You can also take a look at the post following the below link -
ProjectManagement.com - Topic Teasers Vol. 51: Why Bother With Earned Value?
Earned Value Management is a collection of formulas that--when used collectively--provide a tool for the project manager to do four very important things on a project:
- Quantify exactly what they are agreeing to produce with this project, or in the case of working for a contractor, what they will provide within the contract agreement.
- Create an early warning system so that they are alerted quickly if the project deviates from the original baseline.
- Provide a means of quickly assessing the cause of deviations, their impact on the project and helping the project manager find the best corrective action to get the project back on track.
- When there is a deviation from the baseline, which tends to include most every project that is ever attempted, EVM provides a means to forecast the final cost and schedule changes. This allows management to prepare for alterations in the original completion date and budget allocation in time to alert other parts of the organization or plan for the changes.
While any person who holds a PMP certification has learned the math of calculating EVM, the organization into which they are hired may or may not have a process in place and be taking advantage of the power of this approach. It is fairly painless to collect the information you need to begin. You will need a Work Breakdown Structure (WBS) created and then broken down further to the activity level. Estimates for the time needed to complete each activity are collected, ideally from the person who has been assigned to do the work.
Often an automated tool such as Microsoft Project or Primavera is used to make life easier. At this point, it is important to include in the resource sheet the hourly pay of each resource working on the project. Your automated tool now has the calculations for each activity, how much time it will take to complete it and also how much it will cost--at least in human resources expenses--to finish each task. Now you have a project baseline arranged across time on a calendar.
If your organization is unwilling to divulge the salary information for individual team members, you can ask it to calculate an average dollar per hour amount for a certain category of worker. Remember, you are working in comparative calculations, so whether it is true that Alcides earns $80 an hour and Alfred earns only $40 is immaterial. You only need to compare a consistent amount for each person throughout the project timeline.
Here is the missing piece in many work environments: You will need to have a formal change management plan in place and agreed to by management. It should detail what power the project manager has to make changes without upper-level involvement (usually limited to an amount of time or a dollar amount for cost). If further changes are warranted, does the product owner sign off? A change control board consisting of…? You need a list of names. How often does the board meet: Whenever asked to assemble? Every Thursday? On the fourth Monday of each month? What are the cost and schedule variable limits that determine whether you can take action or need board approval?
At the beginning of the project, whether you are using EVM or not, you have estimated the time and cost for the scope of the project and created a baseline. Earned Value Management is nothing more than measuring project performance against the project baseline. We will now begin to think of things like are we ahead of schedule or behind schedule, over budget or under budget? But don’t lose sight of the fact that these are not two isolated factors, since each has a direct impact on the total project cost. What if I’m ahead of schedule (good for me), but my costs are higher than planned (okay, I kept people late and paid overtime)? What if my costs are low (oops!), but I haven’t finished all of the work planned up to this point (how do I catch up)? Earned Value helps us formulate a more scientific plan forward.
Automated software packages can perform Earned Value calculations automatically, so they are very, very desirable. But you can perform these same calculations with a spreadsheet (or even a calculator) if need be. But regardless of how you do the math, it is extremely important that the project manager understand how the data is calculated, where the numbers come from and what has been happening in the project that has led to this current state. Only then can the statistics be interpreted correctly and the most useful action be taken to steer the project back on course.
Just to make things slightly tricky, depending on your age as a project manager (PM age, not birthday age), you may speak a different EVM language. In the 2000 edition of A Guide to the Project Management Body of Knowledge (PMBOK Guide), there was one set of names and initializations for the EVM terms, such as BCSW, BCWP and ACWP. But by the 2004 edition, these had been altered to PV, EV and AC.
The American National Standards Institute/Electronic Industries Alliance maintains the EVM standard, ANSI-EIA-748. They have retained the four-letter initializations, as has Microsoft and other electronic application providers. So if you work for a government agency in the United States, use Microsoft Project or other similar products, or work where your system was started pre-2004, you’ll probably use the four letters. If your workplace has implemented an EVM process since 2004 under the guidance of a PM who trained in 2004 or after, use the two letters. But, not to worry: We’ll use both in our discussion so you are prepared in either instance, and the meaning is the same no matter which “language” you choose.
Think about it. Progress and cost are generally not expended in even increments throughout a project. This makes it difficult to see how we are doing. EMV allows for this assessment with uneven spurts of achievement. It also allows you to judge progress as early as 15 to 20% into a project, which is in plenty of time to apply corrective measures if needed. And in all cases, we will look at both our progress in completing the work of the project and our assessment of what we have spent against what we planned to spend, since both are interrelated.
Let’s look at the key EVM terms and how they are used:
- BCWS: Budgeted Cost for Work Scheduled. This is the number of hours of work to be scheduled or planned to be completed during the project as estimated in your Project Baseline, but we can track it on a weekly or monthly basis. You can also show it in dollars/Euros/pounds if you multiply the hourly rate of the person doing the work by the number of hours that person will work. Since your Gantt Chart breaks things down by days and weeks, you can easily see at the end of Week 1 the total hours of work that were to have been completed this week. It may help to focus on the “S” for “Scheduled” to help you remember the definition.
This term is also used with the name PV: Planned Value. - BCWP: Budgeted Cost for Work Performed. This is the number of hours of work that was actually finished or completed during the week or month time period we are using. The mnemonic device to help you remember what this term means is to focus on the “P” for “Performed”. What was actually done!
This term is also used with the name EV: Earned Value. - ACWP: Actual Cost of Work Performed. This is the number of hours actually worked times the salary amounts for each of the people performing the work. Again, it can be figured weekly or monthly. The idea is that estimates are predictors, but what did it really cost us when the work was actually done.
This term is also used with the name AC: Actual Cost. - CV: Cost Variance. This shows how much over or under the budget the project is at any given point in time. Negative means you are over budget, a positive amount means you are under budget.
- SV: Schedule Variance.This shows how much ahead or behind the schedule the project is at any given point in time. Negative means you are behind schedule, a positive number means you are ahead of schedule.
- CPI: Cost Performance Index. This shows the efficiency of the money being spent by the project. For each dollar spent, how many dollars of value are you receiving? Use CPI to project the cost performance for the remainder of the tasks. A CPI of greater than 1.0 indicates that costs were higher than budgeted. A CPI of less than 1.0 indicates that costs were less than budgeted.
- SPI: Schedule Performance Index. This is a measure of the efficiency of the schedule on a project. Is it on track? Will you meet your goals as planned? Use SPI to project the schedule performance for the remainder of the tasks. A SPI of less than 1.0 indicates that less work was completed than was planned. A SPI of greater than 1.0 indicates that more work was completed than was planned.
Let’s use a simple example and move it away from the business world to keep ourselves from overlaying how we do things at work now. You discover you are having guests coming in from out of town next week, but you are going to be out of town on business this week and the house needs some attention. You do some quick calling around to cleaning services and find Sarah, who will come out for $10 an hour. You engage her for a 40-hour week. You budget that you can afford $400 for this cleanup. Since you’re a project manager, you quickly prepare a list of 40 one-hour tasks for her and leave them on the counter as prearranged. However, when you arrive home after your trip, your list of tasks has checkmarks of completion by only some of the items. At the bottom is a note:
“Sarah was sick with the flu, so I’m her brother, Mike, and I came instead to help her out. She didn’t want to let you down. Sorry, but I only got 32 of your tasks done. I’m taking the $400 check to Sarah. Please feel free to call us again.”
What I expected to get for my $400 was 40 tasks completed. I only got 32, only $320 worth of work at $10 an hour.
BCWP (the cost of the work actually performed, the tasks completed, aka What I Got) $320
- $400 BCWS (the cost of the work scheduled aka What I Expected to Get) = -$80. A minus-$80 means I’m short eight hours of work yet to be completed to finish the cleaning. This is my SV: Schedule Variance:
BCWP – BCWS = SV or, EV-PV = SV
Here we’ve done it in dollars, but this could also be done in hours. I expected 40 one-hour tasks to be completed and I only got 32 one-hour tasks done, so I’m short eight one-hour tasks at $10 each. I’m short eight hours of work.
But how did I do financially? I spent the full $400, because Mike was there the full 40 hours. So the BCWP (the cost of the work actually performed, aka What I Got) $320 - $400 (What It Actually Cost Me) = -$80. A -$80 means I’m down, or short, that amount in my budget because I’ve already spent my total $400 and now I’ll need to spend another $80 to get the work completed. This is my CV: Cost Variance:
BCWP – ACWP = CV or, EV-AC = CV
However, since Mike didn’t work as fast as I planned, even if I ask him back for another 10 hours I don’t think he can get my last 10 tasks completed. Last time he couldn’t get one done per hour, so I’d be foolish to think he could this time. But how fast did he work, so I can plan ahead?
If I take What I Got BCWP or EV $320
What I Expected To Get BCWS or PV $400 = .80 or 80% SPI: Schedule Performance Index
This is how fast the work on my schedule is being completed. For every dollar I spend, I’m only getting 80% of the work. My schedule estimates were off and those weren’t one-hour tasks, at least with the person I have doing them now. So how do I use this going forward with my project? I have eight one-hour tasks left.
8 hours of work remaining
.80 SPI (rate at which work is being accomplished) = 10 hours Ten hours more to complete these eight activities on my list. Ten hours more to do at a rate of $10 per hour I must pay the cleaning help means I will need an additional $100 to get my cleaning project finished before the guests arrive.
I can check this out using my cost formulas:
What I Got BCWP or EV $320 worth of work
What It Actually Cost Me ACWP or AC $400 amount I paid = .80% CPI: Cost Performance Index
For every dollar I spent, I got .80 worth of work.
What I Expected to get (BCWS or PV) $400
Cost Performance Index .80 = $500 It will cost me $500 to complete this project.
This is for just one week. But if this were a real project and I had anticipated 40 hours this week, 50 hours for Week 2, 60 hours for Week 3 and 50 hours for Week 4 for a total of 200 hours, how would I use this information? Plus, we have a budget of $100,000. Rather than having to figure the schedule and cost projections a week at a time and adding them all together as I get further and further into the project, I can use formulas:
- BAC: Budget at Completion. We did our planning so the organization would know how much to allocate for this project. This shows the dollar amount we anticipate spending on this project ($100,000 in this instance).
- EAC: Estimate at Completion. Before the project begins, BAC and EAC are the same thing. They are how much money are we planning to spend. As things change within the project, however, they become two different things:
200 hours 200
SPI Schedule Performance Index .80 = 250 hours. It will take 250 hours to finish. We’ve done 40.
BAC or EAC $100,000
CPI Cost Performance Index .80 = $125,000 It will take an extra 25,000 to finish after the $400.
- ETC: Estimate to Complete. The expected cost to finish all the remaining work of the project from this point forward; or, $125,000 less the $400 we have already paid out = $124,600.
Knowing these statistics at regular intervals throughout the project will allow you to look at the variances and see if they exceed those set in the original change management plan. Perhaps you can make adjustments; perhaps they need to go before the Change Control Board. But before you do anything, look for root causes for the variances to see whether or not they will occur again. After several weeks/months, do you see trends that could be encouraged or mitigated? Look not just for the variance, but evaluate the impact it will have on the project. If it is minor, perhaps it will even out in the next time period. And use this data to make take early corrective actions to minimize damage to the project schedule and budget.
Good project baselines are wonderful. But they are only the beginning to track and guide successful projects.