Earned Value Analysis in Project Management

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A project manager's most important duty is to monitor the project's budget, performance, and progress. Budget frequently restricts a project; therefore, it receives much attention from project sponsors, steering committees, and other stakeholders.

Despite its significance, project managers and PMOs may sometimes need help to implement earned value management. When studying for the pmp certification exam, one discovers that applicants find earned value analysis intimidating. So, let’s move on to an overview of earned value analysis in project management.

What is earned value analysis?

Earned value analysis is another name for the earned value method technique. A project management professional can assess how much work has been done on a project using this method. The Earned value analysis makes it easy to gauge the project's success based on its level of advancement.

The project manager can, therefore, forecast the overall cost of a project, keep eye on components of cost of project and its completion date using the measured progress. The Budgeted Cost of Worked Performed, or BCWP, is often mentioned when the phrase "earned value" is used. The project manager can compute the project's efficiency indices using this value.

Additionally, it reveals how the project is developing compared to what was initially planned. Earned value analysis offers an estimate for the budgeted cost and the actual cost for work that has been completed. The difference between these figures reveals if the project is on schedule, allowing for the early identification of variations that could signify project problems.

To accurately gauge a project's performance at any time, this study employs several measures, including BCWS, the Actual Cost of Work Completed (ACWP), and schedule variance.

What is earned value analysis used for?

EVM project management estimates give a thorough account of how much a company spent in terms of time, money, and other resources on a project. This allows the company to plan and schedule upcoming tasks. Among the crucial applications of Earned value analysis are:

1. Assessing project cost performance

The evaluation of project cost performance is the primary application of earned value analysis. Comparing actual costs to baseline estimates and anticipated expenditures to budgeted costs is part of this exercise. If the scope of the task or its timetable is in question, it could be because the actual cost and anticipated cost are more than the baseline estimate and budget.

One can identify project-related problems and discover solutions by studying these deviations before they cause delays.

2. Making better project decisions

Earned value analysis method can help project management professionals make better project decisions by offering more data on where to allocate funds and allows them to compare the profit of each activity over time to its anticipated value at completion.

If an activity has generated less value than anticipated, managers can determine whether to investigate it further or remove it from a program.

3. Improving proposals

By describing how much work the team completed and how much work needs to be done, earned value analysis can help managers demonstrate the potential of a new project. They can use it to explain how much money they have already spent on the project and how much more they need.

When requesting management's approval for financing or additional resources for a project, the resources may include this information in the proposal or presentation.

4. Improving schedule control

A popular application of earned value analysis is schedule control. The project manager uses actual cost and actual-time data to determine the percentage of work performed.

These figures can be subtracted to get the project variance. A negative variance indicates that the project is running behind schedule. A positive variance depicts that it is ahead of the schedule.

In both scenarios, the project manager can work around the schedule or add resources to help teams finish tasks on time.

Fundamental Concepts in Earned Value Analysis:

As mentioned earlier, earned value management systems enable the project manager to respond to the following three project-related questions:

Where were we before?
Where are we now?
Where are we headed?

Unlike traditional management, earned value management uses three data sources:

The "earned value" of the physical job accomplished;
The budget (or planned) value of the work scheduled; the actual worth of the work completed.
The "earned value" of the physical job accomplished.

With these three data sources, project managers can understand the value they have juiced out from the project and what needs to be done next. Here is a detailed explanation of the same:

1. Planned Value

According to the project schedule and cost estimate, the planned value indicates how far along the project work is intended to be at any time. The physical work scheduled and the approved budget to complete that work are referred to as the cost and schedule baseline.

They produce a significant value when combined: Planned Value (PV). PV can be viewed from both a cumulative and present perspective. The total approved budget for the planned activities that are carried out is known as cumulative PV.

The approved budget for tasks to be carried out during a specific period is known as the current PV. The period in question could be days, weeks, months, and more.

The Budget Cost of Work Scheduled (BCWS), another name for PV, is described through the following elements:

Define the scope: What does the assignment entail (scope statement)
Assign the scope: Divide the scope into manageable components (WBS)
Schedule the scope: Develop a schedule that is time-phased, logic-driven, and critical (project schedule)
Budget the scope: Develop a cost (budget) for every authorized scope (performance measurement baseline)
Baseline: A time until which criteria will be used to measure performance.

2. Actual Costs

The cost expended for working on a project is known as the Actual Cost (AC), also known as actual expenditures or Actual Cost of Work Performed (ACWP). This number reveals how much managers have spent on the project and, like planned value, may be viewed cumulatively and currently.

The total actual cost for all activities completed to date is the cumulative AC. The costs of real activities carried out over a specific time are known as current AC. The time can be days, weeks, or more.

3. Earned Value

Project management professionals must apply EV to the project's numbers and computations to report the project's successes. EV measures the "value" of the job completed so far. In other words, EV gives specific examples of the project's successes. EV can be expressed in a cumulative and current manner as PV and AC.

Cumulative EV is the budget for all projects that have been finished up to this point. The budget for the activities completed in a specific period is added to the current EV. The budgeted Cost of Work Completed is another name for EV.

The baseline in terms of costs and schedules determines the planned value (PV). The project's real costs are what define AC. EV describes the project's accomplishments in tangible terms.

4. Variance Analysis

The variance analysis is a technique where the actual outcomes of a project are contrasted with those anticipated. When a project is accepted, certain expected outcomes are developed with a plan to accomplish them.

If such outcomes are not obtained, the variance analysis helps determine the degree of discrepancy between the predicted and actual results. It is crucial to comprehend the reasons for this failure after evaluating the gap. Specifically, the cost variance and the scheduling variance are highlighted using this technique.

5. Cost Variance (CV)

This value shows how the project is changing concerning the initial budget estimate. The earned value is subtracted from the costs that were incurred to determine the cost variance; the formula is CV = EV - AC.

If the outcome is 0, the project is flawlessly adhering to the budget. If the outcome is poor, the project is over budget, which means that the actual costs have exceeded the budget, which calls for action.

However, if the outcome is favourable, it indicates that the project is on schedule and within budget, meaning that actual expenses are lower than anticipated.

6. Schedule Variance (SV)

The project may be on schedule, early, or in line with the original plans, depending on the earlier approved timetable. Schedule Variance is represented by this value. It is crucial to comprehend how this value lacks information on project work delays and outcomes. It merely states whether or not the job is going as per the planning.

By deducting the projected expenditures up to the time the analysis is done from the realized value, the Schedule Variance, which depicts the project's actual position with planning, is obtained.

The formula is: SV = EV - PV

If the outcome is 0, the project is proceeding according to plan. Positive results indicate that the project is running ahead of schedule. However, if the outcome is bad, it indicates that the project is running behind time and that something has to be done.

7. Project efficiency indexes

The effectiveness of a project can also be analyzed using the Earned Value Method. The Schedule Performance Index (SPI) and the Cost Performance Index are two distinct methods of efficiency assessments (CPI). The SPI measures how effectively a project's program is working.

In actuality, SPI equals the difference between earned value (EV) and projected value (PV): EV / PV

A favourable condition is indicated when the SPI is one or greater. It illustrates how effectively the project is being carried out. A value less than one, however, denotes a bad condition. The ratio of earned value to actual costs, or the CPI, serves as a measure of a project's economic efficiency: CPI = EV/AC.

A CPI number of one or higher denotes a favourable circumstance, whereas one or less denotes an adverse one. In light of this, it is generally feasible that our project will proceed as planned, or that it will be either efficient or inefficient.

Using Earned value analysis in Project Management

Although it is challenging to execute, the Earned Value Method is a great tool for evaluating the performance of a project. EVM necessitates meticulous cost tracking and comprehensive planning: each invoice, each cost component, and each hour worked must be tagged with the appropriate cost object.

Without such a strict implementation, earned value analysis in project management will not benefit project management professionals and EVM will not offer any value. Managers may try the strategy if they have effective procedures in place that enable thorough planning and cost tracking.

Popular project management programs, such as MS Project, offer built-in capabilities for EVA. However, compiling the numbers and completing research takes time. This time may be used to handle communication and project management.

Ready to put the Earned Value Method into practice? It is a highly demanded skill for project managers and leaders. If you are interested in learning more about more such project management techniques then you should get an the PMP Certification with StarAgile.

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