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Earned Value Management Explained

~ By Umesh Dwivedi

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Earned Value Management (EVM) helps project managers to measure project performance. It is a systematic project management process used to find variances in projects based on the comparison of worked performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting. The project baseline is an essential component of EVM and serves as a reference point for all EVM related activities. EVM provides quantitative data for project decision making.

EVM Rewards and Recognition

According to the NASA Headquarters Library, the first version of Earned Value Management (EVM) was developed by the Defence Department (DoD) to track its programmes during the sixties. Since 2005, EVM has been a part of general federal project risk management. Today EVM is a mandatory requirement of the US government. The Office of Management and Budget (OMB) promotes use of EVM as a preferred performance-based management system to manage software projects. EVM is also used in the private sector by companies in a variety of industries, consulting firms and educational establishments.

Some of the most well known organisations practicing EVM are:

  • NASA
  • Project Management Institute (PMI)
  • Society of Cost Estimating and Analysis
  • Defence Acquisition University
  • Federal Acquisition Institute
  • Acquisition Management (UK)

Based on reports of the General Accounting Office (GAO) in August 1996 a memorandum of understanding concerning common cost and schedule management for acquisitions was signed by Australia, Canada, and the United States. This gives international recognition to EVM worldwide.

EVM Measures

EVM consists of the following primary and derived data elements. Each data point value is based on the time or date an EVM measure is performed on the project.

Primary Data Points

  • Budget At Completion (BAC)
  • Total cost of the project
  • Budgeted Cost for Work Scheduled (BCWS) / Planned Value (PV)
  • The amount expressed in Pounds (or hours) of work to be performed as per the schedule plan
  • PV = BAC * % of planned work.
  • Budgeted Cost for Work Performed (BCWP) / Earned Value (EV)
  • The amount expressed in Pounds (or hours) on the actual worked performed
  • EV = BAC * % of Actual work
  • Actual Cost of Work Performed (ACWP) / Actual Cost (AC)
  • The sum of all costs (in Pounds) actually accrued for a task to date

For example say we should have completed £800 pounds of work by today. We completed £600 worth of work. The BCWP is £600. The BCWS is £800. And if we actually paid £700 then (ACWP) = £700.

Derived Data Points

Cost Forecasting:

  • Estimate At Completion (EAC)
  • The expected TOTAL cost required to finish complete work
  • EAC = BAC / CPI
    • = AC + ETC
    • = AC + ((BAC - EV) / CPI) (typical case)
    • = AC + (BAC - EV) (atypical case)

Here atypical means it is assumed that similar variances will not occur in the future.

  • Estimate to complete (ETC)
  • The expected cost required to finish all the REMAINING work
  • ETC  = EAC - AC
    • = (BAC / CPI) - (EV/CPI)
    • = (BAC - EV) / CPI

Variances:

  • Cost Variances (CV)
  • How much under or over budget
  • CV = EV-AC
  • NEGATIVE is over budget, POSITIVE is under budget
  • Schedule Variances (SV)
  • How much ahead or behind schedule
  • SV = EV-PV
  • NEGATIVE is behind schedule, POSITIVE is ahead of schedule
  • Variance At Completion (VAC)
  • Variance of TOTAL cost of the work and expected cost
  • VAC = BAC - EAC

Performance Indices:

  • Cost Performance Index
  • CPI = EV / AC
  • Over (< 1) or under (> 1) budget
  • Schedule Performance Index
  • SPI = EV / PV
  • Ahead (> 1) or behind (< 1) schedule

EVM Example

The best way to understand an EVM example is to solve it.

Problem: A project has a budget of £10M and schedule for 10 months. It is assumed that the total budget will be spent equally each month until the 10th month is reached. After 2 months the project manager finds that only 5% of the work is finished and a total of £1M spent.

Solution:
PV = £2M
EV = £10M * 0.05 = £0.5M
AV = £1M

CV = EV-AC = 0.5-1 = -0.5M
CV% = 100 * (CV/EV) = 100*(-0.5/0.5) = -100% overrun

SV = EV-PV = 0.5-2 = -1.5 months
SV% = 100 * (SV/PV) = 100*(-1.5/2) = -75% behind

CPI = EV/AC = 0.5/1 = 0.5
SPI = EV/PV = 0.5/2 = 0.25

EAC = BAC/CPI = 10/0.5 = £20M
ETC = (BAC-EV) / CPI = (10-0.5)/0.5 = £19M

Time to compete = (10-0.5)/0.25 = 38 Months

This project will take TOTAL £20M (19+1) and 40 (38+2) Months to complete.

EVM Benefits

EVM contributes to:

  • Preventing scope creep
  • Improving communication and visibility with stakeholders
  • Reducing risk
  • Profitability analysis
  • Project forecasting
  • Better accountability
  • Performance tracking

EVM 'Gold Card'

Download and keep this useful Defense Acquisition University (DAU) Gold Card, which is a single-sided reference that defines common Earned Value (EV) terminology - revised in January 2009.


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Comments (3)

Topic: Earned Value Management Explained
3/5 (3)
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11th August 2015 2:13pm
Chris Fostel (Annapolis MS USA) says...
NASA should do more research, and so should Umesh Dwivedi before declaring that Earned Value was created by the Defense Department in the 1960s -- 1967 to be more precise. DoD ADOPTED EVM in the 1960s after evaluating existing commercial EV systems. The first of those EV systems were created in the early 50s by businesses seeking a way to predict project funding requirements prior to discovering an overrun at the end of a project. Predicting funding overruns also had the useful side benefit of predicting project 'success/failure' well before mid-project. DoD adopted the early success/failure predictive capability part of EVM, but never understood or didn't care about the rest of EVM.
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8th December 2014 12:40pm
Dave Helyard (Bristol) says...
I think that you like many others miss the main point. The maths side BCWP, BCWS, EAC, etc. although important is a by product of EVM not the fundamental basis. Everyone on this earth with a reasonable education can carry out these calculations and plenty of academics can propose variations. What needs and must be understood is the 32 criteria, and how they are incorporated into the organisation structure and fully understanding what it means to manage a project through EVM. It is no good a CEO introducing EVM and demanding reports, which is the usual case, without understanding and promoting the role of the Cost Account Manager (CAM). They must fully understanding this role and what it requires because unless they do, EVM will and does fail every time - rubbish in, rubbish out! The maths is easy only if you have the structure in place to provide the true status of what is being measured and the acceptance that the individual who is also carrying out other roles needs to play.
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26th May 2014 8:45pm
Eric says...
All good but estimated time length to complete needs some improvement. Basically you need to take the time base into consideration as otherwise your sponsors will get something that is not gonna be exactly truth.

To show it better - if you double all the input values (BAC=20M, PV=4M, EV=1M and last but not least AV=2M) the work should take exactly the same time to complete. Nonetheless, doing it the way it was shown in the example at the bottom of the article - will actually double the time as SPI will still be 0.25 but other values will change "a bit". To present it better: (20-1)/0.25=76 months which is incorrect.

On the other hand - when having meeting with Steering Committee "Big Boys" it might appear good to firstly tell them that "Instead of scheduled 10 months, we are rather looking at... 76"… and few hours later come with correction. "Sorry guys, I was wrong! It is gonna be 'ONLY' 38.". Feel this tension in the room... & partial relief when you come with ekhm... "great news". 

To get it right "the first time" (which we always want & strive to): 
LAC LENGTH AT COMPLETION (for this example =10)
ELAC ESTIMATED LENGTH AT COMPLETION = LAC / SPI (=40)
ELTC ESTIMATED LENGTH TO COMPLETE = ELAC - (PV / BAC) * LAC (40-0.2*10=38) OR SIMPLER - WHEN YOU CALCULATE Earned Value WE MUST KNOW WHICH ReportingPeriod WE ARE INTO THE JOB):
ELTC = ELAC - YearMonthOrOtherReportingPeriodWeAreCurrentlyAt

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