Managing Projects with Earned Value Management
Using earned value management to track projects can help to avoid surprises by identifying emerging issues. Taking objective measures of the project status, being able to analyze variances that can affect a project, and determining where a project it in relation to cost and schedule are all vital components that make earned value management so valuable to a program team.
Once a time-phased schedule and cost baseline – a performance measurement baseline (PMB) - is established that benchmark is what will be used to measure performance. After starting the project, it is necessary to collect status information regularly, typically weekly or monthly, by someone involved in the project.
Status information has two main parts:
- Percentage of scheduled activities completed
- Work and cost remaining to complete each activity – also called estimate to complete (ETC).
Following schedule and cost data collection, that data is then integrated into software that calculates earned value. There are several alternative methods for measuring the earned value of an activity in progress. The following are some of the most popular:
- Discrete effort – based on a measurable tangible activity, i.e., pouring foundation or writing an installation document
- Level of effort (LOE) – bases earned value on passage of time, is used when a project has no defined discrete accomplishments. Earned value will always be equal to amount budgeted.
It is important to keep in mind when calculating earned value:
- If activity is complete, earned value is equal to budget for activity
- If activity hasn’t started, there is no earned value
- If activity is in progress, it has earned value which is typically budget multiplied by percent complete.
- Cost Variance – Measures difference between the task that was accomplished and how much was spent to complete the work
- Cost Variance = Earned Value – Actual Costs
- Schedule Variance – Measures the amount by which a project runs above or below schedule
- Schedule Variance = Earned Value – Planned Value
- At complete Variance – Measures the project budget at completion against the forecasted cost at completion.
- Variance at Completion = Budget at Completion – Forecasted Cost at Completion
Thresholds are set for variance that are out of tolerance to ensure only meaningful variances are analyzed, many are immaterial. Many projects set tighter thresholds for internal reporting than for external customer reporting. This allows for the project manager to keep a closer eye on performance and identify trends before they become a problem. After variances are calculated, out of tolerance variances need to be analyzed. Typically, a variance analysis document from the earned value software application defines the variance that fall outside the defined thresholds. Several cost and schedule indices provide a quick view of where you should be from a schedule and cost perspective. These indices include the Schedule Performance Index (SPI) and the Cost Performance Index (CPI). If these indices are at 1.0 or higher, your project is in great shape; anything less than 1.0 indicates an issue.
Earned value management is so valuable because of its capability to identify trends that are different from the original plan. Earned value management can give a project or project team a better picture of the health of a project and identify areas that need greater attention. Risk areas and warning signs should be investigated and then explained, mitigated or addressed in future planning to decrease performance problems, cost increases and schedule slips. Earned value management can be used on any project, regardless of dollar value, duration or contract type. In any type of project, the project manager is required to track scope, schedule and cost.
Understanding the relationship amount scope, cost, schedule and risk is critical to successful project execution. Explore how Deltek can help you get control of, and report on, project costs
This post is part of a series discussing all things EVM, specifically for those project professionals considering the implementation of EVM for the first time.
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