Explanation Earned value management involves calculating three values for each activity or summary activity from a project’s WBS.
· The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period. The following table shows an example of earned value calculations. Suppose a project includes a summary activity of purchasing and installing a new Web server. Suppose further that according to the plan, it will take one week and cost a total of
$10,000 for the labor hours, hardware, and software involved. The planned value (PV) for that activity that week is $10,000.
· The actual cost (AC), formerly called the actual cost of work performed
(ACWP), is the total direct and indirect costs incurred in completing work on an activity during a given period. For example, suppose it actually took two weeks and cost $20,000 to purchase and install the new Web server. Assume that
$15,000 of these actual costs was incurred during week 1 and $5,000 was incurred during week 2. These amounts are the actual cost (AC) for the activity each week.
· The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is the percentage of work actually completed multiplied by the planned value. Again, using the example in the following table, suppose you estimated the activity of purchasing and installing a Web server to be 75%
complete after week 1. To calculate the earned value (EV) for week 1, you multiply the planned value of $10,000 for week 1 by 75 percent to obtain an earned value of $7,500 for the activity at that point in time.
Activity Week 1 Week 2 Total % Complete
after week 1 Earned value
Actual cost (AC) 15,000 5,000 20,000
Cost variance
The following table summarizes the formulas used in EVA. Note that all these formulas start with EV, the earned value. Variances are calculated by subtracting the actual cost or planned value from EV, and indexes are calculated by dividing EV by the actual cost or planned value.
The earned value calculations in the previous table are carried out as follows:
EV = $10,000 x 75% = $7,500
Earned value EV = PV to date X percent complete
Cost variance CV = EV – AC
Schedule variance SV = EV – PV
Cost performance index CPI = EV/AC Schedule performance index SPI = EV/PV
Cost variance (CV) is the budgeted cost of work performed minus the actual cost of work performed. In other words, cost variance shows the difference between the estimated cost of an activity and the actual cost of that activity. If cost variance is negative, it means that performing the work cost more than planned. If cost variance is positive, it means that performing the work cost less than planned.
Schedule variance (SV) is the budgeted cost of work performed minus the budgeted cost of work scheduled. Schedule variance shows the difference between the scheduled completion of an activity and the actual completion of that activity. A negative
schedule variance means it took longer than planned to perform the work, and a
positive schedule variance means it took less time than planned to perform the work.
The cost performance index (CPI) is the ratio of work performed to actual costs and can be used to estimate the projected cost of completing the project. If the cost
performance index is equal to one, then the budgeted and actual costs are equal, or the costs are exactly as planned. If the cost performance index is less than 1 or less than 100 percent, the project is exceeding its budget. If the cost performance index is greater than 1 or more than 100 percent, the project is within its budget.
The schedule performance index (SPI) is the ratio of work performed and work
scheduled. It can be used to estimate the projected time to complete the project. Similar to the cost performance index, a schedule performance index of 1 or 100 percent means that the project is according to the schedule. If the schedule performance index is greater than 1 or 100 percent, then the project is ahead of schedule. If the schedule performance index is less than 1 or 100 percent, the project is behind schedule.
Note that, in general, negative numbers for cost and schedule variance indicate problems in those areas. The project will cost more than planned or will take longer than planned. Likewise, CPI and SPI of less than 100 percent also indicate problems.
Earned value calculations for all project activities (or summary level activities) are required to estimate the earned value for the entire project. Some activities may be over budget or behind schedule, but others may be under budget and ahead of schedule. By adding all the earned values for all project activities, you can determine how the entire project is performing.
Exhibit 5-3 provides sample earned value information for a one-year project. This project had a planned total cost of $100,000. The spreadsheet shows the actual cost and percentage complete information for the first five months, or through the end of May. Notice the “% Complete” column on the upper-right side, or in column O, of the spreadsheet. The EV for each activity is calculated by multiplying the percent complete value with the planned or budgeted cost. The “Monthly Actual”
row (row 15 of the spreadsheet) shows the actual cost each month for the project’s activities through May. By calculating the total budgeted or planned costs, the total actual costs, and the earned value costs, you can determine the cost variance, schedule variance, cost performance index, and schedule performance index for the entire project (see cells A18 through B25 in Exhibit 5-3.
Exhibit 5-3: Earned value calculations for a one-year project after five months of operations In this example, the cost variance is –$9,000, and the schedule variance is –$2,000. These values mean that the project is both over budget and behind schedule after five months. The cost
performance and schedule performance indexes are 83 percent and 96 percent, respectively. You can use the SPI to calculate the time required to complete the project. For example, in Exhibit 5-3 the estimated cost at completion is $120,455, or $100,000/83 percent. The estimated time to complete the project is 12.55 months, or 12 months/96 percent (see cells A26 through B27).
You can graph earned value information to track project performance. Exhibit 5-4 shows an earned value chart for the one-year sample project from Exhibit 5-3. The chart includes:
· Planned value (PV), the cumulative planned amounts for all activities by month. Note that the planned value line extends for the estimated length of the entire project.
· Actual cost (AC), the cumulative actual amounts for all activities by month.
· Earned value (EV), the cumulative earned value amounts for all activities by month.
· Budget at Completion (BAC), the original total budget for the project, or $100,000 in this example. The BAC point is plotted on the chart at the original time estimate of twelve months.
· Estimate at Completion (EAC) estimated to be $120,455. This EAC point is plotted on the chart at the estimated time to complete in 12.55 months.
Exhibit 5-4: Earned value chart for the project after five months
Viewing earned value information in chart form helps you visualize how the project is performing.
For example, you can see the planned performance by looking at the PV (or BCWS) line. If the
project progresses as planned, it will complete in 12 months and cost $100,000, which is represented by BAC. In this example, the actual cost of work performed line is always to the right or above the EV (or BCWP) line. When this is the case, costs are equal to or more than planned. The PV line is pretty close to the EV line, just slightly higher for the last month. This relationship means that the project progressed on schedule until the last month, when the project got a little behind schedule.
Senior managers overseeing multiple projects often like to see performance information in a graphic form, such as this earned value chart. Earned value charts allow you to see quickly how projects are performing. If there are serious cost and schedule performance problems, senior managers might decide to terminate projects or take other corrective action. The estimates upon project completion are important input to budget decisions, especially if total funds are limited. EVA is an important
technique because when used effectively, it helps senior managers and project managers evaluate progress and make sound management decisions.
Earned value analysis, however, is not used on many projects outside of government agencies and their contractors for two reasons: its focus on tracking actual performance versus planned
performance and the importance of percentage completion data in making calculations. Many projects, particularly IT projects, lack good planning information, therefore, tracking performance against a plan might produce misleading information. Several estimates are made on IT projects, and keeping track of the latest estimate and the actual costs associated with it can be cumbersome. In addition, estimating percentage completion of tasks might produce misleading information. What does it really mean to say that a task is 75 percent complete after three months? Such a statement is often not synonymous with saying the task will be finished in one more month or after spending an additional 25 percent of the planned budget.
To make EVA easier to use, organizations can modify the level of detail and still reap the benefits of the technique. For example, you can use percentage completion data such as 0 percent for items not yet started, 50 percent for items in progress, and 100 percent for completed tasks. Till the time the project is defined in detail, this simplified percentage completion data provides enough summary information to allow managers to see a project performance. You can obtain very accurate information about total project performance by using these simple percentage complete amounts.
Earned value analysis is the primary method available for integrating performance, cost, and schedule data. It can be a powerful tool for project managers and senior managers to use in evaluating project performance.
Do it!