Posted by David Montour
If you are a project manager, you should always seek to understand how far along you are in a project. You may have a vague idea, like “we are pretty close to schedule”, “we’re about half done”, or “we’re 80% complete.” However, it’s better to be much more precise than that. If you have a good work plan and you are keeping it up to date, you should have a sense for how much work is remaining and what the projected end date is. But are you 50% complete? Or 55% complete? Or 80% complete? It’s hard to know for sure.
What is Earned Value?
Earned Value provides the basis for cost performance analysis. If you want to know what’s happening to the cost of your project BEFORE it is completed, you need to know what the planned cost at any time was and also what the cost of the completed work is.
You can actually trace the beginning of earned value to the late 1800′s and early 1900′s. It was primarily used by managers on the factory floor and production lines. In the 1950/60′s the Critical Path Network (CPMN) and Program (or Project) Evaluation and Review Technique (PERT) methods were used.
- CPMN or CPM calculates the longest path of planned activities to the end of the project, and the earliest and latest that each activity can start and finish without making the project longer.
- PERT – Program (or Project) Evaluation and Review Technique method is used to analyze the involved tasks in completing a given project, especially the time needed to complete each task, and identifying the minimum time needed to complete the total project.
In the 1970′s the term Triple Constraints was established, referring to three primary focus areas: Scope, Time, and Resources.
- Scope – Refers to the necessary work to be performed in order to produce the desired project results.
- Time – The duration of time it will take to complete the defined scope of the project.
- Resources- Includes the money and effort expended on people (labor), and services/products
In the 1980′s Multi Project Management and Project Portfolio Management were the focus. Finally from 1990- present, “Project Integration” has been the key buzzword – which forces project managers to focus on:
- Aligning projects with organization strategy
- Aligning projects with organization culture
- Aligning projects with organization structure
- Aligning projects with organization roles/skills
- Aligning projects with a consistent/structured approach
- Aligning projects with earned value management
Earned Value leverages the triple constraint by determining a distinct priority of the components and managing the project to that prioritization, enhancing the chances for project success.
Integration of Projects and Earned Value
Earned value is a way of measuring strategic and environmental progress.
In any project, the value to be gained is based on completing the work. However, there are two primary issues that have to be addressed.
- Aligning With Organization Strategy
- Problem: Too many project proposals, given limited resources of money, people, and equipment.
- Solution: Allocate resources to projects that contribute the most value to strategy (customer) and balance organization risk, using earned value as an analysis management tool.
- Aligning With Operating Environment
- Problem: Disjointed tools and systems and non-supporting organization culture.
- Solution: Tie all together in a seamless structure within operating environment, using best practices (i.e., earned value).
From personal experience, the business value is achieved when the project is completed. However, putting into operation an Earned Value Management System (EVMS), including implementation and setup, training, cost/schedule/resource/WBS tracking, project data assistance, and project management execution are just a few of the capabilities a company needs to manage schedule, costs, and resources.
As a working professional I encourage hands on project management, as well as supporting the triple constraint bridge between scope, time, and resources. Success of any project is dependent not only on the EVMS system, but also on a project managers’ skill, effort, and willingness to work with collaborative teams, enabling efficient management of any project regardless of size, technical complexity, or structure. You must demonstrate to the customer that you as a project manager can manage costs, schedule, and resources (i.e., Earned Value Management or EVM). This level of successful management can make future additional contracts a reality.
Earned Value 101
Metrics (Building Blocks) and Key Performance Indexes.
There are three metrics that form the building blocks for earned value – Budgeted Cost of Work Performed (BCWP), Actual Cost (AC) and Budgeted Cost of Work Scheduled (BCWS).
- AC (Actual Cost)): The amount reported as actually expended in completing the particular work accomplished within a given time period (Same as ACWP – Actual Cost Work Performed)
- BCWP (Budgeted Cost of Work Performed): the budgeted amount of cost for the work completed in a given time period (Same as EV – Earned Value)
- BCWS (Budgeted Cost of Work Scheduled): the budgeted amount of cost of the work scheduled to be accomplished in a given period (Same as PV – Planned Value)
These three building blocks are needed and used to derive the following key performance indices that are required by most if not all customers and used by practicing project managers who utilize EVM as a management tool.
- Schedule Variance (SV) – The Schedule Variance (SV) tells you whether you are ahead of schedule or behind schedule, and is calculated as Earned Value (EV) – Planned Value (PV). If the result is positive, it means that you have performed more work than what was initially scheduled at this point. You are probably ahead of schedule. Likewise, if the SV is negative, the project is probably behind schedule.
- Cost Variance (CV) – The Cost Variance gives you a sense for how you are doing against the budget, and is calculated as Earned Value (EV) – Actual Cost (AC). If the Cost Variance is positive, it means that the budgeted cost to perform the work was more than what was actually spent for the same amount of work. This means that you are fine from a budget perspective. If the CV is negative, you may be over-budget at this point.
- Schedule Performance Index (SPI) – This is a ratio calculated by taking the EV / PV. This shows the relationship between the budgeted cost of the work that was actually performed and the cost of the work that was scheduled to be completed at this same time. It gives the run rate for the project. If the calculation is greater than 1.0, the project is ahead of schedule. If it is below 1.0 the project is behind schedule.
- Cost Performance Index (CPI) – This is the ratio of taking the EV / AC. This shows the relationship between the Earned Value and the actual cost of the work that was performed. It gives the burn rate for the project. If the calculation is less than 1.0, the project is over budget. For example, if the CPI for a project was EV/AC = (50 / 55) or .91. A CPI of .91 means that for every $91 of budgeted expenses, your project is spending $100 to get the same work done. If that trend continues, you will end up over budget when the project is completed. If the calculation is greater than 1.0, the project is under budget and your team is performing more efficiently.
Earned value serves no purpose without a detailed project plan.
A project requires involvement by all project team members. Ultimate success is highly dependent on their combined efforts helping to achieve a smooth and successful implementation of the product or service. Responsibilities of the team include:
- Assemble an up-to-date project plan.
- This plan would act as a “yard stick” for the project by providing the basis used to regularly assess the earned value performance of the project. The project plan would include a complete list of the activities required to complete each project, as well as the milestones, dependencies, costs, resources and time frames involved in undertaking the project. The above diagram depicts the steps involved in creating a project plan which ultimately is used for Earned Value Management.
- The Work Breakdown Structure (WBS) will list the phases, activities and tasks involved in undertaking the project, along with key milestones. The team will need to quantify the human resources required to carry out each activity listed, then construct a project schedule, which describes the flow of project activities and the time frames involved including listing any planning assumptions and constraints.
- Creating a comprehensive Project Plan is a critical step in the Project Life Cycle, as it will be used to:
- Monitor and control the overall progress of the project i.e. EVMS
- Create the resource, cost, and quality plans for the project
- Help the project manager identify any task slippage and budget overruns
- Determine whether the project activities are complete and the project is ready for closure
- Assess the level of success of the project after it has been closed
- Provide project performance metrics desired by the customer for the cost performance index (CPI), schedule performance index (SPI), and other EVM variance analysis reports.
In some cases, there may well be enough value to go through the pain of a culture change and time tracking. If there is enough benefit. However, institutionalizing Earned Value is a very good technique for determining where you are at on a project and how much work is remaining.
“EVMS forces us to look at our programs through the eyes of the customers. Although not a silver bullet, EVMS provides an easy and accurate way to evaluate how we are doing on a program.” Dr. Harold Kerzner, Ph.D. (Advanced Project Management – Best Practices in Implementation)
Photo Credit: http://www.pmiwdc.org/files/July%202006-Earned%20Value%20Analysis%20for%20Tool%20Time.ppt
Content Acknowledgment: http://www.theicpm.com/download/whitepapers/59-laymans-guide-to-earned-value/download