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The Earned Value Management (EVM) Technique

Introduction

At any organization, measuring the progress of projects is a vital process to ensure the success of its business. The tools used to measure the project performance should provide a clear picture of actual status of the project, and should provide alternative solutions to overcome any delay or obstacle in the project. Earned Value Management (EVM) is considered a powerful tool to measure the project performance and forecast future project trend, which enables the organization to predict any project status in advance and take appropriate corrective action(if needed) to ensure the success of its projects and attaining their strategic objectives.

Background

The traditional way in monitoring project performance is to measure the budget cost for a project against its actual cost. For example, a project of 6 Million Dollar budget and nine month duration consists of three main phases or Milestones could have the budget as follows:

#MilestoneDuration (Months)Budget ($)
1Mileston132 million
2Mileston232 million
3Mileston332 million
Total96 million

Table 1—Original Project Planned Budget

If we measure the project performance at the time of accomplishing the second phase (Milestone2) the previous table may look like the following:

#MilestoneDuration (Months)Budget ($)Actual ($)
1Mileston132 million2 million
2Mileston232 million1.7 million
3Mileston332 million
Total96 million3.7

Table 2—Cost Performance Against Project Budget

By analyzing the data in the previous table we could say it reflects a good project standing at Mileston1 (we spent 2 million Dollar as per the planned budget) and even better status at Mileston2 because we spent less than the budget of the second phase. However, by judging on the project using the mentioned data only, it may guide to misleading information. Because we have to consider other project factors such as Project Time and project scope performance in order to have a clearer project status.

Let us make some more investigation on the above project and include project time and project physical performance (Scope) to the performance table to look on to the project in three dimensions to see whether we are still in  a good project status or not.

#MilestoneDuration (Months)Budget ($)Actual ($)Scope Progress %Time Progress
1Mileston132 million2 million100Delayed by 3 weeks.
2Mileston232 million1.7 million35In progress, not submitted yet.
3Mileston332 million0Not started yet.
Total96 million3.7  

Table 3—Cost, Time, and Scope Progress

Now we have additional project performance parameters which provide better chance to look into the project status. Although we are performing well in regards to cost progress, we have a major problem in time and physical progress of the project.

First we have delayed submission of Milestone1 by three weeks comparing to its baseline schedule. Also, we have started milestone2 late by three weeks which will affect submittal of Mileston3 and consequently, will delay accomplishing the project on its agreed planned date.

Moreover, if we compare what we got out of what we spend we find that the project progress only 35% of the physical work, while they spend (1.7/2) =85 % of the budget of Milestone# 2. That means we spend more than what we accomplish, which imply cost overrun in this project stage. So, our project has time and cost problem as well.

Although comparing Cost, Time, and Scope progress in the mentioned table gave us clear picture on the project, we miss an important factor which is the objective project status. For example, the Management may want to have specified answers for project status such as: how efficiently we are using project time and resources? or how much do we expect to spend extra time and how much do we expect to pay more to finish the project in its agreed imposed date if we have a deflection in the project baseline. EVM provides objective answers to some important project inquiries like:

  • How efficiently are we using time?
  • When do we expect to finish the project?
  • How efficiently are we using project resources?
  • How much do we expect our new project budget will be?
  • Where problems are occurring?
  • What will it take to get the project back on the track?

The answers of these questions and other important project information can be derived by using EVM.

Earned Value Management (EVM) Principle

At a specific project period(called control period or reporting date) EVM measures the project performance by integrating three project elements:  Cost (how much cost incurred) ,Time (how much time we spend) and scope (how much physical work we accomplished) to come up with two main project statuses:

Current Project Status

EVM analysis results tell us how we are standing against project budget and project planned time. In other words, are we over or under budget/are we behind or ahead of schedule? Also, it can provide accurate information regarding how we are utilizing our resources.

Forecasting Project Status

If the project plan is affected or changed, EVM can predict new project budget or can predict new project finish date. In addition, EV can tell us-objectively- how we should perform to get the project back on track to finish it within the original planned budget or on its planned finish date.

EVM Implementation

There are two assumptions required to implement EVM: 1) Project Scope is well understood and can be fully defined 2) Phases of the project are executed sequentially.

EVM can be applied to any project regardless to its industries. It can be applied to construction, oil and gas, IT or any other industry. Therefore, we will use the project mentioned in the begging to measure its performance using EVM and compare the results of the traditional measurements to figure out how EVM can improve our projects.

In order to get accurate project performance results, a proper project plan process should be performed. First, we have to decompose project deliverables into more manageable components using Work Breakdown Structure (WBS). WBS looks like organization chart, but it is deliverables oriented where the lower level called Work package (the work to be done). For each work package, we should estimate its duration (time required) and resources (cost required) to be accomplished.

Below is an example of WBS:

 work-breakdown-structure-example
Figure 1 — Work Breakdown Structure (WBS) Example

From WBS we can now develop the time schedule for this project as illustrated in the below figure:

project-schedule

Figure 2 — Project Schedule

After defining project Work packages/Activities and estimating their required time and cost, the project cost baseline is ready to be derived from the above schedule. As per PMBOK, Project Baseline is an authorized time phased budget at completion (BAC), used to measure, monitor, and control overall cost performance on the project.

This can be created by adding the cost of each Work package/Activity cumulatively through the project time frame.

 project-cost-baseline

Figure 3 — Project Cost Baseline

The above figure represents the baseline (S-Curve) which will measure the project progress against, with total project budget or Budget at Completion (BAC) = $6 Million.Basic Parameters of EV

There are three main parameters needed for any project elements (Work package/Activity) to adopt EVM at any project which are:

1- Planned Value (PV)

It is the budget amount of to accomplish this specific project element (work package) which reflects the amount of resources, hours, or the monetary value of resources, also known as the Budget Cost of Work Schedule (BCWS).

2- Earned Value (EV)

It is the actual amount of work has been accomplished at specific date (usually at date of checking the project progress), also known as the Budget Cost of Work Performed (BCWP). It can be obtained by multiply the percentage of accomplishment by the budget amount of work package

3- Actual Cost (AC)

It is the actual amount of resources or monetary value which has incurred to accomplish project elements. In other words, how much we actually spent to accomplish project element, Also known as the Actual Cost of Work Performed (ACWP).

In our project we chose to measure the project after three months at work package# 3. If we compare the Earned value and actual cost against the project baseline we will have the following table and graphs:

Work Package  Duration (Months)  PV (Budget)  %  EV

(Budget X %)

 AC
 Work Package 11.51.9100.01.91.9
 Work Package 21.50.1100.00.10.1
 Work Package 31.50.535.00.21.7
 Total 2.5  2.2 3.7

Table 4—EV Measurements

EVM-progress-result

Figure 4 — EVM Progress Results

EVM Analysis

By using EVM, Project Performance variances and indices can be obtained through compiling PV, EV, AC of a project at a specific time and analyzing to come up with the following:

First: Schedule Analysis and Forecasting

Schedule Variances (SV)

This indicator reflects the status of a project within time frame. In other words, are we ahead or behind of schedule. Positive value of SV indicates project is in good standing or ahead of schedule, whereas negative value indicates bad project status or the project is behind schedule.

SV can be obtained through the following formula:

SV = EV – PV

In our example, SV= 2.2 – 2.5 = (0.3)

Which means our project status is behind schedule.

We can express SV as a percentage using the following formula:

SV%=SV/PV

So, SV% = – 0.3/2.2= (14) %

Schedule Index (SPI)

We use this index to know how efficiently we are using our resources time wise. Value above 1 indicates project is in good standing, while value below 1 means bad project status.

SPI can be obtained through the following formula:

SPI= EV/PV

In our example, SPI= 2.2/2.5= 0.88

Which means project scope is performing slower than planned.

Time Estimate of Completion (EACt)

We came to a conclusion that the project is going to be delayed beyond the planned finish date. By using this parameter we can forecast the new finishing date of the project.

EACt can be obtained through the following formula:

EACt= PD/SPI

In our example, EACt= (9/0.88)  =10.2 Months. Where PD is Planned Duration.

So the new project duration would be more that ten months.

Second: Cost Analysis

Cost Variances (CV)

This indicator reflects the status of project cost wise. In other words, are we under or over budget? Positive value of CV indicates project is in good standing or under budget, whereas negative value indicates bad project status or the project is over budget.

CV can be obtained through the following formula:

CV = EV – AC

In our example, CV= 2.5 – 3.7 = (1.2)

Which means our project status is over budget.

We can express CV as a percentage using the following formula:

CV%=CV/EV

So, CV% = – 1.2/2.2= (54) %

Cost Index (CPI)

We use this index to know how efficiently we are using our resources cost wise. Value above 1 indicates project is in good standing, while value below 1 means bad project status.

CPI can be obtained through the following formula:

CPI= EV/ AC

In our example, CPI= 2.2/3.7= 0.6

Which means performing project scope is over budget.

Estimate of Completion (EAC)

As a result of CV, we know that the project is performing more than the planned budget. By using this parameter we can forecast the new funding required to finish the project.

EAC can be obtained through the following formula:

EAC=(BAC/CPI)

In our example, EAC= (6/0.6) = 10

So the new project budget would be $8.8 Million

Variances at Completion (VAC)

By subtracting BAC from EAC, we can calculate the additional funding required to finish the project. VAC can be obtained through the following formula:

VAC=BAC-EAC

In our example, VAC= 6 – 10= (4)

So we need to add $2.8 Million to the original project budget to finish the project.

To-Complete Performance Index (TCPI)

This could be considered as one of the most important index in EVM, it tells us how we can bring the deflected project baseline back on track to finish the project in its original budget.

TCPI can be obtained through the following formula:

TCPI= (BAC-EV)/ (BAC-AC)

In our example, TCPI= (6 – 2.2)/ (6 – 3.7) = 1.7

So for our project to be finish in BAC=$6 Million, our performance must improve from CPI = 0.6 to TCPI=1.7 for performance of the remaining work. 

Conclusion

As per previous example analysis, we found that our project is behind schedule (performing slower than planned) and is over budget by $1.2 Million and (if the project continues in the same trend) the Budget at completion of the project is going to increase by $4 Million to be $10 million and the total project duration would be 10.2 months.

Moreover, we knew that if we would like to bring the project back on track and finish it within its original duration and budget our CPI should be 1.7 for the remaining work.

Therefore, shifting from traditional approach to EVM, we can make a revolution in measuring project performance and ensure our projects are performing successfully, as we noticed in this presentation, EVM provided objective project performance measurements which enable project manager the ability to steer the project to success.