The Benefits of Earned Value Management Earned Value Management (EVM) Introduction Earned Value concept was developed

in the late 1800s in the manufacturing industry when it became desirable to measure performance on the factory floor. In the early 1960s, the United States Government needed a method to ensure that money was being spent effectively and progress was being made, on large defense and space projects. EV methods proved very effective in achieving this goal. It enabled the government to keep the focus on the overall mission of these large projects and better predict the progress of these projects. Since then, Earned Value has been adopted as a standard method of measuring project performance. The data collected across decades of projects tracked by the U.S. Government, and their analysis using EV reports, established that a disciplined Earned Value Management (EVM) approach could accurately predict the final cost of a project to within 10%, as early as onefifth of the way through the project. This ability for early and accurate forecasting of costs opened the door to more general use of EVM in support of project tracking. EVM uses effective practices in the areas of project planning and control, and relates to the measurement and analysis, as well as forecasting and reporting of cost and schedule performance for evaluation and action by project managers and other key stakeholders. EVM evolved to be seen as either a friend or a foe, and is either embraced or shunned. It is seen by some as a cost saving tool to the overall project, and cite the improved analysis, communication and control derived from the implementation of Earned Value practices. The opponents of EVM see it as an overhead burden, and generally cite the cost and effort to make it work, and the limited benefit derived from its implementation. If used effectively, it is a great tool for project management. What is Earned Value? Current performance is normally a very good indicator of future performance. It is possible to forecast cost and schedule performance by analyzing current trends. Earned value is one of the most sophisticated and accurate methods for measuring and controlling project schedules and budgets. Earned value is a project management tool for estimating how a project is doing in terms of its budget and schedule, and to obtain an estimate for the cost that will have been used at completion. Project Managers and stakeholders would like to know the following information at any point in time, to ensure that work is progressing according to schedule:

How much work was planned to be completed? How much work has actually been completed? How much did it cost for the completed work? What is the estimate of the final cost? What is the expected completion date of the planned work?

Earned Value calculations help to answer the question what did we get for the money we spent? Earned Value is an approach where you monitor the project plan, the planned work, and the actual completed work to see if a project is on track with respect to cost and schedule. Earned Value focuses on the accurate measurement of work performed against the detailed baseline project plan, and provides accurate prediction of the final cost and schedule, based on the current trends with respect to cost and schedule of planned and actual work. Definitions of Earned Value NASA definition: An integrated management control system for assessing, understanding and quantifying what a contractor or field activity is achieving with program dollars. EVM provides project management with objective, accurate and timely data for effective decision making. Other definitions:

Earned Value is a method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned. Earned Value is a methodology used to measure and communicate the real physical progress of a project taking into account the work complete, the time taken and the costs incurred to complete that work.

Earned Value has proven to be one of the most effective performance measurement and feedback tools for project managers. Timely and appropriate feedback enables project managers to identify problems early on and make necessary adjustments for keeping the project on time and budget. How is it used? EVM is a useful technique for measuring a projects performance in terms of its schedule and cost, and involves using formulas to combine objective measurements of project performance into one integrated system. Project costs are essentially the costs incurred in completing scheduled activities. Hence, work that is completed or work that still has to be done can be viewed in terms of its monetary value. Considering costs and schedules are closely related, EVM can be used to control project costs. The performance of any project is mainly measured against the time it takes and the incurred costs. EVM involves looking at both the schedule performance (how well the project is performing compared to the planned schedule), and cost performance (how efficiently the budget is being put to use to complete the work outlined in the project schedule). There are two EVM variables that are used to measure and specify how the project is doing with respect to time and costs: 1) Schedule Performance Index (SPI): This tells us whether the project is on schedule (SPI = 1), behind schedule (SPI < 1), or ahead of schedule (SPI > 1). 2) Cost Performance Index (CPI): This tells us whether the project is on budget (CPI = 1), over budget (CPI < 1), or under budget (CPI > 1). 2

There are other EVM variables that can reveal the projects performance, but SPI and CPI are the ones that are most commonly used. EVM Variables EVM consists of the following primary data elements, and each of these data point values is based on the time or data an EVM measurement is performed on the project.

BAC (Budget at Completion): Total cost of the project PV (Planned Value) or BCWS (Budgeted Cost of Work Scheduled): The cost of work to be performed as per the baseline project plan. EV (Earned Value) or BCWP (Budgeted Cost of Work Performed): The expected cost for the work that has been completed. AC (Actual Cost) or ACWP (Actual Cost of Work Performed): The actual accrued cost of the work performed so far.

A visual representation of the relationship between the various elements defined above would help in better understanding of the EVM measurements.

Using the primary data elements, we can arrive at the derived data elements for EVM. They typically fall under 3 categories: 1) Variances Schedule Variance (SV) indicates how much the project is ahead or behind schedule. SV = EV PV A negative value for SV (SV < 1) indicates that the project is behind schedule, while a positive value for SV (SV > 1) indicates the project is ahead of the schedule. Cost Variance (CV) indicates how much the project is under or over the budget. CV = EV AC 3

A negative value for CV (CV < 1) indicates that the project is running over budget, while a positive value for CV (CV > 1) indicates the project is running under budget. 2) Performance Indices Schedule Performance Index (SPI) is an indicator or measure of the efficiency of the time spent on the project, or the schedule efficiency of the project. SPI = EV / PV A positive SPI (SPI > 1) indicates the project is ahead of schedule and a negative SPI (SPI < 1) indicates the project is behind schedule. Cost Performance Index (CPI) indicates the efficiency of utilization of the resources allocated to the project, or a measure of the actual cost efficiency on the project. CPI = EV / AC A positive CPI (CPI > 1) indicates the project is under budget and a negative CPI (CPI < 1) indicates the project is over budget. 3) Cost Forecasting Estimate at Completion (EAC) is the estimated overall cost of the project at the completion of the project, or the forecasted total project costs based on project performance till date and likely project performance in the future. EAC = BAC / CPI = AC + ETC = AC + ((BAC EV) / CPI) [typical case]

= AC + (BAC EV) [atypical case] Estimate to Complete (ETC) is the estimated cost required to finish all remaining work. ETC = EAC AC = (BAC EV) / CPI Benefits of EVM Earned Value Management helps in providing an objective measurement of how much work has been accomplished on a project. Using EVM, the management team can analyze and compare how much work has been actually completed against the amount of work planned to be completed, at a given point in time. The primary goal of the EVM system is to provide Project Managers and stakeholders (key decision makers) with valid, timely, accurate, and auditable performance information on which to base management decisions concerning the project. EVM provides many benefits 4

to successfully deliver a project at acceptable and agreed upon quality levels on time and within budget. The key benefits of EVM are:

Preventing scope creep: EVM allows for continuous and detailed planning. It starts with your existing project plan and then breaks it down into individual tasks that each have planned values of scope, cost (budget), and time. Scope creep would result in variances to cost and schedule, and deterioration of efficiencies, which will be highlighted by the EVM measurements. Provides an objective measurement of the scope, schedule and cost: EVM provides an objective assessment of the performance of a project. Instead of simply concentrating on how much time has been taken to achieve progress, earned value focuses on how much value has been achieved so far based on the planned schedule and cost. This helps in measuring the efficiency of the project and in predicting whether the project will achieve the objectives with respect to its cost and schedule. Increases the effectiveness and accuracy of status reporting: EVM is a technique used to accurately measure the projects planned value of the defined work against the earned value actually accomplished. This relationship between the Planned Value and Earned Value indicates precisely how much of the scheduled (planned) work has been accomplished as of the given point in time. It tells whether the project is on track, ahead, or behind schedule. Similarly, with the cost calculations, it is able to clearly tell whether the project is over budget, under budget, or within the estimated budget. This also leads to improved communication with stakeholders. The cost and schedule performance indicators help in providing a good estimation of the efficiency factor of the planned work. In addition to providing a more accurate status of the project, these EVM measures help in increasing the effectiveness as project managers and senior management is able to predict the progress of the project based on current trends. Reducing risk: EVM measurements provide early indicators of potential risks with respect to cost and schedule. Project managers can take proactive corrective actions to mitigate the risks. Managing project performance: EVM allows project managers and senior management to monitor progress and to react to poor or declining performance indicators more proactively. Profitability analysis: EVM measurements assist in performing profitability analysis, and enable project managers to take measures to improve profitability or cut losses. Using EVM, senior management can analyze project performance trends and predict even in the early stages of the project whether it is likely to meet its defined targets. This helps management to make decisions, like whether to cancel the project, much earlier in the project lifecycle, before spending a huge amount of money and resources on the project. Project forecasting: EVM measurements enable project managers to forecast the project performance. Based on current performance metrics, project managers can forecast estimated cost at completion (EAC) and estimated time to complete (ETC). A consistent variance in schedule and/or cost could also point to the fact that the project plan requires a revisit both in terms of cost and schedule. EVM can quickly highlight such issues, and bring to the attention of management to take corrective action.

As far as the Project manager is concerned, EVM changes the emphasis from performance targets that are way into the future, to targets that are coming up in the near term. Measuring the performance of individual tasks (WBS elements) rather than the project as a whole gives both the project manager and senior management a steady stream of indicators about the health of the project. Who Benefits from the use of EVM EVM provides a concise and timely view of project progress that enables monitoring and early forecasting of cost and schedule issues. EVM is indispensable as a communication tool for managing stakeholder expectations. EVM provides important communication content, and it concisely and objectively indicates the schedule and cost status of the project. The objective facilitation of discussions around root cause analysis and problem resolution to identify and justify actions that each stakeholder must own in order to meet expectations becomes much more effective when EVM is used to measure progress. Everyone involved in the project benefits from the use of EVM. Project Manager: No one benefits more from the use of EVM than the Project Manager. Earned Value provides essential project management metrics that will allow the project manager to very accurately identify the current status of the project with respect to cost and schedule, and where the project is headed in terms of the final cost and schedule, and do so throughout the project lifecycle. EVM is one of the most effective ways to manage project schedule and cost performance for large complex projects. The process also gives project managers some data to back up that gut feeling that comes from years of project experience when things are about to go wrong with respect to schedule or cost. The practice of EVM also forces good planning. Program Managers: EVM offers program managers a common platform for planning, executing, monitoring, measuring and controlling one or more projects simultaneously. Stakeholders: The various stakeholders benefit from the use of EVM in different ways. To the key stakeholders, EVM provides accurate reporting of the project status and gives objective indications of the health of the project. EVM gives the stakeholders more reliable information to make better management decisions. The project sponsor gets accurate reports on the current status and future trends of the project, which helps him to make timely decisions about the future of the project. Company: To the company, EVM provides a smarter resource allocation and thereby an increased return on investment. CIOs can expect to further the organizations business objectives by ensuring that their project portfolios are properly, consistently, and systematically managed, and that portfolio values are maximized while risks and costs are minimized. Top reasons why EVM does not work in many organizations Though people recognize the benefits of EVM, there are many reasons why EVM does not work effectively in many organizations. The main reasons are:

Incomplete or not documented requirements WBS either not used or not accepted WBS incomplete 6

Project plan not integrated (WBS-Schedule-Budget) Incorrect schedule and/or budget Change management not used or ineffective Cost tracking system inadequate Incorrect progress monitoring systems Lack of management support and oversight

Conclusion EVM is one of the most effective techniques for providing objective and accurate information on project performance. It can communicate scope, cost, and schedule status information to the stakeholders. When properly used, EVM is a flexible process that provides timely information on the health of the project, and its effective use can provide a competitive edge to the organization in successfully delivering projects. Popularity of EVM has grown significantly in recent years, especially in the management of complex projects, and has been embraced by project managers around the globe with good success. With good planning, and effective implementation of EVM tools and processes, project managers can be better informed to make management decisions during the entire life cycle of their projects. PMI EVM Community of Practice (previously known as PMI College of Performance Management) is a knowledge-based component of the Project Management Institute. The Association for the Advancement of Cost Engineering (a professional Engineering group) advocates the use of Earned Value Analysis and offers certification as an Earned Value Professional.