What is Earned Value Management (EVM)?

Earned Value Management (EVM) is a project management methodology that integrates cost, schedule and risk to measure progress and forecast outcomes. EVM is used to identify project performance issues and help keep projects on track. This article explores the topic in depth to help project managers understand the value of EVM and how it can be used to improve outcomes.

What is Earned Value Management (EVM)?

EVM provides an objective measure of project schedule and cost performance and is the amount of planned work that has been completed at any point in time during a project. EVM is the use of earned value practices and measures in project management. EVM provides a structure, common lexicon and measures progress to keep project scope, budgeted cost and schedule in alignment.

EVM in Project Management

Earned value management is one of the most important techniques for managing large, complex projects. It integrates information about a project's scope, schedule and costs to provide valuable insights into its progress and health. EVM can be required on government contracts for development-type projects, especially for DoD, NASA, the Department of Energy.

Benefits of Earned Value Management

EVM helps project managers accurately forecast project completion and cost and provides early warnings of delays or overruns. EVM helps prevent small changes in the plan from creating scope creep and reducing profitability. EVM helps control project performance to produce competitive advantages and customer goodwill.

Earned Value Management: A Tool for Project Management Success

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Earned Value Management Terms You Need to Know

One of the most intimidating things about EVM is understanding the terms being used. They aren't that difficult, so let's review one at a time.

Earned Value (EV)

EV is a quantified value of work accomplished to date. It leverages a time-phased budget to help keep actual cost and project schedule in alignment throughout the project lifecycle.

Planned Value (PV)

Planned value is the basis for calculating EV and leverages the project budget and schedule budget to track the budgeted cost of work performed. Planned value quantifies the value of progress over time as compared to the budgeted cost.

Actual Costs (AC)

Actual cost is the measure of project cost at a given point in time.

Variance Analysis (VA)

VA identifies problems by comparing budgeted cost and actual cost with earned value.

Schedule Variance (SV)

Schedule variance is how much a task runs above or below the schedule budget.

Cost Variance (CV)

Cost variance is the difference between a task's EV and the actual cost to perform it.

Budget at Completion (BAC)

BAC is the total value of the time-phased budget.

Estimated to Complete (ETC)

ETC is the work and cost remaining to complete each activity expressed in dollars and/or hours.

Performance Indexes

Project performance indexes assess the effectiveness of achieving project objectives. Indexes are useful for comparing project performance. Indices at 1.0 or higher indicate a project is performing efficiently; anything less than 1.0 indicates inefficiency.

Schedule Performance Index (SPI)

SPI provides an efficiency rating for work accomplished.

Cost Performance Index (CPI)

CPI provides an efficiency rating for expended resources.

Earned Value Formulas: How to Calculate Earned Value

Earned Value Management Example

Let's work through an EVM example to show you how it works. We'll use a fictitious company named “Treehouse Ltd”. They're running a project to build a treehouse, with a total budget of $5,000.

Treehouse Ltd calculates the actual costs to date as $1,800 and they have completed 40% of the work. Earned value is $2,000, the percent complete times the total budget. We have a planned value of $2,800, which is the value of what we had planned to accomplish by now.

So, how’s the project doing? Cost variance is EV-AC or $2,000-$1,800 or $200, resulting in a favorable cost variance and telling us that we have spent less than expected for the work we have performed, meaning we are under budget.

Schedule variance is EV-PV or $2,000-$2,800 or -$800, resulting in an unfavorable schedule variance where we thought we’d have $800 more work done by now, so we are behind schedule. Even though we are under budget, the fact that we are behind schedule should be concerning and may eventually offset the favorable cost variance.

Indexes help us evaluate the status objectively and help us derive our ETCs. Our cost performance index is EV/AC or $2,000/$1,800 or 1.1. Our schedule performance index is EV/PV or $2,000/$2,800 or .71. These metrics indicate that we are performing 10% better than expected against the budget but 29% worse against the schedule. We can ultimately use these efficiency factors to help us create independent forecasts to help validate the Project Manager’s ETCs.

EVM Best Practices

Because implementing EVM will likely change your processes, make it an enterprise-wide initiative and give it the support any major change requires. Studies often cite lack of buy-in as the most significant barrier to change. To get buy-in, your colleagues need to understand how EVM improves project management and benefits them professionally.

Here’s a summary of 10 key best practices for EVM:

1. Clearly define project scope and objectives: having well-defined scope and objectives facilitates accurate planning and measurement.
2. Create a realistic project baseline: the baseline helps track performance over the life of the project, so accurate time and cost estimates are needed.
3. Collect data and report in a consistent manner: reliable data is critical for accurate EVM calculations and analysis, so be sure that costs and progress are accurate and captured consistently.
4. Schedule regular progress assessments: the sooner performance issues are discovered the better the chances are of getting things back on track.
5. Leverage key performance indicators (KPIs): KPIs help assess the project's health and forecast future performance.
6. Forecast the project's completion date and final cost: forecasts help stakeholders make informed decisions and make needed adjustments.
7. Analyze cost and project schedule variance: regular analysis helps identify trends and patterns that help identify recurring issues so preventative measures can be taken.
8. Effectively manage changes in scope, schedule and budgeted cost: it is important to have formal change controls and to leverage EVM data to understand performance impacts.
9. Regularly communicate results and insights to stakeholders: it is important to foster open communication and collaboration with stakeholders to address concerns and gain support.
10. Training and skills development: ensure project managers and team members are trained in EVM concepts and techniques.

Earned Value Management Systems

An earned value management system (EVMS) is an integrated set of documented processes, applications and practices that state how your company practices EVM in compliance with established criteria.

An EVMS is built on three foundations:

• People: It’s essential that the team’s skill sets, backgrounds and expertise align with project needs and goals.
• Processes: A project’s EVMS processes are yardsticks for measuring performance. Document your processes and procedures, because the regulatory authority uses them for your EVMS certification, which takes place before a project is launched. The regulatory authority also uses your processes and procedures for annual or random periodic audits of projects.
• Tools: The right technical tools for scheduling, accounting, communication and so on make your journey much smoother. Research and find tools that can handle the amount of data you need, grow with your project, provide necessary features and functions, improve reporting, automate many processes and increase operational efficiency.

Benefits of Having an Earned Value Management System

An earned value management system (EVMS) enables you to manage a time-phased budget, collect actual costs and generate time-phased forecasts. It also enables you to perform EV calculations. Commercial off-the-shelf EV solutions such as Deltek Cobra integrate with planning and scheduling applications (to obtain the time-phased budget and monthly/weekly status) and accounting systems (to obtain actual costs). Look for an application that lets you:

• Load budget data from planning and scheduling applications.
• Automatically load actual costs from most accounting systems.
• Calculate EV using all approved EV techniques.
• Support multiple projects and multiple resource rate files.
• Create detailed time-phased reports and high-level, multi-project reports.
• Submit standard monthly reports/exports based on specific Data Item Descriptions (DIDs) and industry best practices.