If you are managing project or studying project management books you must have heard the magic word of “Earned Value Analysis.” What exactly is it? According to PMBOK earned value analysis is “an objective method to measure project performance in terms of scope, time and cost.”
Hmmm, a bit dry theoretical line…. lets dig it down… Earned Value Analysis (EVA) is a collection of few formulas and some simple math. It is nothing but an excellent technique that helps you assess your project health and at the same time gives you option to apply number of measurement to manage your project. EVA is also an effective way to present overall budget and schedule status to the management or customer.
Project health depends on time, cost and scope which often call as “Triple Constrain”. In project reporting, project manager prepares a report of overall project status by summarizing the status of time, cost and scope. Usually traffic light status approach is use to identify trouble points that need management or customer’s attention. The problem with this approach is it gets created more on perception and influence than any objective metrics. A project report with red status might become yellow or even green in next review meeting. In worse case a project with all green status might become red before launching date.
Earned Value Analysis evaluates the project health in a certain point of time using earned value metrics. To get the earned value metrics you need to have answer of following
- How much work did your plan to complete? (Planned Value)
- How much work did you actually complete? (Earned Value)
- How much did it cost to complete the work? (Actual Cost)
Planned Value (PV) represents the budgeted cost of all the activities that were planned to start and finish at this point of time
Earned Value (EV) represents the total cost of all the activities that been completed at this point of time.
Actual Cost (AC) is the actual cost of the work produced.
Please remember EVA is based off original project budget. Let’s take EVA in action.
Assume a small eight weeks data network rollout in a remote office is budgeted for $30,000. While reporting in fifth week, project manager find out the team has only completed 50% of the work, where they suppose of complete 62.5% by that time. He also noticed that the team has spent $25,000 to date on the project. What is the status of the project?
In this example planned value is % planned to complete * project budget, i.e.
PV = 62.5% * $30,000 = $18,750
where earned value is % actual complete * project budget, i.e.
EV = 50% * $30,000 = $15,000
And the actual cost is
AC = $25,000
With these metrics we determine the cost variance (CV) and schedule variance (SV). CV measures the actual value of the work performed to the project value and SV measures the actual project progress to the schedule. These variances comes from two simple formulas
CV = EV – AC => $15,000 – $25,000 = – $10,000
SV = EV – PV => $15,000 – $18,750 = – $3,750
So both the variances are coming in negative figure that points the project is over the budget and behind the schedule. A positive variance indicates cost saving or schedule efficiency. So the project manager always want to keep the variance either zero or greater.
By reviewing these variances a project manager can prepare his next action i.e. fast track, crashing or extend schedule, ask for extra budget or reduce scope.
However two more indexes are needed to communicate the status to stakeholders that are cost performance index (CPI) and schedule performance index (SPI). These indexes are very helpful to do an objective assessment of the project health and determine the estimate at completion (EAC). CPI is a measure of project’s earned value compared to actual cost incurred and SPI is a measure of actual progress of a project to the project schedule.
CPI = EV/AC => $15,000/$25,000 = 0.6
SPI = EV/PV => $15,000/$18,750 = 0.8
Both numbers are less than one thus indicates the project’s budget and schedule need to be analyzed. However, if the project continues to perform in such rate, what would be the project’s revised budget? To calculate the estimate to completion (EAC), we need to divide the original budget by CPI
EAC = BAC / CPI => $30,000/0.6 = $50,000
Now we have all the calculative values to replace the traffic lights while presenting project status to the management or customer.
That’s all folks…….