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# Earned Value Management

Earned Value Management

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### Earned Value Management

1. 1. Learn to Lead Projects More Effectively
2. 2. PREAMBLE Lets assume that you gave a Rs. 80,000/- contract for some repair work in your house. The job was to be completed in 15 days and involved major repairs in one of the toilets. Repair needs were mutually agreed. After 15 days, the monitoring reveals that all has not gone well. There have been problems in locating various water pipes in the bathroom. The contractor billed Rs. 85,000/- for the work done in 15 days. 2
4. 4. On the other hand, a closer inspection reveals that only 3/4th of the job is complete So what you can find out from this? and more importantly… what can you do about it? 4
5. 5. Concept of earned value tells us that after 15 days, using earnedvalue vocabulary, the situation is as under:Budgeted Cost of Work Scheduled EVM Summary (BCWS) or Planned Value (PV) Description Value = Rs. 80,000/- BCWS or PV 80,000 ACWP or AC 85,000Actual Cost of Work Performed (ACWP) BCWP or EV 60,000 or Actual Cost (AC) = Rs. 85,000/-Budgeted Cost of Work Performed (BCWP) or Earned Value (EV) = 75% of 80,000 = 0.75 x 80,000 = Rs. 60,000/- 5
6. 6. 6
7. 7. COST VARIANCE This is the algebraic difference between Earned Value of the work performed and the Actual Cost of the work performed. In this case:  Cost Variance (CV): CV = BCWP – ACWP (EV) – (AC) = Rs. 60,000 – Rs. 85,000 = (-) Rs. 25,000 Negative value indicating costoverruns 7
8. 8. REMEMBER..! In a typical spend plan analysis, physical progress is seldom taken into account when analyzing cost performance. Instead, a project’s actual costs are simply compared to planned costs often with misleading results. 8
9. 9.  Cost variance of (-) Rs. 25,000/- means that we are required to pay Rs. 85,000/- for Rs. 60,000/- worth of work. For the work we have got done, we have overspent Rs. 25,000/- Note that ‘cost variance’ is being assessed “against the value of the work that has been completed”. Any negative cost variance figure suggests over spending and positive cost variance indicates cost savings. 9
10. 10. SCHEDULE VARIANCEThis is the algebraic difference between Earned Value of the work performed andthe Budgeted Value of the work planned. In this case: 10
11. 11. SCHEDULE VARIANCE You find anything odd about themeasurement of schedule variance..? 11
12. 12. SCHEDULE VARIANCESchedule variance is being measured in monetary units – not time units A positive value for schedule variance represents work ahead of schedule A negative value indicates behind schedule or schedule slippage 12
13. 13. VARIANCE ANALYSIS These variances not only tell the project manager about the true, rather than the apparent state of the project, they also……… Highlight the area requiring greater focus In this case, the larger CV (42% of the EV) as compared to SV (33% of EV) tells us that we need to look more at the cost overrun aspect 13
14. 14. SCHEDULE PERFORMANCE INDEX (SPI) The portion of a job achieved is indicated by SPI We planned to accomplish Rs. 80,000/- of work, but only did Rs. 60,000/- worth of work, thus we are behind planned schedule by Rs. 20,000/- of work. In this case:SPI = BCWP = EV = 60,000 = 0.75BCWS PV 80,000 14
15. 15. SCHEDULE PERFORMANCE INDEX (SPI) The index also shows that 75 paisas worth of work has been accomplished for each rupee worth of scheduled work Given this performance, the job will be completed in:15 = 20 days20 15
16. 16. COST PERFORMANCE INDEX (CPI) The “burn rate” at which we are spending money (it can also be interpreted as an efficiency rate) is called the Cost Performance Index CPI is computed as:CPI = BCWP = EV = 60,000 = 0.705ACWP AC 85,000 CPI of 0.705 means that for each rupee being spent, the project is achieving 70.5 paisas of value 16
17. 17. COST PROJECTION The estimate of final project cost is called the “Estimate At Completion” (EAC) – a forecast value expressed in either rupees and/or hours, to represent the projected final costs of a project when all work is completed:EAC = BAC CPI BAC = Budget At Completion, which is the sum of all authorized budgets allocated to a project. It is synonymous with earned value term “Performance Measurement Baseline” 17
18. 18. ESTIMATE AT COMPLETION In this case, EAC comes out to be:EAC = 80,000 = Rs. 113,475.170.705 18
19. 19. How would you explain the significanceof EAC, SPI and CPI we have calculated? 19
20. 20. ESTIMATE AT COMPLETION Estimate at completion (EAC) allows to forecast the total project costs on the basis of efficiency with which work performance is achieved 20
21. 21. SUMMARY How much you planned to have accomplished by now (in Rs. or hours)  PV How much you actually spent by now (in Rs. or hours)  AC The value in terms of your baseline budget of the work accomplished by now (in Rs. or hours)  EV 21
22. 22. INTERPRETATION OF EFFICIENCY INDICES Cost Index Schedule (CPI) Value (SPI) Under Cost > 1.00 Ahead of schedule On Cost = 1.00 On schedule Over Cost < 1.00 Behind schedule 22
23. 23. PLANNING FOR EARNED VALUE PROJECT MANAGEMENT 23
24. 24. CASE STUDY Project estimate Rs. 1.5M to produce 10 units in-house Project team came to this budget after a careful study of the product and preparation of project documents Project time: 18 months First project report: 3 months EVPM be employed on this project 24
25. 25. CASE STUDYIn a presentation made to the CEO and management board: Budget was revised to Rs. 1.0M Time was reduced to 12 months 25
26. 26. 1st QUARTERLY PROJECT STATUS REPORTA brief summary indicated the following results: 3 of the ten units had been scheduled for completion at the three-month point, but only two accomplished, thus the team was behind its planned schedule It had forecast expenditures of Rs 300,000 and had committed Rs 300,000, so the team was right on schedule with its funding profile. Any optimistic person could easily paint a positive picture of the project 26
27. 27. INFERENCE FROM PROJECT STATUS“ We are right on our cost spending plan, a little behind schedule perhaps, but we are doing well”…. would be the positive spin put on these results by most practitioners 27
28. 28. EVPM EMPLOYMENT Remember the CEO had specifically asked that EVPM be employed on this project. That requirement adds a slightly different orientation to project performance data EVPM requires a detailed bottom-up performance plan, and a “three-dimensional” measurement against the baseline plan EVPM also requires a periodic forecast of the final expected results, based on actual performance 28
29. 29. EVPM EMPLOYMENT In order to employ EV, there must be plan in place that will allow for continuous measurement of actual performance. This may sound difficult, but it is not. Earned Value simply requires a focus on the completed physical or intellectual work, together with management’s authorized budget for the completed work. We call this the “Earned Value”. 29
30. 30. EVPM EMPLOYMENTIn order to employ EV concept, a project must measure three dimensions ofperformance:The first dimension is called the planned value (also called the Budgeted Cost ofthe Work Scheduled – BCWS). To determine planned value (PV), the project mustascertain: • How much physical or intellectual work has been scheduled to be completed as of a point in time • Management’s authorized budget for this authorized work 30
31. 31. NOTE EV requires a baseline master project schedule; or stated another way…without a master project schedule, one cannot employ Earned Value 31
32. 32. EVPM EMPLOYMENT In this case, the master schedule had specified three units to be completed as of the first quarter, and each unit had a budgeted value of Rs. 100,000 per unit Thus, the project team could determine that the planned value for the first three months of the project was Rs. 300,000 32
33. 33. EVPM EMPLOYMENTNext, project team members will need to measure the second dimension called“earned value” for the same reporting period. To measure EV they will need todetermine:How much of the authorized work they actually accomplishedThe amount of management’s original budget for the accomplished workTheir actual performance results; they completed two units each with a value ofRs. 100,000, for a total earned value of Rs. 200,000/- 33
34. 34. EVPM EMPLOYMENT 34
35. 35. EVPM EMPLOYMENT Prior to introduction of EV methods, project managers were used to measuring the performance of their projects by reference to Gantt charts and Critical Path Analysis for the scheduling aspect, and any difference between the planned expenditure and the actual costs to see how the money was going 35
36. 36. EVPM EMPLOYMENT From a time dating back to the 1950s, it was realized that this was not a very satisfactory way of managing projects as there was always the problem of reconciling these two different measures of project progress i.e. time and cost 36
37. 37. EVPM EMPLOYMENT 37
38. 38. EVPM EMPLOYMENT 38
39. 39. EVPM EMPLOYMENT In this case, team members planned to accomplish Rs. 300,000/- of work but only did Rs. 200,000/-; thus, they are behind their planned baseline schedule by Rs. 100,000/-. Not so bad until they realize that they only accomplished, 67 paisas worth for each planned rupee 39
40. 40. EVPM EMPLOYMENT Team members spent Rs. 300,000/- in actual costs to accomplish only Rs. 200,000/- in earned value. Not so good when they realize that for each rupee, they spent, they got only 67 paisas of earned value. Thus, this project is behind its planned baseline schedule, and overrunning costs. The negative schedule variance is serious, but the negative cost variance may be non-recoverable 40
41. 41. EVPM EMPLOYMENT This project at the end of the first quarter is performing at only 67% of its planned schedule, and 67% of cost performance. Stated another way, it is overrunning its costs by 50%. 41
42. 42. NOTE Although only at 25% completion point, by monitoringthese three dimensions of earned value data, the project is forecasting a significant final overrun of costs 42
43. 43. DECISIONS AFTER 1st PROGRESS REVIEW Description Action Project budget revised to Rs. 1.5M Time schedule remained at 12 months Getting project back on Main performance objective schedule 43
44. 44. FINAL RESULTS Project completed with all technical requirements on time within 12 months schedule. Final actual costs Rs 2.0M. The new product worked exactly as required. The management picked up early signals at 25% completion point of cost overruns and provided necessary funds by cancelling two projects of lesser importance 44
45. 45. NOTEExecutives who do not employee EV or do not rely on performance data often find themselves over- committed in their project portfolios, sometimes experiencing catastrophic results 45