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Earned Value Management 101... kinda.
An (overly) simplified beginner's guide to using EVM on your project
”That which gets measured gets improved” —Peter Drucker
The TL;DR Key Takeaways:
The What: Earned Value Management (EVM) is a project management technique used to measure a project's progress against its planned objectives by analyzing its schedule, cost, and scope in a combined manner.
The Why: EVM is a useful tool because it provides an integrated view of project performance, enables data-driven decision-making based on objective metrics, and facilitates effective communication with stakeholders to build trust and confidence.
The How: To use EVM on a project, you need to define the project scope and objectives, break down the work required to create that scope into tasks, establish planned costs for those tasks, objectively evaluate progress against the plan as the work is executed, take corrective actions as needed, and communicate project status to stakeholders. By following these steps, EVM can provide valuable insights into a project's performance, allowing you to keep the project on track and deliver it successfully.
As a new engineering Project Manager, you will quickly learn that executing complex projects can be challenging. You must balance timelines, budgets, and resources to ensure your project is delivered on time, within budget, and to the required quality standards. In fact, this is the primary purpose of project management: to ensure the objective measures of project success are accomplished in the most efficient and effective manner.
As we saw in a recent post on Performance Management, a key step in effectively overseeing your project is the monitoring, or measurement, of how well you’re doing. But this can be challenging. It’s not enough to just measure individual baseline element progress; I.e., you can’t simply look at scope and quality in a vacuum, evaluate schedule performance by itself, or look at budget performance without context. You must also consider these baseline elements as a combined entity; an integrated whole if you will. You must evaluate their unified performance, so you can make informed decisions that consider the totality of the project performance.
One tool that can help you address this is Earned Value Management (EVM), which involves analyzing a project's schedule, cost, and scope in an integrated fashion to determine whether you’re on track, behind schedule, or overspent on budget in the delivery of the scope.
What is Earned Value Management?
EVM is a project management technique that measures the progress of a project against its planned objectives. It involves analyzing the project's schedule, cost, and scope together to determine whether the project is on track or not. EVM helps you understand the current status of the project and how much work has been completed relative to the approved plan.
EVM tracks and combines three key metrics: Planned Value (PV), Earned Value (EV), and Actual Cost (AC). PV represents the planned value of the work scheduled to be completed at any given point, while EV represents the value of the work actually completed at that time. AC represents the actual cost incurred to complete the work.
Using these three inputs, EVM calculations can provide you with valuable insights into the health of your project. It helps you identify any variances between planned and actual work, and allows you to take corrective actions to keep the project on track.
Why is EVM a useful tool to consider?
Measuring individual baseline elements, such as scope production, adherence to quality requirements, schedule performance, or budget expenditures versus plan, are straightforward and easy to do. And for relatively simple projects, this may be sufficient.
But for more complex projects, with multiple moving parts, interrelated schedule activities, and multiple work package deliverables, we need a means of stepping back and measuring project performance of the baseline elements as a combined whole.
For instance, a project can be on schedule (meaning activities are being checked off on time) and on budget (meaning you’re not spending more than you planned to), but perhaps part of the scope has been delivered without meeting all of its full quality acceptance requirements, so it may need some re-work— which in turn is going to require more time or money expended later that wasn’t budgeted.
Or imagine a project that is delivering its scope on budget and meeting its quality acceptance criteria, but is behind schedule… which means you’ll need to pay for unfunded/un-planned marching army costs, perhaps, at the end of the project as you finish the work.
Or your project may be delivering all the planned scope to spec on time, but the costs are higher than planned, and you may or may not have enough contingency to cover completion of the project.
Look, the first step in solving a problem is recognizing there is a problem. Without examining at all four baseline elements together, we can’t really know where we are. And this is where EVM comes in.
EVM provides a single, integrated view of project performance, allowing you to track progress against schedule, cost, and scope. By running standard EVM calculations, we can see at a glance how all areas of a project are performing in terms of scope, schedule, and cost. This can help us identify small issues early on, before they become major issues.
EVM also helps us make data-driven decisions based on objective metrics. By tracking PV, EV, and AC, and calculating such things as cost and schedule variances, we can make informed decisions about whether to accelerate work or adjust our nominal plans. This can help us optimize project performance and reduce risks.
Finally, EVM can help us communicate project status effectively to our stakeholders. By providing clear, easy-to-understand, and repeatable metrics of project performance, we can keep stakeholders informed about progress and any potential issues. This can help build trust, confidence, and support for our project.
How does one use EVM on a project?
Basic implementation of Earned Value Management entails a number of standard, key steps:
Establish the Project’s Performance Measurement Baseline: The first step to employing EVM on your project is to ensure you have an accurate and detailed project baseline that includes a complete work breakdown structure (WBS), a fully detailed schedule, and an accurate and realistic time-phased budget. This latter element essentially becomes what is known as the “planned value” (PV) of the work to be performed. The baseline will serve as the yardstick against which actual progress will be measured (hence the term “performance measurement baseline”).
Measure Actual Progress: Once the project is underway, you will begin to collect data that will then be used to determine the project's actual progress. There are two key inputs that are gathered each month: the amount of work accomplished, and actual costs (AC) incurred.
Calculate Earned Value: The next step is to calculate the earned value (EV) of each aspect of the project. This involves calculating the value of the work completed to date, based on the budgeted cost of each completed task and, say, the percentage complete, as determined in the prior step.
Analyze Current Status Performance: Next is to determine the current status of the project in terms of variances and performance indices. This is done by way of (very) simple equations that use the PV, AC, and EV values from the previous steps.
Forecast Future Project Trajectory: We can also use the same inputs, along with performance indices, to extrapolate future project performance. For example, expected final variances and calculated estimates to complete the project are relatively easy to determine by way of simple equations.
Determine Necessary Corrective Actions: The sixth step in the basic EVM process entails reviewing the variances and estimates that were calculated in steps 4 and 5 to determine all required corrective actions to ensure your project stays on track for a successful outcome. This is performed by analyzing root causes of variances and running “what-if” scenarios among possible corrective actions.
Communicate Project Status: The final step in the EVM process is to share the earned value data and performance analysis with key stakeholders, project team members, and upper management. The reason for this is to ensure everyone is aware of the project's status, expected trajectory, and corrective actions that are being considered or implemented. In other words: manage everyone’s expectations such that there are no surprises.
A (very) simple example of EVM:
Here’s an elementary example of Earned Value— in fact, it’s so simple that EVM is total and complete overkill for it. But it does illustrate how the underlying EVM calculations work, and hopefully should take some mystery out of the process.
So, imagine you’ve contracted someone to dig a 100m-long trench for some underground pipe that you will install. The excavation contractor and you have agreed on a basic time-and-materials-type contract that is expected to take two workweeks, or 10 working days, to complete. The contractor charges $2K per work day of digging, so we’ve budged $20K.
We’ve also got a little contingency cushion in our pocket of 10%, or $2K, in case there’s a problem with the excavation that requires extra effort. The contractor requires they be paid on a weekly basis. So, we sign the contract and the excavator gets to work the following Monday morning.
On Friday at the end of the first week, the contractor submits a bill for five full days of digging, and our financial department cuts a check to them over the weekend for $10K. That following Monday morning, however, we go out to see the work for the first time and are surprised to find they’ve only dug 40m. We expected them to have completed half the 100m trench, or 50m, by the end of the first week.
How far behind are they, and as project managers, how worried should we be?
Now, obviously, they’re behind 10m from where we thought they should be. Without doing something special to speed up the work, and if things continue at this rate, it looks like they’re going to be late finishing. Plus, we’ve paid more for the work performed than we’ve expected to for 40m of trench.
Now, for something as simple as this example, we can intuitively see where they’re at and how big the problem will be. But to get an exact numerical value on the scale of the concern, we can use EVM calculations.
The EVM Inputs:
To run an earned value analysis, we always need four key inputs:
First, is Budget at Completion, or BAC, which for this project is $20K. This is the amount of money we have planned to spend to complete all of this work.
Second is Planned Value (or PV). This is the dollar value of the work we planned to have accomplished at various points along the way. At 1 week, we expected, or “planned” to be at the halfway point, or to have $10K worth of work performed.
Third is Actual Cost (AC). As its name implies, this is how much we’ve actually paid for work to date. Our accounting department cut and sent a check for $10K, which is our current actual outlay cost amount.
And fourth is Earned Value. This is the estimated “value” of the work that has actually been accomplished. In this case, the contractor has only dug 40% of the overall trench length, which means we’ve earned only 40% of the budgeted amount, or $8K.
The first three of these, BAC, PV, and AC, are very straightforward and objective numbers.
The fourth, EV, can sometimes be subjective to determine, but for something simple like this, using percentage complete is an easy, appropriate, and objective method. And that’s it. If we know these four things, we can calculate all the various EVM metrics.
Current Status Metrics:
There are two key types of outputs that EVM provides: current status and future forecasts. We’ll start with the current status calculations, as measured relative to our plan.
For instance, we can calculate a cost variance, or CV, which is a measure of how we’re doing budget-wise with respect to the actual work performed. CV is calculated by just subtracting Actual Costs from Earned Value. In this case, it’s $8K – $10K, which equals negative $2K. In other words, this variance calculations essentially says that we are currently $2K over budget.
Now, of course, this shouldn’t really be surprising, and we probably didn’t need to formally calculate a variance number to confirm what we already thought, but EVM does just that: it gives us a hard number to work with—in this case, negative two thousand dollars.
We can also divide EV by AC, and get an index or percentage measure of our budget situation. We call this our Cost Performance Index, or CPI. In this situation, $10K/$8K is 80%. This essentially tells us the same thing as the previous Cost Variance calculation, but in a percentage format. Generally speaking, variances are more useful for making in-project analyses and decisions, while indices are commonly used as a reporting metric. Regardless, they both tell us the same thing.
Now, that was for budget performance. We can calculate similar variances and indices for schedule performance. For instance, our schedule variance in this case can be calculated by subtracting our planned value (PV) from our earned value (EV), which in this case means our SV = $8K - $10K = -$2K. With a negative result like this, we would say that we’re $2K behind schedule.
And finally, we can calculate a corresponding schedule index, or SPI, by dividing EV by PV. SPI = $8K/$10K = 80%; i.e., we’re behind schedule and our SPI is 80%.
Now, again, these calculations are overkill for this simple project, but they do illustrate just how simple the math is to perform. And more importantly, on a bigger, more complex project with a lot of schedule activities and work packages to track, you can run these same simple calculations and immediately see which areas of your project are in trouble and which are tracking per plan or doing better than plan.
The hardest part of all of this is, frankly, getting timely actuals and estimating the percentage of work actually completed. The rest is just basic math.
Forecasted Future Performance:
In addition to current status, EVM also can help extrapolate, or forecast where we’re going to be if we don’t change anything and continue on our current project trajectory. For example, with the CPI index we just calculated, we can divide it into our overall BAC value and extrapolate an estimate for how much our final BAC will need to be. We call this value the Estimate At Completion, or EAC number.
In this particularly case, EAC would be calculated as EAC = $20K/80% = $25K. In other words, EVM estimates that our final outlay will be $25K if we don’t change anything in the execution of the work.
Similarly, we can calculate a value of how much more money this particular job is going to cost us beyond the $10K we’ve already spent. To calculate this “Estimate to Completion,” or ETC value, we simply subtract our AC value from our EAC number: ETC = $25K - $10K = $15K. That is, we need to have $15K available to complete the project on its current path.
And similarly, we can calculate a VAC, or Variance at Completion, which tells us how far over budget we can expect to be if we don’t change anything. VAC is simply the BAC minus the EAC. In this case: VAC = $20K - $25K = -$5K. Now, we did say we had $2K in contingency available, but it’s not enough to cover this $5K estimated shortfall. We’ll need to either come up with an additional $3K, or find some other way of reducing the overall cost of the project.
Again, EVM is probably not needed to show us that we’ll need an additional $15K to complete the work… ah, but imagine that you have a couple of dozen or more contracts and jobs running at once as part of your project. Earned value calculations like this can quickly focus your attention on the areas that are trending negative. They can also be summed up to tell you the larger financial expectations of the project fairly quickly and accurately.
Some cautions & caveats of using EVM:
When considering the use of EVM, there are several important things to keep in mind. Here are just a few to know before jumping in:
EVM Isn’t For Every Project: There are numerous questions you must consider before deciding on implementing EVM on your project. For instance, how large and complex is your project; EVM may be overkill for a simple project. Furthermore, agile-type projects, non-linear timelines, projects that are primarily level-of-effort, and so forth may not be compatible with simple EVM methods. Moreover, is your upper management onboard with implementing EVM? Is your team ready and willing to provide inputs and analyze results? Are your partners? Do you have budget available to implement EVM? What level of formality is required? And so forth.
Accuracy of Initial Plan: Earned value management relies heavily on a complex and accurate initial project plan. If the plan is not well-defined, then the accuracy of earned value management may be compromised. You need a complete and accurate work breakdown structure (WBS), a reasonably detailed schedule, and a good understanding of the time-phasing of expected costs. You also need to have well-established quality acceptance requirements and test plans in place to ensure you can quantitatively determine when scope is complete and ready for delivery.
Inadequate Data Collection: In order for earned value management to be effective, data on project progress must be collected in a timely and accurate manner. If data (i.e., actuals and percentage of work completion) are incomplete, inconsistent, wrong, or not collected frequently enough, then the accuracy of the analysis may be impacted. The old saying GI/GO, or “Garbage In = Garbage Out” applies strongly to the EVM process.
Over-Reliance on Metrics: While the output metrics are very useful, it's important to remember that EVM is just one tool in the project management toolkit. Over-reliance on EVM metrics can lead to a narrow focus and potentially miss other significant factors that may impact the project. You must look at other data, both quantitative and qualitative in nature, before modifying the project plan.
Misinterpretation of Results: Earned value management analysis can provide valuable insights into project performance, but it's critical to interpret the results correctly. Misinterpretation of results can lead to incorrect decisions, which can negatively impact the project. Just because a variance is positive, for instance, doesn’t mean that there’s not a problem brewing. Similarly, negative variances can be temporary “blips” that have little actual meaning. You must learn to dissect and understand root causes of variances quickly and efficiently for EVM to be useful.
Certified vs. Validated vs. DIY EVM. Finally, it’s useful to point out that what we’ve discussed in this article is a very simplified description of earned value management. It’s the bare basics of what is included in EVM, but it’s not the whole story by any stretch of the imagination. There is a recognized standard (EIA 748) that covers 32 formal guidelines and a host of other requirements that must be employed if your project needs to follow it. There are also formal certifications possible (which can be costly to obtain and continue with), plus less-formal “verifications” that some institutes require. On a previous project I managed, we had to go through formal verification by the National Science Foundation to ensure we were implementing EVM correctly. On a future, less-rigorous project I’m helping get off the ground, we’re planning on using basic EVM calculations and methods, but not strictly follow the EIA standard. Every project is different, and will therefore require a different approach to the level of rigor and formality applied.
The Bottom Line:
Earned Value Management is a project management technique that enables you to make accurate and timely measurements of a project's progress against its planned objectives. As Peter Drucker said, "that which gets measured gets improved," and this is precisely what earned value management does. By providing a single, integrated view of project performance, it helps you make data-driven decisions and communicate effectively with stakeholders. With inputs of PV, EV, and AC, you can quickly identify any variances between planned and actual work, forecast future project performance, and take corrective actions to keep the project on track. In short, earned value management is a valuable tool for project managers looking to stay on top of their projects and ensure their success.