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Project performance measurement using Earned Value Management.

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XXXXXX XXth XXXX 2010

Table of Contents List of Tables ___________________________________________________ 3 List of Figures ___________________________________________________ 3 List of Abbreviations ______________________________________________ 4 Abstract________________________________________________________ 5 Introduction _____________________________________________________ 6 Planning, Execution and Control of a Project ___________________________ 7 Earned Value Management _______________________________________ 9 Requirements for an effective EVM implementation ___________________ 15 Benefits of EVM system __________________________________________ 16 Conclusion ____________________________________________________ 17 List of References _______________________________________________ 18

List of Tables Table 1 Sample Calculatuion of Earned Value as on May_____________12

List of Figures Fig1 Fig2 Fig3 Fig4 Fig5 Fig6 Control-Account Matrix __________________________________ 7 sample network diagram of a project with the work activities______11 Performance Measurement Baseline________________________ 12 Sample Earned Value analysis plot from Jan to May____________ 14 Sample Performance Index plot from Jan to May_______________ 14 Sample Variance analysis plot from Jan to May________________ 14

List of Abbreviations AC ACWP BAC BCWP BCWS CPI CV EACt EAC ETC EV EVM PMBOK PMI PV SPI SV TV WBS Actual Cost Actual Cost of Work Performed Budget AT Completion Budgeted Cost of Work Performed Budgeted Cost of Work Scheduled Cost Performance Index Cost Variance Time Estimate to Complete Estimate at Completion Estimate to Complete Earned Value Earned Value Management Project Management Body Of Knowledge Project Management Institute Planned Value Schedule Performance Index Schedule Variance Time Variance Work Breakdown Structure

Abstract The objective of this article is to give an overview about the Earned Value Management (EVM) methodology and its use as a tool for measuring the projects performance. The success of a project greatly depends on the measurement and control of its progress based on cost, time and scope constraints. EVM is a methodology which is helpful in measuring the progress of the project at any given point of time during its execution using three parameters namely Planned Value (PV), Earned Value (EV) and the Actual Cost (AC). It provides a snap shot of the project status in terms of the cost, time and scope constraints. The calculated parameters like Cost Variance (CV), Cost Performance Index (CPI), Schedule Variance (SV), Schedule Performance Index (SPI) enables the project manager to clearly identify the potential problems and helps in the decision making for controlling the three constraints in a much more integrated manner. Further using the other calculated parameters like Estimate To Completion (ETC), Estimate At Completion (EAC) and Variance At Completion (VAC) appropriate forecasts can be made regarding the success of the project. EVM is considered to be the best tool to measure cost, schedule and performance in terms of reliability and accuracy. In order to achieve the maximum benefit of the EVM implementation, several requirements are to be in place. The article suggests the considerations one should make before implementing EVM and discusses the steps that are prescribed by the Project Management Institute (PMI) practice standard for the EVM.

Introduction According to PMI, project management is the application of knowledge, skills, tools and techniques to project activities to meet proje ct requirements. Project management has evolved as one of the most important management disciplines for achieving greater performance and productivity in organizations. Though this technique has been in practice from the early civilization period, it was only from the start of the previous century, a structured methodology approach was followed. According to PMI, project management involves the following five process groups namely: initiating, planning, executing, monitoring & control and the closeout. One of the most essential requirements for the success of a project is the feedback and control mechanism. EVM is one such critical tool which is provides the performance measurement of the project. It plays a vital role in the planning, execution and control process groups than the other two in order to implement the so called plan-do-check-act cycle. [1] In order to achieve the real benefits of an EVM a more detailed and meticulous project planning has to be to done. The EVM actually measures the technical performance indirectly based on the successful completion of the work packages, therefore the Work Breakdown Structure (WBS) has to be developed in the most detailed manner in order to get the accurate performance measure. [2] In the following chapters planning, execution and control of the project and its importance towards projects success will be discussed followed by EVM methodology its use for measuring project performance, its implementation requirements in detail.

Planning, Execution and Control of a Project As it was briefly discussed in the introduction chapter planning, execution and control are the main process groups which are involved in the plan-do-check-act cycle. Planning of the project is like laying a foundation to a building; it requires a meticulous collection of data in terms of cost, time and scope constraints. Creation of the WBS containing the work packages for which the cost, schedule and resource utilization can be accurately tracked is the first step towards the measurement of projects progress. Next the performance measurement baseline is to be formulated during this stage as it will be the reference with which the performance of the project can be measured.

Fig 1 Control-Account Matrix

(Source [1])

The WBS should be integrated with the hierarchical Organizational Breakdown Structure (OBS) in order to create the Control-Account matrix. This matrix

provides the control accounts which will have a clear ownership in terms of time, cost and scope constraints as shown in the Fig 1-1. At this stage it is important to ensure that a method is clearly defined for measuring the physical work that is completed. [1] During the project execution stage, accurate details regarding resources like labor, materials etc. that are utilized for completing the work has to be collected and documented. This will help during the comparison of the actual cost spent against the performance measurement baseline that was planned. [1] An effective Project Management Information System (PMIS) should be present to ensure that the entire project team and the stakeholders are kept informed of the projects condition through the status reports at regular intervals. Also a good configuration management system is essential in order to make sure that the project scope changes are appropriately updated. During the monitoring and control stage of project it is important to do the performance tracking activities for cost, schedule and resource utilization. In cost tracking activity baseline estimates for labor costs, material costs, capital costs, project support costs etc. are compared with actual costs incurred by the project. In the schedule tracking the baseline estimates of the start and end dates of the relevant work packages are compared against the actual schedule. [3] It is during this stage that the EVM will be put to the maximum use. Using EVM the status of the project in terms of the cost, time, and schedule can be easily analyzed. With the resultant details the project manager can control the project s progress. EVM will be discussed in detail in the following sub chapter.

Earned Value Management Earned Value Management is a methodology used to measure the real physical progress of a project taking into account the completed work, the time taken and the costs incurred to complete that work. EVM allows us to evaluate the progress of the project using the key parameters like Planned Value (PV), Earned Value (EV) and the Actual Cost (AC). Now let us look into their definitions: Planned Value (PV): Planned Value (PV) is the value of the work in monetary terms that is planned to be performed for the given period of time. It is also called as Budgeted Cost of Work Scheduled (BCWS). For example if a work package has a budget of $1000 and 60% of the scheduled time to perform that work has elapsed, then PV for the work package at that instant is $600. Earned Value (EV): Earned Value (EV) is the amount of work in monetary terms that has been completed as against that of the budgeted and planned work. It is also called as the Budgeted Cost of Work Performed (BCWP). For example if the work package has a budget of $1000 with a completion time of 1 day and if only 40% of the work package was completed at the end of the day, then EV at that instant is $400. Actual Cost (AC): Actual Cost (AC) is the amount of money that has been spent to complete a work package within the given period of time. It is also called as the Actual Cost of Work Performed (ACWP). For example if work package was supposed to have been completed within a day with a budget of $1000 and at the end of the day the actual amount spent to complete the work was $1200, then the AC for that work package at that instant is $1200.

Time and resources are spent to complete a task; if it is completed efficiently then there would be time to spare with minimum wastage of resources otherwise it would consume longer time with the wastage of resources. The key parameters which were discussed earlier can be used to calculate the variances, indices and the forecast estimates for the cost, time to measure and forecast the progress of the project. Before looking at the formulas for calculating these parameters let us discuss about another key parameter Budget at Completion (BAC) it is the sum of all the Planned Values for the project, it is the projects proposed budget. Schedule Variance (SV): This is used to find out whether the project is ahead or behind the schedule. It can also be expressed as percentage with respect to PV. Schedule Performance Index (SPI): This is used to find out how efficiently time is used for project completion. Cost Variance (CV): This is used to find out whether the project is under or over the budget. It can also be expressed as percentage with respect to EV. Cost Performance Index (CPI): This is used to find how efficiently the resources are utilized. Estimate at Completion (EAC): This is used to estimate the project cost with the current performance trend. Variance at Completion (VAC): This is used to find out whether the project will be completed within or above the budget. VAC = BAC EAC VAC % = VAC / BAC EAC = BAC / CPI CPI = EV / AC CV = EV AC CV % = CV / EV SPI = EV / PV SV = EV PV SV % = SV / PV

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To Complete Performance Index (TCPI): This is used to find how efficiently the remaining resources need to be utilized in order to achieve the BAC or EAC. Estimate to Complete (ETC): This is used to find the cost of the remaining work Let me see with an example how these parameters can be used in the EVM to measure and forecast the performance of the project.
B START D A C E G END

TCPI = (BAC EV) / (BAC AC)

ETC = (BAC EV) / CPI

Fig 2 sample network diagram of a project with the work activities

Consider a project consisting of several work activities A, B, C, D, E, F, and G as in the Fig 1-3., assume that WBS details are available to us and the day to day expenditure for the project is well documented in daily account book. In order to measure the performance we need to have a baseline with which the reference can be made. As we had seen earlier the Performance Measurement Baseline is the important step towards the progress measurement of the project, this is equivalent to the cumulative planned values at various milestones of the project. The planned values of individual work packages can be obtained from the WBS to plot the performance measurement baseline as in Fig 1-4.

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Fig 3 Performance Measurement Baseline

Let us say we want to measure the performance of the project at the end of the month of May, for that we need to find the EV, AC and the PV at the end of May. PV and the AC can be obtained from the WBS and daily account bookkeeping. EV is calculated using the percentage of work completed against that of the budgeted cost of the particular work package as shown in the Table 1 below.
Work activity A B C D E F G Project Planned Value (PV) in $ as on May 150 250 200 150 0 0 0 $750 % of work completed 100 75 80 100 0 0 0 Actual Cost (AC) in $ as on May 175 300 175 150 0 0 0 $800 Earned Value (EV) in $ as on May 150 225 200 150 0 0 0 $725

Budget in $ 150 300 250 150 200 275 300 BAC = $1625

Table 1 Sample Calculation of Earned Value as on May

As EV, PV and AC are known we can calculate the CV, SV, CPI and SPI as: CV= EV-AC = 725-800 = -75; or CV in % = -75 / 725 = - 10.34 % SV = EV-PV = 725-750 = -25; or SV in % = -25 / 750 = - 3.33 % CPI = EV / AC = 725 / 800 = 0.91; SPI = EV / PV = 725 / 750 = 0.97 EAC = BAC / CPI = 1625 / 0.91 = $1786 VAC = BAC EAC = 1625 1786 = -161 or VAC in % = -161 / 1625 = - 9.91 % 12

TCPI = (BAC EV) / (BAC AC) = (1625 -725) / (1625 800) = 1.1 ETC = (BAC EV) / CPI = (1625 725) / 0.91 = $ 989 Based on the calculated parameters we can do the analysis and hence measure the performance of the project as follows: 1. CV indicates that project is 10.34% over the budget for the work performed 2. SV indicates that project is 3.33% behind the schedule. 3. CPI indicates that the project cost efficiency is 0.91 in other words for every Dollar that is spent well be able to get $0.91 worth of project work. 4. SPI indicates that the work efficiency is 0.97, which is not very bad. The following estimations can be made based on the present status and trend of the project: 1. EAC indicates that the estimated cost of the project at the completion would be $1786 as against the initial budgeted cost of $1625. 2. VAC indicates that the project cost would be 9.91% more than that what was planned initially. In other words the project cost would be increased by $161 dollars. 3. TCPI indicates that in order to meet the budgeted cost the project requires a cost efficiency of 1.1 for the remaining work. 4. ETC indicates that the remaining project work cost to be $989. It should be noted that the EAC estimate is based on the assumption that the future performance will be similar to that of the past performance. In order to arrive at much more accurate estimates several other formulas are suggested in the reference [1].

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If EV calculations for the months of January, February, March, and April were similarly done, we could have done the analysis and with the data the projects progressive plot could have been obtained as shown in the figures Fig 4 to Fig 6.

Fig 4 Sample Earned Value analysis plot from Jan to May.

Fig 5 Sample Performance Index plot from Jan to May.

Fig 6 Sample Variance analysis plot from Jan to May.

With the above charts the progress of the project in terms various earned value parameters can be easily measured. In the following topic the requirements of an effective EVM implementation will be discussed.

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Requirements for an effective EVM implementation Before implementing an Earned value management it is very much important to consider the following points as they greatly affect the effectiveness of the EVM. 1. EVM should be applied to project depending on the type and size of the project. If it is going to be used for smaller projects then it may not be worth implementing as it would consume a significant amount of expense for the implementation and the planning. [2] 2. The project planning has to be done in detailed manner so that logical work packages can be developed. Poor project plan will definitely lead to an inefficient EVM. The project scope should be clearly defined in order to develop and use an accurate WBS.[2] 3. The project team should be able to collect the correct data on time so that an accurate progress measurement is possible. [2] 4. The project should be equipped with a system to measure the technical performance in more accurate manner. [2] 5. The two most important requirements of EVM are i) Establishing a performance measurement baseline & ii) Measuring and analyzing the performance against the baseline. [1] 6. The project team members involved in EVM should be well trained to do analytical analysis and to prepare and communicate timely reports, trends, variances and issues to all the respective stakeholders. [2] 7. It is important to have well defined reporting and feedback system with those who are in the decision making capacity. [1]

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Benefits of EVM system The following benefits could be attributed to an effective EVM system: 1. Unlike S-curves or the bar charts which provide either cost related progress or the time related progress, EVM provides an integrated project tracking mechanism between the cost, time and scope criteria. [4] 2. It is provides the organization a capability of practicing Management by Exceptions thereby greatly contributing towards a n effective and efficient project management because of the reduced information overload. [1] 3. EVM enables the project manager to monitor and have a greater control on the progress of the project. It allows him analyze the results of the performance measurements of EVM and to take appropriate and timely actions. 4. The EVM methodology can be applied to projects in any type of industry without any limitation as it is very much straight forward and simple with well defined steps. 5. The EVM is a robust methodology as it is basically dependent on the performance measurement base line that is created using the detailed work breakdown structure. It can be reliably used for measuring the performance of the project and for tracking its progress. 6. Using EVM variances, indices and the estimates we easily get a snapshot of the projects status and further corrective actions can be initiated depending on the need. In this way the EVM is a very good tracking and control tool for project execution.

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Conclusion In today's tough and competitive market in order to survive, it is imperative that the project execution has to be conducted in a much more efficient manner in terms of cost, time and the scope constraints. As the EVM methodology provides a clear and definitive performance measurement of the project progress status in an integrated manner, it is considered to the best tool for the providing the early warnings for the projects. As seen in this article if the EVM methodology is implemented in the appropriate manner with a well defined performance measurement baseline coupled with the measurement and analysis of the physical work progress the project can be brought under control. As discussed in this article if we carryout the EV analysis routinely and communicate the status of performance measurements to all the required stakeholders we can ensure that the project progress is in the right direction. Using this method we can easily identify the areas of strengths and weaknesses of the projects execution and with that we can troubleshoot the root causes to fix the same in a timely manner in order to ensure the projects success.

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List of References 1. Project Management Institute, Practice Standard for Earned Value Management, PMI, Inc. 2005; ISBN: # 1-930699-42-5. 2. David I. Cleland, Lewis R. Ireland, Project Management Strategic Design & Implementation 4th edition, McGraw-Hill 2002; ISBN: #0-07-139310-2. 3. Gerard M. Hill , The Complete Project Management Methodology and Tool Kit, 1st edition, CRC Press 2010; ISBN:# 978-1-4398-0154-3. 4. Ray R. Venkataraman and Jeffrey K. Pinto., Cost and value management in projects, John Wiley & Sons Inc. 2008, ISBN: # 978-0-470-06913-4.

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