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PRAXIS

Earned Value Management System (EVMS)

An EVMS is the most commonly used performance measurement technique for managing projects. An EVMS compares the schedule and cost information at a point in time and avoids using the project manager's subjective interpretation of data.

 

Earned Value Analysis

 

The EVMS is based on the technique referred to as earned value analysis, which integrates scope, cost (or resource), and schedule measurements to assess project performance. Earned value provides a determination of whether or not work is being completed as planned.

Earned value analysis is not new. The government has used it for decades in the formal Cost/Schedule Control System (C/SCS). In its current form, the government method describes thirty-five criteria to guide effective performance measurement, and requires formal certification.

Earned value analysis is now broadly accepted as an efficient, quantitative method for assessing project status.

Current project management software tools include features that incorporate earned value management techniques into project planning.

 

Benefits of Using an EVMS

 

Using an EVMS allows the project manager to integrate both schedule and cost information to gain a more comprehensive understanding of project performance. This gives the project manager a more complete view of project performance; schedule-only or cost-only comparisons do not provide the same data. This missing data could lead to misinterpretations of project performance.

An EVMS compares the scope, schedule, and cost information at a point in time. In a sense, it provides a snapshot of the Triple Constraint triangle, showing the current status of the project.

This minimizes the errors and misrepresentations possible with a schedule-only or cost-only comparison. Integrating schedule and cost status lets project managers forecast project status from trend information. An EVMS requires the project management team to correctly establish baselines and to learn earned value management terms.

For an EVMS to be effective, it is important for the project manager to ensure that the project baseline is valid, otherwise the data resulting from the calculations cannot be compared to a standard. An EVMS also allows the project manager to forecast future project performance by identifying trends and calculating results if the trend continues.

 

Earned Value Management System (EVMS) Terms

 

An EVMS uses a concept of "dollarizing" the schedule and performance data. A solid understanding of earned value concepts and terms is a prerequisite for the effective use of the associated methods. Three fundamental EVMS terms include:

  • Planned Value (PV): Agreed value of work to be accomplished in a given period;
  • Earned Value (EV): Agreed value of work that was actually accomplished; and
  • Actual Cost (AC): Real cost of the work performed.

Collecting and Analyzing Planned Value (PV)

 

Planned Value (PV), previously called budgeted cost of work scheduled (BCWS) in the government system, is the value of work that was scheduled to be completed as of a certain date.

The PV is really a curve, or time-phased cost budget.At the end of the project, the final PV equals the budget at completion (BAC).

PV is established by time-phasing the project's budgeted costs. When the project plan is approved, the PV becomes a fixed standard of reference.

When it comes time each status reporting period to update the earned value analysis, the PV value is obtained by consulting the project baseline information for the associated time period.

 

Collecting and Analyzing Actual Cost (AC)

 

Actual Cost (AC) is another parameter that must be measured during each status reporting period. This is typically information collected by the organization's cost accounting group, using the company cost accounting system.

The cost accounting group collects all costs against the project work packages and control accounts, including labor accounting sheets, materials invoices, and other direct costs such as travel and contract labor.

AC identifies what it really cost the project to operate during the reporting period, independently of what work was actually accomplished.

The AC is reported as both the new costs for the current period and the cumulative cost for the project since inception.

The reporting of cost is independent of the project team and represents the expenditure of real money, unlike the earned value discussed further in the course.

The only control the project manager has over AC is to ensure that work is performed efficiently, as planned, using the appropriate resources.

Inaccurate accounting of labor is a common cause for cost variances.

AC is also referred to in older earned value management systems as the actual cost of work performed (ACWP).

 

Collecting and Analyzing Earned Value (EV)

 

EV, the central concept in this technique, is slightly difficult to grasp at first. In very

basic terms, every activity or item of work is associated with a dollar value.

 

When you complete a particular activity, you "earn," or receive credit for, that declared

value.

 

A frequent point of confusion is that the actual cost of the job may be different from

the earned value. Earned value is the agreed value of the task, not what you actually

spend on it.

 

If a contractor submits an invoice for an unforeseen additional amount, the actual cost of the job will be the amount of the invoice, but the earned value remains the original negotiated amount. The difference between the earned value and actual cost will be an indication of cost variance.

 

Methods for Computing Earned Value

 

EV, the method for assigning value earned, is calculated based on one of

several predetermined methods. In the simplest concept, the value earned is exactly

the planned value of the task. However, determining when or how the value is a

pplied may use different methods.

 

Keep in mind that the calculation of earned value for a task is different than an

individual reporting status against the task.

 

Status reporting and earned value analysis serve different purposes. Earned value analysis allows the project manager to measure and report the overall project health, evaluating project schedule, cost, and work performed.

 

It provides measures to detect variances, and therefore determine the overall ability to meet project objectives. The information presented below outlines the various methods for computing earned value along with descriptions of how earned value is assigned and their recommended uses.

 

In practice, a project manager may elect to use only a few of these earned value techniques. They are discussed in more detail on the pages that follow.

 

0-100 % 

 

How earned value is assigned for this method

No credit for the start of a task, but 100% upon completion 

 

Recommended use of this method

When tasks are scheduled to complete within one accounting period 

 

50-50 % 

 

How earned value is assigned for this method

50% value when the task starts, and 50% upon completion 

Recommended use of this method 

When tasks are scheduled to complete within two accounting periods 

 

Percent Complete 

 

How earned value is assigned for this method

Value estimated by the person responsible for the task's completion 

Recommended use of this method

Not generally recommended, although it may be used for longer work packages in which distinct milestones are not recognized 

 

Weighted Milestones (WM) 

 

How earned value is assigned for this method

Value given upon milestone completion, where interim milestones mark the completion of a longer task or work package 

Recommended use of this method

For longer work packages for which discrete methods do not seem appropriate 

 

Level of Effort (LOE) 

 

How earned value is assigned for this method

Value earned is proportionate to the total budget of the work package and based on elapsed duration 

Recommended use of this method

Minimize the use of LOE to less than 10% of the total project budget 

 

Apportioned Effort (AE) 

 

How earned value is assigned for this method

Value is planned and measured in relation to another (non-LOE) task 

Recommended use of this method

Not recommended for frequent use but may help

in instances where it is difficult to determine the exact value of the work.

 

Percentage Methods for Computing Earned Value

 

0-100%

 

The 0/100% method is the simplest and usually the best method for tasks of

relatively short duration compared to the standard reporting period length.

For example, if the project status data is collected once per month, this method

should be used on tasks of less than 30 days duration.

 

As an example of computing earned value using the 0/100% method, assume that

there is a work package to paint a room in your company's headquarters.

 

You approved the painter's estimate totaling $1,000 in labor and materials to

perform the job, with a completion date of Friday. When the job is complete,

you will credit the EV column with $1,000, the agreed value of the job.

 

This tracks the completion of the SCOPE leg of the triangle.

 

If the painter submits an invoice for an unforeseen additional $50 in materials, the actual cost of the job will be $1,050, but the earned value remains the original negotiated amount of $1000.

 

Suppose that on Friday the job has not yet been completed, so when the status

report is filed, the value earned remains at $0. The difference between the earned

value and planned value is an indication of schedule variance.

 

This variance will continue until the work is completed. So, if the job is delayed until Wednesday of the next week, the schedule variance will be negative $1,000 until the completion is recorded, at which time the schedule variance returns to $0. Alternatively, if the painter finished the job early, a positive schedule variance would be posted.

 

The 0/100% method is the-all-or-nothing approach, in which no credit or value is earned until the task in question is completed. In the above example, the painter earned no value until the room was completely painted (and presumably cleaned up and inspected). This method eliminates the common project management problem of subjective reporting such as "we're almost done" or "97% complete", etc. Instead, the task owner must ensure complete execution, which generally also assures higher quality results.

 

50-50%

 

The 50/50% method is a minor adjustment to the 0/100% for tasks of longer duration compared to the reporting period. If project data is collected monthly, but a task is planned to take six weeks, the task owner would be showing a negative variance for the first status report, even though the work may be on track.

 

In fairness, the 50/50% method allows the task owner 50% credit for the work, as long as the work has been started. This reduces the negative variance to a smaller amount, and assuming the job finishes on time, the variance will disappear by the end of the next reporting period.

 

Other variations on 50/50% may be defined, such as 25/75%, 40/60%, depending on the rules in the organization. These should be established as standards in the project's cost management plan.

 

Percent Complete

 

The Percent Complete method is one of the recognized methods, but should not be used as a general practice. The discrete 0/100%, 50/50% or milestone methods are much more effective in controlling the reporting of task completion.

 

The percent complete method is subject to abuse, as task owners may have no objective definition of what "60% complete" actually means. Often this is reported incorrectly as the percent of the time that has elapsed rather then the percent of the work that has been completed.

 

While not generally recommended, this method can be useful for longer work packages in which distinct milestones are not recognized. If percent complete is allowed as a method, the work package template should provide an objective basis for awarding percent complete.

 

For example, if the work package involves testing to ensure 30 test cases pass successfully, one could earn 10% each time 3 more test cases pass.

 

The cost management plan or the specific work package planning template must provide explicit definitions of each milestone.

 

Milestone and Effort Methods for Computing Earned Value

 

Weighted Milestone 

 

The Weighted Milestone method is used for longer work packages for which discrete methods do not seem appropriate. Assuming that the process in the work package has clearly understood interim milestones, appropriate credit should be assigned to the accomplishment of each milestone. 

 

Level of Effort  (LOE) 

 

The Level of Effort (LOE) method should be used very sparingly, usually only for the

supervisory tasks on the project. The labor costs of the supervisors, such as the project

manager and any clerical support staff, must be accounted for in the PV and EV

baselines.

 

The problem, however, is identifying exactly what work has been done, or

what deliverables have been produced. After all, supervisors have highly unpredictable

days, integrating all the other team members' activities, attending meetings, filing reports,

and communicating with the stakeholders. 

 

Therefore, one assumes that the supervisors are always on schedule and allows them to earn value proportionate to the total budget of the supervisor's work package. For example, if there are 30 days of supervisory labor planned, the supervisors "earn" 1 day each day of the project. A general rule of thumb is to minimize the use of LOE to less than 10% of the total project budget. Otherwise, large sums of LOE value will mask or disguise smaller variances in other workpackages. 

 

Apportioned Effort Method 

 

The Apportioned Effort Method falls into a category similar to LOE, in that it should not be used often but may help in instances where it is difficult to determine the exact value of the work. 

For example, if a quality inspector is needed to monitor the activities of the test group, the quality work package would earn value at a predetermined rate proportional to the test work package.

As the testing progresses, the quality work earns a corresponding percentage of work complete.

 

Analyzing Cost and Schedule Variances

 

Earned Value Variances and Indices

 

Once the status has been determined for the project, i.e., the PV, EV, and AC values

have been determined for the current period for each work package, what does the data

mean and how is it presented in a useful way? Several earned value calculations allow

the project manager to evaluate both schedule performance and cost performance.

 

A variance is a difference between actual project results and planned or expected results.

A positive variance means that a project is ahead of schedule or under budget, while a

negative variance indicates that a project is behind schedule or over budget.

 

An index is a measure used to assess the magnitude of any project variances that do

occur. For indices, a value greater than 1.00 is better than planned efficiency, while a

value less than 1.00 indicates that efficiency is less than planned.

 

EVMS Schedule Formulas

  • Schedule variance (SV) = EV - PV
  • Schedule performance index (SPI) = EV/PV
  • Preferred state: SV is positive, and SPI is greater than 1.00
    • This means that the earned value is greater than the planned value. More work has been earned than planned, so the project is on or ahead.
EVMS Cost Formulas
  • Cost variance (CV) = EV - AC
  • Cost performance index (CPI) = EV/AC
  • Preferred state: CV is positive, and CPI is greater than 1.00
This means that the earned value is more than the actual cost. More value has been earned than the actual cost expended, so the project is on or under budget.