2.6 Earned Value Management
Earned value management (EVM) is a project management methodology that integrates schedule, costs, and scope to measure project performance. Based on planned and actual values, EVM predicts the future and enables project managers to adjust accordingly.
Monitoring enables the project manager and team to identify unplanned impacts on scope, cost, schedule, resource, performance, and value. The project manager must regularly compare the amount of money spent with the budgeted amount and report this information to managers and stakeholders. It is necessary to establish an understanding of how this progress will be measured and reported.
Measuring the actual data against the project plan requires information from the project team. As work on the project progresses, the project manager can update the plan with the actual start and finish dates, actual work, actual and remaining duration, and percent of work complete.
Estimation Variances
Variance Analysis is a method for determining the cause and degree of differences between the baseline and actual performance.
The differences between the original and the adjusted estimates are called variances. It is important to track and record these variances and examine their causes. Using the concept of progressive elaboration, variances should become smaller throughout the project. Variances between estimated and actual cost, resources, effort, and duration are normal in any project and occur for several reasons based on the specific project life cycles are summarized below:
| Predictive Life Cycle | Adaptive Life Cycle |
| Evolution of requirements. | Rough order of magnitude (ROM) variances |
| The duration of the project | One-point estimating variances |
| Approved change request | Relative estimation |
| Operational problems or changing assumptions | Velocity |
| Faulty estimating | |
| Padding |
During the project, analyzing variances and taking corrective actions is an important activity that must be completed by the project team and manager. Taking appropriate corrective actions and updating project plans and documentations are required. All issues should be examined and communicated to relevant stakeholders and any issues should be resolved. Any changes in the budget, schedule, and resources should be identified and communicated to the stakeholders and all corrective actions should be addressed and lessons learned documented.
As you read think of examples of factors that may cause deviations from Project Plans for the following factors and provide reasons:
| Factors | Reasons for deviations from the Project Plans |
| Scope | |
| Cost | |
| Schedule | |
| Resources | |
| Performance | |
| Value |
Earned Value Analysis (EVA)
Earned Value Analysis (EVA) uses a set of measures associated with scope, schedule, and cost to determine the cost and schedule performance of a project. EVA indicates how much of the budget should have been spent, in view of the amount of work done so far and the baseline cost for the task or resources. The project manager should generate and review status reports on the information of a project. Each team must also prepare and share the progress reports of each project with the stakeholders.
EVA uses “work in progress” to indicate the future of a project. EVA examines actual cost at any period during the progress of a project. This provides project managers greater insight into potential risk areas and allows them to plan with risk mitigation plans based on actual cost, schedule, and other elements of the work.
EVA helps answer many questions about project progress and performance and indicates the performance measurements for costs and schedule.
The table below provides a summary of the key terms, their meanings, and formulae to help calculate EVAs.
| Cost Term | In Short | What is it? | Formula |
| Planned Value | PV | Sum of estimates for work planned to be done up to the present | |
| Earned Value | EV | Sum of estimates for work done up to the present | |
| Actual Cost | AC | Sum of actual costs up to the present | |
| Budget at Completion | BAC | Total approved budget for the project when the scope of the project is completed (includes contingencies). | |
| Estimate to Complete | ETC | Budget to complete taking into account work done to date and work remaining – in the context of cost performance | ETC = (BAC – EV) / (CPI) |
| Estimate at Completion | EAC | Budget at completion considering actual cost incurred. | EAC = AC + ETC |
| Cost Variance | CV | Difference between earned value and actual cost | CV = EV – AC |
| Cost Performance Index | CPI | Ratio of Earned Value to Actual Cost | CPI = EV/AC |
| Schedule Variance | SV | Difference between Earned Value and Planned Value | SV= EV – PV |
| Schedule Performance Index | SPI | Ratio of Earned Value to Planned Value | SPI = EV/PV |
| Variances and Performance Indices Interpretations | |
| Schedule Variance | Cost Variance |
| Variances are deviations from the expectations – difference between planned and actual progress:
SV=EV-PV
|
The difference between the earned value and the actual cost is the cost variance:
CV=EV-AC
|
| Schedule Performance Index | Cost Performance Index |
| Compares progress on the scope to spending:
SPI = EV/PV
|
Compares the budget spent to date with progress to date:
CPI=EV/AC
|
Example – SeaCo, Inc.
SeaCo, Inc., a media and entertainment company is interested in purchasing and installing a new server. The company estimates an activity of a major project for scalability of company offerings to last a week and a cost $20,000, including hardware, software, and installation. The $20,000 is the baseline budgeted cost of the project which is the budget at completion (BAC). SeaCo, Inc., wants to monitor the progress of this project. It finds out that at the end of the second day of a five-day week, 20 percent of the work is completed and $9,000 has been spent. The planned activity had 30 percent completion at the end of the second day.
Solution – SeaCo, Inc.
Earned value is the most effective technique for providing information on project performance. It communicates scope, schedule, and cost status information to project stakeholders. Earned value is a flexible process that provides timely information on the project’s health. It is important to note that effective use of earned value concepts can provide a competitive edge in successfully delivering projects.