How to Utilize Earned Value Management to Keep Project Time and Cost on Track

11/14/2013 Carsten Howitz Project Management

Cost/Time Management-Earned Value

Earned Value Management (EVM) is a cornerstone of cost and schedule management for a project. It is used to determine how much value has been put into a project. This helps the project manager to report the progress of the project related to cost and schedule, so that adjustments can be made as needed to keep the project on track.

In order to understand earned value, think about the concept of debits and credits. For every debit to one account, there is a corresponding credit to another account. Earned value is similar in that if you spend one dollar on labor the project is “earning” a dollar’s value back into the project. Writing code, training users, writing documentation and any work you perform on the project, earn value back into the project.

Although there are many key formulas associated with EVM, I will only go through some of the more important ones.

I will go over the different values and formulas for a project with a total budget cost of $100,000.

Earned Value – EV

How much work was actually completed during a given period of time? This value is derived by measuring where you are in terms of work completed during the given period of time in the schedule.

Let’s say that you have delivered 25% of the project. In this case EV = 25% of $100,000 = $25,000.

Planned Value – PV

How much work should have been completed at a point in time based on the plan? This value is derived by measuring where you had planned to be in terms of work completed at a point in the schedule.

Let’s say that you planned to be 30% done resulting in a PV = $30,000.

Actual Cost – AC

This is the money spent during a given period of time (billed hours). In our example let’s say that the actual cost is $20,000.

Schedule Performance Index – SPI

SPI is the rate at which the project is meeting schedule expectations up to a point in time. In our example SPI = EV / PV = ($25,000 / $30,000) = 0.83. This means that our projects schedule is progressing 83% of the pace we expected, which is bad. Any number larger than 1 is desirable. Numbers less than 1 means we are behind schedule.

Cost Performance Index – CPI

CPI is the rate at which the project is meeting cost expectations up to a point in time. It’s an indicator as to how much we are getting for every dollar we spend. In our example CPI = EV / AC = $25,000 / $20,000 = 1.25 which means that we get $1.25 worth of performance for every $1,00 we expected, which is good. A CPI of 1 means that we are exactly on budget while a value of 1 or more is good, and values less than 1 are undesirable.

So for the example above, we are behind schedule since we only are progressing 83% of the pace we expected. However, we are doing fine on cost. We are getting $1.25 worth of performance for every dollar we expected.

So what can we use all these numbers for? Well, the project manager can now make the necessary adjustments to bring the schedule back on track at a point when the project is only 30% done according the plan. That’s much better than finding this out when the project is 100% done and we are late, right?

In our example the project manager can allocate more resources to the project to catch up to the schedule. That might end up costing more for a few weeks but there is room in the budget for this since we are under budget for now.

EVM is performed continuously throughout the entire project lifecycle and helps the project manager to keep the time and cost on track. It is also used in project performance reporting. Changes to the performance indexes can give early warnings allowing the project manager to make the changes needed to get the project back on track.

EVM includes many other formulas and indexes that are used during a project that I didn’t cover in this article but I tried to cover the most important ones. If you would like to know more about EVM, additional information can be found in this article.

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