In any organization, to meet the strategic and business objectives, projects have become an inevitable part. And to monitor and gain control over their projects, companies adopt several tools and techniques. One of those techniques is the Earned Value Measurement which is used to monitor and control the triple constraints of the project.
According to the project management Institute, the three constraints are the SCOPE, SCHEDULE and BUDGET. So, to manage these essential triple constraints effectively, it is very important that the project managers monitor the status of the projects with respect to these afore mentioned constraints in real time.
Here comes in play the Earned Value Analysis, which is an effective and widely accepted way of measuring the actual work performed on a project. Through the EVA method project managers can measure the project’s progress, trend and forecast, with respect to the work accomplished, money spent and time utilized.
Often, the earned value is also defined as BCWP or the budgeted cost of work performed, which when measured enables the project manager to calculate the performance indices or burn rates for schedule and cost performance, that is used to analyze the project’s progress relative to the project’s baselined plans. Also the project manager can forecast the project’s future performance by applying these indices to the future work, often assuming the burn rates won’t fluctuate.
Earned Value Analysis helps the project manager answer the following questions at any given point in time on the project:
1. Is the project on schedule or behind schedule or ahead of schedule?
2. Is the Project underbudget, on budget or over budget
3. When can the project be completed?
4. What would be the total cost for the entire project?
Earned Value Management is the tool which integrates the Project SCOPE, SCHEDULE and COST, for the project manager to make some strong and effective decisions that will impact the project’s success. EVM uses the Performance Measurement Baseline (PMB) and compares it with the actual cost and schedule performance. Thus, it is clear that the primary requirement is to perform EVA to achieve the Performance Measurement Baseline (PMB).
EVM system allows the project manager have answers to the following project related questions that the project stakeholders always want to know:
1. Where have we been? 2. Where are we now? 3. Where are we going?
There are three values required in the Earned Value Management in order to compare the budgeted value of work scheduled with the “scheduled value of the physical work completed”, and the actual value of work completed.
PV is the budget or planned value of work scheduled (BCWS). Planned value describes how much of the project work is supposed to be at any given point in the project schedule and cost estimate. It is the approved budget for the work to be performed for an activity or work package. Schedule and Cost baselines refer to the physical work scheduled and budget approved to complete the scheduled work. When accumulated, this results in the Planned Value. PV for completed project is basically the Budget at Completion (BAC). There are two types of PV:
1. Current PV = approved budget of scheduled activities to be performed during a given period(hours/days/weeks/months/years).
2. Cumulative PV = Sum of approved budget for scheduled activities to be performed to date. Cumulative PV is also referred to as PMB (performance measurement baseline).
AC is the Actual Value or Cost of Work Performed (ACWP). By the term itself it is understood that it is the actual expenditure or cost incurred for executing the project work, during a specific time period. This value tells us what have been spent and as in the case of PV, AC can also be looked at in terms of current and cumulative.
1. Current AC = Actual costs of activities performed during a given period (hours/days/weeks/months/years).
2. Cumulative AC = Sum of the actual cost for activities performed to date.
EV is the earned value of the physical work completed in terms of authorized budget for certain work element(s). Earlier this was also referred to as Budgeted Cost of Work Performed (BCWP). To describe it in a more simple words, It is the authorized budget associated with the work, that is completed so far. EV can be used to measure the work performance of each element of the work breakdown structure (WBS) and to report the project accomplishments. EV can also be presented in a Current and Cumulative fashion.
1. Current EV = Sum of the budget for activities completed during a given period.
2. Cumulative EV = Sum of the budget for activities accomplished to date.
• PV is determined by the Cost and Scheduled Baseline.
• AC is determined by the Actual Cost incurred on the project.
• EV indicates, in physical terms, what the project has accomplished so far, with respect to scope, cost and schedule.
The PV,EV and AC values are used for variance analysis. Variance is defined as a quantifiable deviation, departure, or divergence away from a known baseline or expected value. Variance is calculated for project Cost and Schedule, once the PV, EV and AC are established.
The schedule variance is expressed as the difference between the work planned (baseline) and the work performed. To calculate the schedule variance(SV) the project earned value(EV) minus the project planned value (PV).
SV = EV-PV
If SV = 0, the project is considered to be on schedule.
if SV < 0, the project is considered to be behind schedule.
if SV > 0, the project is considered to be ahead of schedule.
The cost variance is expressed as the difference between the budgeted cost of work performed and the actual cost of work performed. To calculate the cost variance(CV) the project earned value(EV) minus the project actual cost (AC).
CV = EV-AC
If CV = 0, the project is considered to be on budget.
if CV < 0, the project is considered to be over budget.
if CV > 0, the project is considered to be under budget.
EVM is also used to calculate the projects performance or burn rate. There are two types of project performance that a project manager examines – Schedule Performance Index (SPI) and Cost
The SPI Is the measure of schedule efficiency on a project, which is calculated as the ratio of project’s earned value (EV) to planned value (PV).SPI = EV/PV
If SPI = 1, the project is on schedule (work completed as planned).
if SPI > 1, the project is ahead of schedule (work completed more than planned).
if SPI < 1, the project is behind schedule (work completed less than planned).
The CPI Is the measure of cost efficiency on a project, which is calculated as the ratio of project’s earned value (EV) to actual costs (AC).CPI = EV/AC
If CPI = 1, the project is on budget (money spent is as per planned(budgeted) costs).
if CPI > 1, the project is under budget (money spent is less than planned(budgeted) costs).
if CPI < 1, the project is over budget (money spent is more than planned(budgeted) costs).
Based on the project SV,CV, SPI, CPI values, it’s for the project manager to decided the best decision on how to pursue the remaining project work or how to bring the project back on track if that’s case.
Now let’s take a took at how the project future is predicated based on the reported progress or trends reported to date. This requires determining when the project will be completed and how much it will cost to complete. To complete this analysis, it is required to know the estimate at completion (EAC) and the Budget at Completion (BAC) Values.
This basically means what do we expect the total job to cost? The EAC is the actual cost to date plus an objective estimate of costs for remaining authorized work. The reason for calculating EAC is to have an accurate projection of total cost at the project completion. It is a periodic evaluation of the project status, generally on a monthly/quarterly/annually basis or whenever a significant change occurs on the project. The EAC is developed for control accounts, work packages as well as for the whole project. The formula that is commonly used to calculate EAC is by dividing the budget at completion by the current cost performance index of the project.EAC = BAC/CPI
This basically means what is the total project budgeted to cost? The BAC is the sum of all budgets allocated to a project scope. This must always be equal to the total planned value (PV) of the project, for the earned value analysis and calculations to be accurate.
All the above mentioned formulas are the foundation to performing Earned Value Analysis (EVA).
EVA gives the project manager an opportunity to visualize and track the project performance. EVA starts with the planning process to create baselines and is extensively leveraged during the project monitor and control. Thus, EVM is a substantial part of a project manager’s work life, and a preferred tool for complex projects, where uncertainty is high.