Ok, this blog site is called Project Management nerd for a reason and this article is a great example of me nerding out on a PM concept. Today I want to have a look at Earned Value Management (EVM). Let’s start with some definitions and then let’s have a look at some examples.
EVM is a technique for measuring a project’s performance and progress. It has the ability to combine the three project constraints of time, cost and scope. It also enables different projects to be compared to each other in a like for like comparison. There are 3 key areas that EVM monitors. These include:
- Planned Value (PV) – is the authorised budget assigned to scheduled work. Specifically, the budget that has been approved by management and is developed from the Work Breakdown Structure (WBS). At any given time, the PV defines the work that should have been accomplished. The total of the PV is sometimes referred to the Performance Measurement Baseline (PMB). The total PV for a project is also known as the Budget at Completion (BAC)
- Earned Value (EV) – is the value of work that is actually completed. The EV measured cannot be greater than the PV budget. The EV is often used to calculate in percentage terms how far the project is complete. EV is an important metric for Project Managers as it determines the current status and can also identify longer term performance trends.
- Actual Cost – AC is the realised cost for work performed. The AC needs to correspond to what was budgeted in the PV. There is no upper limit for AC as whatever is spent to achieve the EV will be measured.
Now we have the three progress measures that can be compared to the baseline. When we look at the three values of PV, EV and AC we can determine whether or not work is being accomplished as planned. Common measures we use are:
Cost Variance (CV) = EV-AC
CV is the amount of budget deficit or surplus at any given point in time. It is a measure of the cost performance on any given project.
Schedule Variance (SV) – EV-PV
SV is the amount by which the project is ahead or behind the planned delivery date at a certain point in time. It is a measure of how well the schedule is being adhered to in the project.
Using the two values above we can now develop efficiency indicators that reflect the cost and schedule performance of the project. The most common two are:
Cost Performance Index CPI = EV/AC
This indicator is the sum of all the individual EV budgets divided by the sum of all the individual AC’s. It is generally used to forecast the cost to complete a project.
Schedule Performance Index SPI = EV/PV
This indicator is often used with the CPI to forecast the overall project completion estimates.
A negative/positive SV means the project is behind/ahead schedule
A negative/positive CV means the project is over/under budget.
Trend analysis
By examining how our project is doing over time we can establish trends and determine if our performance is improving or deteriorating.
We can use graphs to monitor the planned value, earned value and actual cost over different periods of time. We can also use cumulative or S curves to determine if the trend tells us if the project is performing within budget or schedule.
Forecasting
As you can see in Figure 1 we can now start to visualise trends of how our project is going . There are four calculations that can provide some insight of the future performance of the project. They are:
- Estimate to Completion (ETC)
- Estimate at Completion (EAC)
- Variance at Completion (VAC)
- To Complete Performance Index (TCPI)
Each of these uses the previous calculations as input. The difference being they were used to determine where the project is now, and the latter calculations forecast future performance.
Estimate to Completion (ETC)
This calculation tells us the expected cost required to complete the project. It measures the future budget needed to complete the project, not the entire budget. It tells the project manager what the funding needs are to finish the project with the funding available.
There is also a new calculation to consider which is probably the easiest of them all and that is:
Budget at Completion (BAC) – there is no formula for this as it is simply the project budget.
The new calculation is:
ETC = (BAC-EV/CPI)
Estimate at Completion (EAC)
The EAC tells us what the full task or project cost is expected at completion. It can be calculated on a task-by-task basis or just the once for the entire project.
The calculation is:
EAC = AC + ETC
Variance at Completion
The VAC is a measure of what the cost variance will be upon the completion of the project. It tells the project manager what the size of the cost overrun or underrun will be. This tells the project manager early that they may need to apply for extra funding. The VAC represents the size of the request.
The calculation is:
VAC = BAC – EAC
To Complete Performance Index (TCPI)
The TCPI indicates how efficient we need to be in order to finish on budget. It is a good tool as it is easy to determine if your people will be as productive as the calculation tells us. For example if the calculation tells us that we need to be twice as efficient as the schedule then it provides a red flag that action needs to be taken.
There are two ways to calculate the TCPI:
If you are under budget you will calculate the TCPI based on the BAC. The formula will be:
TCPI = (BAC-EV)/ (BAC – AC).
If you are over budget you will calculate the TCPI based on the EAC. The formula will be:
TCPI = (BAC – EV)/ (EAC -AC)
If the TCPI is less than one you are in a comfortable position
If the TCPI is greater than one, you will need to perform with a better cost performance than the past cost performance
If the TCPI is equal to one then you can continue the project with the same cost performance