What is Earned Value?
Current performance is the best indicator of future performance, and therefore using trend data, it is possible to forecast cost or schedule overruns at an early stage in a project. The most comprehensive trend analysis technique is the Earned Value method.
In a nutshell, Earned Value is an approach where you monitor the project plan, actual work, and work-completed value to see if a project is on track. Earned Value shows how much of the budget and time should have been spent, with regard to the amount of work done so far.
Here are five other definitions:
- Englert and Associates, Inc define it as, "A method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned."
- Project Magazine defines it as, "A methodology used to measure and communicate the real physical progress of a project taking into account the work complete, the time taken and the costs incurred to complete that work."
- The user guide for Microsoft Project 2003 defines Earned Value as, "A method for measuring project performance. It indicates how much of the budget should have been spent, in view of the amount of work done so far and the baseline cost for the task, assignment, or resources."
- Field Operative defines it as, "The physical work accomplished plus the authorised budget for this work. The sum of the approved cost estimates, (which may include overhead allocation), for activities, (or portions of activities), completed during a given period, usually project-to-date."
- NASA defines it as, "An integrated management control system for assessing, understanding and quantifying what a contractor or field activity is achieving with program dollars. EVM provides project management with objective, accurate and timely data for effective decision making."
Earned Value differs from the usual budget verses actual costs incurred model, in that it requires the cost of work in progress to be quantified. This allows the project manager to compare how much work has been completed, against how much he expected to be completed at a given point.
The project manager needs to agree the project scope, create a Work Breakdown Structure ¹ (WBS) and assign budget to each work package ², the lowest level of the WBS. Next he or she will create a schedule showing the calendar time it will take to complete the work. This overall plan is baselined (this is the planned value) and used to measure performance throughout the project. As each work package is completed (earned) it is compared with planned value, showing the work achieved against plan. A variance to the plan is recorded as a time or schedule deviation.
It is necessary to get the actual costs incurred for the project from the organisations' accounting system. This cost is compared with the earned value to show an overrun or under run.
Earned Value provides the project manager with an objective way of measuring performance and predicting future outcomes. This can enable him or her to report progress with greater confidence and highlight any overrun earlier. This in turn, enables the management team to make cost and time allocation decisions earlier than would otherwise be the case.
It is true that past performance is a good indicator of future performance. Earned Value is a useful tool for predicting the outcome of projects in terms of time to completion, cost to completion and expected final costs.
Earned Value is also known as Performance Measurement, Management by Objectives, Budgeted Cost of Work Performed and Cost Schedule Control Systems.
- A Work Breakdown Structure (WBS) is a hierarchical structure used to organise tasks for reporting schedules and tracking costs.
- Work Packages are a small-defined set of tasks or activities that form part of an overall project scope, usually the lowest level of the Work Breakdown Structure.
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