Earned value understanding

Earned value understanding

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  Earned Value Management EarnedValueManagement(EVM) isa technique thatmeasuresprojectperformance againstthe projectbaseline.The EarnedValue calculationsare studiedandmemorizedbyall projectmanagers seekingPMPcertification.However,their use inpractice isinconsistent.EVMisconsideredby Cardinal tobe one of the “critical few”bestpractice areasfor monitoringprojectperformance from botha cost andschedule perspective. It iscommon tothinkabout projectswithbinarythinking:  Aheadof schedule vs.Behindschedule  Overbudgetvs.Under budget Both projectperformance factorshave adirectimpacton the total projectcost.What will be the total cost of myprojectif I'm aheadof schedule butmycostsare higherthanexpected?If I'mbehind schedule butmycostsare lower?EVMprovidesgreatinformationtohelpwiththesequestions! CalculatingEarned Value Software packageslike MicrosoftProjectcanperformEarnedValue calculationsautomatically,and theyare simple calculations thatcanquicklybe performedmanuallyasneeded.EarnedValue calculationsrequire the following:  PlannedValue (PV) =The budgetedamountthroughthe currentreportingperiod  Actual Cost (AC) = Actual coststo date  EarnedValue (EV) = Total projectbudgetmultipliedbythe % complete of the project Withthese readilyavailable numbers,we're readytodosome calculations.  Schedule Performance Index (SPI)calculation:SPI=EV/PV SPImeasuresprogressachievedagainstprogressplanned.AnSPIvalue <1.0 indicateslessworkwas completedthanwasplanned.SPI>1.0 indicatesthatmore workwas completedthanwasplanned.  Cost Performance Index(CPI) calculation:CPI=EV/AC CPImeasuresthe value of workcompletedagainstthe actual cost.A CPI value < 1.0 indicatesthat costs were higherthanbudgeted.CPI>1.0 indicatesthatcostswere lessthanbudgeted. For bothSPIand CPI,>1 is good and <1 is bad.Note thatif you’re ina hurry,that forboth Costand Schedule,youcansubtractinsteadof dividingtogetthe variance.ScheduleVariance =EV - PV and Cost Variance = EV – AC.Subtractingcan quicklybe done inyourhead,and forthese cases,>0 is goodand <0 is bad.But unlike SPIandCPI,variance cannotbe effectivelycomparedacrossprojects
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  or overtime wherethe budgetfora projectmayhave changedbecause theyare relative tothe size of the project.  EstimatedatCompletion(EAC) calculation:EAC= (Total ProjectBudget) /CPI EAC isa forecastof howmuch the total projectwill cost. An Example Let’stake a lookat an example.Assume thatwe are halfwaythroughayear-longprojectthathasa total budgetof $100,000. The amountbudgetedthroughthis6-monthmarkis$55,000. The Actual Cost throughthis6-monthmark is$45,000. So insummary:  PlannedValue (PV) =$55,000  Actual Cost (AC) = $45,000  EarnedValue (EV) = ($100,000 * 0.5) = $50,000  Schedule Variance (SV) =EV – PV = $50,000 - $55,000 = -$5,000 (badbecause < 0)  Schedule Performance Index (SPI)=EV / PV = $50,000 / $55,000 = 0.91 (badbecause < 1)  Cost Variance (CV) =EV – AC = $50,000 - $45,000 = $5000 (goodbecause > 0)  Cost Performance Index(CPI) =EV / AC = $50,000 / $45,000 = 1.11 (goodbecause > 1)  EstimatedatCompletion(EAC) =(Total ProjectBudget) /CPI= $100,000 / 1.11 = $90,000 Because SV isnegative andSPIis< 1, the projectisconsideredbehindschedule.We are 50% of the waythrough the project,buthave plannedfor55% of the costs to be used.There will have tobe some catch-upin the secondhalf of the project. Because CV ispositive andCPIis> 1, the projectis consideredtobe underbudget.We are 50% of the way throughthe project,butour costs so farare only45% of our budget.If the projectcontinues at thispace, thenthe total cost of the project(EAC) will be only$90,000, as opposedtoouroriginal budgetof $100,000. Pitfallsto Watch Out For  Take care not to relysolelyonEarnedValue–itrepresentsasingle objectivedatapoint.EarnedValue can change quicklyandactual costsand projectprogressrarelyoccur as budgeted.However,Earned Value doesserve asanexcellentearly-warningsystem, andlookingatEarnedValue trendscan provide veryuseful data.Itismostcommonto reportEarned Value monthly,butthiscouldbe more frequentfora shorterproject.
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   CustomerSatisfactionandQualityare notcapturedwithinEarnedValuecalculations.WhileEarned Value ishelpfulformeasuringprojectperformance relative toscheduleandbudget,itdoesnot guarantee projectsuccess.  It isimportantto make sure that all Actual Costsare includedinyourcalculations.Especiallywhen usingsoftware like MicrosoftProject,somethingcouldbe overlooked(particularlyindirectlaborand non-laborcosts).  If you are reportingEarnedValue calculations,make sure the recipientsknow whatthe numbers meanand howtheyare used.Irecommendpresentingtheminnon-projectmanagementtermsto projectsponsorsandotherkeystakeholders.Thisismucheasierthantrainingstakeholderson “projectmanagementspeak”(whethertheywantitor not). These EarnedValue calculationscanhelpaProjectManageridentifyproblemsearlyandbe more proactive asopposedto“after the fact” and reactive.EV metricsare definedinastandardmanner and the data isavailable tobe reportedregularlyacrossthe projectportfolio.