What is Earned Value Management Method?
Earned Value Management is a method to measure the project performance. In this method the data related to the actual cost of the work in a particular Work Package of WBS, The cost of the work we scheduled to be performed to date and the value of the work that has been accomplished to date in terms of money is investigated and once the data is processed, the performance of project in terms of budget and schedule is determined. They can also estimate the future performance of the project and how the project will end up.
How to Calculate Earned Value Management?
To start with it is necessary to have the WBS of the project. Each unit in WBS should be analyzed separately and the progress of each work package needs to be measured. If the work unit is completely done or if the work has not started, 100 percent and 0 percent are assigned to the rate of completion respectively. If the work package is partly done, depending on the applied techniques the work package is assigned either a percent of completion or treated as if they are not started.
Different methods to assign a completion rate to Work Package of WBS
Measuring the percentage of the completion of each work package and comparing that to the cost accrued to that task and the value of accomplished work is not an easy task. 50-50 rule, the 0 -100 percent rule and critical input use rule are examples of techniques which might be applied to overcome this challenge. However, as the main focus of this article is on analyzing the Earn Value Management method, we assign 0 percent of completion to the work packages which are either have not started yet or are partially done. We assign 100 percent completion rate to the work packages which are completely done.
First things first
In order to investigate the EMV method the following concepts first need to be defined:
– Earned Value (EV): It is the amount of money we budgeted for the work that has been accomplished to date.
– Actual Cost (AC): It is the actual cost of the work.
– Planned Value (PV): The cost of the work we scheduled to be performed to date.
These figures should continuously be calculated and plotted on the chart and any deviation of the figure to planned performance should be investigated and treated accordingly.
We continue by investigating those indices in more details
- Cost Variance (CV): It is calculated as Earned Value minus Actual Cost. The negative amount of this value indicates the fact that the project is over budget which simply means we have spent more money than what we have planned to spend.
CV = EV – AC
- Schedule Variance (SV): It is calculated as Earned Value minus Planned Value. The negative amount of this value indicates the fact that the project is behind schedule.
SV = EV – P
- Cost Performance Indicator (CPI): It represents how efficiently the cost of the project has been spent so far and it equals to Earned Value divided by Actual cost. Numbers less than 1 mean we have spent more than what we were supposed to do.
CPI = EV / AC
- Schedule Performance Indicator (SPI):It represents how effectively the schedule of the project is being passed and it equals to Earned Value divided by Planned Value. Numbers less than 1 mean the works are being performed at a slower rate than what we planned.
SPI = EV / PV
The analysis can be further processed so that we can estimate the future performance of the project.
- Estimate budget To Completion:
It gives us an understanding of how much more we are going to spend – assuming the performance Indicators do not change. It equals to the Budget At Completion minus the Actual Cost divided by the Cost Performance Indicator.
ETC = (BAT – AC) / CPI
- Estimate At Completion (EAC):
It indicates how much money the project is going to cost in total – assuming the Performance Indicators do not change. It equals to Actual Cost plus Estimate budget To Complete.
EAC = AC + ETC
- To Complete Performance Indicator (TCPI):
It represents the calculated estimation of cost performance which must be obtained in the remaining of the project to fulfil a specific management goal. In other words, it is the remaining work divided by remaining budget and it calculates as:
TCPI = (BAC – EV) / (BAC – AC)
There are other indicators such as TPI, TV, SPI or so which look to the performance of project through different lenses, however, the accuracy of the EVM method is highly dependent on the degree to which the percentage of the work completed reflects reality.