Have you ever had a project balloon out of control and fail? You may have had costs exceeding your total budget, schedules conflicting with one another, unforeseen risks, or tasks yet to be done at the end of the project.
These things happen more often than you think, even to professional project managers. Using the earned value management (EVM) methodology is one way to plan, forecast and make adjustments along the way, improving your chances of success.
This article details all you need to know about implementing earned value management. We'll explain what it is, its benefits, and how to use it to deliver more successful projects.
A Brief History of Earned Value Management
Earned value management was developed by the United States Department of Defense (DOD) in the 1960s. They used it to track and enhance their project and program management.
Today, U.S. government programs, including the Department of Energy and NASA, use earned value management. It's their preferred system to measure and manage scope, cost, and schedule performance across numerous ongoing projects and programs.
EVM has expanded beyond the early days and is now a part of the PMBOK Guide created by the Project Management Institute (PMI). It's a widely used and accepted method for tracking and controlling project performance until completion.
What Is Earned Value Management?
Earned value management (EVM) is a technique for monitoring the level of work that's been completed and for measuring project performance. It is an objective way to assess if your project is on course to meet its objectives with the planned resources and available time.
One of the best things about EVM is that it allows you to control your project performance, not just measure it. You can determine your rate of progress and make informed decisions about how best to continue and complete the work.
EVM shows if you’ve completed the project tasks and deliverables you should have by the current date. It reveals if you’re on track to finish in time and if you’ll meet the eventual goal. It goes beyond project tracking and helps you identify and fix problems before they become unmitigable risks or roadblocks.
What Are the Benefits of Earned Value Management?
Using the earned value management methodology has many benefits, including the ability to:
- Quickly assess project performance: EVM provides a structure to measure your progress against the established project baselines. This helps you identify when you're deviating from the plan and conduct the needed variance analysis to decide the best way to move forward to complete the project.
- Anticipate risk and problems: EVM helps pinpoint problem areas early in a project and signal when corrective actions are necessary. This helps limit the impact of changes and risks. It takes you from a passive role of watching to see what happens to one where you impact the outcome to ensure success.
- Quantify variables: EVM maps project costs directly with work. It also schedules and transforms unknown factors into tangible figures with real outcomes. Knowing how your actions impact outcomes improves your decision-making and encourages you to align operations with the overall goal.
- Provide visibility into project progress: EVM fosters visibility, which in turn promotes transparency and accountability. It makes it easy for anyone with the right access to monitor and communicate progress updates with other stakeholders using metrics that show exactly where you are in the project.
- Improve future project planning: The more you use EVM to manage your projects, the more you can improve project planning in new projects. You can take your learnings and experiences from past projects to make future project planning more accurate and efficient.
The 5 Stages of Implementing Earned Value Management
The principles of EVM are outlined in the National Defense Industrial Association’s (NDIA) Earned Value Management Systems EIA-748-D Intent Guide. According to the NDIA document, the implementation of EVM consists of 32 guidelines, which are broken up into five process categories:
- Planning, Scheduling, and Budgeting
- Accounting Considerations
- Analysis and Management Reports
- Revisions and Data Maintenance
While this provides a general framework for earned value management, keep in mind that this is an adaptable process. So it’s not necessary to use all 32 guidelines for every project. It’s also important to know that some of these stages may happen in unison with other stages.
Let’s look at each of the five EVM process categories.
During this stage, you will define the project scope. The NDIA recommends creating a work breakdown structure (WBS), which will define the tasks that need to be done to achieve the desired end result or deliverable. You will also determine who will be responsible for the different elements of the project.
2. Planning, Scheduling, and Budgeting
In this step, you create a project schedule by assigning due dates for individual tasks. Be sure to consider which tasks need to be completed before other tasks can begin so you can schedule enough time between them. At this point, you will also determine which milestones will be used to monitor the project’s progress.
Budgeting is another part of this stage. You will want to estimate your budget based on known and expected costs. This baseline budget will be used to reconcile incurred costs and to perform earned value analysis.
3. Accounting Considerations
This stage involves keeping track of all project costs as they are incurred. In addition to recording the costs, compare them to the budget to make sure the finances are staying on track.
4. Analysis and Management Reports
Throughout the course of the project (at least on a monthly basis), you’ll want to perform earned value analysis (EVA). This involves calculating the project’s schedule variance and cost variance. (We’ll talk more about this below.)
You can use this information to create progress reports for your company’s management team and to decide if any actions are needed to get the project back on track if it’s gotten off course.
5. Revisions and Data Maintenance
Within this stage, you will make any necessary changes to your budget or project schedule based on what was revealed during your EVA.
Ensure that you're documenting changes as you make them. This keeps project stakeholders on the same page and makes sure you’re basing future analysis on the most current baseline data.
How to Conduct Earned Value Analysis (EVA)
As we mentioned above, during the Analysis and Management Reports stage, you will perform an earned value analysis. Here are some variables and data you’ll need for your calculations:
- Budget at completion (BAC): This is the total approved budget for the project. For the sake of example, let’s say we’ve planned a project with a total budget of $50,000. This is our BAC.
- Planned value (PV): PV tells you the value of the planned work you expect to have done at specific periods of the project timeline. This is also known as the budgeted cost of work scheduled (BCWS). The formula to determine PV is: The expected percent of the project completed x BAC. So let’s say our project is planned to take one year, and we want to know the planned value of completing three months of the project. Three months of a 12-month project is equal to 25% of the project. So if you multiply 0.25 by the $50,000 BAC from our above example, your PV for the first three months of the project would be $12,500.
- Earned value (EV): Earned value is also known as budgeted cost of work performed (BCWP). It’s similar to planned value, but it’s the value of the amount of work that's actually been completed (not the value of the planned work). The formula to determine EV is: The percent of the project completed x BAC. So once we’ve completed 10% of our project, our EV would be $5,000 (0.10 x $50,000 = $5,000).
- Actual cost (AC): AC is the total cost incurred for the work completed by the current date. So let’s say your total expenditures on a project so far have been $13,000. That means your AC is equal to $13,000. This variable is also known as the actual cost of work performed (ACWP).
Once you’ve determined the above variables, you’re ready to do variance analysis. You will look at both schedule variance and cost variance.
Schedule Variance (SV)
The schedule variance formula will tell you if your project is on schedule or not. The formula is: SV = EV-PV. You’ll know if you’re on schedule based on whether your SV is a positive number, a negative number, or zero:
- Positive number: You’re ahead of schedule.
- Negative number: You’re behind schedule.
- Zero: You’re right on schedule.
Let’s look at an example. You’re three months into your project. Your planned value for this point is $12,500, and your earned value is $5,000. If you subtract $12,500 from $5,000, you would get a schedule variance of -$7,500. This means you’re behind schedule.
Another formula you can use for this analysis is called the schedule performance index (SPI). The formula is: SPI = EV/PV. If your result is less than one, then you’re behind schedule, and if the result is more than one, you’re ahead of schedule. A result of one means you’re on schedule.
Using the above numbers, let’s do the SPI calculation: $5,000/$12,500 = 0.4. This means that your project is behind schedule and you’ve only completed 40% of the work that was originally planned to be done by this point in the project.
Cost Variance (CV)
The cost variance formula tells you if your project is on budget or not. The formula is CV = EV-AC. You’ll know if you’re on budget based on whether your CV is a positive number, a negative number, or zero:
- Positive number: You’re under budget.
- Negative number: You’re over budget.
- Zero: You’re right on budget.
Here’s an example of this formula in action. Your earned value for the amount of work that’s been completed so far is $5,000, but the actual cost of the project so far has been $3,000. If you subtract $3,000 from $5,000, you get a cost variance of $2,000. This means the project is under budget.
Another formula you can use for this analysis is the cost performance index (CPI). This will measure the project’s relative cost efficiency. The formula is: CPI = EV/AC. If your result is greater than or equal to one, your project is efficient. If your result is less than one, your project is not efficiently using your monetary resources.
Based on the above numbers, let’s do a CPI calculation: $5,000/$3,000 = 1.6. This means the project is cost efficient.
Reach Your Goals by Monitoring Your Performance
Earned value management is a technique that helps you plan details of a project, set baselines, and then monitor your progress with quantifiable data. This process can help you estimate budgets and make adjustments to the plan when you find the project getting off course.
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