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Controlling project costs – The basics of Earned Value Analysis

Surely one of the toughest things, for a project manager, to do on a project is to keep the cost under control. This means, amongst others, keeping the schedule (progress) and the scope under control (including preventing scope creep). It’s thus of the utmost importance to monitor the project very closely and redirect it when necessary. Of course, this is easier said than done. So how should we do this?

Monitor the progress of the project

To be able to judge if it’s all under control you must monitor the progress. And this can be done several ways. You can just monitor progress against the schedule and redirect if you think it tends to be deviated. However, does this assure you that the project is still on schedule and that the costs are still under control? Your feeling might say: ‘Yes, it’s under control’. But is your feeling correct or not?

Let’s take an example: In our project we currently have 6 weeks of work performed. Looking at the schedule it feels like we’re on track. But let’s look closer: In our planning, we had determined that by this time, the end of week 6, we should have consumed 100.000€. It shows however that we only have consumed 75.000€ up until now. Fine, it looks like we’ve saved 25.000€ and are still on schedule. Does this ring a bell? No, not yet? Ask yourselves the question then: ‘How is it possible that we’ve saved this amount of money? Did we do our work faster than foreseen? Is the labour cost lower than first expected?’ The answer to this is: ‘Maybe or maybe not’. Actually we might have no idea at all.

And it can get worse. Let’s dive again in the schedule. Now we notice that only 60% of the work, that should have been done by the end of week 6 is done. This means that we only should have consumed 60.000€ (60% of the 100.000€). So actually, since we’ve spent 75.000€ up until now, we spent 15.000€ too much. We see now a complete different picture. Instead of being on track, we’re actually falling behind and overspending our budget.

How can Earned Value Analysis help in this?

We need to be sure that we have a correct picture of the situation. EVA can help us in this because it’s an objective way to measure the progress of the project on one side, and on the other side it provides us a perspective on the evolution of the project. Measuring progress, as in: ‘Where are we now?’, ‘Are we on track or are we falling behind?’, ‘How is the situation with our actual costs compared to the costs we’ve planned?’. And a perspective on the evolution of the project as in: ‘Looking at the current trend, can we meet the planned deadline or do we need more time and/or budget?’

EVA is based is on a number of calculations, such as the performance of the schedule (SPI, schedule performance index) and cost (CPI, cost performance index). If one or both indexes are less than 1, then we’re behind schedule what concerns SPI and for CPI this means that we spent more budget than we should have. If, on the other hand, one or both are more than 1, then we’re ahead of schedule (SPI) and less budget spent than we should have when it concerns CPI. An index of one means that we’re on schedule (SPI) and just as much budget is spent as planned (CPI).

There are 3 indicators you need in order to calculate these indexes. The first is called Earned Value (EV) which is the measure of the progress. Otherwise said: ‘What part of the baselined schedule is finished up until now’. The second one is the planned value (PV) which reflects what should have been finished by now according to the baselined schedule. And thirdly, ‘What is the actual cost (AC) up to now’. Putting these in a formula we come to: SPI = EV / PV and CPI = EV / AC.

Taken from our example: SPI = 60.000€ / 100.000 = 0.65% and CPI = 60.000€ / 75.000€ = 0,8%. Now we have a thorough and objective measurement and can conclude that the project is behind schedule and that more money was spent than planned.

What is needed for Earned Value Analysis?

The figures, we need for the analysis, don’t come falling out of the sky of course. To get these, so we can benefit from the use of EVA in our project, we must establish a couple of things.

First of all we need something to compare the progress with. That’ll be our projects baseline, also known as ‘Planned Value’. This can be retrieved from a Work Breakdown Structure (or if you’re using Prince2, a Product Breakdown Structure). For each of these products or pieces of work to be done, time must be estimated and the people, needed to do the work (to create the product), must be identified. All of this information also helps us to determine the budget for the project.

So far so good, but we’re not there yet. We still need things to set up in order to be able to measure the progress of the project on regular basis. This measurement will be compared with the baseline. And finally we need reports to communicate our findings.

What’s next?

The goal of this article was to point out some basics of EVA. We only had a look at 3 indicators and what we can do with it, but in EVA there are more than these and thus much more that can be done with it. It can, for instance, be used to forecast the evolution of the project as in: ‘will we make the estimated deadline or do we need more time’.

Organisations benefit from using EVA, it can help them to monitor the projects and direct them whenever it starts to fail. Is it worth the investment? Sure it is, when set up properly, it’ll be very cost-effective at the end. And that’s what we all want, isn’t it?