In project management, Earned Value Management or EVM is one of those concepts which has been a topic for many project management knowledge sources. However, still a wide range of project managers have not started to take advantage of this powerful tool; or they still do not use it completely. This motivated me to write this short kick-off. First I will start with introducing the methodology and a summary of its status in the PM society and then I will briefly explain the principles and elements of earned value management. Eventually, I will provide you a short list of sources to study and learn more about project Earned Value Management.
What is Earned Value Management?
PMBOK 5th edition defines EVM as a performance measurement methodology that combines scope, schedule and resource measurements in order to come up with an integrated scope-cost-schedule baseline and give the PM team the opportunity to have a comprehensive overview about the status of project and the overall project performance. In other words, EVM is a tool for you to monitor and control all three sides of the famous project triangle of constraints. Isn’t it easier to have a comprehensive overview of the project with a combined system instead of getting lost between different types of baselines and various aspects of project performance factors?
It’s a fact: EVM works!
Earned value management (EVM) is a widely recognized term in project management. The findings of a research by the University of Houston in 2010 about the global practice of earned value management, advocates that this methodology is widely well-known regardless of the industry or country. The users of earned value management strongly believe in the effectiveness of this methodology in providing early warning, improving communication, and helping to achieve the project objectives regarding to the triple constraints of time, cost and scope.
If it is good and you know it…?!
Okay! Now you reasonably expect that this proven powerful well-known tool is used in all the projects, don’t you? Let me surprise you by telling you that it is not. My experience shows (and if you are also in project management most probably agree with me) that many projects for various reasons do not use EVM at all or do not utilize it correctly or comprehensively. This raises the question “Why is that?”.
Quentin Fleming and Joel Koppelman in their book “Earned Value Project Management” offer three main reasons for this:
Diversity in terminology in different standards which could sometime make the whole concept too complicated.
Failing in coming up with a broadly usable technique in initial versions of EVM.
Unwillingness of some project managers to utilize the technique because:
- They are too confident in relying to their understanding about the status of project and they are sure that they could finish the project according to the plan despite of all the challenges
- Simply because they don’t feel comfortable to get alarmed so they try to recover the bad news by ignoring them!
Besides these three I would like to add two more reasons:
Poor organizational infrastructure for providing the required input for proper earned value management
Lack of in-house knowledge about implementation of the earned value management system.
No excuses anymore; It’s the time to start!
Although some of the above mentioned reasons could sound to some extend valid (for sure not the third one!) the good news is that nowadays most of them are resolved. The method is adequately matured. Also, developments in IT made it quite doable to collect and manage the required information for performing earned value management. On the other hand, thanks to PMI’s project management body of knowledge and AXELOS’s PRINCE2 framework project managers are now more aware about the project management processes so that they do not only rely on their gut feelings for making their decisions. So in short, I should say that everything is now ready for you to start with EVM!
EVM: how to get there?
Let me confess something: I am too bad in finding the addresses on my own. It used to make a lot of challenges for me in the past before invention of google map; but now it is not a problem at all. The only thing that I need to do is to check the route in the map in advance and then the rest is easy: just follow the instructions and enjoy your journey! I believe that’s the same with adopting a new system: first you need to select your road-map and then the rest is a piece of cake!
For developing EVM methodology two organizations played very important role. Firstly the US department of defence (DoD) developed the concept in 1960’s. Later in 1996 and with a joint effort with private sector the complete methodology guide got released under the name ANSI-EIA-748. Then in 1996, project management institute has included earned value management in its project management body of knowledge and developed the practice standard for earned value management.
Technically the both standards are compatible and it is up to you to decide which one you are going to use as your road map for implementing earned value management. Association for the Advancement of Cost Engineering (AACE) also suggests the both standards as the source. The only difference is that ANSI-EIA-748 looks sometimes too detailed while the PMI practice guide is relatively straight to the point. Let’s say for the majority of simple and usual projects the PMI guide is sufficient. For large complex projects you may want to go for ANSI-EIA-748.
What do we do in EVM?
I think to understand what we really do in earned value management the easiest way is to refer to the fundamental principle of EVM as is formulated by PMI. This is actually the key point of EVM that when you have a sound baseline, performance trend in a project is a reliable predictor to forecast the future of your project. As you see, this principle emphasizes on three main elements which technically form together the whole earned value management methodology. These elements are:
- Sound baseline
- Performance trend
This simply outlines what we do in EVM: we prepare a baseline, measure the performance and forecast the future in order to perform timely reactions to meet the project objectives. Technically this is what we are supposed to do in project monitoring and control. But the strength point of EVM which make it quite districted is “Integration”. As you know, based on PMBOK we must have scope baseline, schedule baseline and cost baseline and monitor the performance against these baselines. Earned value management method is designed in a way that combines all three and provides you with an integrated system to monitor the performance.
What “exactly” do we do in EVM?
I assume now you want to know what exactly you need to do. Don’t you?! Here you go the recipe:
The first thing you need to do in EVM is to define the project scope and prepare a good quality WBS (I explained here how you should prepare a quality WBS). Then you assign management responsibility to each WBS element. The third step is to prepare the project schedule. When you have the schedule then you prepare a time-based budget for all WBS elements to the lowest level (Activities). Then you should decide and determine the appropriate performance measurement method for each work package/activity. When you have your schedule, budget and performance measurement method set, now you baseline it. What you will have here is a high quality fully resource loaded schedule which you can easily extract any time-cost information about project from it. The only thing that is left in preparation stage is to develop a structure for collecting the time-cost-scope performance information in an integrated manner.
Now you have your performance measurement baseline (PMB) and your structure for collecting the progress in place. So you can start utilizing the system. In every reporting period you measure the actual earned value and actual cost accurately. Then you analyse time/cost performance and forecast the future using the EVM techniques. You determine the estimate at completion (EAC) and then prepare your report for designing the corrective actions. In the whole process you must of course maintain your performance measurement baseline.
I know that this article has already become too long but I am afraid I cannot finish it yet before briefly outlining the components of earned value management methodology. It may sound boring if I say that I am going to give some formulas as well but I promise to keep it as short as possible.
Okay. The main components of EVM are:
- Earned Value (EV): The value (cost) of the work performed to date.
- Planned Value (PV): The value (cost) of the work that was planned to be done to date (baseline).
- Actual Cost (AC): The actual spent cost of the work performed to date.
- Project Budget Base (PBB): The Initial estimated budget of activities.
- Budget at completion (BAC): The overall estimated budget of the project: the sum up of all the activities estimated cost.
- Estimate to complete (ETC): The estimated cost to finish the remaining work.
Based on these components, EVM introduces some indicators which can be used for evaluating the overall project performance:
- Estimate at completion (EAC): The expected cost of project when it is completed.
- EAC = AC + ETC
- Variance at completion (VAC): The variance between estimated at completion cost and the initial budgeted cost.
- VAC = EAC + BAC
- Schedule Variance (SV): The variance between the earned value and the planned value.
- SV = EV – PV
- Schedule performance index (SPI): The ratio of earned value to planned value.
- SPI = EV/PV
- Cost Variance (CV): The variance between the earned value and the actual cost.
- CV = EV – AC
- Cost performance index (CPI): The ratio of earned value to actual cost.
- CPI = EV/AC
- To Complete Performance Index (TCPI): the efficiency needed to finish the project on budget, it is the ratio between budgeted cost of work remaining and money remaining.
- TCPI = (BAC – EV)/(EAC – AC)
Tip 1: If you think about the concept behind these formulas carefully you don’t really need to memorize them. For instance for SV, SPI, CV, CPI keep in mind that we are talking about earned value. So EV is always the first element in the equation. Then when we talk about schedule, we are talking about what we planned. Therefore we expect that for SV and SPI the second element should be the planned value (PV). Also when we talk about cost, we should take care of actual cost. So in the formulas related to cost (CV or CPI), AC is the second element.
Tip 2: You may combine the mentioned formulas and come up with new equations. Sometimes you need to do that. But I believe if you know these concepts, the rest is just some mathematical practices so you don’t really need to memorize all the combinations.
Tip 3: Today there are many powerful software which do all the calculations for you. For example In Oracle Primavera, if you prepare a good quality resource loaded schedule, the software calculates all the EVM indexes; however still you should always know what they really mean and how they are calculated in order to interpret them correctly for your corrective actions.
That’s it. Now it’s time to read more!
I guess this is enough as a kick off. Now I have some sources for you to read more about the earned value management:
- Of course the first source is: PMBOK (Currently the 5th edition) Published by Project Management Institute. You may refer to the part related to cost control.
- The second source: Practice Standard for earned value management; again from Project Management Institute (currently the latest is second edition).
- ANSI-EIA-748: Earned value management systems. There is also an acceptance guide and an intention guide to understand the standard better.
- Earned value project management. by Q.Fleming and J. Koppelman, published by PMI.
- The last one: Skills and knowledge of cost engineering; published by AACEi . You may refer to section 4: progress & cost control.
Good luck with implementing EVM!