Master your project control by using Earned Value Management

Abstract: Presents an introduction to Earned Value Management techniques, debates on how they are used to control and monitor a projects performance during its implementation. This paper will also analyze the three major questions regarding this topic: What, Why and How? The purpose is to convince the reader about the usefulness of this tool and to point the way to making it work. The applicability of this method are presented based on a real situation study case with quantitative variables. It is expected that the reader will gain a strong understanding of the concept for implementing Earned Value on his/her project.

Key words: Earned value method, control, performance, forecast, cost

ACHIRILI Mircea Alexandru, A.S.E., Faculty of Management, Project Management TINCA Titus, A.S.E., Faculty of Management, Project Management TRIFA Horatiu, A.S.E., Faculty of Management, Project Management

Introduction to Earned Value Management As any seasoned project manager knows, projects can be technical and challenging and even the most organized of project managers will run into some problems along the way. Adding to the complexity of project demands is the fact that many organizations are facing increasingly difficult market or trading conditions, so now more than ever the requirement for planning and control around management of projects is critical. In the midst of a typical project, it is often desirable to estimate such quantities as How much time is left? or How much of the work is complete? or How much money will the project spend before it is complete? One example is the common question Are we there yet?, that children often ask when going on trips , it is not surprising. Just as the passengers on a trip wonder how long it will take to get to the destination, so managers have a responsibility to understand how long a project will take to get to its destination - and what it will cost. Those working on the project usually want to know this too. Earned value management (EVM) is a project management technique for measuring project performance and progress in an objective manner. As a contribution to project management, EVM is able to provide accurate forecasts of project performance problems, combining measurements of scope, schedule and cost. Earned Value Management, as a method for estimating project performance emerged in 1965. It was created in the United States Department of Defense, where employees devised a set of criteria to monitor order fulfillment by contractors. Before Earned Value Management emerged, PERT (Program/Project Evaluation and Review Technique) was often used to make routine analyses and forecast construction. PERT/Cost was used for forecasting total costs and for forecasting the time required to execute a project. Improved implementation of Earned Value Management was developed in 1963. Instead of comparing planned and actual costs, this new method required users to correlate earned value and actual costs to determine capital efficiency. The modern implementation of Earned Value Management was created by the National Security Industrial Association (NSIA) based on analysis of the techniques used from 1967 to 1996. It was approved by United States Department of Defense in 1996, and comprises 32 criteria - considerably simplified compared to the previous edition, which used 35 criteria. Even in this edition, Earned Value Management is intended essentially for large projects and includes many requirements which are not of great importance. It is

generally believed that due to high complexity of the techniques in its current interpretation, this method will not be practical for the vast majority of project managers.. A re-occurring theme that project managers face is the management of their projects' performance and any project's performance can be diminished due to cost overruns and time delays. A project manager's job is ultimately to keep control of a project and aim to have their projects completed all within an assigned time scale and budget. To ensure the project manager sees these potential or real overruns, a process needs to be in place that provides effective project control. A suitable system within project management that provides an organization with this functionality is Earned Value Management (EVM). The systemic approach of Earned Value Management is to aid project managers in the area of project performance and answers the "how is the project going?" question in a quantifiable manner. Due to financial or market constraints, projects selected for implementation must prove successful so an early warning system in place to resolve any issues that may arise during the project implementation process is a must. Earned Value Management looks at the real-time progression of a project by examining the work completed, the costs associated with that work and also the total number of hours used. Observing this progression will enable an organization to have greater control of the risks that could be associated with a project. Before a project starts, the project team sit down and prepare a plan. This plan will determine the goals of the project and is made up of a number of criteria such as, how long the project will take to complete and the resources and costs assigned to that project. As the project is in motion a realtime snap shot can be taken and, from here, an in-depth examination of the project's progress can be taken into consideration using the Earned Value Management criteria. To determine the cost and performance of a project an organization using EVM needs to look at the actual and planned costs associated with a project. Taking an assessment of these will enable a project manager to make a judgment on the revised completion date. Earned Value Management's reputation as a project planning function has increased over the years leading to it now being a popular choice among project managers for the successful delivery of their projects. The Earned Value Management process is designed to deliver project performance through information relating to the cost and schedule of a project and integrating these two items is vital to the working of earned value management. If and when an organization decides to implement an EVM system in conjunction with their Project Management Process, they must follow the guidelines and practice of good Earned Value Management in order for the system to work to their advantage. What does Earned Value Management bring to an organization?

Visibility of how well a particular project is doing. Communication and visibility for project team members is improved. Control of a project's performance is increased. Fully integrates the components such as scope, schedule and cost of a project. Answers any queries relating to the performance of the project. While also comparing past, current and future performance. Determine the future status of a project. Aiding in the decision making process of a project. Risk management: By having an EVM systems integrated with a project management system, an organizations risk management will improve. EVM system can emphasize any weak points within the planning of the project. Prevents your organizations project scope from creeping.

Earned Value Management has been proven to aid in the performance capabilities of a project however many project managers may never gain from the offerings of EVM. While Earned Value Management has the ability to add many benefits to an organization it is also argued to present a number of limitations. The quality of a project is thought to diminish while having an EVM system. EVM is believed to focus on time and cost savings rather than the quality of the project. As referred to earlier EVM takes the planned value, however this planned value is merely a forecast of the future and the plan may be flawed from the start. This forecast may have discrepancies and from there have a knock on effect on the actual plan. This will mean that the organization will need to amend the planned and actual performance of the project. Probably the biggest issue around implementing an Earned Value Management process is maintaining the information required to produce the calculations. Time and effort must be invested maintaining the project plan, in terms of both planned and actual time and cost. Whilst the intention may be there, the project manager may not always follow through with the process and, if this is the case, the information produced will be of very little value to the organization. Essentially, an organization will not gain fully from the Earned Value Management process if they do not engage with it properly. Overall an Earned Value Management system will bring a number of benefits to an organization ensuring the success of projects. However an organization who doesn't participate in the Earned Value Management process entirely will ultimately fail to gain the rewards it has to offer. Earned Value also is a consistent method for analysis of project performance. Suppose you ask the bricklayers and the carpenters how theyre doing. You are likely to

get different answers, influenced not only by how they are actually doing, but also by how they calculate their plan and their progress. As we shall see below in the discussion of How, using Earned Value establishes a particular method for determining what the plan to date is and what the progress actually achieved is.

Definitions of Earned Value Management terms Earned value actually uses three data values, which are computed each week, month, or whatever other period you wish to use. We use the term analysis date to refer to the date when the three values are analyzed. Thus if we measure these values monthly, an analysis date of October 31 would include all values from project inception until the end of October. The three values are: Budgeted Cost of Work Performed (BCWP). This is the cost originally budgeted to accomplish the work that has been completed as of the analysis date. It answers the question how much work has actually been completed?. Budgeted Cost of Work Scheduled (BCWS). This is the total budgeted cost up to the analysis date. It answers the question How much did we plan to spend as of this date? A variant of this question is How much work should have been completed by this date?. Actual Cost of Work Performed (ACWP). This is what it actually cost to accomplish all the work completed as of the analysis date. It answers the question how much have we actually spent?. This is usually determined from the organizations accounting system, or can often be approximated by multiplying the number of people by the number of hours or days or weeks worked.

(Fig. 1)

Following is the summary of important Earned Value terms and formula. Term PV (BCWS) EV (BCWP) AC (ACWP) BAC EAC ETC VAC (Table no. 1) Name Cost Variance (CV) Schedule Variance (SV) Cost Performance Index (CPI) Schedule Performance Index (SPI) Estimate At Completion (EAC) Note: There are many ways to calculate EAC. Formula EV AC EV PV EV / AC EV / PV Interpretation NEGATIVE is over budget, POSITIVE is under budget NEGATIVE is behind schedule, POSITIVE is ahead of schedule I am [only] getting _____ cents out of every 1. I am [only] progressing at ___% of the rate originally planned. As of now how much do we expect the total project to cost _____. Used if no variances from the BAC have occurred Actual plus a new estimate for remaining work. Used when original estimate was fundamentally flawed. Description Planned Value Earned Value Actual Cost Budget at Completion Estimate at Completion Estimate to Complete Variance at Completion Interpretation What is the estimated value of the work planned to be done? What is the estimated value of the work actually accomplished? What is the actual cost incurred? How much did you BUDGET for the TOTAL JOB? What do we currently expect the TOTAL project to cost? From this point on, how much MORE do we expect it to cost to finish the job? How much over or under budget do we expect to be?

BAC / CPI AC + ETC

AC + BAC EV AC + (BAC EV) / CPI

Actual to date plus remaining budget. Used when current variances are atypical. Actual to date plus remaining budget modified by performance. When current variances are typical. How much more will the project cost? How much over budget will we be at the end of the project?

Estimate to Complete (ETC) Variance at Completion (Table no. 2)

EAC AC BAC - EAC

Illustrative explanation of Earned Value In the following four periods, we expect to complete 100 of work: 1 Work Scheduled () [Planned Value 25 (PV)] (Table no. 3) 2 25 3 25 4 25 TOTAL 100

As time progresses, we can see what was actually spent in each period: 1 Work Scheduled () [Planned Value 25 (PV)] Actual cost () [Actual Cost (AC)] 22 Variance 3 (Table no. 4) 2 25 20 5 3 25 25 0 4 25 25 0 TOTAL 100 92 8 (8%)

From an accounting sense, it appears that this project is experiencing a deficit of 8. It was expected to cost 100, and has actually cost 92. What is missing from this equation is the value of how much work actually was completed or performed. Work Scheduled () [Planned Value (PV)] Accomplished Value () [Earned Value (EV)] Actual cost () [Actual Cost (AC)] Schedule Variance (SV) [SV=EV-PV] 1 25 20 22 -5 2 25 20 20 -5 3 25 20 25 -5 4 25 20 25 -5 TOTAL 100 80 92 -20 (20%)

Cost Variance (CV) [CV=EV-AC] (Table no. 5)

-2

-5

-5

-12 (15%)

We now have a clearer perspective of the actual status of the work. We currently have a schedule variance of -20. We were scheduled to complete 100 of work, and have only completed 80. In addition, the work that was completed (80) has cost more than we had planned (92), creating a cost variance of -12. The actual cost variance is not 8% as calculated by the traditional approach but it is 15% which is more accurate as it also considers the work accomplished.

Case study The assumptions :

John is managing a software development project. The project estimates include a total of 100 hours of development time. There are five separate tasks that will take 20 hours each. Each task has 4 subtasks that take 5 hours to complete. John hires five programmers. Each will each have twenty percent of the work that can be completed concurrently. Each programmer will charge 100 per hour. Total budget for the project is 10,000. Based on the distribution of work, it is determined that the project can be completed within one week.

Initial reports :

At the end of the week, the programmers turn in time sheets. A total of 90 hours is reported. Based on this information, John quickly assumes the project is 90% complete. John realizes that the project will not be completed on time. Johns status report claims that the project is within budget but not on time.

Questions: Would you agree with Johns assessment of the project? If you answered No or I do not have enough information to support that claim youre right on track. And to understand why that is the correct answer, lets dig further into the problem.

What do we Know (for a fact)?

The project has 5 tasks, 20 hours each, total 100 hours. The programmers were given 1 week to complete their tasks. Timesheets show 90 hours of work.

What do we Not Know (to be true)?

How many of the tasks (or portions of a task) have been completed? Do we know that work performed was solely dedicated to completing tasks or was the time spent on non-related tasks or inefficiencies?

To answer this question, John calls each programmer and gathers the following information: Programmer Budgeted Time Bob 20 hours Sue 25 hours Roger 20 hours Mike 20 hours Jill 20 hours Total time and costs incurred (Table no. 6) Actual time spent 15 hours 25 hours 5 hours 30 hours 15 hours 90 hours Invoices Submitted 1,500 2,500 500 3000 1,500 9,500 Percentage of all tasks completed 60% 75% 10% 50% 80%

Without going any further John can see the project has encountered a serious problem. Collectively, the programmers show 90 hours of work. However, no one programmer can make the claim that they have completed 90% of their assigned task (and final deliverable). John scratches his head and is dumbfounded when it comes to understanding: What has happened

 What to do next So he asks an associate for help and she comes to the rescue. Margie introduces John to a project management tool called Earned Value Management (EVM). In fact, she gives him an article that has the following definition: Earned Value Management - The process of considering scope, schedule, and resources, measured against a projects actual performance. It compares the planned amount of work to the completed tasks, to the projects cost, to determine if the cost, schedule, and work completed (thus far) are all in sync and in accordance with the plan. This analysis will show past performance and will estimate future efforts to complete the project (with the desired results). The article provided by Margie also contains a table that shows all the terms, definitions, and formulas needed to conduct EVM analysis. At this point, John feels overwhelmed and has no idea how to apply the EVM terms and formulas to his project. So with Margies help, they slowly begin the analysis by defining the terms and plugging in the known figures. Step 1 The Starting Point Calculations Symbol Description PV Planned Value Formula None Explanation The estimated value of the work planned to be done thus far. In this case, the projects PV is the estimated cost of 10,000 because we estimated the project would be completed within a week. The total costs incurred to date, based on timesheets, invoices, other expenses, etc. In this case 9,000 The estimated value of (intended) work completed thus far, as it relates to the expected deliverables.

AC EV

Actual Costs Earned Value (Table no. 7)

None Sum of all (Task Budget * % Completed)

PV (Planned Value) and AC (Actual Cost) are easily derived. PV is based on what should have been completed thus far. For multi-period projects, it will seldom equal the full budget figure. The idea is to calculate a figure that represents the amount of intended work; the work performed (thus far) in relationship to the assigned tasks. In reality, EVM analysis will be done over several periods and the value for PV will be constantly changing. To derive EV, multiply the budget figure by the percentage of all tasks completed (see Table 1). For example, Bob was given 20 hours to complete 4 subtasks. He estimated that 60% of the subtasks are completed. You multiply 2,000 by 60% and this gives a value of 1,200. So you can clearly see that Bobs (real) work does not equal

the actual cost of 1,500. As a result, Bob has fallen behind (in schedule and cost) based on this one calculation. To calculate EV for the entire project, simply add the individual EV values for each programmer. Refer to Table 3. Term Value PV AC EV Notes

10,000 Our budgeted figure 9,000 5,500 Total invoices submitted thus far (2,000 * 60%) + (2,000 * 75%) + (2,000 * 10%) + (2,000 * 50%) + (2,000 * 80%)

(Table no. 8) Again, we can see that the group as a whole has fallen behind on their work. They have submitted 9,000 as the cost but produced only 5,500 of (Earned) value. So at this point in time, the project appears to be 3,500 over budget. And we also know the project is behind schedule (because the tasks were not completed within the 1 week time frame). Step 2 The Performance Index Calculations The Performance Index figures help us quantify efficiency. They are also used in subsequent EVM calculations. Symbol Description CPI SPI Cost Index Formula Explanation I am (only) getting (blank) performance out of every 1 spent. cents

Performance EV/AC EV/PV

Schedule Performance Index (Table no. 9)

I am only progressing at (blank) % of the rate originally planned.

By plugging in our known values for PV, AC, and EV, we can calculate CPI and SPI. Term CPI SPI Value 61.11% 55.0 % (Table no. 10) Notes Using (EV/AC); (5,500 / 9,000) Using (EV/PV); (5,500 / 10,000)

Based on these results, John can see that his team is working at an average of 61.11% performance efficiency. The 55% SPI index tells him that the project will most likely need another week for completion. Step 3 The Final Cost Estimates John then asks Margie; Based on this information can we calculate the projects final cost? So Margie rolls out the next set of terms and calculations. Symbol Description BAC EAC ETC VAC CV SV Budget Completion Estimate Completion Estimate Complete Variance Completion Formula At None At BAC/CPI To EAC-AC At BACEAC Explanation The original budget for the total job The amount currently expected for the total project cost From this point on, how much MORE do you expect the cost will be to finish the job How much over or under budget will the project come in at Negative is over budget, Positive is under budget Negative is behind schedule, Positive is ahead of schedule

Cost Variance (in EV-AC dollars) Schedule Variance EV-PV (in dollars) (Table no. 11)

BAC is the original budget total. For this project, it is 10,000. Calculating a value for EAC can be tricky. There are four different methods for calculating EAC. Each method can yield a different result. Since Bob employs the principle of conservatism and wants the worst case scenario he uses the formula the yields the highest figure. ETC is an easy calculation. This figure represents the additional costs from this point forward in order to finish the project. Term BAC EAC ETC VAC Value 10,000 16,363 7,363 - 6,363 Notes The original budget Using (BAC/CPI); [10,000/.611] Using (EAC-AC); (16,363 - 9,000) Using (BAC-EAC); (10,000 - 16,363)

CV SV

- 3,500 - 4,500 (Table no. 12)

Using (EV-AC) with answer in dollars; 5,500 - 9,000 Using (EV-PV) with answer in dollars; (5500 - 10,000)

At this point in time, the project appears to be 6,363 over budget (VAC). It will be next to impossible to hit the original target figure of 10,000. The current EAC value assumes that the programmers will continue working at the same pace. The Cost (CV) and Schedule (SV) variances indicate that the project is over budget and behind schedule. Step 4 Overall Efficiency Ratings John is shaking his head in disbelief. Not only is his project struggling to meet the original estimates, but he must now report the bad news at the next steering committee meeting. He knows that the management team will not be able to follow the calculations shown above. So he needs to simplify the reporting to three simply values. Symbol Description PE PS CSI Planned Earned Percent Spent Formula EV/BAC AC/BAC Explanation Project % Complete (as it relates to time and deliverables) Project % Spent (as it relates to cost)

Cost Schedule CPI Index SPI (Table no. 13)

* The overall efficiency rating. The further CSI is from 1.0, the project will have difficulties in recovering.

Using the known values, John calculates PE, PS, and CSI. Term PE PS CSI Value 55% 90% 0.336 (Table no. 14) The values for PE and PS do not surprise John. He has seen these figures before. But CSI is surprising. This value is far from 1 and indicates the seriousness of the projects inefficiency. The formulas provide a mathematical analysis of performance. Unfortunately, they cannot explain why the inefficiencies have occurred. For this, John will need to Notes Using (EV/BAC); (5,500 / 10,000) Using (AC/BAC); (9,000 / 10,000) Using (CPI * SPI)

examine the work of each programmer in order to understand why they are all running over the allotted time for each task. Hopefully, he can correct the problems. The other issue to consider is that the task lengths were severely underestimated. Interviews with the programmers may show that they in fact are working to the best of their ability. The problem may have occurred in the original project estimates.

Conclusion EVM is a valuable tool in the Project Manager's "toolbox" for gaining valuable insight into project performance and is the tool that integrates technical, cost, schedule and risk management. In addition, EVM provides valuable quantifiable performance metrics for forecasting at-completion cost and schedule for their project. With the above presentation, we have explored the What, Why and How of Earned Value. We have seen that Earned Value is a tool for improving the performance analysis of a project, by: providing a uniform unit of measure for project progress, enforcing a consistent method for analysis and providing a basis for cost performance analysis of the project. The reason for using Earned Value is tied closely to what Earned Value is. There is much more to EVM than discussed in this article. But you are now aware of the third dimension of a projects financial analysis. All three dimensions are key elements that must be considered when analyzing project performance.

Acknowledgments

1. 2. 3.

Biblioteca centrala ASE KPMG RomActiv Business Consulting

Referinte 1. 2. 3. 4. Clements, James, P.; Gido, Jack Effective project management,

Thomson/South-Western, Mason 2006. McCollum, J.K.- Project management, a practical approach, Editura Universitara, Bucuresti, 2005. Project Management Institute Practice Standard for Earned Value Management, Newtown Square, Project Management Institute, Inc., 2005. Solomon, P.J., Ralph, Y.R. - Performance-based Earned Value, Hoboken, J. Wiley and Sons, 2007