Role of Earned Value Technique in Project Management

Earned Value Analysis is a way of quantifying project performance against the plan. It's a way to measure deviations from the baseline costs and schedule. Results from an Earned Value analysis indicate whether the project is on track.

What Do You Understand by Earned Value Analysis?

Earned Value Analysis (EVA) is a method of measuring the amount of work done on a project. It allows you to measure progress and forecast the project’s total cost and completion date based on trend analysis or application of the project’s “burn rate.”

Earned value is defined as the “budgeted cost of work performed” or BCWP. This measure enables project managers to compute indices for cost and schedule performance, which provide information on how well the project is doing relative to its original plans. These indices allow for forecasting how the project will do in the future, assuming that burn rates will not fluctuate.

The Needs for Earned Value Analysis

EVA is an all−in−one digital productivity tool that offers a variety of ways to measure progress. It's the perfect tool for everything in your project, requiring no other action. EVA is short for "Economic Value Analysis" and is used to measure the health, productivity, and performance of a project. With the Earned Value Analysis, you'll get additional insights into the progress of your project. You'll always know what percentage of work is assigned to each milestone in the project timeline. EVA offers a real−time value scale for every project. There are estimated total hours to complete the project. Every task has been assigned an Earned Value, which is the estimated percentage it will take to complete.

What are the Main Goals of Earned Value Analysis?

• The ability to have a functional relationship between technical, scheduling, and cost−related performance.

• Providing accurate, reliable, and timely data for proactive management analysis and action.

• Providing managers with a realistic summary of data and results so that they can make effective decisions.

What are the Components of Earned Value Technique that You Need to Understand?

Planned value

The Planned Value is the budgeted cost of work scheduled. It is the budgeted cost of work scheduled, exclusive of any management reserve.

Earned value

Earned Value is the value associated with actual work performed within the specified time frame. Earned Value Analysis (EVA) uses Planned Measurable Block (PMB) to calculate Earned Value for the part of the project that has been completed so far. Additionally, for every element of the Work Breakdown Structure (WBS), EV can help measure work performance. Therefore, EV helps you understand current project performance and predict long−term trends within and beyond project performance. This metric is also called the Budgeted Cost of Work Performed (BCWP).

Actual cost

Actual cost (AC) is the sum of direct costs and indirect costs. Direct costs are based on actual invoices, account books, or other sale or purchase−related documents. Indirect costs include labor and overhead expenses, which can be derived from time sheets or other appropriate forms. While project value (PV) and expected value (EV) are measured in a given range, AC does not have an upper limit. As a project manager, you should try to keep your AC within the range determined within the PV and EV. It becomes a matter of concern if your AC exceeds both these figures.

Benefits of EVM

The earned value management (EVM) method helps project managers to measure project performance, understand the variance and costs involved, and communicate this information to stakeholders. The main benefits of EVM are −

• The project manager uses a data−driven approach to performance measurement to identify issues related to scope, cost, and schedule estimates.

• It is straightforward, and thus easy to understand, identifying areas where there are shortcomings that can be improved upon going forward.

• It gives a clear view of the project status.

• It helps project managers to assess the future, plan for any obstacles, and understand the trends that are likely to affect the outcome.

• It allows you to resolve problems that exist or may arise in the future.

Implementing into Project Management

The guidelines for calculating EVM can be divided into five phases.

Organization

The organization phase includes defining the tasks to be performed and their relation with pre−defined deliverables. You also need to define the organization breakdown structure (OBS), which identifies who will be responsible for which task in which department, thus delegating and defining responsibilities within the work breakdown structure (WBS).

Planning and scheduling

During the planning phase, the project manager should go over the requirements for planning the project in phases and set deadlines for each phase. The resources you estimate at this phase are called the BCWS or Budgeted Cost of Work Scheduled.

All projects begin with some uncertainty. You can never be 100% sure how your project will unfold, so you need to leave room for delays, errors, and feedback. To ensure that the project's goals are met, project managers also set aside additional funds known as a management reserve.

Accounting

You will need to calculate your Actual Cost of Work Performed (ACWP) in this phase. The AC must be in line with the way work is planned and budgeted. Collect the material costs during the same month that you collect BCWP to avoid ‘booking lag’, which is a very common source of misleading cost variance.

Analysis and detailed reporting

The project manager and data analysts and strategists on the team must examine data collected through the project to identify root causes of variance, their impact on the current and future work efforts, and take corrective action. As project managers carefully review cost and schedule variances during every reporting cycle, they are essential while calculating EAC (Estimate at Completion).

Data maintenance

The last phase includes the implementation of changes directed by the client, which may include orders to stop work (SWOs). It also includes the implementation of project planning, analysis, and implementation of changes internally. This phase is a crucial part of proactive, meaningful earned value management with a regularly changing baseline.

How to Perform Analysis on Your Project?

You can calculate the EV and cross−check your accounts for data on the AC up to that point in the project. You can also calculate the PV that was budgeted for that work.

To measure cost and schedule performance, calculate the two variances−cost variance (CV = EV − AC) and schedule variance (SV = EV − PV). If the results are negative, you should be concerned about potential problems with your project.

• When the cost variance is negative, it means that your project is going over budget.

• A negative SV indicates you are behind schedule.

Now, calculate the scheduled performance index (SPI = EV/AC) and cost performance index (CPI = EV/AC). These calculations should help you determine whether there are any performance issues so far.

• If the SPI is less than 1.0, then you are behind schedule. If it is 0.5, then you've only completed 50% of your work and need to work much more efficiently.

• If you maintain a CPI of less than 1.0, you will be spending less money than planned. A CPI of 0.8 means that 80% of your budget is being spent efficiently.

By considering the values of SV, CV, SPI, and CPI, you can see where your project is lacking or not going as planned. This information will help you make decisions that put your project back on track.