Introduction to Earned Value Management
Published March 18, 2022, 7:50 p.m. by sdanquah@gmail.com
Introduction
Earned Value Analysis (EVM) is a method project management use to measure and track the amount of work performed, against an established baseline at specific times to determine project progress beyond the basic review of cost and schedule reports. Projects can be complex. The also take long time to complete. Within that period, a lot can go wrong. Project managers, or owners could lose track of where the project is headed. Are we running on time, or behind schedule? Is the cost of work performed over or above budget? Without any system to help contractors or managers keep track of important indices on a project, they have no way of knowing where they are headed before it becomes too late.
EVM provides contractors means to establish baselines, measure project progress against the baselines to determine project progress. It then gives management the opportunity to take corrective actions to mitigate the risk of overruns. EVM is not just a performance management framework but also a project reporting and communication tool. Project managers can generate periodic reports to management to help them make informed decisions. As a project communication tool, it relies on a set of common lexicons, understood by management, the sponsoring organization, and other project stakeholders.
Fundamentals of Earned Value Management
On a project, Earned Value represents what a contractor has earned up to and including the point in question based on established rates of the project. Earned Value has nothing to do with the cost incurred in earning that value. Every project goes through planning process. At the end of the planning process, the cost of the project, and the schedule are established to determine the anticipated cost, and the duration that a professional and an experienced contractor could take to complete the project. These initial cost and schedule are forecasts and may differ from the actual cost of the project (we will talk about them later). They are for planning purposes. From these initial estimates, baselines are developed. A project may have a schedule baseline, and cost baseline. As the names suggest, they are what we compare progress to. Individually, these baselines do not help much in tracking progress because they are lump sums and fixed times, and only give us the total cost and duration of the project.
Management need to find ways and means to track progress and measure that progress against a baseline. This is where integrated baselines become very useful. The integrated baseline is a cost loaded schedule. A cost loaded schedule is one that has the cost of each activity factored in its schedule. With an integrated schedule, one can create a periodic cumulative amount against which to track performance. A plot of the cumulative amounts against time generates the S-Curve
Chart 1.0
The Project S-curve take from https://www.ntaskmanager.com/blog/s-curve-in-project-management/
The S-curve is the plot of the cumulative values against time. S-curve plot from the integrated baseline represents Planned Values.
The Earned Value is the actual amount of work performed by a contractor going by rates established at project onset. That may be less or more than the Planned Value.
For example, if a contractor is scheduled to finish $50 million worth of work by month 12, but progress measurement shows he only completed $40 million, then the contractor would have earned $40 million. The $40 million is the Earned Value, and the $50 million, the Planned Value. From these two, one can only say that the contractor is behind schedule. One cannot draw any valid conclusion or analysis about cost because there is no information on cost. The difference between the Planned Value and the Earned Value is called Schedule Variance.
In earning the $40 million, the contractor would have employed factors of production - labor, equipment, materials, and subcontractors. The contractor would incur cost in employing the factors of production. The contractor must buy materials, pay wages, and pay for equipment. When he/she sums up all the cost incurred to earn the $40 million from the project, he can now compare that cost to the Earned Value to determine if he is under budget or overbudget. Let’s say the cost is $35milliom. The $35million becomes the actual cost. The difference between the Earned Value and the Actual Cost is the Cost Variance.
Plotting all three -Earned Value, Planned Value, and Actual Cost against time might look like the chart below.
Chart 2.4
Taken from https://www.mpug.com/earned-value-management-evm-in-agile-development/7-figure-s-curve-for-agile-evm/
The EVM Chart showing Planned Value, Earned Value and Actual Cost. Location and behavior of the curves may change depending on the project, and the period in question
Let’s take care of some important definitions before we continue. These are from PMBOK, 6th edition.
Planned Value (PV) – This is the authorized budget assigned to scheduled work. It is the authorized budget planned for the work to be accomplished for an activity or work breakdown structure (WBS) component, not including management reserve (Project Cost Baseline) This is budget allocated by phase over the life of the project, but at any given point in time, planned value defines the physical work that should have been accomplished. The total planned value for the project is known as the Budget at Completion (BAC). Planned Value is referred to Budgeted Cost of Work Scheduled (BCWS) in US federal agencies
Earned Value-This is the measure of the work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that should have been completed (modified) Earned Value is sometimes referred to as Budgeted Cost of Work Performed (BCWP)
Actual Cost – This is the cost incurred for the work performed on project activities for the earned value period. This is what ever is spent to achieve the Earned Value. (modified). This is sometimes referred to as Actual Cost of Work Performed
Other definitions that are important to understand EVM include.
Estimate at Completion (EAC)-this is the sum of the actual cost performed plus the estimated cost of remaining work
Variance at Completion (VAC)-This is the BAC-EAC
Earned Value System
Earned Value Management occur within a system that integrates project cost, project schedule, an organization accounting system and management. We have already talked about the role project cost and schedule baselines play in earned value. So, what about accounting? Accounting helps the contractor determines actual cost. To successfully integrate accounting, all activities that are supposed to be tracked need to be cost coded according to defined Work Breakdown Structure (WBS).
Earned value management systems is governed by American National Standards Institute (ANSI)/Electronic Industries Alliance Institute (EIA) standard 748. EIA-748 provides 32 guidelines that, if followed, leads to the overall success of the project. The 32 guidelines are grouped into 5 major areas:
- Organization
- Planning and Scheduling and Budgeting
- Accounting Considerations
- Analysis and Management Report
- Revisions and Data Maintenance
Together these guidelines help federal contractors and enterprise implement Earned Value Management System to manage and control projects.
Benefits of Earned Value Management Systems
Successful implementation of Earned Value Management leads to benefits including:
- Detailed and accurate planning at a project pre-construction stage and address major issues that could derail the project in the future.
- Earned Value can help organization measure performance and can also help management track resource allocation and usage on the project, helping manage site inefficiencies, material theft and productivity.
- Earned Value reduced risk on the project and help mitigate cost and schedule overruns. Problems are identified early so corrective actions could be taken.
- Provides contractors reliable data for analysis and future use.
How Danquah Group Can help you.
Danquah Group provides training, consulting, and advisory services in project management to help organizations deliver their projects. We bring technical and management expertise to project management to help owners and contractors mitigate risk of overruns and delays on their projects. Our cost consulting services include:
- Estimating and Cost Management
- Planning and Scheduling
- Cost Controls
- Earned Value Management (EVM)
- Training to help increase workforce competences and skills in cost estimating, project management, and EVM
- Project Administration
This article was written by Seth Danquah
Seth Danquah has over 20 years experienced in the construction industry. He is experienced in establishing and managing project cost from inception to completion. His expertise includes Project Cost Estimating, Capital Budgeting, Earned Value Management, Capital Budgeting, and Quantitative Risk Analysis.
Organization looking for training or consulting can contact him at sdanquah@danquahgroup.com.
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