In project management, the Earned Value method is one of the most appreciated and well-known project management tools.
It is a project management technique that allows to measure performance and progress.
It combines the measures of the project management triangle: scope, time and costs.
In a unique integrated system, the Earned Value Method is able to give accurate predictions on the performance problems of a project.
Therefore, you can understand how important its contribution to project management can be.
What is the Earned Value Method?
The Earned Value Method method is also known as Earned Value Analysis (EVA).
This method allows the project manager to measure the amount of work actually performed on a project.
Thanks to the EVA, it is possible to measure the project according to the progress achieved.
Using the measured progress, the project manager is therefore able to predict the total cost of a project and its completion date.
Often the term “earned value” refers to the Budgeted Cost of Worked Performed or BCWP.
This value allows the project manager to calculate the efficiency indices of the project.
Moreover, it provides information on how the project is progressing in relation to its original planning.
These indices, if applied to future activities, allow to predict how the development of the project in the future will be, provided that the performance indices do not fluctuate.
The requirement for the Earned Value Analysis
In order to have an accurate Earned Value Analysis, the creation of a solid project plan is needed.
In particular, it is possible to use the Scope Statement, the real fondation of a project.
In short, the Scope Statement is a document wrote by the project manager on the project start-up.
It includes project goals and objectives, final product requirements, major milestones, and project risk analysis.
In order to develop that common understanding of the work required for a project, another key structure should be created, the Work Breakdown Structure (WBS).
The WBS is a proper list of all project activities, a hierarchical decomposition which focuses on the deliverable of the project.
Each descending level represents an increasingly detailed definition of the project’s work.
A WBS records the hierarchy and description of the tasks that have to be performed and their relationship with the final product.
The WBS breaks down all working sectors into appropriate planning elements.
Budget definition, cost accounting, progress measurement and management control.
Project planning is therefore a necessity not only for using the Earned Value Method, but also for the success of the project in general.
Once the bases have been established, let’s look at the three necessary information that allow to calculate the EVA.
The fundamental concepts of the Earned Value
The Earned Value Method allows the project manager to answer the following three questions about the project:
- Where were we?
- Where are we now?
- Where are we going?
Unlike traditional management, in the Earned Value Method there are three data sources:
- Planned value – PV;
- Actual value – AV;
- the earned value of the concrete work already completed.
Starting from these three sources, the Earned Value Method extrapolates the data and is able to compare them.
The planned value
The planned value describes to what extent the activities of a project should be at a determined point in the project schedule and in the cost estimation.
The baseline of the project schedule and of the costs refer to the planned physical work and the budget approved in order to complete the planned activities.
Together, these two values define an important value: the planned value (PV).
This value can be analysed in two ways: cumulative or current.
The cumulative PV is the sum of the approved budget for the planned activities that have to be performed in general, througout the project.
On the other hand, the current PV is the approved budget for the planned activities that have to be performed during a given period.
This period could refer to days, weeks, months, etc.
The actual cost
The actual cost (AC), also called the actual cost of the work performed (ACWP), is the real cost incurred for the execution of a task for a project.
This value refers to what has actually been spent and, as in the case of the planned value, can be either cumulative or current.
The cumulative AC is the sum of the actual cost for all the activities performed up to the historical moment in which it is calculated.
On the other hand, the current AC is the actual cost of the activities performed during a given period. Here too the period can refer to days, weeks, months, etc.
The earned value (EV) of the completed work
The earned value is the quantification of the value of the work actually performed up to a certain date.
In other words, the EV refers to what was achieved during the project.
The cumulative EV is the sum of the budget for the activities performed up to the date when this value is calculated.
The current EV is the sum of the budget for the activities carried out in a given period.
The variance analysis is a method where the achieved results of a project are compared to the expected results.
When a project is approved, certain expected results are established, as well as a planning in order to achieve them.
The variance analysis, in case of failure to achieve those results, helps to understand the amount of difference between the expected results and those actually achieved.
After having evaluated the gap, it becomes fundamental to understand what were the causes of this failure.
This technique is used to highlight cost and time variances, ie the cost variance and the schedule variance.
Cost Variance (CV)
This value indicates how the project is evolving with respect to the initially estimated budget.
The cost variance is calculated by subtracting the earned value from the costs actually incurred, here is the formula: CV = EV – AC.
If the result equals 0, it means that the project is perfectly respecting the budget.
If the result is negative, this means that the project is out of budget, ie the costs incurred are greater than those planned.
It is therefore necessary to take action.
On the other hand, if the result is positive, it means that the project is under budget, ie the costs incurred are lower than those planned.
Schedule Variance (SV)
With respect to the scheduling initially approved, the project may be late, in advance or in line with the initial planning.
This value represents the Schedule Variance (SV).
It is essential to understand how this value does not provide data on the impact that any delay in work has on the project and its results.
It simply indicates whether the work is in line with the planning or not.
The Schedule Variance, which shows the actual situation of the project with respect to planning, is obtained by subtracting from the earned value the planned costs up to the moment in which the analysis is carried out.
Here is the formula: SV = EV – PV.
If the result is 0, it means that the project is in line with the planning.
If the result is positive, it means that the project is ahead of schedule.
On the other hand, if the result is negative, it means that the project is behind the schedule and it is necessary to take action.
Project efficiency indexes
Another analysis that can be performed using the Earned Value Method is that of project efficiency.
In particular, there are two types of efficiency analysis: the Schedule Performance Index (SPI) and the Cost Performance Index (CPI).
The SPI is an indicator of the efficiency of the program of a project.
In fact, it is the ratio between the earned value (EV) and the planned value (PV): SPI = EV / PV.
If the SPI is equal to or greater than one, this indicates a favorable condition. This means that the project is being carried out efficiently.
On the contrary, a value lower than one indicates a negative situation.
The CPI is the indicator of economic efficiency of a project and is the ratio between the earned value (EV) and the actual costs (CA): CPI = EV/AC.
A CPI equal to or greater than one indicates a favorable condition and a value below one indicates a negative situation.
Therefore, in general, it is possible that our project is in line with the planning or is efficient or inefficient.
But which are the most frequent causes that determine these deviations? Let’s see them together.
The efficiency of a project can be reached thanks to the following conditions:
- Less complex work than expected;
- Less revisions and re-elaborations;
- Favorable market fluctuations in labor or material costs;
- Decrease of expenses in general.
On the other hand, the possible causes that lead to an inefficiency of the project could be:
- More complex work than expected;
- Many reviews and re-elaborations;
- Unclear requirements;
- Scope Creep or uncontrolled change of scope, ie the deviation of the project scope from what initially agreed and planned;
- Unfavorable market fluctuations in labor or material costs;
- Increase of expenses in general.
Estimate and budget upon completion
Let’s now how to analyze the future.
We are not talking about magic, but about what is expected to happen in a project, given the measurements of the progress recorded until the moment we perform the analysis.
These estimates allow us to see when the project will be completed and how much it will cost to complete it.
Therefore, we examine the Estimate At Completion (EAC) and the Budget At Completion (BAC).
The EAC is the total cost expected for a scheduled activity.
It is considered that the remaining work is performed on schedule and based on the current CPI and SPI.
The EAC is a periodic evaluation of the project.
It is usually carried out on a monthly basis or when there is a significant change in the project.
A common formula that allows to determine the EAC is expressed as the budget to completion divided by the current project IPC: EAC = BAC / CPI.
The BAC indicates the total value of the costs initially foreseen for the project and is calculated by summing the initial costs foreseen for each individual activity.
The BAC must always be equal to the total PV of the project.
If these two values do not match, the calculations related to the earned value will be inaccurate.
In conclusion, here are five basic rules for effective Earned Value Management:
- Organize the project team and the project scope using a Work Breakdown Structure (WBS);
- Plan activities in a logical way so that the lower level elements support the following elements and the higher level milestones;
- Check the budget regularly;
- Establish objective means to measure the realization of work. The budget should always respect what is planned.
- Control the project by analyzing the cost and time deviations, evaluating the final costs, checking the changes with respect to the project baseline and developing corrective actions when necessary.
It must be clear that applying the Earned Value Method is certainly more complex than it may appear in this article.
A lot of discipline and detailed information are needed to manage it properly.
But we think, it is useful to simplify the concepts in order to make the approach easier for those who want to experiment with this method.
What is essential to remember is that everything starts with good project planning.
Have you ever put the Earned Value Method into practice in one of your projects?
How was your experience?
Tell us about it.