Earned Value Managment: A useful PM tool

 

Earned Value Management 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 helps evaluate and control project risk by measuring project progress in monetary terms.

We spend time and materials in completing a task. If we are efficient we complete the task with time to spare and with minimum wasted materials. If we are inefficient we take longer and waste materials.

We also plan how we will accomplish the task. How long it will take, the resources we need and the estimated costs.

By taking a snap-shot of the project and calculating the Earned Value metrics we can compare the planned with the actual and make a subjective assessment of the project progress.

By extrapolating the curves and further calculation we can also estimate the costs to project completion and the probable completion date.

The basics of Earned Value can best be shown on the ubiquitous 'S-Curve'.

The S-curve in its simplest form is a graph showing how project budget is planned to be spent over time.
We can complicate the graph by showing the actual costs of doing the work over the same period.
And also on the same graph we can show how the value of the product of the project increases over the same period.

The three curves on the graph represent:

• Budgeted Cost for Work Scheduled (BCWS) - the budgets for all activities planned to be completed.

• Actual Cost of Work Performed (ACWP) - the real costs of the work charged against the completed activities.

• Budgeted Cost of Work Performed (BCWP) - the planned costs of the work allocated to the completed activities. This is the Earned Value.

The BCWS curve is derived from the Work Breakdown Structure, the project budget and the Project Master Schedule. The cost of each Work Package is calculated and the cumulative cost of completed Works Packages is shown based on the planned completion dates shown in the Master Schedule.

The ACWP curve is found by actual measurement of the work completed. Actual costs recorded from invoices and workmen's time sheets. This appears a daunting task but it can be very simple with sufficient planning and organising.

The BCWP is calculated from the measured work complete and the budgeted costs for that work.
Earned Value = Percentage project complete X Project Budget

Variances

Schedule and cost variances can both be calculated in monetary terms from the data needed to produce the S-curves.

Schedule variance is the difference between the Earned Value and the planned budget.
SV = BCWP - BCWS

Cost Variance is the difference between the Earned Value and the actual costs of the works.
CV = BCWP - ACWP

Performance Indices

Schedule Performance Index and Cost Performance Index give indications of the health of the project. Is the project on time, in budget or what?

Schedule Performance Index is a ratio of Earned Value and the planned value of completed works. A SPI < 1 is not good
SPI = BCWP / BCWS

Cost Performance Index is a ratio of Earned Value and the actual costs of completed works. A CPI < 1 is not good
CPI = BCWP / ACWP

Estimate At Completion

The EAC gives an idea of the final costs of a project. It takes into account the original budget (BAC), the Earned Value and the Cost Performance Index of the already completed works.
EAC = ACWP + ((BAC - BCWP)/CPI)

Earned Value is based on the idea that the value of the product of the project increases as tasks are completed. And therefore the Earned Value is a measure of the real progress of the project.

Earned Value provides a standard means of objectively measuring work accomplished by integrating cost, schedule and technical performance into one set of metrics so that effective comparisons can be made.

Earned Value can be used to communicate the progress of the works. This is historical information, "water under the bridge", you can't do anything about it.

The more relevant use to the proactive project manager is to measure variances and define trends. Actions can then be taken to reduce the unwanted variances and the wayward trends.

Remember, if you can't measure it, you can't control it.

Setting up an Earned Value Management system

• Define the scope of the works.

• Set up a Work Breakdown Structure (WBS).

• Develop a Project Master Schedule showing when every Work Package will be carried out.

• Allocate budget costs to each Work Package (the lowest level of WBS).

• Establish a practical way of measuring the actual work completed.

• Set, in concrete, the performance measurement baseline.

Define the scope of the work

Scope definition will be the subject of future articles. Enough to say here is that the scope of the works must be frozen at some early stage in the project life cycle. And if the product of the project changes shape, size or color then change management techniques must be employed to control and monitor the changes to the agreed frozen scope.

Set up a Work Breakdown Structure

For efficient monitoring and control the scope of a project must be clearly structured. A project's structure is a hierarchical distribution of the scope into logical groupings and levels. This, the Work Breakdown Structure, is usually triangular in shape and the base, or lowest level, is made up of Work Packages (WP).

Work Packages are the smallest self contained grouping of work tasks considered necessary for the level of control needed.

A Work Breakdown Structure is defined disregarding the time schedule and any inter dependencies. However, it is the basis for developing the time schedules, delivery plans as well as for resource planning.

In 'PMI-Speak', the WBS is an output from the Scope Definition Phase, part of Scope Management. And the development of the WBS to WP level is called 'decomposition'.

Develop a Project Master Schedule

A Project Master Schedule shows the calendar time it will take to complete the works. It shows all activities and major events, like milestones and shows the logical relationship between the Work Breakdown Structure elements (at the most detail level, this will be the Work Packages).

Allocate budget costs to each Work Package

The computation of budgeted costs will depend on the financial management systems employed by the 'Performing Organisation'. However the two principle cost elements are labor and materials.

To assist in estimating labor costs it is usual to devise an Organisational Breakdown Structure (OBS). Similar to a WBS, the OBS shows the resource and competence groups necessary to complete the works. At the lowest level, the OBS shows individuals engaged on the project.

By combining the WBS and the OBS we can obtain a good visual overview of the project. A matrix can be drawn with the WBS along the top and the OBS along the side. At each intersection, detailed plans can be made regarding the tasks and the cost of labor.

Because the project scope has been decomposed to individual Work Packages it is a relatively simple exercise to estimate the cost of materials from Bills of Materials and suppliers quotations.

Then total the costs for each Work Package.

Very important point:

• For cost control within the project, internal to the performing organisation, actual costs to the performing organisation is used.

• For reporting to the Customer, customer contract prices are used.

Establish a practical way of measuring the actual work completed

There are many considerations before deciding which criteria to use for measuring the work completed, including type of contract, terms of payment and whether some WP's are high value and some low value.

The methods adopted to obtain the data must also be cost effective. If the methods are cumbersome, difficult or expensive then find simplier, cheaper alternatives.

The 'Rules' employed to measure the actual work completed must be easy to administer, unambiguous and applicable to all works packages.

Measures could include:

• Quantities installed - Physically counting the number of an item installed compared to the planned total quantity.

• Percent complete - An estimate by the actual persons responsible for completing the Work Package.

• Effort by support services - Tasks that cannot be easily quantified like logistics and the work by project planners; which are more a function of time can be measured by time lapsed compared to planned total time allowed.

• By Milestones - Predefined milestones with predefined estimated work completed percentages. E.g, foundations poured = 15%, walls to first floor level = 10%, all materials delivered = 5%.

• Tied to contract terms of payment - Usually related to progress of the works except for the initial down payment.

• Two point measurement - Limited to two predefined measurement points. E.g, 50% when all materials on site, 50% on completion of the Works Package.

• Single point measurement - In a project where there are numerous small value Work Packages, the measurement point could be 100% on completion only.

Set the performance measurement baseline

We now have the WBS, the OBS, the PMS and the budget.

We can now estimate, in monetary terms, how much we plan to spend / claim in each time period (weeks or months), over the planned duration of the project.

This estimate is usually in tabular form. Time from left to right across the top. Work Packages from top to bottom along the left. Total planned cost, or price, for each period along the bottom.

Then another row for accumulative cost/price.

We can then draw a graph of time versus accumulative cost/price. And this usually looks like the well known 'S' Curve.

And if we're really smart, we would have negotiated with the project's sponsor, a 'management reserve', which could also be included in the graph indicating the absolute maximum budget.

Continuing our series, we now look at some basic examples to illustrate how Earned Value is used to assess the 'health' of a project.

In all examples, as in real life, we are taking a 'snapshot' of the project at a single point in time

The baseline in the following table shows the planned progress of tasks for the reporting period, usually from the start of the project up until the 'snapshot' is taken.

	A	B	C	D	E	F	G	Total
Planned value ($)	20	5	10	20	20	10	15	100

Example 1

	A	B	C	D	E	F	G	Total
Planned spend ($)	20	5	10	20	20	10	15	100
Actual spend ($)	18	6	10	17	18	10	0	79
Spend variance	2	-1	0	3	2	0	15	21

Comparing the measured (actual) spend with the baseline planned spend is of very little use without some indication of the amount of work done.

Task A is underspending by 2; Are we saving money, or behind schedule. On the other hand, Task B is overspent by 1; are we overbudget or ahead of schedule. While task G hasn't even started yet; at a guess behind schedule.

Reports to management are usually at a high level, they see an underspend of 21%, congratulate the PM and divert some of the management reserve!

Example 2

	A	B	C	D	E	F	G	Total
Earned value ($)	20	5	5	15	20	10	0	75
Actual cost ($)	18	6	10	17	18	10	0	79
Cost variance	2	-1	-5	-2	2	0	0	-4

The earned value compared with the actual cost of doing the work necessary to acheive that earned value, provides a measure between planned and actual costs. The difference is called Cost Variance. If the cost variance is negative, more money was spent doing the work than was planned. In the example, the earned value of the work complete was 75 but the actual cost of doing th work was 79, a cost variance of -4 or -4/75 = -5.3%

Example 3

	A	B	C	D	E	F	G	Total
Planned value ($)	20	5	10	20	20	10	15	100
Earned value ($)	20	5	5	15	20	10	0	75
Schedule variance	0	0	-5	-5	0	0	-15	-25

Planned value compared with earned value measures the volume of the work planned against the work completed. The difference is called Scedule Variance. If the schedule variance is negative, the work is late. in the example the schedule variance is -25 or -25/100= -25%

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Variance analysis and trend projection are two important tools used by the project manager to control projects.

Using earned value techniques the project manager can monitor both schedule and cost variances as well as predict trends using Cost Performance Index and the Schedule Performance Index.

The astute project manager will also calculate a set of Critical ratios at a selected level of the Work Breakdown Structure.
One useful ratio combines the schedule progress versus actual progress with the budgeted cost versus the actual cost.

(Actual Progress/Scheduled Progress) X (Budgeted Costs/Actual Costs)

This critical ratio is a good measure of the general health of a project as it combines both schedule and cost in that a poor performance in one is compensated by a good performance in the other.

A critical ratio greater than 1 is good, less than one is bad.

furthermore the project manager should also set control limits on the various critical ratios. If the ratios are outside the limits then corrective action is necessary.