Project Management IV Research Paper

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Mathematical and Quantative Methods

The Earned Value Management - A Measurement Technique of the

Performance of the Costs and Labor in the Project

Carmen Gasparotti1, Alina Raileanu2, Eugen Rusu3

Abstract: Most of the planned projects have problems due to the cost and time overruns from different

reasons. Earned value management (EVM) is a project performance evaluation technique that has been

used in many projects from several fields, but which has been adapted to be used in project management

to objectively track the physical accomplishment of certain work. The earned value analysis offers the

possibility to manage the project performances in early stages of the project to point out the need of the

eventual corrective action. This paper aims to present the main parameters involved in the calculation

of the Earned Value Analysis (EVA) for a ballast plant on shipboard.

Keywords: Earned Value Management; Earned Value Analysis; Cost Variance; Schedule Variance;

Planned Value

JEL Classification:

1. Introduction

An important tool required to deliver the project on time is Earned Value

Management (EVM).

Earned Value Management is a project management methodology for control the

project that is based on measuring work performance. It is a system that predicts the

final cost and duration of the project by comparing the work done with that planned.

In the same time, EVM is a warning tool, based on which the project manager

identifies and controls any problem before it becomes critical, being able to exploit

the project opportunities (Eun Hong et all, 2003, p. 375).

The concept of earned value management has been first introduced as a fundamental

approach in 1966 when the United States Air Force mandated earned value in

1 Associate Professor, PhD, “Dunarea de Jos” University, Romania, Address: 47 Domnească Str., Galati

800008, Romania, Corresponding author: [email protected]. 2 PhD, Danubius University of Galati, Romania, Address: 3 Galati Blvd., Galati 800654, Romania, Tel.:

+40372361102, E-mail: [email protected]. 3 Assistant Professor, “Dunarea de Jos” University, Romania, Address: 47 Domnească Str., Galati

800008, Romania, E-mail: [email protected].

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relationship with the other planning and controlling requirements on Air Force

programs (Abba, 1997, p. 58).

Regardless the field where this concept is applied, either in research and

development projects, or engineering, construction and contract administration

companies as well as large design-manufacturers such as aerospace companies, it

provides all levels of management with early visibility on cost and schedule

problems.

Nowadays EVM is used in programs from world-wide. It becames a requirement of

many U.S. Government agencies, including the Department of Defense, the National

Aeronautics and Space Administration, the Department of Energy, the Intelligence

Community, the Department of Homeland Security, the Federal Aviation

Administration and Department of Transportation, Health and Human Services, and

others (Abba, 2000).

This concept and its requirements have remained basically unchanged, although

some updates have been done regarding its title. These updates have been the

following:Cost/Schedule Control System Criteria, Earned Value Management

Systems Criteria and so on, the only purpose being to provide a formal version of

the „Earned Value” concept (Wesselius & Ververs, 1990, p. 319).

Even if there are still discussions and ongoing debates regarding its practical utility,

Earned Value is recommended for monitoring and controlling project execution. It

is a concept that must be appreciated because it shows how this performance

measurement technique can be a valuable management tool for the project.

Due to the fact that the projects do not generally achieve the required scope and they

are often late, the project performance must be managed using a logical technique

like earned value, with the expectation that the project results will soon improve

(Archibald, 2003).

EVM is regarded as a relationship between three variables that reflect the

performance of the project: budget- to see how the project fits in estimates; time- to

accomplish scope of the project and the work- to see how it was done physically and

the way by which it can measure progress (Anbari, 2003, p. 12).

In the planning phase of the project each work package within the Work Breakdown

Structure is assessed in terms of the cost estimates and the scheduling in a time

sequence. In this way it can be obtained the project cost baseline represented as a

graph of planned costs over time that represents in fact the planned value (PV). PV

is a numerical reflection of the budgeted value of the work that is scheduled to be

executed.

The project cost baseline or performance measurement baseline can be changed only

to reflect the cost changes or programming produced by changes in the project

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content. This guideline describes how it is supposed to evolve the project throughout

the execution period, in each programmed point. It helps the project manager to

predict when the money must be spent and in what period.

The performance measurement performed in raport with the guideline (baseline) is

shown in Figure 1.

Figure 1. Comparison between the Baseline and the Earned Value

From this perspective, this paper aims to provide an overview of the way in which

the earned value (EV) and the actual costs (AC) are calculated and compared with

the planned value (PV) in a project that refers to a ballast plant on shipboard in order

to establish conclusions on the performance of the project.

2. The Earned Value Terminology

Earned Value Management offers a set of guidelines that guide the project managers

to perform a program for cost reduction when the cost is exceeded. This can be done

either by decreasing the scope in some areas of the project or providing an additional

budget to cover the overrun cost (Mohammad, 2010).

When the time is exceeded, it may plan another program for fast tracking to reduce

the time.

This technique uses the cost, that allows the measurement in currency, hours,

worker-days, or any other similar quantity, of the values associated with project work

(EunHong, 2003, p. 375).

To evaluate the project performance Earned Value technique uses the following

project parameters such as: Planned Value (PV) or budgeted cost of work scheduled,

Earned value (EV) or budgeted cost of work performed and Actual Cost (AC) or

actual cost for work performed.

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The Earned Value method indicates the performed labor costs till a point in a project,

as well as the amount of the work already accomplished of the activity in question

(Gasparotti, 2014, p. 574).

EV of a project activity is the cost associated with that activity when the project

budget has been defined. It is determined by summing the individual value of each

activity in the project, considering fractional completion of each activity (Suketu,

2002).

To determine the actual cost AC it is required a registration system of the costs that

enables the data collection that refers to the recorded costs for labor and materials

used in the project.

The value of this cost is compared with the earned value (EV) from which resulting

the cost variance (CV).

The cost of work scheduled (PV) is used to compare the achievements with the plan.

Both PV and EV are expressed in money and measures the amount of work or the

achievements. To calculate PV it is need the following items: the estimated costs of

all activities from the tables with estimates; the date that the activities are scheduled

to begin, from the work schedule; the expenditure profile of each activity during its

performance (Kuehn, 2007).

The graph PV reported in time is drawn immediately after the costs of all activities

are estimated and it is developed a work schedule indicating when each task should

be executed.

The schedule variance (SV) results from the comparison of the works planned with

those performed, thus obtaining the difference between the outputs and the expected

values. The term used in the earned value system that measures the work done

compared to the plan expressed in financial terms. In other words, SV measures, in

money how much have progressed the works compared with the plan (Fleming,

2000, p. 212).

At the end of the project, PV reaches the agreed value for the estimated cost for the

end of the project, namely the project budget (PB), and the AC value summing the

total costs recorded in the project (Czarnigowska, 2008, p. 15).

Among the terms used for the costs control the following are important: total

estimated cost at completion (ECAC); the cost performance index (CPI), the

schedule performance index (SPI), the estimated completion date (EDC) and the cost

to complete (CTC).

The total estimated cost at completion (ECAC) can be interpreted by the project

manager, either considering that remaining works to be achieved will fit within the

values provided in the budget or remaining works will be carried out with the same

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costs recorded as in the case of the completed works by that time. Depending on the

interpretation of ECAC, this is calculated differently (Kim et all, 2003, p. 375).

The cost performance index (CPI) is not a very safe clue in the early stages of the

project, when the percentage of the completed works is small, because it is based on

insufficient data. After the execution of more than 30% of the works and later, as the

works progress and the project draws near of 100% completion, it is appropriate to

use the CPI index within the calculations (Kerzner, 1984).

The schedule performance indicator (SPI) shows if the project is carried out faster

than plan or it is lagging behind.

When the project is nearing completion, the EV approaching the PV and the SPI

value tends to 1, regardless of the project duration.

The estimated completion date ECD is determined considering two alternative

interpretations (Kwak & Anbari, 2012, p. 77).

The first interpretation is the situation when it is assumed that all the remaining

works will be carried out in the rhythm indicated by the work schedule, in which the

estimated completion date ECD is obtained by adding or subtracting of the time lag

to/from the initial date of completion, as appropriate.

The second interpretation refers to the situation when it is assumed that the work

schedule for the remaining works not fall into the same delay as the works done so

far, when the estimated completion date ECD is obtained by multiplying the initial

date with the overcome factor (Vandevoorde & Vanhoucke, 2006, p. 289).

The cost to complete (CTC) is the estimated cost of the remaining works to be

executed by the end of the project, which is the most relevant cost in the decision to

continue or not a project. When the CTC value is higher than the likely benefits that

would be achieved if the project will be continued, there is need to take the decision

to cancel the project to avoid further losses (Pajares & Lopez-Parades, 2010).

Table 1. Terms use for the cost control in Earned Value Analysis (from Suketu, 2002)

Symbol Name Significance and formula

AC

Actual cost of work

performed until a certain

moment

It is calculated by collecting the recorded

data as the project progresses

EV

Budgeted cost of work

performed until a certain

moment

It is calculated by summing the value of

each work from the project taking into

account the completion percent of each

element

PV

Budgeted cost of work

scheduled

It is calculated by summing the value of

all scheduled works

CPI

Cost-Performance Indicator CPI= BCWP/ACWP

CPI>1 project is under budget (saving);

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CPI=1, which is estimated =current;

CPI<1 project is over budget;

CTC

Cost to complete CTC=ECAC-ACWP

CV

Cost variance CV= BCWP-ACWP

CV<0 the project exceeded the budget

CV>0 the project has savings

SV

Schedule variance SV=BCWP-BCWS

SV <0 the project is behind the schedule;

SV> 0 the project is ahead of the

schedule;

ECAC

Total estimated cost at

completion

ECAC=PB-CV, if the unexecuted works

will be completed within the budgeted

limits

ECAC=PB X (ACWP/BCWP), if the

remaining works will be executed with the

same costs recorded for the completed

works until then

ECD

Estimated completion date ECD=ECD0 +/- gap,

if all the remaining work will be

performed in the rhythm indicated by the

initial planning;

ECD=ECD0 x overcome factor,

if the remaining work will be performed

by maintaining the gap of left behind of

the works;

overcome factor = BCWS/BCWP

SPI

Schedule Performance

Indicator

SPI=BCWP/BCWS

SPI> 1 project is ahead of programming;

SPI = 1 which is estimated = current;

SPI <1 project is delayed (over the limit);

PB

Project budget The estimated costs of the work

performed until the project completion

In figure 2 there are shown the terms from the Earned Value Analysis (Fleming,

2000, p. 212).

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Figure 2. Terms use for the cost control in Earned Value Analysis (from Fleming,

2000, p. 212)

In Table 2 it can be observed what measures EVM, indicating what happens with the

project in terms of work scheduled and the budgeted resources.

Table 2. Performance measurement using EVM (Anbari, 2003)

Performance

measurement

SV & SPI

CV & CPI

>0 & >1 =0 & =1 < 0 & <1

>0 &

>1

In advance of the

programming and

the budget savings

According to the

programming and

the budget savings

Delayed to the

programming

and the budget

savings

=0 &

=1

In advance of the

programming and

according to the

budget

According to the

programming and

the budget

Delayed to the

programming

and according to

the budget

< 0 &

<1

In advance of the

programming and

over the budget

According to the

programming and

over the budget

Delayed to the

programming

and and over the

budget

3. Case Study, Earned Value Analysis for Monitoring Costs in Case of

Ballast Plant on Shipboard

The commercial ships are built for the transport of various cargoes or passengers.

When a ship is not fully loaded, the additional weight is required to provide the ship's

seaworthiness, to compensate the increased buoyancy which can lead in the lack of

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the propeller immersion to an inadequate transversal and longitudinal inclination, as

well as other stresses on the ship’s hull (Gasparotti et all, 2013, p. 987). The material

that is used for the adding the weight on the ship is referred to ballast water. Even

when a ship is fully loaded it can require the ballast water operations due to a non-

equal distribution of weights on the ship or due to the bad weather conditions and

the sea conditions. As a result of these factors, the ship is fundamentally based on

the ballast water for safe operations as a function of their design and construction

(Gasparotti & Rusu, 2012, p. 1751), (Ivan et all, 2012, p. 1673).

The organizing of the work is the one of the first tasks for the program management

of implementing EVM. Within the organization (the shipyard) is defined the project

scope of work and the groups who will be responsible for performing work as is

showed in the Statement of Work (SOW). So, if is developed a Work Breakdown

Structure (WBS) of the project, that is the framework for the project effort which

breaks down the complex project into individual components by listing all the

products, components, software, data, and services to be delivered, this is used as a

common base for project planning, scheduling, budgeting, cost accumulation, and

reporting of the performance.

Once the project has begun, the performance of the project against the Performance

Measurement Baseline is checked regularly. The actual work performed, the

schedule, and the costs are monitored regularly and the reports are created.

The project of fabrication and mounting of the ballast plant from the Tulcea shipyard

is performed over a period of 48 weeks (12 months). The start data of the project is

18 August 2014 which corresponds with the finalization data of the hull mounting

from 12 August 2015. During the entire process are used 46 tones of equipment

including 40 tones of piping and 6 tones of valves.

The duration estimated by the staff at planning for fabrication was 4663 hours, but

actually there were consumed 5349 hours, more than the estimated value, and for

mounting there were estimated 7716 hours from which there were used 7162 hours,

less than the estimators expected, as it can see in figure 3.

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Figure 3. The estimated duration of the project

The figure 3 represents the estimated consumption of 100% by the staff at the

planning.

The project budget is 3291102 euro which includes the cost of manufacture,

assembly, materials, labor, production, valves and employees.

Table 3. The activities of the fabrication and mounting

Block Process Start

data

Finish

data

Budgeted

(euro)

A Piping

Block 1

Prefab. Ballast system piping

block 1

28 Oct.

14

10 Jun.

15

235064.6

B Mounting ballast system piping

block 1

6 Jan.

15

29 Jun.

15

234766.6

C Piping

Block 2

Prefab. Ballast system piping

block 2

18

Aug.14

1 Jul. 15 234689.6

D Mounting ballast system piping

block 2

15

Dec.14

12

Aug.15

235108.6

E Piping

Block 3

Prefab. Ballast system piping

block 3

21

Aug.14

8 Jun. 1 235455.6

F Mounting ballast system piping

block 3

18

Dec.14

13 Jun.

15

236377.6

G Piping

Block 4

Prefab. Ballast system piping

block 4

12

Nov.14

10 Jun.

15

235229.6

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H Mounting ballast system piping

block 4

6 Jan.15 10 Jul. 15 235877.6

I Piping

Block 5

Prefab. Ballast system piping

block 5

30

Nov.14

8 Jun. 15 234047.6

J Mounting ballast system piping

block 5

9 Jan.

15

29 Jun.

15

234169.6

(*) all dependencies are assumed to be FS – Finish to Start

Figure 4. The network of the project

Figure 5. Gantt chart of the initial planning

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Table 4. The duration and the predecessors of the activities

Activity Immediate

predecessor (*)

Duration

(weeks)

Start data in the

week

A G 33 44

B D, F 26 2

C - 43 34

D A, I 30 50

E - 43 34

F A, I 27 50

G C, E 38 44

H D, F 26 2

I G 37 44

J B, H 26 2

(*) all dependencies are assumed to be FS – Finish to Start

Table 5. The costs from the earned value system

PV EV AC week

1567191,79 1567191,79 1567191,79 0

2350787,34 2045184,99 1820214,64 8

2507506,45 2382131,13 2120096,71 15

2664225,56 2451087,52 2205978,76 20

2820944,67 2595269,1 2439835,05 28

2977663,78 ─ ─ 36

3291102 ─ ─ 48

Calculation for the graphic of the earned value system

To apply the earned value method in the control and monitoring of project costs it is

considered that the progress report is drawn up after the first 28 weeks from the start

of the project, as is presented in Figure 6.

It considers that of the ballast plant execution project has a duration of 48 weeks and

a project budget PB= 3291102 euro.

CV=EV-AC=2595269,1-2439835,05 = 155434 euro (economii faţă de bugetul

iniţial)

SV=EV-PV=2595269,1-2820944,67= -225675 euro (lucrări rămase în urmă faţă de

planificarea iniţiala)

The Schedule Variance SV indicates how much the project is ahead or behind than

the initial planning.

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In this case it has resulted from the calculations that the value of SV is negative

which means that the project are behind the initial planning.

To determine the estimated completion date ECD is necessary to consider two

alternatives:

1. If it is assuming that all the remaining work will be performed in the rhythm

indicated by the initial planning, then ECD will be:

ECDI =ECD0 +28/17 =48+28/17=50 weeks

2. If it is assuming that the remaining work will be performed by maintaining the

gap of left behind of the works.

ECDII =ECD0 X 28/17= 48 X 28/17=79 weeks

Figure 6. The curves of the Earned Value System

After the analyzing of the progress report of the project (after 28 weeks), it find out

that it has been spent less than estimated in the budget for the activities undertaken

up to the moment (AC <EV), but also the activities have remained as provided

behind to the initial programming (EV <PV).

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4. Conclusions

To use this tool called EVM, is necessary to plan resources, time and cost, to analyze

the performance with which they are made. It has been demonstrated that the earned

value concept is an effective technique in the project management. It permits the

project managers to receive early warning signals to modify the ultimate direction of

the project.

The major objectives of applying the Earned Value are to encourage the contractors

to use effective internal technical cost and schedule management control systems.

EVM allows a better and more effective management decision minimizing the

adverse impacts to the project.

Among the main advantages in using the earned value are:

a) The accuracy in the achievement of the reporting.

b) The early warning that provides a tool to project managers, allowing them to

take the necessary corrective actions if the project is spending more money than it

was physically planned.

The efficiency of the costs control system and the schedules is improved by

presenting on the same graph of the curves EV, AC and PV. They indicate the way

in which evolving the project in financial terms (by the relative positions of the

curves AC and EV) and which is the situation in terms of framing the results

obtained in the work schedule (the relative positions of the curves EV and PV). In

this way, it is demonstrated that the Earned Value Management (EVM) is a

management concept that integrates the technical performance requirements,

resource planning, schedules, while the risk is taken into consideration.

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