Earned value management or earned value analysis, EVM for short, are two terms for one and the same project management tool, which, however, is rarely used in practice. Earned value analysis is a tool for controlling and monitoring projects. Why do many people shy away from it? Perhaps it is the many formulas and the many numbers that appear in it. However, EVM can be a great help when it comes to determining the degree of completion of a project. It can also be used to identify cost and schedule variances at an early stage.
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How is our patient doing?
Earned value analysis is a kind of health check for a project. It shows how the patient - the project - is doing and where it stands in the schedule. A rough estimate is not enough. The question about the schedule must be answered concretely and with numbers. That is why EVM offers the possibility of underpinning such answers with key business figures. Project progress is no longer just an estimated percentage figure, but has more substance. The focus is on the evaluation of the services rendered in comparison to the planned and already incurred costs. An earned value analysis refers to a specific point in time in the project and shows on that day how the schedule and finances are doing. From here, forecasts are also always possible. The quality of the project is not taken into account in the EVM. An EVM can be used in agile as well as in traditional or hybrid projects. It is independent of the project approach.
Explained by example
The earned value analysis consists of different components from which key figures can be derived. Imagine a project led by Maria Smith. She works in a medium-sized company with about 250 employees. In this company, a newer version of the operating system is to be introduced on all computers. Maria has four weeks to do this, i.e., 20 working days. The company pays 12,000 CHF for the changeover. Maria creates a work structure plan that shows all the tasks and thus the total amount of work. She specifies that 12 to 13 systems have to be converted every day if the project is to be completed on time after four weeks. She estimates a budget of 600 CHF for each working day. The project plan is set. But after only a few days it becomes clear that the goal of converting at least 12 systems per day cannot be consistently met. However, with an EVM Maria can always provide the actual value on a key date and detect deviations from the target value.
The key figures
Maria has the following key figures to consider:
- The Planned Value (PV). This is the planned amount of money or output. The Planned Value is calculated by multiplying the planned percentage of completion by the planned total cost.
- The Actual Cost (AC). This value reflects the actual costs or the work performed up to this point in time. The Actual Value is calculated from the actual quantity multiplied by the actual costs, i.e., the total costs expended to date.
- The Earned Value (EV). This is the key figure that represents the value of the project up to this point. The Earned Value is calculated by multiplying the actual percentage of completion by the planned total costs.
The three values only unfold their informative value when they are combined with each other. This results in further key figures:
- The Schedule Variance (SV). This value is calculated from the Earned Value and the Planned Value: SV = EV-PV. Here Maria can see whether she is ahead or behind schedule. If the value is positive, her project is ahead of schedule. If the value is negative, it is behind schedule. If the value is zero, the project is exactly on schedule.
- The Cost Variance (CV). It can be calculated from the Earned Value and the Actual Cost: CV = EV-AC. If the CV is negative, the costs exceed the planning. If it is positive, Maria's team is working cost-effectively. If it is zero, costs are within plan.
- The Schedule Performance Index (SPI). This index indicates the relationship between the Earned Value and the Planned Value: SPI=EV/PV. If the value is less than 1, your project is behind schedule. If the value is greater than 1, your project is ahead of schedule.
- The Cost Performance Index (CPI). The CPI indicates the ratio between the Earned Value and the Actual Costs and is calculated as follows: CPI = EV/AC. A number greater than 1 means that the project was able to achieve a higher value than originally planned. Therefore, the project was particularly cost-efficient. If the value is less than 1, the cost-benefit ratio is worse than planned.
Limitations of earned value analysis
Earned value analysis offers many advantages, but also poses some challenges.
First, complexity: EVM is not a simple procedure. It requires a deep understanding of specific terminology and calculation methods. This can be a real challenge for less experienced project managers and team members.
Another critical issue is the data basis of EVM. It relies on accurate and up-to-date data on costs, units of work and project progress. If this data is faulty or late, it can affect the results of the EVM and lead to distortions.
Furthermore, EVM is based on the assumption of linear and uniform project progress. However, this is rarely the case in practice. Unforeseen project developments may cause EVM to have difficulty in correctly assessing such non-linear progress.
Another potential stumbling block is the limited forecasting ability of EVM. As it is based on historical data and trends, future changes or problems might not be detected in time.
Finally, while EVM is a good tool for monitoring costs and time, other important project aspects such as quality, risks or customer requirements might be underrepresented. This can lead to critical areas of the project being overlooked.
Despite these challenges, EVM remains an important tool in project management. It is particularly valuable when used in conjunction with other control tools and project management techniques. The possible weaknesses of EVM should not lead to underestimating its value, but rather serve as an indication that it should be used carefully and in combination with other methods.
Conclusion
If you like numbers and calculations, you will like the earned value method. For some, this method may sound a bit cryptic, but it is based on facts and figures and is therefore objective and offers good measurability of project parameters. These parameters also provide a better view into the future than a simple comparison of schedules or budgets, even if these results should be taken with a grain of salt. Approaching the question of where your project stands can in many cases also convince stakeholders that you are an expert in your field and have everything under control. However, some people feel overwhelmed by the jungle of numbers. Therefore, think carefully about where and with whom you work with the figures from the EVM.
Author: IAPM internal
Keywords: Project management, Earned Value Analysis
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