Earned Value Management (EVM) is the most popular technique used to monitor schedule and cost performance. The following are the key benefits of EVM.
Before explaining the steps involved to implement EVM based project management, let me explain how EVM works quickly. Earned value management revolves around four basic measurements like;
Once we have these basic status data, it is very easy to calculate the Schedule Variance (SV), Cost Variance (CV), Schedule Performance Index (SPI) and the Cost Performance Index (CPI).
Schedule Variance SV = EV-PV Schedule Performance Index (SPI) = EV/PV
Cost Variance (CV) = EV-AC Cost Performance Index (CPI) = EV/AC
Broadly speaking, If the project manager can maintain the schedule and cost variances around zero throughout the project , then the project will get over on time within budget. In other words, if the project manager can maintain the Cost Performance Index (CPI) and the Schedule Performance Index (SPI) at around ‘1’ throughout the project, the project will get over on time within the budget allocated.
That is is the crux of Earned Value Project Management. As long as both the CPI and SPI can be maintained around 1, the project is safe. That makes Earned Value Project Management simple and powerful.
Earned Value Project Management simplifies project management for project managers. Monitoring project health boils down to tracking the Schedule Performance Index (SPI) and the Cost Performance Index (CPI). It is more like performing health checks frequently, so that action can be taken if there is any health issue. Though this is better than living in total oblivion, still the project managers will be operating in a reactive mode. They will still wait for the schedule performance index or the cost performance index to slip in order to take action. With the ability to forecast the target cost and the target schedule project managers can act proactively. They will be able to tackle schedule and cost related issues before they occur. Let me explain this further.
We need to understand one more term ‘Budget at Completion’ (BAC) before dwelling into forecasting. Budget at completion (BAC) is the total budgeted cost of the project from the start of the project till the end of the project. If all the conditions remain same, how much will it cost us, when the project gets completed?. That is the Estimate at Completion (EAC).
Estimate at Completion (EAC) = AC + (BAC – EV) / CPI
Let us work out one simple example
The diagram above depicts the status of a project as on a specific review date.
The total budget of the project is 100000. As per the plan, the project team was supposed to complete work worth 60,000 (Planned value) . Actually they completed work worth 50,000 only (Earned Value). For completing the work worth 50,000, they spent 65,000 (Actual Cost).
Schedule variance (SV) = (EV – PV) = 50,000 – 60,000 = -10,000
Schedule Performance Index (SPI) = EV/PV = 50,000 / 60,000 = 0.83
Cost variance (CV) = EV-AC = 50,000 – 65,000 = – 15,000
Cost Performance Index (CPI) = EV/AC = 50,000 / 65,000 = 0.76
Both the Schedule Performance Index (SPI) and the Cost Performance Index (CPI) are 0.83 and 0.76 respectively. The work has not progressed as planned and at the same time the completed portion of the work took more than the budgeted value. There is both schedule slippage and cost overrun as on the review date.
While this data is better than having no data about the project’s status, it would have better if the team was alerted in advance about this impending situation.
The total budget of the project or the Budget At Completion (BAC) = 100000
Estimate At Completion (EAC) = AC + (BAC – EV) / SPI = 65,000 + (100000 – 50,000) / 0.76 = 130,789.47
If all the conditions remain the same, this project will cost 130,789 instead of 100,000 when it gets completed.
How can we complete the project within 100000?
To Complete Performance Index (TCPI) = (Remaining Work / Remaining Funds)
Remaining work = BAC – EV = 100,000 – 50,000 = 50,000
Remaining funds = BAC – AC = 100,000 – 65,000 = 35,000
TCPI = Remaining work / Remaining funds = 50,000 / 35,000 = 1.42
For the remaining part of the project, if the project team can maintain the Cost Performance Index (CPI) at 1.42, still the project can be completed within the initial budget of 100,000.
How can we complete the balance work without consuming the budget allocated to the tune of 1.42?. Cost Performance Index (CPI) = EV/AC. The team has to find out ways and means maintain the Actual Cost well below Budgeted Cost of Work to be completed. In other words, the team should be able to complete work worth 1.42 dollars for every dollar spent from now on, till the end of the project. Brainstorming with the relevant engineering and project management disciplines is the solution and the strategies may include;
By now, you may agree with me that Earned Value Project Management enables the project managers to be more proactive than reactive. Being so, the next logical topic of interest would be about the implementation steps of Earned Value Management System.
Here are the logical steps for implementing Earned Value Management System;