As a Project manager, one has to deal with these essential constraints and manage them effectively. Hence, it is very important for them to monitor the status of the projects on a real-time basis with respect to these constraints. Earned Value Analysis (EVA) does this for any point of time during project life and helps to deliver early signals about any such issues.
Thus, EVA is very helpful for the project manager and more importantly, for management to get early warnings. Based on these warnings, they can plan for rest of the project work to recoup the losses or to modify the estimates.
In fact, these days Earned Value Analysis has become a favorite tool among project management professionals. As a matter of fact, there is no other single tool, which addresses the issues related to schedule and budgeted cost both on a real-time basis. EVA indeed answers the following questions in a project:
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Hence, the Project Manager can identify the schedule or cost issues with the help of EVA and address these issues early in the project. If the project is behind schedule or over budget - what will it take to bring the project back on track?
What is Earned Value Analysis (EVA)? EVA is a technique to monitor and control project performance. In 1960, the United States Air Force first introduced the concept of modern earned value. It was then called the Cost/ Schedule Control System Criteria or C/SCS. Later in 1996, C/SCS was rewritten jointly by DoD and a private industry. Thus, by now, C/SCS was replaced by a new standard – ANSI-EIA 748. Same year PMI also introduced its PMBOK guide. PMI derived earned value concept from ANSI standard.
What is Earned Value Management? Earned Value Management tool is the one which integrates the project scope, schedule and cost. Thus, a single tool fetches a lot of useful information for a project manager to make decisions. EVM uses Performance Measurement Baseline (PMB) to compare it with actual cost and schedule performance. Thus, the primary requirement to perform Earned Value Analysis is to obtain Performance Measurement Baseline.
Earned Value Management (EVM) – Three dimensions: For applying Earned Value Management in a Project, it’s important to understand three key components as listed below:
Planned Value (PV): Formally, it was called the Budgeted Cost of Work Scheduled or BCWS. PV is the value of the authorized budget assigned to the work scheduled. Hence, it’s the approved budget for the work to be done for an activity or work package (or control account). This budget doesn’t Include any management reserve. The cumulative PV is also referred to as Performance Measurement Baseline (PMB). Hence, PV for complete project is nothing but the Budget at completion (BAC).
Earned Value (EV): Formally, it was called the Budgeted Cost of Work Performed or BCWP. EV is the value of work performed in terms of authorized budget for that work element(s). Hence, it’s the authorized budget associated with the work, that is completed so far. EVA uses PMB to calculate Earned Value for the completed part of project work. For each element of the Work Breakdown Structure (WBS), the work performance can be measured through earned value. Thus, EV is useful to understand the current project performance and to determine long-term trends on Project performance.
Actual Cost (AC): Formally, it was called the Actual Cost of Work Performed (ACWP). AC is the value of the actual cost incurred or realized for the performed work during a particular time period. Since this is the actual cost incurred for the work measured by EV. Hence, it includes the cost elements such as direct costs, direct hours, indirect costs etc., which can be traced from actual invoices or books of accounts. It’s important to note that this dimension doesn’t have any upper limit. It is always painful for a project manager if AC exceeds its earned value.
Though, the terms BCWS, ACWP, and BCWP are still used by some project professionals. However, with the introduction of the second edition of PMBOK, the terms PV, EV and AC are being used commonly as three dimensions of EVM.
Purpose or goals of Earned Value Analysis in project management EVA in project management is very useful for a project manager and top management to make decisions well in advance. However, at this point, it is important to understand that Earned Value concept is effective for projects, but not for routine operational activities. That is why often it is called as earned value project management tool. Also, it can be better utilized for large size complex projects. Whenever a project involves a lot of uncertainty regarding schedule or budget, EVM is an effective tool to closely estimate the schedule, scope, and budget for the project based on EVM trends.
EVM, as discussed, gives an early warning signal regarding over-budget or behind schedule issues. Based on these signals, course corrections can be taken in a project to recover the performance as scheduled and budgeted. Scheduled performance issues can be addressed and corrected (may be at the expense of over-budgeting, when the deviation is high). However, it is impractical to correct over-budget issues, keeping the initial estimates as it is.
For some critical and complex projects, EVM is a better approach to understand, whether original project estimates are viable or not. If needed estimates can be corrected based on current earned value trends. These re-estimated values of schedule, scope, and cost would replace the originals and become the new baselines for the project. Based on the earned value analysis result, management can also take an early call to secure reserves for any further contingency in the project.
Thus, EVA communicates a lot about project health and performance. However, EVA alone can not correct the project performance. It’s an indicator of project status. Based on EVA results, the project manager has to identify the root cause of the issue and address the same to reform the performance. Below are some earned value formulas used in EVA calculation:
