Q 418. What is Earned Value of a project and how is it used to gauge project progress? When is Earned Value not a meaningful method for progress review?

 

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Earned value (EV) is a project management technique which can be used to measure the project completion status again the project plan (Project schedule & budget) . In other words, It is a way to review the project progress by multiplying the project completion percentage with the project budget. (Earned Value = Project completion % X Estimated project budget)

 

EV is quantitative technique in nature, and calculated by evaluating project actual performance(completion % and Actual cost incurred) against the project schedule and project estimated cost (budget).

 

When is Earned Value is not a right measure?

• Earned value is project management technique which would not be opt when project scope changes, this method is mostly suitable for a waterfall method of project management but would be not be right for current trend as every project follows the agile way where is "Change is the only constant".
• When the data is not accurate or just an estimate then this model is not a right method to evaluate the project progress
• Mostly, if you represent EV as just a number it would not give you right reference as project progress unless you furnish relevant context of the project with supporting information 

Earned Value (EV) is a technique which helps to measure project performance and progress wrt the plan in plan. This will help in assess the performance on schedule, cost and scope.

EV is calculated by multiplying %completion of each task by its planned value.

It is advised not to wait till the completion of a project to compute EV as the identified risks or challenges identified through the process may become inconsequential if you do not have sufficient time to make necessary modifications

 

EV = % work completed * Budget

 

For Eg: if the project in scope has to deliver 500 features of a product and the total project budget is INR 5,00,000 and currently the project has delivered 300 features then

Work completed = 300/500 = 60%

Budget = 500000

Then EV = Rs 300000

 

Earned Value though a powerful technique to assess performance, may not hold good in certain scenarios. They are as below

·       EV is based on the % completion, in cases where the completed % cannot be computed logically, EV may not be valid

·       Again EV doesn’t take complexity into consideration. In the example quoted above, the pending features could take much time than before based on the complex logic involved or could even be simpler

·       EV has a huge dependency on a structured plan. In cases where the project plan is not extensive or volatile and keep changes then EV calculation will not be meaningful

·       EV numbers may not give the full picture and the situation on ground should also be considered. The data reported without contextual awareness could result in wrong analysis

 

Earned value of a project provides the progress of a project in terms of schedule and cost. Earned value helps to gauge the project progress in the following manner.

Earned value is the percent of the total budget actually completed at a particular point in time.

EV = %complete *total budget

Actual cost is the actual money spent on the work completed.

Planned value is the budgeted amount for the work panned to be completed.

Cost variance, CV = EV-AC

Cost Performance Index, CPI = EV/AC

Schedule variance, SV = EV-PV

Schedule Performance Index, SPI = EV/PV

If CPI is less than one and CV is negative indicates that project cost performance is below plan.

SPI greater than one and positive SV indicates that more work was established than planned.

This is how Earned value helps gauge project progress.

 

Earned value may not help in the following cases -

1. Project scope, schedule or budget is not properly defined

2. WBS is not complete

3. Actual cost does not include all the costs.

4. Management influence

5. No time to collect all data.

 

Definition: Earned value of Project is very high level and simplistic way of assessing a project progress with respect to Cost and timelines for a given scope. In very simple terms , earned value (EV) can be explained as below:

Example: A 2000 Sq feet of G+1 floor independent house need to be constructed in 18 months with Budget cost to complete in INR 54 Lakhs with Actual Cost (AC) - time (T) in perfect slope of C= 3 T

Say after 6-month, Budgeted cost of Work scheduled (BCWS) would be = 3 x 6 = 18 Lakhs

 

In actual, if planned work of 6 months (nothing but Planned value) completes as per schedule and also actual cost spent is INR 18 Lakhs ( ACWS)  , we can say both Cost performance Index ( EV/AC), Schedule performance Index  ( EV/PV) is 1. Any departure of these indices from 1 would indicate deviation in cost and time performance against plan. If both these indices are less than <1 , it would indicate project is over-run in cost and also behind schedule.

 

Exceptions : The major drawback of EV measurement is , it does not account Critical Paths in project progress. A non-critical path work with significant high cost / spend or Critical path work with less cost / spend , EV method can give wrong insights for the management. Additionally cases where inflationary corrections, scope changes , contingencies are not built in to budget, management should draw conclusions and take actions with due diligence when EV is used for progress tracking.

Earned Value is a project management technique used to measure the performance / progress made at each stage of the project in comparison to the overall project schedule and cost basis project scope

Below is an example of how Earned Value is calculated

For e.g. let's assume Planned cost for a project is USD 20K, schedule is 6 months, estimated hrs is 200 hrs and actual hrs spent is 50 hrs

EV at any stage of the project can be calculated as follows

EV  = (Planned Cost * Number of hours completed)/Estimated hours

EV = (20,000*50)/200 which is USD 5K

 

Limitations of EV - EV is effective only when the project plan, schedule and cost is mostly static and hence will not be applicable for Agile projects where the scope, time, cost and schedule can be very dynamic

Earned Value (EV) is one measure used to gauge how projects were effectively managed - budgeted time & cost against progress or actuals of these two components.  This is done at the beginning of projects that uses estimations.  Experienced project managers need to carefully examine declared estimates since this can make or break the final EV.  When EV is included it usually provides for the necessary cadence of clear accountability on projects because activities, timelines, distinct responsibilities are laid out and clearly designated.  

Looks simple but it is rather a best practice principle that requires discipline and continued application.  An individual who carries this out needs to have eagle eyes in every detail and aspect of a project, staying not just of top of everything but in most cases ahead of the game.  

Since this is a constant measure throughout the duration of a project, information and data is critical.  When it is not available performance cannot be measure or inaccurately measured.  Stability of the information and data sets is also a considered to come up with an accurate value.

As with PERT which was first adopted by the US Navy, the Earned Value Project Management was first adopted by the US Air Force in the early 1960s.

Earned Value of a Project, also called BCWP (Budgeted Cost of Work Performed) is a measure of the Project’s performance. It is basically a relationship between the percent of the project actually completed and the budget. It links the Project time and cost and is used to measure the health and status of the Project. The foundation of EV management is the measurement and tracking of project work. At the commencement of the Project, the Budget at Completion (BAC) or Planned Value (PV) is assessed. These figures are the cost of the project and the value that the project will deliver on its completion. The Earned Value is calculated by the formula below

Planned Value = Actual Percent Completed x Budget for the Task

The Planned Value or BCWS (Budgeted Cost of Work Scheduled) is the amount of tasks that should have been completed and is calculated by the formula below

Planned Value = Planned Percent Completed x Budget for the Task

The Earned Value is an important metric to the Project Manager as it gives the value that has so far been earned on the Project as compared to the amount that has been spent. It thus is a good measure to calculate the ROI and the efficiency of the Project.

Example

AMCO Project Management Co has undertaken a Project of $100,000. As of date, 20% of the Task has actually been completed as against the planned percent of 30%. The EV and PV for this Project are calculated below.

EV = Actual Percent complete x The Budget for the Task.

EV = 20% of $100,000 = $20,000

PV = 30% of $100,000 = $30,000

Comparing the EV with the PV will give a good indication of the progress of the Project.

When not to use Earned Value

Some Project Managers do not use Earned Value for the wrong reasons. Some lack the will to do it and think of it to be a complex process, and are happy to monitor their project through the present system. In most cases, the Project Managers are not aware of the actual cost of their project.

One of the important reasons to use or not use the Earned Value system will be the maturity of the Project Management system. This would involve the use of at the very minimum, basic project management disciplines such as a reliable enterprise-wide DBMS, an estimation process, Work Breakdown Structures (WBS), a Contract Management System, Scheduling System, reporting systems for direct and indirect cost, an EAC process, a risk management system, a change management system and a work authorization process. Earned Value project management should not be used in an immature project management system that lacks the basic project management disciplines required for its success.

It entails a necessity for the project manager to be able to define the project work in detail. At the very minimum, it requires a detailed WBS system and a good understanding of the work authorization process.

References

https://www.projectmanagement.com/contentPages/wiki.cfm?ID=711501&thisPageURL=/wikis/711501/What-Is-The-Earned-Value--EV--Of-A-Project#_=_

https://sitemate.com/us/resources/articles/finance/earned-value-calculation/

https://www.ipma-usa.org/articles/NotUsingEV.pdf   © 2014, by Jim Baber. Published at www.asapm.org, April, 2014

Earned value analysis (EVA) is one of a project management technique that is used to measure how the project is progressing. It is a method that compares the actual work completed to the original budget and schedule at any point of time.  Calculating Earned Value involves calculating three key values namely.

The Planned Value (PV) which is the approved cost estimate to be spent till that point of work. It is also called as Budgeted Cost of Work Scheduled (BCWS).

Actual Cost (AC) which is the actual or total cost incurred in accomplishing the work till that specific period. It is also called as Actual Cost of Work Performed (ACWP).

Earned Value (EV) which is the actual value of the work completed till that specific point. It is also called as Budgeted Cost of Work Performance at a specified point (BCWP).

 

These three parameters are used in performing variance analysis which determines whether work is being accomplished as planned. There are two types variance associated with EV which are Schedule Variance (SV) & Cost Variance (CV). Schedule Variance (SV) is the dollar value difference between work that is ahead or behind the plan and represents the schedule status of the project. It is calculated by the below formula

SV = EV – PV

If the schedule variance (SV) is negative, then you are behind schedule.

 

Cost Variance (CV) is the dollar value difference between budgeted cost of work performed and actual cost work performed. It represents the cost status of the project and is calculated by the below formula

CV = EV – AC

If the cost variance (CV) is negative, then you are over budget.

 

EVM is based on the fact that the project has all the detailed plans upfront. Hence, it works perfectly for projects where the planning process can identify all major project deliverables and does not entertain any change during the project development cycle. Due to this, EVM does not work well for projects with agile initiatives as agile processes harness the power of change during the project development to provide customer’s competitive advantage.

 

" What's the worth of the work done so far"

 

     The above phrase is the basis for the genesis of the concept Earned Value(EV).The EV Analysis(EVA) enables the project managers to measure the progress of the project beyond just reviewing the traditional cost and schedule metrics. Such analysis is possible only if the scope is frozen and project details are known upfront.

 

   The three important pillars of EVA which determines the direction of the project progress in terms of the what the project has accomplished so far are:

 

Earned Value(EV) also termed as Budgeted Cost of Work Performed(BCWP)

Actual Cost(AC) also termed as Actual Cost of Work Performed(ACWP)

Planned Value(PV) also termed as Budgeted Cost of Work Scheduled(BCWS)

 

Any deviations from the Budgeted values are captured at the first level using the Schedule Variance(SV) and Cost Variance(CV) by using the following expressions:

 

* SV=EV- PV

* CV=EV-AC

 

The second level of project progress performance is captured using Scheduled Performance Index(SPI) and Cost Performance Index(CPI) using the following expressions:

 

* SPI= EV/PV 

  An SPI = or > 1 indicates a favorable condition and a value of < 1 indicates  an unfavorable condition

 

* CPI= EV-AC

  An CPI = or > 1 indicates a favorable condition and a value of < 1 indicates  an unfavorable condition

 

 

Drawback of EVA

 

  EVA fails to capture the real worth of the project progress in agile project conditions where the details are unknown and uncertainties are high. EPC contract projects like Solar energy projects are such classic cases where the  multiple suppliers and multiple contractors are involved in multi location scenario.

Edited November 12, 20214 yr by C V Satish
Added an Example of EPC projects

Earned value is a technique used in project management to measure the project performance and its progress in an objective manner. EV tells us the value of the work that has been completed against the planned budget. It helps us in providing an accurate forecast of project performance and its problems. This in turn helps the management to take proactive actions and make decisions effectively.

EV focuses on three factors of project (before, during & after) to evaluate its feasibility, progress & Success. This is calculated by multiplying the project completion % with the total allocated budget for the project. Ex. If the total project budget is $ 10000 and the project completion is 45% then the EV is $4500. However, to get more insights on the project performance we need few addition calculations along with EV which are scheduled variance and cost variance.

 

Schedule variance is calculated as Earned Value (EV) – Planned Value (PV), [SV=EV-PV]. This will help us assess if the project is ahead (if positive) or behind (if negative) the schedule. 

 

Cost Variance is calculated as Earned Value (EV) – Actual Cost (AC), [CV=EV-AC]. This will help us assess if the project is over (if negative) or under (if positive) the budget.

 

This technique of assessing the project performance holds good for projects that follow waterfall methodology which focuses on delivering (OTOBOS – Ontime, On budget, On Scope) and stresses the need for establishing a baseline before the project starts. Hence this technique will fail if applied for projects that follows Agile methodology where the projects are agreed and delivered in portions during the fixed sprints. Agile methodology which gives room to accommodate frequent changes during the various stages of the sprints EV might not be a best technique to adopt. 

Earned value :

Earned value denotes the actual completed work in a project ,representing the value generated in same. The calculation of earned value will give a quantified measure of success for the project.  

 

Earned value in project management

Calculation of earned value will be a key indicator to measure the project completion against plan. To calculate earned value on a project and use it to gauge the project progress ,the below listed needs to be considered.

 

Earned value (EV) = % of task completed * Budget of the task

Planned value (PV) = % of task planned to complete * Budget of the task

Actual cost (AC)= Actual amount spend on a completed work

 

Schedule variance

Schedule variance is the difference between Earned value and Planned value ,which clearly indicates the project manager whether the project is behind or ahead of the schedule.

“Schedule variance(SV)” is calculated as “Earned value(EV)” – “Planned value(PV)”

For example the planned value of a project at a particular milestone is 20 days and the earned value there is 10days then Schedule variance =10-20 ,that is “-10”, which indicates that the project is behind schedule.

Similarly ,we can calculate the cost variance as well, comparing the difference in earned and planned value in terms of cost.

 

Limitations of this approach in project management

The calculation of Earned value requires a quantification of the project plan and activities ,which would be challenging for projects of discovery driven nature or research projects. The earned value method will have its limitation when the project contains a significant portion of LOE ( Level of Effort), where it would be difficult to quantify the repeated periodic effort from these activities.

All the published answers have highlighted the importance of Earned Value and its limitations. Answers from Prabhu, Johanan and C V Satish are a must read.

 

The best answer has been provided by Prashant Philip Vargis.