Role of Earned Value Technique in Project Management
Last updated on 10th Oct 2020, Artciles, Blog
What is Earned Value Management and Why is it Important?
A clear overview of one of today’s most effective management approaches :
EVM is a management approach which upon incorporating any type of program – provides all levels of management with early visibility into cost and time related problems.
EVM helps provide the basis to assess work progress against a baseline plan, relates technical, time and cost performance, provides data for pro-active management action and provides managers with a summary of effective decision making.
Benefits of 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.
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- This is the approved budget for the work scheduled to be completed by a set date.
- This is the approved budget for the work actually completed by the specified date.
- The costs actually incurred for the work completed by the specified date.
To describe your project’s schedule and cost performance with EVM, you use the following indicators:
Schedule variance (SV):
- This is a measure of the difference between the work that was actually done against the amount of work that was planned to be done. This clearly shows is the project is on schedule or not.
Cost variance (CV):
- This is the measure of the difference between the amount that was budgeted for the work meant to be done and the amount that was actually spent for the work performed. Thus this shows if the project is on budget or not.
Schedule performance index (SPI):
- This is the ratio between the budget that is approved for the work that is performed to the budget that is approved for the work that was planned in the first place. This is a relative measure of the project’s time efficiency.
Cost performance index (CPI):
- This is the ration between the approved budgets for the work that is performed to the budget that was actually spent for the stipulated work. It is a relative measure of the cost efficiency of the project and can be used to estimate the cost of the remainder of the task.
Earned Value Technique
Earned value management (EVM) is one such technique that, in a single integrated system, can accurately forecast problems so you can better manage project performance.
What Is Earned Value Technique?
As noted, EVM is a technique that project managers use to track the performance of their project against project baselines. Often the progress of a project is thought of simply as being ahead or behind schedule and over or under budget. However, what if you’re ahead of schedule, but costs are higher than your planned budget? Or, what if you’re behind schedule, but costs are lower than you first calculated?
This is where knowing the earned value helps. It can provide deeper information on your project. And when learning about earned value, it’s important to remember that there are three terms associated with it, which are each slightly different.
- 1. Earned Value Analysis (EVA): This project management technique is quantitative. It evaluates project performance by figuring out the likely results of the project. It does this by comparing the progress and budget of work planned to the actual costs.
- 2. Earned Value Management (EVM): This methodology measures project performance with an integrated schedule and budget, which is based on the project work breakdown structure (WBS).
- 3. Earned Value Management System (EVMS): This is the collection of tools, templates, processes and procedures that an organization uses to do EVM.
Calculations for Earned Value Management
There are calculations that can be done quickly and easily to execute EVM. To do so, you need to know the following:
- Planned Value (PV): Budgeted amount through the current reporting period
- Actual Cost (AC): Actual cost to date
- Earned Value (EV): Total project budget multiplied by the percentage the project is complete
Once you have those figures in hand, you can now do a few calculations:
- 1. Schedule Performance Index (SPI): This calculation involves dividing the EV by the PV to measure progress achieved against where you expected to progress at a certain point. If you’ve come up with a value less than 1.0, it means that you’ve done less work than you projected for this point. While a value greater than 1.0 means you’ve completed more than was planned.
- 2. Cost Performance Index (CPI): For this calculation you divide EV by the AC to measure the value of work completed against its actual cost. Again, if you reach a figure less than 1.0, your costs are higher than budgeted. A number higher than 1.0 means the costs are less than budgeted.
- 3. Estimated At Completion (EAC): With this calculation, you divide the total project budget by the CPI value you figured out above.
EVM Is Great, With a Few Caveats
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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