Understanding Earned Value Management

Projects are getting bigger and bigger and it is becoming increasingly difficult to properly keep track of real-time costs, schedules, and project value. In the construction industry, the rise of megaprojects engenders feelings of both excitement and fear.

While taking on new groundbreaking projects may be exciting, no project manager wants to be in charge of an uncontrollable project, and with statistics showing that 65% of all megaprojects fail, the task is daunting. For decades people have been looking for solutions and Earned Value Management is a tried-and-tested solution that stands up.

What is Earned Value Management?

Earned Value (EV) is the measurement used to evaluate the performance of a project or program. It quantifies the ‘worth’ or value of the work completed to date. This value then enables project managers to make more accurate forecasts on the future of the project or program’s performance.

Earned Value Management (EVM) is thus the methodology that helps calculate and optimize for earned value. It involves the integration of schedule, costs, and scope collectively to paint a more holistic and accurate image of a project or program performance. With the help of several key concepts and calculations (which we go into further detail below), project managers can not only predict the future performance of their project more accurately but have the insight to adjust their plans accordingly.

History of Earned Value Management

Earned Value Management emerged from the United States Air Force in 1967 to facilitate better controlling and planning of Air Force programs. It first came in the form of a policy dubbed the Cost/Schedule Control Systems Criteria that contained 32 criteria and 26 ‘specifications’ that needed to be met as a guideline for effective EVM. Only several new criteria have been added since its inception and it has remained relatively unchanged from its original form. 

Though emerging from the defence field, EVM has gained traction in the engineering and construction industry for its ability to facilitate effective coordination, planning and controlling of large-scale projects. However, as projects in all industries continue to grow in both size, complexity, and agility, the value of EVM will continue to grow beyond the confines of those industries.

Objectives of Earned Value Management

There are five key objectives of EVM:

1. To align time-phased budgets with specific contracts and/or statements of work
2. To provide the foundations to capture project progress and assess them against baseline plans.
3. To align technical, schedule, and cost performance within the project.
4. To provide justifiable, appropriate, and auditable data for proactive project management analysis and action.
5. To provide project managers with practical and summarised information to enable effective decision making

Benefits of Earned Value Management

There are critical problems in traditional project management that separate schedule, cost, and scope management. Most projects do not adjust their schedules and estimations as frequently as we would like and are thus slow to respond to ongoing changes. As a result, cost control is often carried out after the event, and teams are controlled by the project, rather than having control over the project. Decisions are made with inaccurate data and teams are preoccupied with analyzing the problems rather than making solutions.

Here are some of the key benefits of EVM that counteract those problems.

Enables realistic project planning and decision making 

Project planning is not only an early-stage process that is one and done at the beginning of the project. It needs to be continually updated and adjusted to properly respond to ongoing changes within the project. 

With smart EVM systems, much like the ones used by pmo365, keeping up to date with the costs, schedule and scope is significantly simplified and gives an accurate image of where projects are really at. With what-if scenario calculations, project manners can easily make decisions to their plans based on accurate and realistic projections. This not only saves a significant amount of time for managers but also keeps managers objective about their progress.

Provide real-time visibility through data centralization

The critical benefit of EVM is its real-time quality. Traditional project management often applies periodic reporting practices that do not give teams the required agility to make timely decisions. Additionally, traditional practices often separate schedule, cost, and scope management into their own individual activities with their own data collection processes. This makes it especially hard to collate and analyze project progress across all dimensions effectively.

A smart EVM system enables managers to integrate all their tools and data onto a single platform, from schedules to budgets, and helps calculate progress throughout every stage of the project. This allows work to be easily assigned in productive chunks and monitored in real-time for any deviations. EVM also helps managers identify inaccuracies within their task dependency priorities.

Predict risks and enable early intervention

The visibility over projects in real-time gained by EVM gives managers the critical benefit of anticipating risks and intervening early. By altering managers of potential problems areas within the project, it enables them to create timely adjustments and modifications, whether in scope, budget, resources, or more.EVM helps quantify project unknowns into quantifiable factors that can be planned for and mitigated more easily.

Improves transparency and accountability

The added visibility and control of EVM gives managers greater transparency over their project progress to both their teams and key stakeholders. Improved transparency has the added benefit of increasing team motivation to keep up with the pace of other teammates to match their output. With this transparency also comes greater accountability to stakeholders and helps managers communicate progress clearly and manage stakeholder expectations accordingly. 

5 Core Concepts of Earned Value Management

Earned Value Management is concerned with asking three critical questions:

• How much work should be done?
• How much value has been gained?
• How much work remains?

To answer these questions, EVM pulls from three data sources:

• The budget
• The actual value of the completed work
• The ‘earned value’ of the work completed to date

Emerging from these three questions and data sources are the five core concepts or measurements that support effective EVM.

1. Planned Value (PV)

Planned Value (PV) is the predetermined budget cost allocated for work scheduled (BCWS). It describes how far long project work is supposed to be at any given point in the project schedule and cost estimation. It is determined by the cost and schedule baseline.

PV can be understood in two ways- cumulative and current. Cumulative PV refers to the sum of the approved budget for activities scheduled to be performed to date. Current PV refers to the approved budget for activities scheduled for any given time period whether it is months, days, hours, etc.

The typical PV calculation is : 

PV = Total project cost X % of planned work

2. Actual Costs (AC)

Actual Costs (AC) captures how much has been spent on a project or the actual cost of work performed (ACWP). Similar to Planned Value it can also be measured in cumulative and current terms. It is important to remember hidden costs such as hardware, software license, overheads, etc. that may not be actively calculated with your project management software.

3. Earned Value (EV)

Earned Value (EV) quantifies the ‘worth’ or value of the work completed to take and gives you a realistic idea of what has been accomplished to date. Like the previous two, EV can be calculated in both cumulative and current forms.

The typical EV formula is:

EV = Task budget X % project completed (actual)

4. Variance Analysis

While planned value, actual costs, and earned value are the fundamental measurements in EVM, variance analysis and the following performance indexes help give project managers a better idea of how they are performing compared to their project baselines.

There are two types of variances that are commonly measured in EVM:

• Schedule Variance (SV)

Schedule variance quantifies the divergence of the current project progress and the planned schedule. A negative SV signifies the project is behind schedule, a positive SV signifies a project is ahead of schedule and zero means the project is right on schedule.

The schedule variance formula is:

SV= EV – PV

• Cost Variance (CV)

The Cost Variance (CV) quantifies the divergence of the current project cost from the planned budget. A negative CV signifies the project is over budget, a positive CV signifies a project is under budget and zero means the project is right on budget.

The cost variance formula is:

CV= EV – AC

5. Performance Indexes

Performance Indexes are another means of measuring project performance and consist of two parameters: schedule and cost indexes.

• Schedule Performance Index (SPI)

PMI’s PMBOK defines Schedule Performance Index (SPI) as “a measure of schedule efficiency on a project.” It is calculated through a ratio basis. If the SPI is equal to or greater than one, the scheduled performance of the project is favourable. A value less than one is an unfavourable condition.

The SPI formula is:

SPI = EV/PV

• Cost Performance Index (CPI)

PMI’s PMBOK defined Cost Performance Index (CPI) as a “measure of cost efficiency on a project”. Similar to SPI, any factor equal or greater than one indicates a positive cost performance while a value less than one indicates an unfavourable cost condition.

The CPI formula is:

CPI= EV/ AC

Master Earned Value Management with pmo365

You can already imagine how difficult mastering earned value management must be without a proper software tool. Lucky for you, pmo365 excels at integration and has been incorporating EVM calculators and systems into many of our different features from timesheet reporting to schedule management, cost management, and more. If you want to see an effective EVM system in action, make sure to book a free trial with our PPM experts today!