What are the Basic Concepts of Earned Value Management?
Managers and team leaders have permanent headaches regarding many daily issues. One of them is how to measure and track the effectiveness of project plans implementation.
There are many solutions on how to deal with these issues. In this post, we highlight the key advantages and the power of the Earned Value Management technique. EVM is being applied all over the world, so feel free to also dive into the concept’s details.
What is Earned Value Management?
The main desire of every manager is to clearly understand the status of his/her project and get the answers to whether the project lags behind the plan or ahead of it, how efficiently the resources are used, whether the budget is exceeded or there are savings, etc.
In order to get a successful outcome, project managers must carefully manage each project’s component and process. Constant feedback is also crucial – it helps to see possible problems in time and solve them.
The Earned Value Management method is aimed to help in managing these challenges. EVM integrates analysis of the scope of work on the project with a work plan and the cost of its implementation. It allows observing the main metrics of the project state and assessing the real situation, making the necessary managerial adjustments.
The power of EVM
Earned Value Management is a systematic process that is used to find project variances based on the comparison of worked performed and work planned. Project managers use the method to control the cost and schedule and apply it for project forecasting.
The reference point for all EVM related activities is the project baseline. The method provides quantitative data for project decision making.
The first version of the Earned Value Management concept was developed by the Defense Department to track its programs during the 60s. Since 2005, the technique has been a part of the U.S. federal project risk management.
Today EVM is applied as a preferred management system to manage software projects. Earned Value Formulas are widely used by companies in a variety of industries, educational establishments, and consulting firms.
The key EVM principle means that the value of the piece of work is equal to the number of funds budgeted to complete it.
- Planned value – the approved work budget scheduled to be completed by a specific date.
- Earned value – the approved work budget actually completed by the particular date.
- Actual costs that actually incurred for the work completed by the set date.
In order to describe schedule and cost performance with EVM, project managers use the following indicators:
- Schedule variance (SV) is the difference between the amounts budgeted for the done work and for the work, you planned to do. This indicator demonstrates how much your work is ahead of or behind the set schedule.
- Cost variance (CV) is the difference between the amount budgeted and the amount actually spent on the work. CV demonstrates how much you are under or over your approved budget.
- Schedule performance index (SPI) is the ratio of the approved budget for the work performed to the approved budget for the work planned.
- Cost performance index (CPI) is the ratio of the approved budget for work performed to what you actually spent for the work.
Schedule Variance can be calculated by subtracting the Budgeted Cost of Work Scheduled (BCWS) from the Budgeted Cost of Work Performed (BCWP).
- BCWS measures the budget for the entire project
- BCWP measures the cost of actual work done.
The difference is the schedule variance.
Mathematically, schedule and cost variances and performance indicators are defined in the following way:
- SV = Earned value (EV) – Planned value (PV)
- CV = Earned value (EV) – Actual cost (AC)
- SPI = Earned value (EV) /Planned value (PV)
- CPI = Earned value (EV) /Actual cost (AC)
What are the EVM benefits?
Applying Earned value management principles, project managers are able to get more information than normal project tracking gives.
The EVM helps to define more accurately where we are in the project and calculate its successful completion.
Using the value-added approach, you can achieve better control of the project activities and greater visibility. It will help to respond to possible issues earlier and meet the timeline. Earned value management also provides clear communication and improves project accountability.
EVM: from theory to practice
Earned Value Management has proofed itself as a powerful system for monitoring performance and getting feedback about the project status during its management.
Many companies around the world use EVM, including Toshiba, IBM, Boeing, Jacobs, SAP, etc.
Have you used EVM in your work? Was the approach helpful?