Earned Value Management (EVM)
Earned Value Management (EVM), earned value project management, or earned value performance management (EVPM) is a project management technique for measuring project performance and progress in an objective manner. Essential features of any EVM implementation include:
- A project plan that identifies work to be accomplished
- A valuation of planned work, called planned value (PV) or budgeted cost of work scheduled (BCWS)
- Pre-defined "earning rules" (also called metrics) to quantify the accomplishment of work, called earned value (EV) or budgeted cost of work performed (BCWP)
- Actual Cost which is also known as Actual Cost of Work Performed (ACWP)
- A plot of project cumulative costs vs time especially to show both early date and late date curves
EVM mainly covers the three most important knowledge areas of Project Management: Scope Management, Cost Management and Time Management. EVM unifies those three areas in a common framework that allows mathematically representing the relationship between them. Even though EVM is weak in other areas of Project Management like the Stakeholders Management, it can be used to dramatically improve the success rate in projects when it is complemented with other techniques of Project Management.
source: Valor Ganado
Background and Objectives of Earned Value Management
The concept of earned value management became a fundamental approach to program management (EVM project management) in 1966 when the United States Air Force mandated earned value (USAF EVMS) in conjunction with the other planning and controlling requirements on Air Force programs. The requirement was entitled, the Cost/Schedule Planning Control Specification (C/SPCS). Over the decades, the concept and its requirements have remained basically unchanged. It has had periodic updates to its title: Cost/Schedule Control System Criteria (C/SCSC), Earned Value Management Systems Criteria (EVMSC), and the current 32 guidelines in the EIA-748 Standard for Earned Value Management Systems (EVMS). The EVM concept presented in these requirements is a sound management approach, that once incorporated on any type of program, whether research and development, construction, production, etc. provides all levels of management with early visibility into cost and schedule problems. Earned value management is now used on programs world-wide. Primary EVM users include the United States, Europe, England, Canada, Australia, China, and Japan. It is a requirement of many U.S. Government agencies, including the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA), the Department of Energy (DOE), the Intelligence Community, the Department of Homeland Security (DHS), the Federal Aviation Administration (FAA) and Department of Transportation (DOT), Health and Human Services (HHS), and others.
EVM is more than a unique project management process or technique. It is an umbrella term for 32 guidelines that define a set of requirements. The basic concept of EVM is more than a unique project management process or technique. It is an umbrella term for 32 guidelines that define a set of requirements that a contractor’s management system must meet. The objectives of an EVMS are to:
- Relate time phased budgets to specific contract tasks and/or statements of work.
- Provide the basis to capture work progress assessments against the baseline plan.
- Relate technical, schedule, and cost performance.
- Provide valid, timely, and auditable data/information for proactive project management analysis and action.
- Supply managers with a practical level of summarization for effective decision making.
Components of Earned Value Management (EVM)
The figure below shows the main components of an EVM analysis, divided in three different layers
The three key parameters of EVM are given along the following lines:
- Planned Value (PV): Time-phased budget baseline as an immediate result of the baseline schedule, often called the Budgeted Cost of Work Scheduled (BCWS).
- Actual Cost (AC): The cumulative actual cost spent at a given status date, often referred to as the Actual Cost of Work Performed (ACWP).
- Earned Value (EV): Represents the amount budgeted for performing the work that was accomplished by a given status date, often called the Budgeted Cost of Work Performed (BCWP) and equals the total activity (or project) budget at completion multiplied by the percentage activity (or project) completion (PC) at this particular point in time (= PC * BAC).
Based on the Planned Value and Earned Value, a fourth key parameter can be automatically calculated as follows:
- Earned Schedule (ES): Translation of the EV of a given status date into time units by determining when this EV should have been earned in the baseline schedule. The Earned Schedule metric measures your project progress in a time dimension and varies between 0 time units (at the start of the project) and the baseline Planned Duration (PD) at the end of the project. Hence, at the end of the project, EV = PV and ES = PD.
Project performance, both in terms of time and costs, is determined by comparing the key parameters PV, AC, EV and ES, which results in the following performance measures.
- Time performance: The Schedule Performance Index (abbreviated as SPI or SPI(t) depending on whether EV or ES is used) is a measure to express the current time performance of the project, showing whether the project is ahead of schedule (>100%), on time (=100%) or late (<100%).
- Cost performance: The Cost Performance Index (abbreviated as CPI) is a measure to express the current time performance of the project, showing whether the project cost is below budget (>100%), on budget (=100%) or above budget (<100%).
The project time and cost performance measures are assumed to be a representative indication for future project performance, and can therefore be used to forecast the final project duration and cost.
- Time forecasting: The Expected At Completion - Time (abbreviated as EAC(t)) is a forecast of the final project duration at the current status date, given the current project performance. Obviously, this forecast might differ from the baseline Planned Duration (PD).
- Cost forecasting: The Expected At Completion - Cost (abbreviated as EAC) is a forecast of the total project cost at the current status date, given the current project performance. Obviously, this forecast might be different from the original budget or Budget At Completion (BAC).
Fundamentals of Earned Value Management
Earned value management is all about measuring and benchmarking against a well-defined plan. Therefore, you can only perform this in organizations with a certain key elements in place. The 32 guidelines defined under the EIA-748 standard discuss, in detail, the fundamental processes and systems for the implementation of EVM. These guidelines are outlined as part of five broad principles. But again, the level of detail and overhead to implement should vary based on factors including organizational maturity, project size and complexity and contractual requirements. Let’s review these principles.
- Organization and Scope of Project: We start by identifying the ‘what’ element of the project with requirements collection and scope definitions. The five guidelines documented as part of this principle recommend us to create three important documents:
- Work Breakdown Structure (WBS): Create a WBS dividing high-level deliverables into smaller work packages. This graphical representation of the work we have set out to complete gives clarity on the scope.
- Organization Breakdown Structure (OBS): Create an OBS, a form of an organization chart, which shows the people, teams and departments that are involved in a project, along with their hierarchy, roles and responsibilities. OBS addresses the ‘who’ element.
- Responsibility Assignment Matrix (RAM): Interpose the WBS and OBS to create a RAM, defining exactly which task will be performed by whom. Each of these mappings or control accounts will be measured in future stages.
- Planning, Scheduling, and Budgeting: The objective of the guidelines in this principle is to help define the project baseline in concrete terms. These are the parameters against which the project will be monitored and controlled throughout the lifecycle. The WBS is a good starting point for the planning stage. We ensure that multiple activities are grouped under a single work package and multiple work packages are grouped under a single control account. Each account will have an account manager who will monitor its progress (in reality, the same person could manage multiple accounts). At this point, we define the “when” element, defining both high- and low-level milestones and assigning clear due dates to each activity. Then, we move on to time-phased budget allocation, apportioning the total budget at the level of each activity inside a work package. This includes costs, such as labor, material and subcontracting. We also assign methods of progress measurement to each work package, which will decide how EV will be calculated at a later point for a task-in-progress. The sum of all budgeted work is called as the performance measurement baseline. Additionally, project managers allocate management reserves for unexpected scope increases.
- Accounting for Actual Costs: A set of six guidelines discusses the process of cost calculation. The focus of this activity is simple—to measure the actual costs. But it’s important to have systems in place that can track costs at a work package level, otherwise it’ll be difficult to measure progress accurately. Also, it’s possible that you may be incurring/paying out the actual costs only a few months later, but a portion of it has to be allocated much earlier to calculate the earned value. To avoid these booking lags, the guidelines emphasize on accounting for accruals.
- Analyzing and Reporting on Project Performance: The calculations of PV, EV, AC, along with variances and indexes are described in detail in this section with six guidelines. The idea is to consistently report these numbers such that team members, senior leaders, and customers have visibility into project progress. But the focus is as much on identifying the corrective actions to be taken as the measurement against the baseline and reporting numbers. The guidelines recommend defining variance thresholds; when the cost performance reports indicate a threshold breach in a control account, one can drill down to spot the problematic tasks.
- Revisions and Data Maintenance: The five guidelines under this section acknowledge that the project baseline is not rigid, especially when problem areas are uncovered in the middle of a project. But you cannot revise a baseline every time you overspend or there is a delay in a task. Some scenarios when the guidelines recommend revising a baseline are when there is an authorized change to the scope, cost or schedule of the project or when there is fluctuation in rates. Creating change management and risk management plans, seeking necessary approvals and evaluating the need to dip into the management reserve are some of the activities that fall under this section.
Earned Value Management Measures
EVM consists of the following primary and derived data elements. Each data point value is based on the time or date an EVM measure is performed on the project.
Primary Data Points
- Budget At Completion (BAC)
Total cost of the project
- Budgeted Cost for Work Scheduled (BCWS) / Planned Value (PV)
The amount expressed in Pounds (or hours) of work to be performed as per the schedule plan
PV = BAC * % of planned work.
- Budgeted Cost for Work Performed (BCWP) / Earned Value (EV)
The amount expressed in Pounds (or hours) on the actual worked performed
EV = BAC * % of Actual work
- Actual Cost of Work Performed (ACWP) / Actual Cost (AC)
The sum of all costs (in Pounds) actually accrued for a task to date
For example say we should have completed £800 pounds of work by today. We completed £600 worth of work. The BCWP is £600. The BCWS is £800. And if we actually paid £700 then (ACWP) = £700.
Derived Data Points
- Estimate At Completion (EAC)
- The expected TOTAL cost required to finish complete work
- EAC = BAC / CPI
= AC + ETC
= AC + ((BAC - EV) / CPI) (typical case)
= AC + (BAC - EV) (atypical case)
Here atypical means it is assumed that similar variances will not occur in the future.
- Estimate to complete (ETC)
- The expected cost required to finish all the REMAINING work
- ETC = EAC - AC
= (BAC / CPI) - (EV/CPI)
= (BAC - EV) / CPI
- Cost Variances (CV)
How much under or over budget
CV = EV-AC
NEGATIVE is over budget, POSITIVE is under budget
- Schedule Variances (SV)
How much ahead or behind schedule
SV = EV-PV
NEGATIVE is behind schedule, POSITIVE is ahead of schedule
- Variance At Completion (VAC)
Variance of TOTAL cost of the work and expected cost
VAC = BAC - EAC
- Cost Performance Index
CPI = EV / AC
Over (< 1) or under (> 1) budget
- Schedule Performance Index
SPI = EV / PV
Ahead (> 1) or behind (< 1) schedule
Benefits of Earned Value Management (EVM)
EVM provides more information than normal project tracking. It is a step further by answering the question; Have we got to where we want to be in the project? and When are we going to finish this project? It helps define more accurately as to where we are in the project as well as calculate its successful completion.
The value added approach helps achieve greater visibility and control of the project activities which helps in responding to issues early on, thus making it possible to meet the project timelines. It provides a clear communication of the activities involved and improves project visibility and accountability. The basic principle of earned value management (EVM) is that the value of the piece of work is equal to the amount of funds budgeted to complete it.
Earned Value Management (EVM) Limitations
EVM is a technique that you can use to help manage and control your project, but EVM won’t solve everything. Furthermore, as PMI notes, it doesn’t always work on your project. It is not a magic bullet that can pierce all project problems, and it has some pitfalls. You can’t rely solely on earned value management. Remember, it’s merely calculating a single objective data point. The earned value on your project can change and can change fast. Naturally, cost and progress are seldom reflected in the actual project as they are when you’re executing the project. So, EVM acts as a safeguard and provides useful data. It’s best to make these calculations monthly or more frequently if your project is shorter in duration.
- EVM Doesn’t Ensure Quality: There are some things that EVM doesn’t offer a window to view, such as customer satisfaction and quality of the project. The project performance as it relates to important factors such as schedule and budget are tracked with EVM. But a successful project is not one merely brought in on time and within budget. If your customer is unhappy or the project or service quality is poor, there’s a big problem, regardless of meeting schedule and budget demands.
- Without Accurate Data, EVM is Useless: Also, if you don’t include all actual costs in your calculations then your results are not going to accurately reflect the progress or performance of the project. If you’re using a software that automatically makes these calculations you need to be doubly cautious, as they might overlook some critical data and give you a misleading result.
- EVM Needs Context: Finally, don’t just deliver the numbers to customers, stakeholders or whomever you’re reporting to. They need to know what those numbers mean and how you’re using them. Be clear in your language and avoid the jargon that we all start using without thinking. You know what you’re talking about, but it’s important that who you’re talking to understands as well. Don’t dumb it down, of course; just speak clearly and simply. Being able to effectively communicate EVM is as important as being able to calculate it.
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- Defining Earned Value Management (EVM) Wikipedia
- Background and Objectives of Earned Value Management (EVM)Humphreys and Associates
- What are the Components of Earned Value Management (EVM) PM Knowledge Center
- 5 Fundamentals of Earned Value Management Hexagon
- EVM Measures Project Smart
- Benefits of EVM APMG International
- EVM Is Great, With a Few Caveats Project Manager