Become an expert in earned value management, so you can identify and fix problems before they become disasters later on in the project lifecycle.
Project managers commonly have issues relating project progress to desired end results.
When clients or executive team members ask for an update, understanding how far through the work they are and how much money has been spent is just the beginning. You can look at your project budget and your timeline, but that doesn't give you the full picture.
The question is often about how the current rate of progress impacts the timeline and budget. Will we come in under budget? Will it finish on time? If not, how far off track are we?
A PMI study in 2017 found that 14% of workplace projects were considered failures. By monitoring work performed against expectations, project managers can identify issues and make informed decisions that minimize their impact and reduce the chance of falling into that category.
This is where earned value management comes in.
Earned value management (EMV) is a way of standardizing how project progress is measured and communicated. It's used to understand the rate of progress against timelines and budgets to provide feedback that goes deeper than just reviewing estimated costs or schedules.
With a sound understanding of how progress compares to the original baseline, you can forecast the cost and schedule for the rest of the work.
EVM allows project managers to actually control project performance, rather than simply see what progress is being made. This includes making informed decisions on how best to continue work to deliver on key project objectives.
EVM is a tool primarily used in human resource management systems. Benefits of earned value management include:
A project manager typically tracks several elements throughout the work performed until its completion: project scope, cost, and timeline. However, if these things are tracked separately, there's less visibility on overall project performance with all three elements considered.
For example, a project may be completed on time, but over budget. Or, it may be completed to budget but be delivered late.
EVM jointly considers the impact of scope, cost, and time to deliver standardized measurements of progress and the implications on the overall project. It makes the relationship between all three much clearer and brings context behind figures to life.
When a project exceeds the budget or project schedule, there could be many reasons why. Scope creep, changing client priorities, resource clashes, unexpected risk management activities and plenty of other unforeseen occurrences impact the actual cost and schedule performance.
Earned value management allows a project manager to calculate actual cost and schedule variances and identify the factors that created them.
Because earned value management recognizes project variances, it also enables a project manager to control the impact of risks that present themselves in real time.
Managers can intervene in the early stages of an issue or setback to mitigate the effect on the project. Not only can this happen dynamically, but the earned value management process enables better risk identification from the outset.
Adjustments such as tweaking project scope, budgets or timelines, or procuring additional resources can be made before encountering costly delays.
Teams working on projects often don't have a transparent view of how their work is performing to expectations. Being able to show project performance to team members in real time helps to motivate them to achieve success in key areas.
Read more: How to create a project status report
Earned value management incorporates feedback to team members on:
PMI outlines earned value management as having three data sources:
Earned value analysis enables stakeholders to compare the three to understand how progress compares to the initial plans.
Planned value
Planned value, or PV, refers to how much work is supposed to have been completed at a certain point in the project schedule (schedule performance), and the cost of the work performed at that time (cost performance). Together, schedule and cost performance make up planned value.
PV can be either cumulative or current.
Actual costs
Actual costs (AC), as the name suggests, is the real cost of work performed on a project. It provides feedback on how much money has been spent, and can be compared to budgets to calculate cost variance - more on that shortly.
Read more: How to avoid project cost overruns
As with planned value, AC can also be calculated cumulatively or currently. Cumulative AC is the total actual cost for work completed to date, while Current AC is the total cost of work performed in a given period.
Earned value
At its core, earned value (EV) is about the worth of work done. It tells you the value of what's been accomplished on a project to date.
To fully understand earned value in project management, there are four key calculations to perform.
Variance analysis is about comparing actual progress to original plans, and helps to evaluate project performance in terms of time and cost.
1. Schedule Variance (SV)
Schedule variance is the difference between the amount of work scheduled to be complete at a certain time and the actual work that's been done. It's calculated with the following formula:
SV = EV - PV
For example, say you're working on a six week project, and you're three weeks in. Work has progressed faster than anticipated, and you've completed 75% of the work already. In this instance, EV = 4 weeks (75% of six weeks) and PV is 3 weeks. Your SV is 4-3, which is 1.
Ideally schedule variance will be a positive number, which will indicate the project is ahead of schedule. If SV is a negative number, it will mean it's taking longer than anticipated.
2. Cost Variance (CV)
Performance indexes are used to standardize schedule and cost variances across different projects.
They're helpful because a large project that deals with long time periods and more budget may have an SV or CV that's a high number, but it may be difficult to understand and communicate the context of these raw figures.
For example, say a project has a CV of -$10,000. If it's a project with a $1 million budget, then that represents a much smaller proportionate overspend than a project that has a $10,000 budget.
Performance indexes incorporate contextual information to allow stakeholders to have greater depth of understanding into what earned value figures actually mean.
1. Schedule Performance Index (SPI)
Schedule Performance Index relates to SV, but it's about more than just comparing progress to the planned timeline. It allows project managers and stakeholders to see the progress that's being made on individual tasks as well as on an entire project level.
The benefit of an SPI is it shows how progress on tasks is impacting the overall project.
For example, calculating schedule variance might allow you to see that three tasks are running behind schedule. However, if seven other tasks are on schedule, or ahead of schedule, the entire project may still be on track to be completed as planned.
Understanding the entire project status provides deeper feedback, which allows stakeholders to make more informed decisions. SPI is calculated by using the formula:
SPI = EV / PV
If SPI is greater than 1.00, that means the project or task is ahead of schedule. If it's less than 1, it's behind schedule.
2. Cost Performance Index (CPI)
As with SPI, the Cost Performance Index figure provides more understanding of how the current actual cost of work performed relates to the budget at this point.
CPI = EV / AC
A value greater than 1.00 means costs are under budget, and under 1 means you're over budget.
CPI can also go further to allow stakeholders to see what impact the current level of spending will have on the final costs. In short, how much the project will cost in total, given what's been spent so far. It's known as the Estimate at Completion (EAC).
To see this, divide the total budgeted cost by the CPI. In the previous example, with an EV of $75,000 and AC of $85,000, CPI is 0.882. The budget is $100,000, and with the current rate of spending, the EAC is $113,378.
When using earned value management in project management, it's critical to stick to standard processes to ensure consistency and comparability in all facets.
The United States National Defense Industrial Association has developed 32 guidelines that earned value management systems should comply with. When carrying out earned value analysis, there are three key things to get right:
The purpose of earned value management systems is to provide accurate feedback that enables better decision making. Any inconsistencies in tracking and recording project performance leads to unreliable data.
For accuracy and convenience, project tracking should always be done the same way, in the same place. Earned value management software makes establishing, tracking and reporting project status simple and straightforward, giving all stakeholders the visibility they need.
Software automatically updates calculations, reducing the risk of human error and highlighting the most important information for quick, informed decision making.
Your performance measurement baseline (PMB) is the standard you compare project progress against. It's made up of plans for the three crucial elements of the project:
Simply, tracking progress isn't possible without having something to compare it to. A good earned value management system needs to have well thought-through baselines in all of these areas, because it relies on the relationship between the three.
If these goals are unrealistic or absent, feedback on progress will be inaccurate, unhelpful and possible even disruptive. Baselines also need to be defined from the outset, not cobbled together after work has begun.
As above, EVM is about tracking project work against an agreed timeline, budget, and scope. These are the three critical data sets that should be focused on in reporting.
Stakeholders should include key decision makers within an organization, but also those responsible for delivering tasks and project deliverables.
EVM isn't necessarily about explaining reasons for project delays or spending. This context is important in the feedback stage, but while project work is ongoing, EVM is about illustrating how the current rate of progress translates to achieving overall baselines.
It's vital that stakeholders keep this front of mind to enable good decisions moving forward, not get bogged down with detail of contributing factors to the current state of progress.
Finishing a project to the desired standard, on time and on budget is a key KPI for any project manager, and EVM is a critical technique for achieving the results you want.
Rather than making plans and trusting things pan out the way you hope, EVM improves visibility in real time and enables decision makers to make improvements while you can still influence the outcome.
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