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W5N1 Overview of Earned Value Management

Oftentimes, project status is presented as follows:

But what does this really show?  Can you tell from this diagram whether the project is on target?  How can you tell how much work has been completed?  This diagram only shows that spending is a little lower than expected.  But what if no real work has been accomplished yet?

Earned value management is an industry standard way to:

· Measure a project's progress

· Forecast its completion date and final cost, and

· Provide schedule and budget variances along the way

Earned value management compares the PLANNED amount of work with what has actually been COMPLETED, to determine if COST, SCHEDULE, and WORK ACCOMPLISHED are progressing as planned.  Work is earned or credited as it is completed. 

To be successful, earned value management requires:

· Proper WBS design

· Baseline budgets

· Baseline schedules

· Work measurement (e.g., work-hours, dollars, units)

· Good project management practices

Without these basics, Earned Value Management can not be used.  The quantification and measuring of work progress on a project can be difficult and the time required for data measurement, input and manipulation can be considerable.  Using the Earned Value Management technique requires an organization with a fairly high degree of project management process maturity and requires that the organization is willing to provide project management resources to support the activity.  

W5N2 Earned Value Management Terms and Exercise Support

The Planned Value  :  The planned cost of the total amount of work scheduled to be performed by the milestone date.  Planned Value is also sometimes called the Budgeted Cost of Work Scheduled (BCWS).  As an the example, the Planned Value for June in the example below, is $55,000.

Actual Cost :  The cost incurred to accomplish the work that has been done to date.  Actual Cost is sometimes called Actual Cost of Work Performed (ACWP).  In the example, the planned value for June 2003 was $49,000 and the Actual Cost is $56,000.  

Earned Value (EV):  The planned (not actual) cost to complete the work that has been done. Earned Value is sometimes also called the Budgeted Cost of Work Performed (BCWP).  In the example, the EV was $49,000 and the BCWS was $55,000.

Put together, the earned value management process provides the whole story.  $55,000 of work was scheduled; $49,000 of work was planned and the actual cost spent was $56,000.


Variance is calculated as part of earned value:

Schedule Variance (BCWP-BCWS):  This provides a comparison of the amount of work performed during a given period of time to what was scheduled to be performed.  A negative variance means the project is behind schedule.  A positive variance means the project is ahead of schedule.  In the example, there was a negative schedule variance (SV=49,000 - 55,000=-6000) so the project is behind schedule.  Less work was accomplished than planned.

Cost Variance (BCWP-ACWP):  A comparison of the budgeted cost of work performed with the actual cost.  A negative variance means the project is over budget; a positive variance means the project is under budget.  In the example, there was a negative cost variance (CV=49,000-56,000=-7000) so the project is over budget.

Performance indices are also calculated.

Schedule Performance Index (SPI=BCWP/BCWS).   A schedule performance index of less than 1 means a project is behind schedule.  In the example, the SPI is less than 1 (SPI=49,000/55,000=.89) so the project is behind schedule.

Cost Performance Index (CPI=BCWP/ACWP).   A cost performance index of less than 1 means a project is over budget. In the example the CPI is less than 1 (CPI=49,000/56,000=.875 ) so the project is over budget.

Cost Schedule Index (CSI=CPI*SPI).   The further CSI is from 1.0, the less likely project recovery becomes.  In the example, the CSI=.875/.89=.98

The CPI and SPI are statistically accurate indicators of final cost results.  Once a project is 10% complete, the overrun at completion will not be less than the current overrun.  Once a project is 20% complete, the CPI does not vary from its current value by more than 10%.

Earned Value management can also be used for forecasting.  

Budget at Completion (BAC).   The sum of all budgets for the work to be performed.

Estimate to Complete (ETC) (ETC=BAC - EV)/CPI .  The expected cost needed to complete all of the remaining work. 

Estimate at Completion (EAC).   The expected total cost when the defined scope of work is completed based on performance to date. EAC is calculated by adding the Actual Cost plus the Estimate to Complete (EAC=AC + ETC).  

Variance at Completion (VAC).   Forecasts the amount of budget deficit or surplus at the end of a project.  VAC is calculated by subtracting the EAC from the BAC (VAC=BAC-EAC).

The following shows how these calculations can be used to define detail about the status of your project.  Using the example, the following can be calculated:

Measure	Calculation	Value at this point	Progress/Status
BAC (Budget at Completion)	Approved Budget	105,000
PV (Planned Value)	Approved Budget for time (in example June)	55,000
AC (Actual Cost)	Given	56,000
EV (Earned Value)	Given	49,000
CV (Cost Variance)	EV-AC	-7,000	Over Budget
SV (Schedule Variance)	EV-PV	-6,000	Behind Schedule
CPI (Cost Performance Index)	EV/AC	0.875	Over Budget
SPI (Schedule Performance Index)	EV/PV	0.890	Behind Schedule
ETC (Estimate to Complete)	(BAC-EV)/CPI	64,000	Not enough money in Original Budget
EAC (Estimate at Completion)	AC+ETC	120,000	Will Finish Over Budget
VAC (Variance at Completion)	BAC-EAC	-15,000	Contingency Reserves will need to be used

You can use this type of a chart to submit your weekly exercise this week.

W5N3 Managing Variances

During project execution, things may not go as planned.  This may be due to things such as changes in scope, changes in availability of resources, changes in cost of materials, or the occurrance of unanticipated risks.  Such variances affect the ability to deliver the project on-time and on-budget and require analysis and potential changes to the project plan baselines.

There are various causes for variance from estimates on a project. 

· Interaction and communication costs are often hidden in estimates.  The time to coordinate and communicate between activities is often not well estimated.

· Estimates should be based on normal conditions, but often normal conditions do not apply.  Resource shortages, in terms of people, equipment and/or manterials can occur.  The decision to outsource an activity can also impact estimates by having to bring new people up to speed or can bring expertise that increases performance.

· Things often go wrong on a project.  Design flaws emerge, natural disasters occur, accidents occur.  These items should not be included in estimates, but they must be dealt with if they do occur.

· Activity schedules may shift, causing changes in the way in which cash must be expended on a project.  This can be a concern to an organization's financial management even if the overall cost of the project will come in without variance.  It is important for a project manager to understand how expenditures on their project affect the overall finances of the organization, particularly on large projects.

· Many projects are burdened by changes in project scope and plans.  As the problem is better understood during execution of the project changes are requested.  New customer or competitive demands can occur over the course of the project.  Unstable project scope is the major source of project variances.

Variance analysis is used to define the cause and degree of difference between the baseline and actual performance.  Earned Value Management is an excellent tool for predicting and identifying variances.  The process allows the project manager to monitor costs and ensure that expenditures do not exceed authorized funding; monitor cost performance to isolate and understand variances against the approved baseline; and monitor work performance against the funds and time expended.

Where Earned Value Management is not available, project managers must identify the impact of changes or issues on the plan without the precision available with the Earned Value Management tools and processes.  

Change control is important when dealing with variances.  Change control can help identify scope changes that can impact project variance.  Change control is also critical when controlling the project baselines related to scope, schedule, cost and quality plans.  

As variances are identified, the project team must  define how the variance will be resolved.  Sometimes there is sufficient lead/lag time to resolve a schedule variance.  Various techniques for schedule compression, such as project crashing or fast tracking, defined in your readings, may be used to try to recover from variance. Sometimes the variance will result in the need to replan the project.   Any update to the project plan will result in changes to the project plan baseline, which must be approved by management and stakeholders.