11.3 Earned Value Management (EVM)

A project manager must regularly compare the amount of money spent with the budgeted amount and report this information to key stakeholders. In addition, project managers must also compare the progress of the actual work completed with the estimated durations in the project schedule. One of the quantitative monitoring techniques project managers utilize is Earned Value Management (EVM) which combines scope, schedule and cost baselines to determine the project’s well-being and to decide whether an action is required in case of problems. EVM is essential to project success. It is used extensively in many business fields and organizations such as the Department of Defense (DOD) and construction industries while the IT industry has not due to the reasons such as practicing agile (adaptive) project management and hence lack of a fixed baseline^[1].

EVM is a quantitative monitoring technique that uses metrics and indexes to assess project performance. Earned value analysis compares the performance measurement baseline to the actual schedule and cost performance. EVM integrates the scope baseline with the cost baseline and schedule baseline to form the performance measurement baseline ^[2][ii]. The application of earned value in the early initiation and planning phases of a project increases the validity and usefulness of the cost and schedule baseline and is an excellent verification of the project scope assumptions and the scope baseline. Once established, these baselines become the best source for understanding project performance during execution. A comparison of actual performance (both cost and schedule) against this baseline provides feedback on project status and data, not only for projecting probable outcomes but also for management to make timely and useful decisions using objective data^[3]. EVM, known as “management with the lights on”, is based on the principle that past patterns and trends can indicate future conditions. EVM helps us clearly and objectively see where our project is headed compared to where it’s supposed to be^[4].

EVM can help answer the questions below^[5]:

• Are we delivering more or less work than planned?
• When is the project likely to be completed?
• Are we currently over or under budget?
• What is the remaining work likely to cost?
• What is the entire project likely to cost?
• How much will we be over or under budget at the end of the project?
• What is driving the significant cost and/or schedule variances?

In EVM, there is an important point that must be clarified. We will always see monetary amounts even though we are measuring the scope or schedule performance. The denominator for all of them is the currency we are using for our project. If we are using the US dollar, the denominator would be the US dollar. The analogy for EVM would be doing shopping in a market. We buy different items such as olive oil, cookies, milk, eggs, and laundry detergent. All these items are converted to a monetary value, and it allows us to compare the prices between different brands. In the end, we know the total amount in dollars. This is exactly what is happening for EVM. Therefore, when we see a result showing dollars, it doesn’t necessarily mean that it is related to the cost. It can indicate a problem in scope (e.g., not all planned activities have been completed) or schedule (e.g., the project is behind schedule).

11.3.1    Main EVM Parameters

To start with EVM, we should elaborate on three key dimensions. They are:

1. Planned Value (PV) is the amount of work that is estimated and planned to be done by a particular date in the project. This work is measured by the cost of planned work by a specific date. As explained above, EVM measures all the values with monetary units to create a common measurement scale. PV includes contingency reserve while excluding management reserve. Microsoft Project also uses the term BCWS (Budgeted Cost of Work Scheduled) besides PV. Total PV can be referred to as Performance Measurement Baseline (PMB) or Budget at Completion (BAC).

Let’s consider our Grocery LLC’s m-commerce project. Let’s assume that we outsourced the development component to a software company. Therefore, this component would be a project for this company. They divided the development of the mobile app interface and the backend part into ten activities (e.g., user profile and settings, items to purchase with pictures, features and prices, payment, order tracking, databases, etc.). There are ten activities to finish the development of the mobile app (scope baseline). Then, we can continue with the testing of the mobile app. Each development activity was scheduled to be three days. In total, the mobile app will be ready to test in thirty days (schedule baseline). Let’s also assume that we need to pay $2,000 for each phase. Total cost baseline for all ten activities is $20,000 ($2,000 x 10). For earned value analysis, we consider $20,000 as our total planned value which is also named BAC (Budget at Completion).

2. Earned Value (EV) is the amount of work that has been completed by a particular date in the project. This work is measured by the cost of work performed and completed by a specific date. Microsoft Project also uses the term BCWP (Budgeted Cost of Work Performed) besides EV.

Let’s assume that the company we outsourced the development component finished five activities at the end of the eighteenth day. The planned value by that day was 6 activities, which amounts to $12,000 ($2,000 x 6). However, only five activities were completed, which is 50% of the planned work. This is our earned value which can be measured as $10,000 ($2,000 x 5).

3. Actual Cost (AC) is the sum of the amounts which has been spent on the project so far. Microsoft Project also uses the term ACWP (Actual Cost of Work Performed) besides AC.

For the five activities completed, we paid $11,200. This is the actual cost at the end of the eighteenth day (the status date).

11.3.2    Variance Analysis

After we calculate PV, EV, and AC, we can conduct variance analysis to figure out if we are on, over, or under budget, and if we are on, behind, or ahead of the schedule.

Cost Variance (CV) and Cost Performance Index (CPI)

The difference between EV and AC is the cost variance (CV).

CV = EV – AC

If the cost variance is negative, we can conclude that the project as of the status date is over budget. If the cost variance is positive, this indicates that the project is under budget. IF CV is zero, it means that the project is on track in terms of the budget.

In our example, at the end of the eighteenth day, we could finish five activities. EV is $10,000, and AC is $11,200.

CV = 10,000 – 11,200 = -1,200

It means that our project stands over the budget.

Instead of CV, we can also use CPI (Cost Performance Index) which gives us a ratio instead of an absolute number. CPI uses the same variables as CV but expresses them as a ratio. CPI is calculated as follows:

CPI = EV / AC

CPI = 10,000 / 11,200 = 0.89

CPI is a measure of the cost efficiency of budget resources^[6]. When CPI is less than 1.0, it indicates a cost overrun. When CPI is greater than 1.0, it indicates a cost underrun for the work completed. If it is 1.0, it indicates that the project budget is on track.

Schedule Variance (SV) and Schedule Performance Index (SPI)

The difference between planned value and actual progress (earned value) is the schedule variance (SV).

SV = EV − PV

If less value has been earned than was planned, the schedule variance is negative, which means the project is behind schedule. If there is a positive variance, it indicates that the project is ahead of its planned schedule. If SV is zero, it means that the project schedule is on track.

In our example, at the end of the eighteenth day, we could finish five activities. EV is $10,000, and PV is $12,000.

SV = 10,000 – 12,000 = -2,000

It means that our project is behind its schedule. -$2,000 does not indicate a number related to the cost. As mentioned above, the monetary unit is the common measure we are using for the schedule baseline and variance as well.

Instead of SV, we can also use SPI (Schedule Performance Index) which gives us a ratio instead of an absolute number. SPI uses the same variables as SV but expresses them as a ratio. SPI is calculated as follows:

SPI = EV / PV

SPI = 10,000 / 12,000 = 0.83

SPI is a measure of schedule efficiency. It measures how efficiently the project team is accomplishing the work^[7]. When SPI is less than 1.0, it indicates that the project is behind schedule while an SPI that is greater than 1.0 indicates that the project is ahead of schedule. If it is 1.0, it indicates that the project schedule is on track.

11.3.3    Trend Analysis

After PV, EV, and AC values are generated, and variance analysis is performed, we can conduct trend analysis to predict how our project may perform during the rest of the project, and when the project is completed.

Trend Analysis for Schedule

We can estimate the new project completion time. In our example, the project is behind schedule. Let’s figure out if we may have a delay if the SPI remains the same. We had scheduled to finish the development component in 30 days. The current SPI is 0.83. If we cannot improve the SPI, we will end up with a delay.

Adjusted schedule estimate = Original schedule estimate (schedule baseline) / SPI

Adjusted schedule estimate = 30 days / 0.83 = 36.14 days

Therefore, we may have a delay of 6 days in this component.

Trend Analysis for Budget

We can estimate the new project budget. In our example, the project is over budget. Therefore, may we expect to spend more than what we estimated in our cost baseline (BAC – budget at completion which is the total PV)? If we assume that CPI won’t change during the rest of the project, we can use the formula below:

EAC (Estimate at Completion) = BAC / CPI

EAC = $20,000 / 0.89 = $22,472

Therefore, we can estimate that we may find ourselves spending $22,472 instead of $20,000 which was our cost baseline. The difference between BAC and EAC gives us VAC (Variance at Completion).

VAC = BAC – EAC

VAC = $20,000 – $22,472 = -$2,472

Thus, if we cannot improve the current CPI, we may spend an additional $2,427 when the project is completed.

Another parameter that we can generate is ETC (Estimate to Complete).

ETC = EAC – AC

ETC = $22,472 – $11,200 = $11,272

Thus, we expect to spend $11,272 during the rest of the project.

The third parameter we can use is TCPI (To-Complete Performance Index). Project managers use TCPI to calculate the CPI that is required to get back the project on budget.

TCPI = (BAC-EV) / (BAC-AC)

TCPI = ($20,000 – $10,000) / ($20,000 – $11,200) = 1.14

The project manager should assess the CPI (1.14) required to get the project back on track with its cost baseline. This assessment would be based on various factors such as the availability and quality of resources for the remaining activities, and the project team’s commitment and performance.