Earned Value – A Simplistic Explanation

Over the years I have seen many articles, discussions and questions about Earned Value Management (EVM). What is it, how valuable is it as a management tool, how do you use it?  Often the explanation can be quite complex.  As is usual for experienced project managers or project cost practitioners we often talk in technical terminology. Terms such as Cost Performance Index (CPI), Cost Variance (CV), To Complete Cost Performance Index (TCPI), Schedule Performance Index (SPI), Schedule Variance (SV) and the myriad of other indices that can be used are expounded and discussed with complex looking formulas.  However I think to the average Project Manager or project professional who is new to the concepts of Earned Value (EV), this can be very confusing. Moreover, by the use of these acronyms and the focus on the calculation of the indices, I believe the essential meaning of what EVM stands for and its objective can often be overlooked.

Understand that EV is a tool that is used to provide meaningful measures to allow the Project Manager to easily determine the state of the project and instigate control measures to control or manage the project   The data that it provides allows us, as Managers, to get a clear assessment of the state of the project, mitigate risks whilst driving performance to keep the project on track.

In itself, EVM is a simple concept.  It is a means of linking the physical work we complete back to a baseline budget as a measurement of how we are performing.  In simple terms - what were we supposed to do (Baseline), what are we doing now (Actuals and Progress), how does that compare (EV indices and variances), and how does that affect where we will finish (Analysis). 

 Without bringing physical progress into the picture we are left to compare actual spend against budget. This is a fairly common methodology, however it is somewhat one dimensional.  Take a scenario, for example, where a project is halfway through in time and had spent 50% of the budget. It would be easy to assume that the project was on track and be expected to be completed within budget.  However what only completed 40% of the work had been physically completed?  Then we have a very different picture.   Now we can see that we have only “earned” 40% of our budget, yet we have over run on our costs to achieve this. This now means we are likely to finish over budget unless corrective action is taken. Additionally had we planned to be 50% complete at this time and were only 40% complete, then the project is behind on time and therefore likely to finish later than anticipated. This is the essence of EVM.

By converting these calculations to indices it becomes easy to run down your Work Breakdown Structure (WBS) and quickly identify the areas where an anomaly is happening.  In this way it becomes easier to manage the project by exception and direct focus to areas where slippage is occurring.

Understand that the individual indices are a guide only to quickly determine variances and are meant to be used in conjunction with other project indicators and requires further analysis.  There may be several reasons why a particular code has a low CPI (underperforming) or low productivity.  It could be that they are truly underperforming, and that a mitigation strategy needs to be put in place – but it could also mean that that the baseline was incorrect and that the physical progress measurement does not truly reflect physical effort, or that the project is using cheaper resources that spend more hours but save in cost, or it could mean there is additional scope that has not been change managed yet.  Regardless it is a cause for further analysis to determine what is truly happening.  Understanding the root cause of variance is essential to develop an appropriate corrective action plan.

This brings us to the crux of EVM – generating performance metrics and reports is not the end of the process.  EVM is a tool to identify variances, and as such these metrics are the start of the process of analysis and mitigation.  These metrics are a tool for control and like any tool, there needs to be clear operating instructions to use it correctly.  In project terms, this means that there are a few fundamentals that must be correct in order to get the most out of this methodology.

The baseline budget must be clearly defined and broken down in a manner to reflect how the work will be delivered.  This will quite often mean extracting a tender estimate and reworking it until there is an adequate performance baseline.  This stage is critical because it will be the yardstick that you will measure yourself against on the project.  Breaking the work down into design work packages, construction packages and / or by discipline or commodity will allow the production of metrics to see how each area is performing and to produce targeted performance metrics for each package / team leader.

The method of obtaining physical progress must reflect the physical effort to do the work.  Whether this be quantities installed, in the case of construction work, or deliverable milestone gates which is common to design work, or weighted activities, these physical gates need to reflect the effort and budget required to do the work. It should not, for example, reflect payment milestones, time based progress or an estimate of progress achieved.

 Actuals and progress data must be collected in a timely matter.  The essence of earned value management is to provide timely information to quickly identify variances and implement correct actions.

There also must be a mature change process in place in order to identify changes in scope or trends which may impact on cost of completion.  Identification of changes in scope is critical.  After all, EVM is all about comparing what we are supposed to do against what we are actually doing.  If the initial scope (or what we are supposed to do) has changed then we must initiate a change process to capture this so we are constantly comparing our progress to a relevant baseline or approved budget.

In summary, EVM is a valuable tool for any project manager. Without it the focus of Project Management may drift from the overall health of the project and be lost in the day-to-day problems. Its strength lies in its ability to act as an early warning system and providing clear analytical data that allows the Project Manager to identify areas of concern. Linked with further analysis, it allows the root cause of problems to be identified which results in realistic corrective action plans being developed allowing the Project Manager to remain focused on delivering the project.

 

 

Carmen Bates is a Project professional with over 27 years’ experience in Project Controls, Project Accounting and Commercial Management

Comments

I constantly engage in

I constantly engage in arguments with Legacy Project Control Mgrs who do not use Activity based costing to determine EV to measure progress, but instead rely on Revenue Earned as a means to determine Project performance. They simply do the division of Revenue Earned / Total Expected Revenue to arrive to a percentage which is then used to multiply to the planned cost to come up with a simulated Earned Value. And then use that to determine the forecast Cost (ETC/EAC)

Not to forget they focus on Cost elements budgets as cost Drivers using Salaries vs Man hours.

there argument when it comes to ABC At L5/L6 is it is too time consuming and requries resources "PMO" to apply

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