In this blog Nick Rowles explores how EVM works and some examples of how you can use it
Author: Nick Rowles Consultant at i3Works
Earned Value Management is a metrics-based P3 performance measurement discipline. It was developed by the US Department of Defence in the 1960s to unify the three pillars of P3M performance – scope, cost and time. More explicitly it compares, at a certain point in the life of a project, how much of the scope of work has been completed (or earned), how behind or ahead of schedule it is, and finally how much more or less has been actually spent than we planned for a certain level of scope completion.
Traditionally those three variables were often looked at separately but this could give a misleading impression, for example being under budget by a certain date may seem like a good thing but if the work complete is less than planned for that spend then the project is actually over budget. Properly applied EVM can knit these three variables together.
Key to EVM is the establishment of a project baseline, sometimes called the Performance Measurement Baseline. This requires a project schedule which encapsulates the entire scope of work being budgeted for, mapped in discreet activities against time. A logical Work Breakdown Structure then allows EVM to be applied lower down the WBS level, as well as potentially at the project, programme and portfolio level. Furthermore, costs must be mapped in such a way that they accrue either directly in the schedule or can be mapped to accounting systems in some way that is directly proportional to work completion.
The simplest way to do this is to have all work and cost tracked with the same place i.e. a comprehensive project schedule. However, many organisations (particularly larger ones) are reluctant or unable to commit full project cost details into project schedules. In such organisations the achievement of work scope needs to be mapped to costs through the use of Control Accounts, which are responsible for both. In this way data can extracted from two systems and the EVM calculations made. Of course it also requires progress and costs in these systems to be updated accurately as the work progresses.
So how does it work? Well EVM is based around three values which go into two formulas to give two performance indicators – cost performance and schedule (time) performance.
- Cost performance – Cost performance is perhaps the more accurate figure and tells you how much your work is costing.
- Schedule performance – Schedule performance reflects how early or late you are, but is expressed usually in monetary terms. EVM figures are traditionally expressed in currency for both measures. In effect the Schedule Variance (SV) is an expression of how much the time variance will cost or save you. However, the assumptions in the calculation may not be accurate for certain projects.
EVM also uses indices where Cost Variance or Schedule Variance are converted into a single figure:
- 1 for a project completely on plan for cost and time,
- < 1 for behind baseline,
- > 1 for ahead of baseline,
Although the three key values to perform EVM are all usually expressed in currency, they can be expressed in any other proportional accrued value, for example hours. They are:
Planned Value – The planned cost of the planned completion level at this point in time
Actual Cost – The actual amount spent to the actual completion level at this point in time
Earned Value – The planned cost of the actual completion level at this point in time.
The Planned Value is the project baseline. The Actual Cost is straightforward. The key figure is Earned Value. The other two figures pivot around the Earned Value in the relevant formulas.
A simple way to think of these three values is that PV is a purely planned figure, AC is a purely actual figure and EV is a combination of both.
- Cost Variance is then measured as (EV – AC). A positive figure is under budget (In EVM all positives are good and negatives bad).
- Schedule Variance is measured as (EV – PV). Again, a positive value is ahead of schedule.
- The Cost Performance Index is (EV/AC) where greater than 1 is under budget.
- The Schedule Performance Index is (EV/PV) where greater than 1 is ahead of schedule.
EVM calculation A simple example
A 10-month project, with a total planned cost of £100,000, planned to accrue evenly across the project so at the 5-month point, planned completion is 50%, and planned cost is £50,000.
At the 5-month point in reality we have spent £60,000 but only done 40% of the work.
Values at 5 months are therefore:
PV = £50 000
AC = £60 000
EV = £40 000
Our cost performance is therefore. £40 000 – £60 000, meaning we are £20 000 over budget.
Our schedule performance is £40 000 – £50 000, meaning we are also £10 000 ‘behind schedule’.
CPI is 40 000/60 000 = 0.67
SPI is 40 000/50 000 = 0.8
The two indices CPI and SPI can then be used to extrapolate to the end of the project to theoretically give cost/schedule variance at completion and an informed estimate of total project cost at completion. The acronyms used for these various figures are below.
ETC – Estimate to completion
EAC – Estimate at completion
BAC – Budget at completion
VAC – Variance at Completion
The calculation of these figures can be done in different ways depending on whether we wish to combine or disregard cost and schedule trends and is a subject for another blog. Finally, there are some limitations in accuracy of EVM particularly of the Schedule Variance figure as project nears completion. Again that’s the subject of another blog…