Earned Value Management

I have seen many PMP aspirants and practising Project Managers struggling with Earned Value Management or Earned Value Analysis.  In this blog, I’ll discuss all aspects of Earned Value Management to make you comfortable on this topic.

Consider you are travelling from Delhi to Mumbai by your own car with a rented driver.  It’s a long journey and you must be having an idea how long it is going to take, what route you will take, how much fuel you are going to burn (resource) etc. So once you have a fair idea and basic plan about your journey and you have taken required resources with you, you are good to start your journey.

After spending some time on the road, wouldn't you like to know-

•        How much you have travelled till now and how long it took?
•        Is it exactly what you had planned (e.g. 90 KM in first 2 hours) or there is some deviation?
•        How much fuel you have burnt and how much was expected?
•        How much other resources like water, snacks etc has been used and if resources are being used more quickly or it is as per plan etc…

Knowing above is crucial so that you can take corrective actions (like increasing your speed, or running in economy mode) prior to the overall delay of you task.  If you don’t monitor these crucial parameters, you may still complete your journey but may end up burning more fuel (and hence more cost) or reach late to your destination. You should also understand that each parameter has a dependency and effect on other constraints. For example, if you are running slower than what you had planned and decides to run on full throttle, your are going to burn more fuel and add more risk (by increasing speed) hence those things should also be considered which planning corrective action.

For simple tasks like above, calculating these parameters is quite easier but in complex projects, knowing your projects status, keeping track taking corrective action and monitoring performances are lot more crucial for the success of a project and takes huge effort as well as planning.

The three most crucial constraints of a project are Scope, Time and Cost. Earned Value Management provides methodology to integrate the management of these constraints. With EVM, you can check if your project is running behind schedule or is over budgeted.  You can find where the actual problem is, how critical the problem is and what are the alternatives available to take the project back on track.

So, with above discussion, we can conclude that EVM is of importance in Planning processes, Integration of management of Scope, time and cost, Monitoring and Controlling functions of Project Management.

The overall practice actually makes a close loop similar to PDCA (plan-do-check-act) for improvement.

 

Scope, Time and Cost are three different parameters, each having its own unit which each has dependency and impact on others. Hence for effective measurement and control, these three should be converted to single unit of measurement.  EVM takes the same concept and coverts everything into money.

Performance Measurement

There are three important terms of EVM called as Planned Value, Earned Value and Actual cost.

Let’s take the example of our Delhi to Mumbai journey again.  Let’s assume the distance between 2 cities around 1500 KM. Mileage of our car around 20 KMPL and Price of diesel around 40 Rs/L.  Drivers charges Rs.  200 per hour. With average speed of 50 Kmph, if we plan to reach Mumbai in 30 Hours, the total cost of run would be sum of cost of fuel and cost of driver.  This comes around Rs 9000.

Let’s check our status after running for 6 hours on road.  Suppose we have completed a distance of 290 KM and burnt 16 L of Fuel.

Total running time was planned to be 30 hour costing Rs 9000. Hence per hour cost will be Rs. 300.  Similarly, 1500 KM distance has to be covered in Rs 9000 hence per KM cost is Rs.6.

Hence after running for 6 hours, we should have completed 300 KM (as per schedule) which would cost Rs300x6 i.e. Rs 1800.  We call it Planned Value.

In actual, we have completed a distance of 290 KM which amount to Rs. 1740 (290 (km)x6 (rs/km)).  We call it Earned Value.

Now that we have burnt 15 Ltr. which amount to fuel cost Rs. 640 and took 6 hours which amount to drivers cost of Rs. 1200. Hence total expenditure is Rs. 1840.  We call this amount as Actual Cost.

Hence: Planned value is the cost of task which was planned to be completed when at the check-point also called as Budgeted Cost of Work Scheduled (BCWS).

Earned Value is the cost of task actually completed as per planned amounts also called as Budget Cost of Work Performed (BCWP).

And Actual cost is actual cost incurred also known as Actual Cost of Work Performed (ACWP).

Now let us see what the significance of above calculations is.

Once we have calculated the measurement factors, we are ready to answer few very important questions-

•      Where are we w.r.t. Cost and Schedule? Are we running ahead or Behind?  Answer is calculation of variances called as Cost Variance and Schedule Variance.
•       How efficient are we in terms of Cost and Schedule?  This we calculate in term of Performance index known as Cost Performance Index and Schedule Performance Index.
•       What is going to be the final status of project considering current performance? When actually the task will complete (Time Estimate at Completion). How much the project will actually cost (Estimate at completion). How efficiently the remaining resource needs to be used (TCPI) and so on…

Calculation of Variances

Schedule Variance: Schedule Variance tells us if we are ahead of time or behind time.

SV= EV-PV

In our example

SV=1740-1800=-60

ð  We are running behind Schedule.

Cost variance: CV tell us if project is running over budget or under budget.

CV= EV-AC

In our example

CV= 1740-1840=-100

ð  We are running over budget

Calculation of Performance Index

Now as we know that we are running behind schedule and are over budgeted, we need to know how efficient we are so that we can understand how critical these variances are.

Schedule Performance Index:

SPI= EV/PV

In our example

SPI=1740/1800= 0.97

Although we are running behind schedule, we are very close to one and hence the issue is not that critical.

Cost Performance Index:

CPI=EV/AC

In our example

CPI=1740/1840= 0.94

Hence Cost factor seems critical than Schedule issues and needs more focus in terms of corrective action.

Let us assume that we took some corrective action by adjusting our cars speed and taking smoother road re assessed performance after 10 Hours.

Below is the data at 10^th Hour:

Total Distance completed: 510 KM

Fuel consumed: 31 Ltr.  Let us calculate the performance now:

EV= 510x6= 3060

PV=10x300=3000

AC= (10x200)+ 31x40= 2000+1240= 3240

SV= 3060-3000= + 60

ð  Running ahead of Schedule

CV= 3060-3240= -180

ð  Still Over budgeted.

SPI= 3060/3000 = 1.02

CPI= 3060/3240= .94

ð  By corrective actions, we have been able to improve Schedule performance but cost performance still remains same.

Basis on above information, we can dig down the cause of cost performance issue. The cost depends upon the cost of driver and fuel efficiency of car.  Cost of Driver is fixed cost and you cannot change.  Fuel efficiency can be varied by varying driving style and road conditions but in our case this has not helped much. Hence we should re look at our plan and forecast how much it is actually going to cost, How long it is going to take and what performance is needed if we want to complete as per plan.

Forecasting

Time Estimate at completion EAC(t) :  It tell us When the project actually complete as per current performance.

EAC(t)= (BAC/SPI)/(BAC/Time Units) = time units/SPI=30/1.02=29.4 Hours

ð  We are expecting to complete journey in 29.4 Hours.

To Complete Performance Index (TCPI)

It gives the required performance to complete the project within budget.

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

ð  TCPI= (9000-3060)/(9000-3240)=5940/5760= 1.03

•  We need a performance improvement from CPI 0.94 to CPI 1.03

Estimate at Completion (EAC)

It tell us how much the project will cost if current trend continues

EAC= BAC/CPI=9000/.94= 9574.5

Variance at Completion

VAC= BAC-EAC= -574.5 (over budget)

Estimate to Complete (ETC)

ETC= EAC-AC=9574.5-3240= 6334.5

Performance Table

Below table will help you to immediately tell the status of project based on SV, CV, SPI and CVI.

	SV>0 SPI>1	SV=0 SPI=1	SV<0 SPI<1
CV>0 CPI>1	Ahead of Schedule Under Budget	On Schedule Under Budget	Behind Schedule Under Budget
CV=0 CPI=1	Ahead of Schedule On Budget	On Schedule On Budget	Behind Schedule On Budget
CV<0 CPI<1	Ahead of Schedule Over Budget	On Schedule Over Budget	Behind Schedule Over Budget