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EARNED VALUE MANAGEMENT

EARNED VALUE MANAGEMENT


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

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

CPI < 1 is not good

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.

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EARNED VALUE MANAGEMENT

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
Organization'. However the two principle cost elements are labor and materials.
To assist in estimating labor costs it is usual to devise an Organizational 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 organization, actual costs to the performing
organization are 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 simpler, 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.
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EARNED VALUE MANAGEMENT


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 were 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.
Source: Project Magazine November, December 2000 & January 2001 issues
EXAMPLES
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
Planned value ($)

20 5

Total

10

20 20 10 15 100

Example 1
A

Total

Planned spend ($)

20 5

10 20 20 10 15 100

Actual spend ($)

18 6

10 17 18 10 0

Spend variance

-1 0

79

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!

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EARNED VALUE MANAGEMENT


Example 2
A

Earned value ($)

20 5

15 20 10 0 75

Actual cost ($)

18 6

10 17 18 10 0 79

Cost variance

-1 -5

-2

G Total

0 -4

The earned value compared with the actual cost of doing the work necessary to achieve 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 the work was 79, a cost variance of -4 or -4/75 = -5.3%
Example 3
A

B C

Total

Planned value ($)

20 5 10 20 20 10 15

100

Earned value ($)

20 5 5

75

Schedule variance

15 20 10 0

0 -5 -5 0

-15 -25

Planned value compared with earned value measures the volume of the work planned against the work completed. The
difference is called Schedule Variance. If the schedule variance is negative, the work is late. In the example the
schedule variance is -25 or -25/100= -25%
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.
Source: Project Magazine November, December 2000 & January 2001 issues

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