Earned Value
UNIT 8 EARNED VALUE ANALYSIS Analysis
Objectives
After studying this unit, you will be able to:
• Define Earned value analysis.
• Able to measure and control the performance and progress of a project
Structure
8.1 Introduction
8.2 Define Earned Value Analysis
8.3 Earned value Analysis Terms
8.4 Earned value – Performance metrics
8.5 Let Us Sum Up
8.6 Key Words
8.7 Self-Assessment Exercise
8.8 Further Readings
8.1 INTRODUCTION
In 1966, the United States Air Force mandated earned value management
(USAF EVMS) in addition to the other planning and controlling requirements
on Air Force programs, turning the idea of earned value management into a
basic approach to program management (EVM project management). The
Cost/Schedule Planning Control Specification (C/SPCS) was the name of the
demand. The idea and the necessary conditions have essentially not altered
over the years. Cost/Schedule Control System Criteria (C/SCSC), Earned
Value Management Systems Criteria (EVMSC), and the present 32
guidelines in the EIA-748 Standard for Earned Value Management Systems
have all undergone frequent modifications (EVMS).
Project managers use the Earned Value Management (EVM) approach to
monitor how their projects are performing in comparison to project baselines.
It’s common to think of a project’s progress as being ahead of schedule,
behind schedule, or over budget. In this global era of highly competitive
conditions, all the business practices operating in the public, as well as
private sectors are made to operate faster than ever before. As a result, it is
observed that industries are working on multiple projects simultaneously. To
make these projects work, regardless of the scope, companies need skilled
project managers. Project control is the activities conducted by the project
managers within the horizon of monitoring and updating the project, which
examines the current situation of the project and differentiates it from the
initial project plan to develop a current plan suiting the actual situation. If
there is a further delay in the project after updating, the manager may take
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Project Planning necessary steps to prevent the delay. Deviations happening in a project can be
minimised by making a healthy decision using the proper tools. In addition to
that, with the moving time, sustainable measures related to quality and cost
should also need to be monitored. In this context, Earned Value Analysis
(EVA) is a very much useful and efficient tool used widely. For the
management of successful projects, project management presents several
tools and techniques, of which, Earned Value Analysis is the most regarded
one. It is a method used for measuring the performance project at any given
point in time. A technique, that uses “work in progress” status to predict the
future performance of the project.
To understand it better, let us consider you are a project manager working for
a client that contracted with your firm to produce 5 software. You developed
a plan to produce the five software during this year. In fact, the plan calls for
100 hours to be spent on each software. Finally, the ear ended, and five
software were produced. At year-end, you check with the finance department
to inquire about the total number of hours spent while developing the
software. The finance team informs you that 400 total hours were expended
to create the five software. At first, you are filled with a sense of
accomplishment, in fact, dazzling accomplishment as you finished the
planned five-hundred-hour production of software in 400 hundred hours,
saving the company 100 hours that may be applied to other projects in need.
Then, a sense of less-than-great feeling is recognized from deep within; why?
What’s wrong with this picture?
Maybe it is the fear of the unknown that gives Earned Value a less-than-
stellar review by many in the field. Information, which is power, can help
hold project fear at bay. Therefore, this unit sets out with the fundamental
expectation of providing the learner with basic information about Earned
Value Management.
8.2 DEFINE EARNED VALUE ANALYSIS
Earned Value Analysis is a method that allows measuring the amount of
work actually carried out on a project rather than the basic review of cost and
schedule reports. EVA provides a method that combines a project’s domain,
and schedule, under a bound together situated metrics to monitor and forecast
the project’s performance. The project manager is then able to use the
progress measured, to forecast a project’s total cost and date of completion,
based on trend analysis or application of the project’s “burn rate”. This
method relies on a key measure known as the project’s earned value. Often,
earned value is defined as the budgeted cost of worked performed. This
basically, enables the project manager to compute performance indices or
burn rates for cost and schedule performance, providing information on how
well the project is doing or performing relative to its original plans. These
parameters, when applied to future work, forecast how the project will do in
the future, assuming the burn rates will not fluctuate, which oftentimes is a
130 large assumption.
Earned Value
Analysis
Figure 8.1: Risk management using EVA
8.3 EARNED VALUE ANALYSIS TERMS
As already discussed, Earned Value Analysis allows the project manager to
answer the following three questions, as they relate to the project:
1. Where have we been?
2. Where are we now?
3. Where are we going?
In Earned Value Analysis, unlike in traditional management, there are three
data sources:
• The budget (or planned) value of work scheduled (PV)
• The actual cost/value of work completed (AC)
• The earned value of the physical work completed (EV)
Planned Value (PV): It is the planned cost that has been estimated for the
following project. PV explains how much the project work is supposed to be
at any given point in the project schedule and cost estimate. Cost and
Schedule baseline refers to the physical work scheduled and the approved
budget to accomplish the scheduled work. PV can be looked at in two ways:
cumulative and current. Cumulative PV is the sum of the approved budget for
activities scheduled to be performed to date. Current PV is the approved
budget for activities scheduled to be performed during a given period. This
period could represent days, weeks, months, etc. PV, also known as Budget
Cost of Work Scheduled (BCWS).
Actual Cost (AC): It is the total cost incurred directly or indirectly in
completing a work on a particular project during a given period. This
numbers tells what amount has been spent and, as with Planned Value, can be
looked at in terms of cumulative and current. Cumulative AC is the sum of
the actual cost for activities performed to date. Current AC is the actual costs
of activities performed during a given period. This period could represent
days, weeks, months, etc. AC is also called Actual Cost of Work Performed
(ACWP).
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Project Planning Earned Value (EV): It is the estimated value of the work that has been
actually completed. To understand the accomplishments of the project, EV is
applied to the numbers and calculations in the project. EV basically
quantifies the worth of the work done to date. EV can be presented in a
Cumulative and Current fashion as well. Cumulative EV is the sum of the
budget for the activities accomplished to date. Current EV is the sum of the
budget for the activities accomplished in a given period. Earned Value is also
called Budgeted Cost of Work Performed (BCWP).
2/3 Time – ¾ Progress
Progress
1/3 Time – ¼ Progress
Time
Figure 8.2: Earned value – The standard Curve
Progress
No ramp up – no learning time
Time
Figure 8.3: Earned value – The Aggressive Curve
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Earned Value
Analysis
Progress
About 30% of the
work done
70% to 80% of
the time gone
Time
Figure 8.4: Earned value – The Curve to avoid
8.4 EARNED VALUE- PERFORMANCE METRICS
Cost Variance (CV): It is the difference between earned value and actual
costs. (CV = EV – AC). Sometimes it is also expressed as the difference
between budgeted cost of work performed and actual cost work performed. If
the variance is equal to 0, the project is on budget. If a negative variance is
determined, the project is over budget and if the variance is positive the
project is under budget.
Schedule Variance (SV): It expresses the difference between work that is
ahead or behind the plan and reflects a given measurement method. The
formula utilized to express schedule variance is project earned value minus
the project planned value as of the date of examination. (SV = EV – PV) If
the variance is equal to 0, the project is on schedule. If a negative variance is
determined, the project is behind schedule and if the variance is positive the
project is ahead of schedule.
Schedule Performance Index (SPI): It is the measure of schedule efficiency
on a project. It is the ratio of earned value (EV) to planned value (PV). The
SPI is equal to earned value divided by planned value, (SPI = EV/PV). An
SPI equal to or greater than one indicates a favourable condition and a value
of less than one indicates an unfavourable condition.
Example: Calculation show a SPI of 1.4, that means project recognizing Rs.
1.40 for every Rs.1.00 spent to date on project. Assuming SPI efficiency
remains throughout the reminder of work, project will finish ahead of
schedule.
Cost Performance Index (CPI): It is as a measure of cost efficiency on a
project. It is the ratio of earned value (EV) to actual costs (AC). The CPI is
equal to the earned value divided by the actual costs, (CPI = EV – AC). A
CPI equal to or greater than one indicates a favourable condition and a value
of less than one indicates an unfavourable condition. 133
Project Planning Example: Calculation show a CPI of Rs. 0.50, that means project
recognizing Rs. 0.50 for every ₹ 1.00 spent to date on project. Assuming CPI
efficiency remains the same throughout the reminder of work, project will be
over budget.
Figure 8.5: Earned value performance metrics
Index values
<1: Over budget or behind schedule
>1: Under budget or ahead of schedule
CV
Progress SV
Update date
Time
Figure 8.6: Earned value analysis curve
Example 1:
1. You are the project manager on a project that has Rs. 900,000 in the
product development effort. There are two teams of workers that will
work for six months for a total of 12,000 hours. According to the project
schedule, your team should be done with 34% of the work. As of today,
the project is 37% complete, while 48% budget has been used. Calculate
and share your conclusion.
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Earned Value
Solution: Analysis
Budget at Completion (BAC) = Rs. 900,000 (given)
AC = Rs. 432,000 (48% budget used)
PV = BAC × Planned % Complete
= 900,000 × 0.34 = Rs. 306,000
EV = BAC × Actual % Complete
= 900,000 × 0.37 = Rs. 333,000
CV = EV – AC
= 333,000 – 432,000 = -99,000
CPI = EV / AC
= 333,000 / 432,000 = 0.77
SV = EV – PV
= 333,000 – 306,000 = 27,000
SPI = EV / PV
= 333,000 / 306,000 = 1.08
Since CPI is less than 1, the project is over budget
And since SPI is more than 1, the project is ahead of schedule.
Check Your Progress 1:
For the following project, calculate SV, CV, SPI and CPI at the end of the
second month.
Month 1 2 3 4
Planned Rs. 11,10,000 Rs. 6,00,000 Rs. 25,00,000 Rs. 8,00,000
Value
Earned Rs. 10,00,000 Rs. 7,50,000
Value
Actual Cost Rs. 12,50,000 Rs. 5,00,000
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
Check Your Progress 2:
You are managing a software project which is into eight months of its
execution. You are now reviewing the project status, and you have
ascertained that the project is behind schedule. The actual cost of Activity A
is Rs. 4,00,000 and that of Activity B is Rs. 2,00,000. The planned value of
these activities is Rs. 2,80,000 and Rs. 80,000, respectively. The Activity A
is 100% complete. However, Activity B is only 82% complete. Calculate the
schedule performance index and cost performance index of the project on the
review date.
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8.5 LET US SUM UP
In short, the project manager and the project team should make an effort to
make sure that the realized value of their project is always more than the
projected value and the actual cost booked on the project. Proper data
collection and computation of the project’s completion percentage are
essential to the success of earned value analysis. Each person interprets the
percentage of work completed in their own unique way. Because of this, The
Practice Standard on Earned Value Management outlines the procedures to
be used for calculating the percent of work completed for various project
activity types and scenarios.
8.6 KEYWORDS
Planned Value (PV): The budgeted cost for the planned work is the planned
value (BCWS). PV fluctuates depending on the size of the project under
consideration and where you are in the overall timetable.
Actual Cost (AC): The cost expended for carrying out work on a project is
known as the actual cost (AC), also known as actual expenditures.
Earned Value (EV): EV measures the “value” of the job completed so far.
In other words, EV explains the project’s accomplishments in concrete terms.
EV can be expressed in a Cumulative and Current manner, just as PV and
AC.
Cost Variance (CV): It is defined as the discrepancy between the actual cost
incurred while carrying out the scheduled activity and the anticipated cost of
work accomplished (earned value).
Schedule Variance (SV): It is a measure of the schedule performance of the
project. It can be expressed as the difference between the budgeted cost of
work scheduled (planned value) and work performed (earned value).
Schedule Performance Index (SPI): SPI is a measure of the schedule
efficiency of the project and indices if the project is ahead of the baseline
schedule. SPI can be expressed mathematically as Earned Value divided by
Planned Value. Schedule Performance Index (SPI) = Earned Value (EV) /
Planned Value (PV)
Cost Performance Index (CPI): CPI is the measure of how efficiently the
budgeted resources are being utilized on a project. It is mathematically
expressed as Earned Value divided by Actual Cost. Cost Performance
Index (CPI) = Earned Value (EV) / Actual Cost (AC).
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Earned Value
8.7 SELF-ASSESSMENT EXERCISE Analysis
1. What do you mean by the term ‘earned value? Explain.
2. What is Earned Value Management (EVM)? Discuss the roles of EVM
in Project Management.
3. What are the top three 3 EVM performance measures? Discuss.
8.8 FURTHER READINGS
Project Management Institute. (2004) A Guide to the Project Management
Body of Knowledge (PMBOK® Guide). (Third ed.) Newtown Square, PA:
Project Management Institute
Project Management Institute. (2005) Practice standard for earned value
management (PMI Global Standard) (2005 ed.) Newtown Square, PA:
Project Management Institute
Government Electronics and Information Association. (2002) Earned value
management systems Approved: May 19, 1998. Reaffirmed: August 28,
2002. ANSI/EIA-748-A-1998
United States Department of Energy (2005) Earned value management
application guide, version 1.6. January 1, 2005. Office of Engineering and
Construction Management.
Reichel, C. W. (2006). Earned value management systems (EVMS): "you too
can do earned value management" Paper presented at PMI® Global Congress
2006—North America, Seattle, WA. Newtown Square, PA: Project
Management Institute.
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