Earned Value Management (EVM) is among the most effective ways project managers track their project progress. It tells a project manager and all the relevant stakeholders where a project currently stands in terms of budget and timeline compared to the original project plan.
But what’s the role of earned value management in project management, and how can project managers use it to get better project insights?
That is what we’ll discuss in this detailed article.
What is Earned Value Management Anyway?
Earned Value Management (EVM) is a methodology for tracking project progress against its original cost, scope, and timeline.
It allows project managers and other key project stakeholders to identify the gaps in project execution and forecast changes based on the project’s divergence from its original plan.
EVM plays a critical role in helping project managers detect scope creep, avoid delays, and minimize unplanned costs.
It provides a project manager the tools and systems to accurately measure project progress in view of the original plan and develop a concrete plan based on calculated project forecasts.
As a result, a project manager can use EVM to proactively address the issues impacting the project’s performance, collaborate with the relevant stakeholders to create awareness, communicate the problem more transparently, and accurately measure a project’s profitability.
Earned Value Management is often confused with similar terminologies like Earned Value (EV), Earned Value Analysis (EVA), and Earned Value Management Systems (EVMS).
All of these terms are connected, but each has a different purpose and meaning.
Let me explain.
Earned Value (EV) is the value of the work completed on a project so far. It allows project managers a straightforward way to assign a value to their completed work in terms of hours or your chosen currency.
Earned Value Management
Earned Value Management (EVM) is a set of tools and processes project managers use to determine project performance’s actual vs. planned difference. It is a handy way of identifying project scope creep and determine whether a project will be completed in the planned time and budget or not.
Earned Value Analysis
Earned Value Analysis (EVA) goes beyond basic scope and cost when measuring the difference between actual vs. planned work. It is a quantitative approach that figures out the likely results of the project by comparing the progress and budget of work planned to the actual costs. EVM uses EVA as one of the calculation factors.
Earned Value Management Systems
Earned Value Management System (EVMS) refers to the tools, templates, and software used to execute EVM.
How Earned Value Management Works
Earned Value Management plays a crucial role in project tracking and enables a project manager to identify divergence from the original plan.
Here are some of the main benefits of EVM:
- EVM allows much more effective project tracking by giving you a quantifiable measure of your project’s trajectory.
- It answers crucial questions like “Is the project on schedule so far?”, “Will it complete on time?”, “Are its cost within the original budget?”, “Will we need additional funds to complete it?” etc.
- EVM allows project managers to raise red flags in time by identifying scope creep.
- It gives all stakeholders a transparent and reliable way to verify the project team’s claims.
- It helps the project manager identify critical paths to project execution by comparing the actual progress against the project plan.
- EVM allows the project manager to take corrective actions like requesting additional budgets and resources for the project’s timely completion.
Limitations Of Earned Value Management
Earned Value Management in project management is a proven method to keep things on track and ensure that the project is completed according to the original plan.
However, EVM comes with a few limitations that can impact its usefulness and accuracy:
- EVM helps determine when a project goes off-track in terms of cost, scope, or timelines. However, it doesn’t identify the exact problem area. The project manager needs to do the necessary analysis to identify the factors causing the delay or increase in costs.
- EVM doesn’t guarantee project quality and customer satisfaction. Even if a project is completed within the original timelines, budgets, and scope, the project manager must also ensure it satisfies the customer’s quality requirements. EVM is not a good indicator for this purpose and should only be used for project tracking.
- The EVM results are based on your input. Therefore, your EVM numbers can be misleading if you do not enter all the relevant project data. This is why it’s critical to carefully consider all the information from your project plan to use the EVM results confidently.
- When reporting EVM to clients or internal stakeholders, include the relevant context that helps them understand what the EVM numbers represent and what it means for the project plan. Without the necessary details, EVM is hard to understand.
Getting Started With Earned Value Management
Now that you have a fair idea of what EVM is and its role in project management, let’s understand how you can get started implementing it in your process.
To perform EVM, you need to calculate specific values that collectively give you the information required to execute Earned Value Management and analyze the variance from your planned work.
Let’s look at them one by one.
Budget At Completion
Budget At Completion (BAC) shows the total project cost determined in the project plan. This is a fixed value that indicates the project’s total intended (not actual) budget at the time of completion.
Planned value shows how much a project should ideally be completed at a given time with reference to the original schedule and cost.
Project managers use two types of planned values while performing EVM:
Cumulative Planned Value: The budgeted cost of work of a project from the start until the end date.
Current Planned Value: The budgeted cost of work of a project for a specific period.
Planned Value is calculated as:
PV = BAC x % of planned work.
Let’s say the BAC (total project cost) of a 10-month project is $30,000
In the second month, the percentage of planned work is (2/10)*100 = 20% (meaning 20% of the total planned amount of work is now complete).
So, the project manager will calculate the PV of this project in month two as:
PV = 30,000 x 20%
PV = $6000
If you want to calculate the PV for a specific period, for example, from month two to month five (four months in total), here’s how you’ll do it:
PV = 30,000 x 40%
PV = $12,000
This is the value that your project should achieve according to your original project plan.
Actual Costs (AC) represents the total cost of all the activities performed in the project so far (no projected or intended). Calculating it is straightforward: just add all the activity costs so far.
However, you need to ensure that your project management software accurately tracks the costs of all the major and minor project activities (e.g., labor, material, equipment, indirect costs, etc.). Otherwise, the Actual Cost figure will be inaccurate, and, as a result, you won’t be able to calculate the Earned Value correctly.
Like PV, AC can also be calculated from the start of the project to date or for a specific period.
For example, let’s say the actual cost of our project at the end of two months is $10,000 instead of the anticipated PV of $6,000.
Earned Value (EV) represents the value of the work performed in your project so far. It shows you the actual worth of the project and allows you to track what you have accomplished so far.
For example, let’s say you should’ve completed 30% of your work by the third month, but you actually managed to complete only 15% of the work.
EV tells you the cost of this work in reference to your total project cost.
Like PV and AC, EV can also be calculated from the start of a project to date or for a specific period.
To calculate the Earned Value (EV) of the project, you’ll use the following formula:
EV = BAC x % of actual work.
EV = 30,000 x 15%
EV = $4500
Now that you have calculated the Earned Value of your project, you can use it to determine how far you’ve moved from the project’s baseline.
Variance Analysis & Schedule Variance
The variance analysis allows a project manager to know exactly how far the project has diverged from the baseline. It can be determined by evaluating the project schedule and cost variance.
Schedule Variance (SV) indicates whether a project is on schedule, behind schedule, or ahead of the planned schedule.
A negative SV score means you’re behind schedule.
A positive SV score means you’re ahead of schedule.
An SV score of zero means you’re on schedule.
Here’s how you calculate Schedule Variance:
Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV).
Let’s take the figures from our previous example to calculate SV.
SV = 4500 – 6000
SV = -1500
Based on this number, we’ll calculate the Schedule Variance Percentage.
SV% = (SV/PV) x 100
SV% = (-1500/6000) x 100
SV% = -25%
This means we’re 25% behind schedule on our project.
Cost Variance (CV) shows you whether your project is over budget, under budget, or on budget.
A negative CV score means you’re over budget
A positive CV score means you’re under budget
A CV score of zero means you’re exactly on budget.
Here’s how you can calculate CV:
Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC).
Let’s take the figures from our previous example.
CV = 4500 – 10,000
CV = -5500
CV% = (CV/EV) x 100
CV% = (-5500/4500) x 100
CV% = -122%
So, according to this CV percentage score, we’re 122% over the original budget.
Not a good sign if you’re the project manager.
EVM Performance Indexes
Performance indexes are an alternate way of doing earned value management. You’ll calculate all the core values like EV, PV, and AC the same way, but this time we’ll use Schedule Performance Index (SPI) and Cost Performance Index (CPI) to measure divergence.
Schedule Performance Index
Schedule Performance Index (SPI) shows you how far you’ve diverged from the project plan in terms of schedule.
Here’s how to calculate SPI:
SPI = Earned Value/Planned Value.
An SPI score greater than 1 shows you’re ahead of schedule
An SPI score lower than 1 indicates you’re behind schedule
An SPI score of 1 shows you’re on schedule.
Using the values from our previous example, here’s the SPI score:
SPI = 4500/6000
SPI = 0.75
This shows we’re behind schedule.
Cost Performance Index
The Cost Performance Index (CPI) shows how far you’ve diverged from the project plan in terms of cost.
Here’s how to calculate CPI:
CPI = Earned Value/Actual Cost.
A CPI score greater than 1 shows you’re over budget
An SPI score lower than 1 shows you’re within the budget
An SPI score of 1 shows you’re exactly on budget.
Using the value from our previous example, here’s the CPI value:
CPI = 4500/10000
CPI = 0.45
This means we’ve only consumed 45% of the allocated budget.
Using An Earned Value Management System
The values we’ve described and calculated in this article so far are necessary for effective Earned Value Management.
However, you can make this process much easier by using an Earned Value Management System (EVMS). An EVMS automates the process of calculating all the relevant values and variables required for EVM.
Compared to manual calculations, an EVMS is much more transparent, credible, and allow project managers to make informed decision confidently.