Earned Value Management (EVM) is a project management methodology that employs a set financial of metrics 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.
EVM is used on the cost and schedule control and can be very useful in project forecasting.
Earned Value Management Core Elements
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, the PV for complete project which is expected to run for 5-month is $25,000:
PV for the complete project = $25,000
PV at 2 months = $25,000 * 40% = $10,000
Actual Costs (AC)
Actual costs, also known as actual cost of work (labor cost - CAPEX and OPEX combined) performed (ACWP), plus any overhead charged to the project (e.g. marketing materials, hardware, software licenses, travel expenses, customer dining, etc.)
Here is how Jira-based project management system allows you to track all the costs within a single project and assign them to a pre-configured account, which results in a real time spreadsheet of project actual costs - https://wmdemo.atlassian.net/wiki/spaces/BPS/pages/11763839/Filter+View
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 complete a certain 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 only managed to finish 30%.
The question, then, is, what’s the budgeted cost for this work? EV, also referred to 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
Variance Analysis
Planned value, actual cost, and earned value numbers are vital 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 currently stand in your project.
Performance Indexes
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.
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