EARNED VALUE MANAGEMENT · 12.04.2011 · EARNED VALUE MANAGEMENT ... it has not been accepted as...

EARNED VALUE MANAGEMENT

Chapter 6

©Sheila Belayutham©Sheila Belayutham

EARNED VALUE MANAGEMENT

Is the best project control technique for early detection of performance variances.

The technique was developed nearly 40 years ago for the United States government to better manage contract payments to vendors.

Ever since, it has grown in popularity and acceptance across many industries, and now is regarded as the preferred project control technique by PMI.

However, it has not been accepted as standard practice in all industries, and it is usually a technique found in organizations or industries that are relatively mature in their management processes.


Assess cost performance and schedule performance together The main value of EVM is that it allows you to measure and track both

schedule and cost performance together. Evaluating project performance on just one of these indicators does not always give you the true picture and does not allow you to detect variances as early.

Each work package has a planned value The planned value of any work package is the budgeted cost of the work

scheduled to complete the work package. The important point here: Estimate the cost of each work package in your schedule. Also, this means that the project as a whole has a baseline schedule and budget.

At any point, the project has an "earned" value The earned value of a project is the budgeted cost of the work actually

completed. In other words, how many work packages (or partial work packages) have been completed at this time? The value is expressed in budgeted cost terms, not actual costs. This allows you to perform cost analysis by comparing budgeted versus actual costs for the work completed.

EARNED VALUE MANAGEMENT©Sheila Belayutham©Sheila Belayutham

INTRODUCTION TO EARNED VALUE SYSTEM (EVS)

The EVS is used to monitor the progress of work and compare accomplished work with planned work.

There are several factors in the earned value report that needs to be known in order to use it effectively.

The factors are the: Budgeted cost of work scheduled (BCWS) Budgeted cost of work performed (BCWP) Actual cost of work performed (ACWP)

These three elements form the basis for the earned value reporting system.


EQUIVALENT TERMS

Budgeted cost of work scheduled (BCWS)=Planned Value (PV)

Budgeted cost of work performed (BCWP)=Actual Cost (AC)

Actual cost of work performed (ACWP)=Earned Value (EV)


EVM takes the planned value (PV), or what you planned to do at an estimated cost, and compares it against the estimated cost of the work performed (EV) and against the actual cost of work performed (AC), or what actually got done.

These metrics provides information about whether the project tasks are taking longer than they should (schedule variance, or SV), or whether they are actually requiring more work effort to complete (cost variance, or CV).

In addition, the estimate-at-completion metric (EAC) helps you forecast final project performance and determine if any corrective action needs to take place.

EARNED VALUE MANAGEMENT©Sheila Belayutham©Sheila Belayutham

Is the amount of money that was planned, or budgeted, at each time period in the project.

It is determined by cost loading the CPM diagram to determine the distribution of cost in accordance with the project plan.

The S-curve for a project represents the BCWS.

Budgeted cost of work scheduled (BCWS)


The ACWP is the actual amount of money that has been spent at any point in time during the project.

It is determined from accounting records or the responsible party that keeps records of actual expenditure of money.

Actual cost of work performed (ACWP)©Sheila Belayutham©Sheila Belayutham

The BCWP is the amount of money earned based on the work that has been completed.

It is determined by multiplying the percent completed by the budgeted amount for the work.

Budgeted cost of work performed (BCWP)


What could you conclude from the figure below?


Project tracking without EVM

Figure 1 shows the cumulative budget for this project as a function of time (the blue line, labeled PV). It also shows the cumulative actual cost of the project (red line) through week 8.

To those unfamiliar with EVM, it might appear that this project was over budget through week 4 and then under budget from week 6 through week 8.

However, what is missing from this chart is any understanding of how much work has been accomplished during the project.

If the project was actually completed at week 8, then the project would actually be well under budget and well ahead of schedule.

If, on the other hand, the project is only 10% complete at week 8, the project is significantly over budget and behind schedule. A method is needed to measure technical performance objectively and quantitatively, and that is what EVM accomplishes.


Figure 2 shows the EV curve (in green) along with the PV curve from Figure 1.

The chart indicates that technical performance (i.e., progress) started more rapidly than planned, but slowed significantly and fell behind schedule at week 7 and 8.

This chart illustrates the schedule performance aspect of EVM.

Project tracking with EVM©Sheila Belayutham©Sheila Belayutham

Figure 3 shows the same EV curve (green) with the actual cost data from Figure 1 (in red).

It can be seen that the project was actually under budget, relative to the amount of work accomplished, since the start of the project.

This is a much better conclusion than might be derived from Figure 1.


Figure 4 shows all three curves together – which is a typical EVM line chart.

The best way to read these three-line charts is to identify the EV curve first, then compare it to PV (for schedule performance) and AC (for cost performance).

It can be seen from this illustration that a true understanding of cost performance and schedule performance relies first on measuring technical performance objectively. This is the foundational principle of EVM.


Question

Suppose a project is in progress and as of today the planned expenditures for the project were to have been $500,000. Suppose also that there were five tasks and the tasks had budgets of $30,000, $100,000, $250,000, $100,000, and $20,000, respectively. The actual cost of each of the tasks that were worked on was $11,000, $120,000, $230,000, $105,000, and $20,000. Tasks 1, 2, 3, and 4 are complete.

What are the BCWS, ACWP, and BCWP (PV, AC, and EV)?


Answer

BCWS is $500,000. ACWP is $486,000. BCWP is $480,000. From these figures we can see that the accomplishments of the project as

of today are somewhat less than what was planned for. This is the difference between the earned value and the planned value to date. The planned value is the BCWS and the earned value is the BCWP. This means that we are $20,000 behind schedule.

We can also see that the actual cost is $14,000 less than the planned expenditures to date. This means that we are somewhat under budget. Unfortunately we are $14,000 under budget but also $20,000 behind schedule. If we add the $20,000 of work that should have been completed but was not, we find ourselves projecting a $6,000 over budget condition. It could be that things are actually worse than they appear at first glance. If the performance to date continues, the amount over budget will probably be even higher at the end of the project. This is usually considered a bad situation.


Variances & IndicesVariances: CV = BCWP – ACWP (Cost variance=Earned-Actual) SV = BCWP – BCWS (Schedule variance=Earned-Planned)

Indices: CPI=(BCWP/ ACWP)

Cost Performance Index=(Earned/ Actual)Cost variance related as a ratio instead of a dollar amount. A ratio less than 1.0 indicates that the value of the work that has been accomplished is less than the amount of money spent.

SPI=(BCWP/ BCWS)Schedule Performance Index=(Earned/Planned)Schedule variance related as a ratio instead of a dollar amount. A ratio less than 1.0 indicates that work is being completed slower than planned.


Ratios are used in the earned value system to predict the cost to complete a project.

The CPI is used to predict the magnitude of a possible cost overrun or under run. It adjusts the budget based on past performance.

The SPI is used to predict the magnitude of a possible time advance or delay. It adjusts the schedule based on past performance.

Variances & Indices©Sheila Belayutham©Sheila Belayutham

In the schedule below, Project A has a CPI greater than 1.00. This shows us that the project has been earning value faster than it has been accruing costs.

However, Project A also has a SPI value that is less than 1.00. Although Actual Costs are low, Task 1 is behind schedule, so the project has not earned as much value as was planned.


Forecasting

BAC=Original project estimate (Budget at completion)

ETC=[(BAC-BCWP)/CPI] Estimate to complete

EAC=(ACWP + ETC) Estimate at completion


EXAMPLE 1 (Q)

Provide an earned value analysis to evaluate the progress of the sewer and water lines project. The original budget is RM147, 500 and the project is scheduled to be completed in 94 working days. A status report after 10 working days into the project includes the following information: Activity 10, 100% complete as scheduled, actual cost=RM1, 500 Activity 20, 100% complete as scheduled, actual cost=RM2, 200 Activity 30, 100% complete as scheduled, actual cost=RM4, 000 BCWP=RM7, 600 ACWP=RM7, 700 BCWS=RM7, 600 BAC=RM147, 500 The BCWS and BCWP shown above are the same values as shown on

the tenth working day because activity 10, 20 and 30 were all completed according to the original planned schedule.


Cost and schedule deviations: Cost variance, CV=BCWP-ACWP

= RM7, 600-RM7, 700= -RM 100

EXAMPLE 1 (A)

A negative value of CV represents a costoverrun. Based on the status report the actualcost is greater than earned by RM 100.


Schedule variance, SV =BCWP-BCWS= RM7, 600-RM7, 600= 0

EXAMPLE 1 (A)

Since the SV is zero, the project is progressing asplanned. The project is not ahead of or behind theplanned schedule.


Cost and schedule performance: Cost Performance Index, CPI=(BCWP/ACWP)

= (RM7, 600/RM7, 700)= 0.987

The CPI is less than 1.0, which indicates a poor cost performance. The earned value is less than the actual costs.

Schedule Performance Index, SPI=(BCWP/ BCWS)= (RM7, 600/ RM7, 600)= 1.0

The SPI equals to 1.0, which indicates the schedule performance is progressing precisely as planned.

EXAMPLE 1 (A)©Sheila Belayutham©Sheila Belayutham

Forecasting cost at completion Estimate to complete, ETC=[(BAC-BCWP)/ CPI]

= [(147, 500-7, 600)/0.987]= RM141, 743

Based on the analysis of the statues report, the remaining cost to complete the project is RM141, 743.

Estimate at completion, EAC=ACWP + ETC= 7, 700 + 141, 743= RM 149, 443

Based on the analysis of the status report, the estimated cost of the project at completion is RM149, 443, which is RM1, 943 over the original budget of RM147, 500.

EXAMPLE 1 (A)©Sheila Belayutham©Sheila Belayutham

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