some scenarios when the guidelines recommend revising a baseline are when there is an authorized change to the scope, cost, or schedule of the project or when there is fluctuation in rates.
Creating change management and risk management plans, seeking necessary approvals, and evaluating the need to dip into the management reserve are some of the activities that fall under this section.
Find the Best EVM Solution for Your Projects
Earned value management is one of the most accurate techniques for project forecasting in mature organizations. But its complexity mandates the use of comprehensive EVMS platforms for successful implementation.
EcoSys for Earned Value Management is the EVMS platform that provides extensive support for all levels of EVM; from basic measures to support project performance measures all the way to the EIA-748 standard, including control account definition, WBS, and OBS. It also offers seamless integration with ERP and financial systems as well as scheduling, timesheet, and other enterprise systems for tracking actual costs and resource expenditures.
To understand more about how we can help you, get a consultation with an EcoSys expert now!