What is Earned Value Management?
Earned value is a value assigned to work that has been done or accomplished during a specific period of time. Earned value can be reported in any appropriate measurable unit (hours or dollars). Analyzing a project’s earned value provides progress data that can be compared against the planned budget and actual cost, thus providing deeper insight into project status and performance.
|Earned Value||usually refers to the budgeted resources that have been earned when work is accomplished|
|Earned Value Management||usually refers to the overall method of managing projects with earned value processes|
|Earned Value Management Systems||usually refers to contractors’ internal management control systems that meet the guidelines|
A Brief History of EVM
In 1967, the U.S. Department of Defense (DoD) issued the Cost/Schedule Control System Criteria (C/SCSC), imposing 35 criteria on a contractor’s management control system for cost or incentive contracts. It was reworked in the mid-90s to be more applicable to the private sector, resulting in the American National Standard Institute-Electronic Industries Association ANSI/EIA 748 standard. The concept of earned value management has remained ultimately unchanged since the 1960s, and that’s because when implemented on essentially any type of project or program, it provides all stakeholders with early visibility into cost and schedule problems.
Precursors to EVM
Cost variance defined
PERT – developed by Navy to manage Polaris missile program
CPM – developed by DuPont using activity-on-arrow (AOA) method
PERT implemented in industry
- Standard reports introduced “Value of Work Performed” data
- Similar to modern EV techniques
Early EVM Principles
USAF established Cost/Schedule Control Systems Criteria (C/SCSC)
- 35 performance criteria
- Valuable project data gleaned
- System too complex for widespread use in private industry
Modern EVM Techniques
National Defense Industrial Association (NDIA) developed the modern EVMS
- Reduced criteria from 35 to 32 and simplified language
- Adopted in private industry as a best practice
- Adopted by DoD in 1996
- Reflected in ANSI/EIA 748 Guide in 1998
- Sarbanes- Oxley (2002) strengthened EVMS popularity
The Benefits of EVM
Improved communication and visibility with project stakeholders
Scope creep prevention and reduced overall project risk
Improved project profitability analysis
Improved project forecasting
Increased accountability for project team
Improved project performance measurement
The Basic Concepts of Earned Value Management
An earned value management system also allows for management by exception, in which project managers and other stakeholders can focus on the areas that are not performing as projected.
Planned Value (PV) is defined as the budgeted cost for the work scheduled to be done. This is the portion of the project budget planned to be spent at any given point in time. This is also known as the Budgeted Cost of Work Scheduled (BCWS).
Actual Costs (AC) is defined as the money spent for the work accomplished; also known as the Actual Cost of Work Performed (ACWP).
Earned Value (EV) is defined as the percent of the total budget that is completed at a set point in time; it is also referred to as the Budgeted Cost of Work Performed (BCWP). EV is calculated by multiplying the budget for an activity or work package by the percent complete (its progress):
EV = % complete x budget
Earned Value Calculations & Variance Analysis
Understanding the fundamental variance calculations above (Planned Cost, Actual Cost, and Earned Value), allows us to see how closely we are in line with our project estimate. We can use these calculations to determine where project performance is currently using the estimated project baseline’s cost and schedule information.
A variance is defined by PMI’s PMBOK® Guide as “a quantifiable deviation, departure, or divergence away from a known baseline or expected value”. The two basic expressions of variance are schedule variance and cost variance.
• Cost Variance: CV = EV – AC
• Cost Performance Index: CPI = EV/AC
• Schedule Variance: SV = EV – PV
• Schedule Performance Index: SPI = EV/PV
Difficulties Organizations Face When Implementing Change Control
Schedule Variance (SV) is a quantifiable indicator of diverging away from the project’s estimated schedule. A negative SV informs you that the project is behind schedule, while a positive SV tells you that you are ahead of the schedule, and a zero means that you are directly on schedule.
Cost Variance (CV) is a quantifiable indicator of diverging away from the project’s estimated schedule. A negative CV informs you that the project is over budget, while a positive CV tells you that you are under budget, and a zero means that you are directly on budget.
Another way of looking at project performance through a different lens than variance analysis, is through project performance indices: schedule performance index and cost performance index.
Schedule Performance Index (SPI)
The Schedule Performance Index (SPI) offers project performance measurement from a schedule perspective.
SPI = EV/PV
An SPI greater than 1 indicates the project is ahead of schedule, meanwhile an SPI less than 1 indicates the project is behind schedule. If the variance is equal to 0, the project is on schedule.
Cost Performance Index (CPI)
The Cost Performance Index (CPI) offers project performance measurement from a cost perspective.
CPI = EV/AC
A CPI greater than 1 indicates the project is under budget and CPI less than 1 indicates the project is over budget. If the variance is equal to 0, the project is on budget.
Effective Earned Value Management Rules: EIA-748 Standard for EVMS
The EIA-748 Standard for EVMS consists of five core sections, which altogether make up and outline 32 guidelines outlining effective EVM.
- Project Organization
- Planning, Scheduling, and Budgeting
- Accounting Considerations
- EVMS Analysis and EVMS Management Reports
- Revisions and Data Maintenance
Project Organization for EVM
Organize the project team and the scope of work, using a work breakdown structure (WBS). Each task should have a single WBS number and organizational code.
Planning, Scheduling, & Budgeting
Schedule the project’s tasks in a logical manner in which the lower level schedule elements support subsequent elements and the project’s top level milestones.
Allocate the total budget resources to time-phased control accounts; this way you are measuring the actual costs and can thereby accurately measure progress.
EVMS Analysis & EVMS Management Reports
Establish objective means for measuring the project work accomplished/completed. The budget should be earned in the same way that it was planned.
Revisions & Data Maintenance
Control the project by analyzing its cost and performance variances, assessing its final costs, developing corrective actions, and controlling changes to the integrated baseline.
Who Uses Earned Value on Projects?
- Project Managers
- Control Account Managers
- Engineering Managers
- Executive Leadership
- Internal Independent Auditors, Program Control (PMO, ICE, Master Scheduler, FM)
- External Oversight Agencies (GAO, IG)
Project Management with Earned Value versus Traditional Management Approach Without It
Project management with earned value has clear differences to the traditional management approach without earned value. Traditional management is oriented towards return on assets.
Project Management without EV versus Project Management with EV
Project management with EV seeks to accomplish work within the customer’s parameters of scope, cost, and schedule– the Performance Measurement Baseline (PMB). Project management with earned value utilizes tools and techniques to evaluate performance against the PMB and to forecast future performance based on trending.
Earned Value Management Solution for All Projects
When project plans are properly prepared, earned value analysis takes very little to no additional time or effort to implement and establish. Being ready with complete project requirements and a good project plan including the work breakdown structure (WBS) is the starting point for measuring project performance with EVM. Having a prepared WBS allows you to fully document the project’s scope. Once you know the scope, the project’s schedule and cost estimate can be integrated into the WBS.
Without the project’s scope, schedule and cost estimate, attempting earned value analysis will lead to inaccurate data and results, so proper preparation is key to successful EVM. When properly implemented, earned value management provides timely project performance measurement and provides organizations with a competitive edge in successfully delivering projects on-time and within budget.