Project Management: Understanding Earned Value Management

One of the the favorite question of a project sponsor during a steering meeting is “So, what is the status of my project?” If things are looking good, a frequent answer from the project manager often sounds like this: “Well, we seem to be within the budget and it looks like we will meet the target go live date…”. If things are a bit dicey, he or she might say “Well, there have been some roadblocks and bottlenecks, so it looks like the timeline might slip by a few weeks and we will also need an additional budget…” Now if I were a project sponsor, this is definitively not what I would want to hear. I will share in this post a good way to report on project status, using a simple methodology: the Earned Value Management.

The goal of Earned Value Management (EVM) is to objectively understand what was accomplished, and compare it to work planned, in other words what was spent and how. By using EVM, the project manager wants to manage cost (and schedule) rather than just monitoring and reporting it.

Let’s take an example of a project status. The project, 10000 CHF budget, 10 days effort, will produce 10 deliverables. The status report gives the following elements: Time elapsed 5 days, spent to date 6000 CHF, deliverables produced: 5 complete and 1 half done. What is the status of this project? How far along are we? What about the performance of the team? If we spend 60% of the budget, does that imply that we have 60% of the project completed?

Without EVM, we just make inspection. With EVM, we make management. EVM can help the team to accurately report on project status and accurately identify trends (and problems). The project manager is then able to answer following questions:

• What is the status of the project?
• What are the problems and how to fix them?
• What is the impact of each problem, and what are present and feature risks?

Here are the basic elements used in EVM (note that money is used to monitor costs AND schedule)

Let’s take again our previous example to illustrate it. We need to produce 10 deliverables within 10000 CHF budget (=> 1000 CHF per deliverable), 5 days of work we already spent 6000 CHF and have 5 deliverables + 1 half done.

In the following graph, we just plot all information.

In most projects, the Planned Value looks like an S-Curve.
What is the status of this project? To know it we will use variance calculation:
Cost Variance CV= EV-AC = 5500-6000 = - 500 CHF negative => bad
Schedule Variance SV= EV-PV = 5500-5000 = + 500 CHF positive => good
Variances can also be represented as indexes. Those indexes can be viewed as the factor of performance.
Cost Performance Index CPI = EV / AC = 5500/6000 = 0.916 Less than 1 => bad
Schedule Performance Index SPI = EV / PV = 5500/5000 = 1.1 More than 1 => good
The Estimate At Completion EAC can be calculated in four different ways depending on the trends of the project:

• If there is no variances in the project EAC ‘no variances’ = BAC / CPI
• If the initial estimates are flawed EAC ‘fundamentally flawed’ = AC + ETC
• If the trend will change EAC ‘atypical’ = AC + BAC – EV
• If the trend will stay the same until the end EAC ‘typical’ = AC + ((BAC – EV) / CPI)

Let’s say for our example that the first estimate is flawed, we need to calculate the Estimate To Complete, ETC. 4.5 deliverables need to be finished.
EAC = AC + ETC = 6000+4500 = 10500 CHF
The Variance At Completion VAC can be now calculated as VAC = BAC – EAC = 10000-105000 = -500 CHF => the project will cost more than planned.

As a conclusion for this sample project, you are now able to give an objective status:

• Project is over budget, we spend more than planned.
• Project is ahead of schedule, we produce quicker.
• Project will cost 500CHF more than planned at the end, but we will probably deliver earlier

In such case, we could imagine that removing a resource inside the team will reduce the cost, and even if it delays the time we have enough margins for this.
As a general conclusion on EVM systems, to be effective, the system should be put in place as earlier as possible. An established baseline must exist (based on scope analysis and the Work Breakdown Structure) against which to measure progress.
EVM also contains more indicators such as To Complete Performance Index, the TCPI (which provides a projection of the anticipated performance required to achieve either the BAC or the EAC). Project managers can also perform variance analysis and management and contingency reserve analysis (trend analysis).

To summarize, this table contains useful formulas for EVM