WHY EARNED VALUE MANAGEMENT IS ESSENTIAL

According to the PMI - PMBOK? Guide,  

“EVM is a methodology that combines scope, schedule, and resource measurements to assess project performance and progress. The principles of EVM can be applied to many projects in any industry.”

EVM is a project management technique for measuring project performance and progress. It has the ability to combine measurements of scope, schedule, and costs. In a single integrated system, EVMS is able to provide accurate forecasts of project performance problems, which is an important contribution for project management. Proper implementation and application of EVMS can provide significant benefits to include improved program/project performance, early risk indication / mediation, and clear / transparent accountability.

In fact, these days Earned Value Analysis has become a favorite tool among project management professionals. As a matter of fact, there is no other single tool, which addresses the issues related to schedule and budgeted cost both on a real-time basis. EVA indeed answers the following questions in a project:

1. Whether the project is on schedule at any given point of time?
2. Whether the project is going as per approved budget at any given point of time?
3. When should the project likely be completed?
4. What should be the likely cost for the entire project?

Hence, the Project Manager can identify the schedule or cost issues with the help of EVA and address these issues early in the project. If the project is behind schedule or over budget - what will it take to bring the project back on track?

Earned Value Management (EVM) – Three dimensions:

For applying Earned Value Management in a Project, it’s important to understand three key components as listed below:

Planned Value (PV): Formally, it was called the Budgeted Cost of Work Scheduled or BCWS. PV is the value of the authorized budget assigned to the work scheduled. Hence, it’s the approved budget for the work to be done for an activity or work package (or control account). This budget doesn’t Include any management reserve. The cumulative PV is also referred to as Performance Measurement Baseline (PMB). Hence, PV for complete project is nothing but the Budget at completion (BAC).

Earned Value (EV): Formally, it was called the Budgeted Cost of Work Performed or BCWP. EV is the value of work performed in terms of authorized budget for that work element(s). Hence, it’s the authorized budget associated with the work, that is completed so far. EVA uses PMB to calculate Earned Value for the completed part of project work. For each element of the Work Breakdown Structure (WBS), the work performance can be measured through earned value. Thus, EV is useful to understand the current project performance and to determine long-term trends on Project performance.

Actual Cost (AC): Formally, it was called the Actual Cost of Work Performed (ACWP). AC is the value of the actual cost incurred or realized for the performed work during a particular time period. Since this is the actual cost incurred for the work measured by EV. Hence, it includes the cost elements such as direct costs, direct hours, indirect costs etc., which can be traced from actual invoices or books of accounts. It’s important to note that this dimension doesn’t have any upper limit. It is always painful for a project manager if AC exceeds its earned value.

Though, the terms BCWS, ACWP, and BCWP are still used by some project professionals. However, with the introduction of the second edition of PMBOK?, the terms PV, EV and AC are being used commonly as three dimensions of EVM.

Benefits of Earned Value Management:

• EVM provides one reliable central data source, which results in faster reporting cycles offering more time for analysis.
• All authorized work is integrated using a product-oriented work breakdown structure. This helps to coordinate the contributions from each department and ensure that work, schedule, and cost are properly integrated.
• Managing issues highlighted as areas of concern helps management to focus on the most critical issues. This clearly defined process reduces the risk that something will be overlooked.
• Significant cost and schedule variances are detectable when planned work has reached as little as 10% completion on any portion of the project. This means a performance and productivity issues can be identified early in a project’s life.
• EVM monitors budget, schedule and scope, accurately measuring performance and predicting the future of the project’s performance.
• EVM can be reported in real-time offering Mangers and stakeholder early warning signs to a project going off track.
• EVM is time-phased, therefore the more regularly that it is checked and calculated, the more likely a successful outcome for your project.

Earned Value Calculation

Below are some earned value formulas used in EVA calculation:

1. Cost Variance (CV) = EV – AC
2. Schedule Variance (SV) = EV – PV
3. Cost Performance Index (CPI) = EV/ AC
4. Schedule Performance Index (SPI) = EV/ PV
5. Variance at completion (VAC) = BAC – EAC, where BAC: Budget at Completion and EAC: Estimate at Completion
6. Estimate at Completion (EAC) = BAC + AC – EV = AC + ETC
7. Estimate to Complete (ETC) = (BAC – EV)/ (CPI x SPI)

Above are some of the earned value management formulas used in EVA. However, readers are encouraged to refer PMBOK 6th Edition Guide to understand more about the terms used in these formulas

Summary

EVA is very helpful for the project manager and more importantly, for management to get early warnings. Based on these warnings, they can plan for rest of the project work to recoup the losses or to modify the estimates.

Earned Value Management removes the guesswork from by providing accurate, empirical data from which decisions can be based upon. EVM seamlessly integrates data throughout a project into a single system, improving both the scope definition as well as the analysis of the overall project performance. With can predict the future project performance more accurately while alleviating risk and satisfying stakeholders and management.

In recognition of this we in LogiKal helping our achieving better project outcomes by improving project processes, capability and systems.

If you’d like find out more how we in Logikal can help your organisation and business and/or to discuss any points of this article, please drop me a message.