What is earned value management?
Earned value management, or EVM, is a project management technique that integrates cost, scope, schedule, and risk to measure project performance. Because EVM predicts a project’s future based on planned and actual values, you can use trend analysis and forecasting data to identify patterns, create solutions, adjust strategies, and manage performance more effectively. The foundation of earned value management is to use the original goals you outlined in your project scope as progress milestones. As earned value management deals with the data and the actions required because of the data, measuring performance against goals helps you determine your project’s progress effectively.
An earned value management system, or EVMS, encompasses all the software, tools, templates, and processes of EVM. An EVMS gives project managers a more accurate assessment of their project’s financial status compared to simple budget vs. actual calculations. An earned value management system can even improve schedule progress by measuring the amount of work completed. Earned value analysis (EVA) is an example of an EVM tool that evaluates project performance by analyzing cost and schedule variances.
Foundational concepts of earned value management
Many project managers become intimated by EVM because of the many terminologies associated with it. Within EVM’s structure, you’ll find three data sources for calculating and measuring completed work:
- planned budget
- actual value
- earned value
Here’s a breakdown of these smaller concepts that play a fundamental role in improving project performance:
Planned value
Planned value (PV) is the budgeted cost for work scheduled (BCWS). Planned value varies based on the scope of work and where you’re at in your schedule. You can evaluate the planned value in cumulative and current PV. Cumulative planned value puts your entire project budget against your progress to date. In contrast, the current planned value considers the budget for estimated progress within a specific period, such as a week or month. Use the following formula when evaluating the planned value of your project:
PV = Project budget x % of completed planned work
Let’s say your project has a $25,000 budget, and you planned to have a quarter of the project done at the time of evaluation:
PV = $25,000 × 25%
PV = $25,000 × 0.25
PV = $6250
The planned value of your project currently sits at $6250.
To calculate PV for a specific period, like month two to month four during a five-month project, your calculation would look like this:
PV = $25,000 × 60% = $15,000
Actual cost
Actual cost (AC), also known as the actual cost of work performed (ACWP), measures all the expenses associated with work completed on a project. Like planned value, the actual value gives you the information for a specific time and as a cumulative total for progress to date. Calculate your AC by adding all the costs incurred in a particular period. Your current AC includes the total costs for all activities and tasks within a set timeframe, such as days, weeks, or months. Your actual cumulative value consists of the project’s total costs to the date of calculation. Use the following formula when evaluating the actual value of a project:
AC = Total of all project expenses incurred
Determine the actual cumulative value of a project by reviewing your budget and determining the following information:
Workforce total labour = $20,000
Materials = $8,000
Quality control charges = $5,000
Now calculate your AC:
Actual value = $20,000 + $8,000 + $5,000
AC = $33,000
The actual cumulative value of your project is $33,000.
Remember to use all hidden costs, such as hardware, software, overheads and any other resources, when calculating your AC.
Earned value
Earned value (EV), also known as the budgeted cost for work performed (BCWP), helps project managers measure their project’s progress when compared to the original plan and determine a project’s outcome by comparing actual costs and timelines to the planned schedule and budget. EV results help you identify your project’s accomplishments even if you’re not entirely on schedule. Like with PV and AC, you can learn your earned value based on cumulative or current amounts. Use the following formula when completing your earned value analysis:
EV = Total project budget x % of planned work completed
Say your project has a planned budget of $20,000 for a five-month project, and you’ve completed 25% of the project after three months. Your EV calculation looks like this:
EV = $20,000 × 25%
EV = $20,000 × 0.25
EV = $5,000
The earned value of your project currently sits at $5,000.
There are some EV variances to consider. Variance refers to unexpected circumstances that can affect your project’s outcome. Determine several variance types using the following formulas:
Schedule variance (SV) = EV – PV
A positive number indicates you’re ahead of schedule, while a negative number shows you’re behind.
Cost variance (CV) = EV – AC
A positive number indicates you’re under budget, while a negative number shows you’re over budget.
Benefits of earned value management
EVM is one of the most powerful tools for cost control and predicting your project’s future. Earned value management is also beneficial for:
- mapping work with costs and reducing unknowns into measurable factors
- comparing and benchmarking your current status against project baselines and identifying critical paths
- creating data-based frameworks that enable you to take action and make crucial decisions for the future
- fast interception when necessary. For example, adjusting the project budget and scope, pivoting resources, or investing in better technologies
- creating accountability and promoting enhanced visibility for collaborators using clear metrics
- providing insight for a clearer picture at both portfolio and project levels
The fundamentals of earned value management
The following steps will ensure you have all the necessary information to use EVM effectively:
1. Organization and project scope
The key to successful EVM is having the project scope and organization information ready. Design your project scope early in its lifecycle to help move critical data as you go through additional steps. Then, use your project scope to create your organizational breakdown structure (OBS)—where you identify your project collaborators and anyone participating in the project. You should also create a work breakdown structure (WBS) to reduce more significant project deliverables into smaller milestones or tasks. Once you have your WBS, you can develop a responsibility assignment matrix (RAM) to assign individual responsibility for each job.
Each of these documents provides critical data when evaluating the progress and performance of your projects.
2. Plan, schedule and budget your project
Outline your project by defining significant deadlines and minor milestones. A concise plan and schedule help you assign a fair percentage of your budget to each project step. They also enable you to review the estimated costs of materials, labour and other expenses to make changes where necessary. EVM calculations require detailed information about completion percentages and activity costs to make your analysis and evaluation more accurate and easier to complete.
3. Account for actual costs
Track the exact costs associated with your project and allocate them to the relevant part of your plan and schedule. Doing this at the start of your project will help you track your AC quickly and accurately.
4. Accurate analysis and reporting
Once your project begins, you’ll start receiving information through tracking systems. Use this data to regularly report the planned, earned and actual values to your collaborators. This crucial information helps you analyze project progress and performance according to your planned budget and schedule. Include your evaluation and use recommendations to improve your project’s performance or adjust the course of action when reporting to collaborators.
5. Revise and optimize your project
The final step of your earned value management strategy is setting guidelines for project revisions. After analyzing your progress and performance data, you want to easily revise your project’s plan and schedule by establishing clear procedures detailing how to make the revision process more transparent and effective for project team members and collaborators. Creating risk management plans and change management, evaluating the need for using management reserves, and seeking necessary approvals all fall under this category.
