Earned Value Management (EVM)
Contents |
Abstract
When managing projects, it is of greatest interest to make sure that the project delivers what has been agreed upon. In order to improve the odds to fulfill the expectations, performance measurements can be used. Performance measurements allows the project manager and other stakeholders to closely monitor the project and easier decide when it is necessary to take actions, if the project is running out of line. Projects that are not monitored properly run the risk of being late, overrun the budget and end up being out of scope, which often can lead to unsatisfied stakeholders. [1] Earned value management is a method used in project management to evaluate the performance of a project at any point to monitor whether the project is proceeding according to plan or not. This is done by comparing the expected outcome of the three constraints cost, time, and scope. In addition, earned value also evaluates what has been accomplished in the project so far.[2][3] The result of the performance measurement is a value which indicates how much the current state of the project varies from the expected progress with cost, time, and scope taken into account. This value can later be used to forecast when the project will be finished and at what cost, if it proceeds at the current pace. [4]
This article aims to explain the purpose and concepts of earned value management and how it can be applied in order to improve projects. Further, the concept will be analysed where the advantages and disadvantages of the concept will be explained. Finally, the article will discuss the limitations of the concept, what it does and does not do.
What is Earned value management?
Earned value management (EVM) is a method used throughout the entire project life cycle to manage projects, programs, and portfolios to visualize the current status. The use of (EVM) dates back to the 1960s when the United States Department of Defense implemented a similar system to measure project performance in order to control cost and schedule. It was first implemented as many projects had become more expensive and delivered later than anticipated. [5][6] Add more to the background why it was developed
EVM mainly consists of the three elements that often play a big role in project management; budget of cost, project schedule as well as scope of work. The main idea of EVM is to use these elements to develop a baseline which can be used and compared to the actual outcome of the project at a certain point. It is thereby important that these elements are established with care when the project is planned. The difference between the traditional cost management and earned value is the additional component earned value measuerement which is used to measure the actual accomplishment, for example, "after spending 50 percent of the budget, is 50 percent complete?" [7]
EVM allows project managers to integrate these already organized components to forecast the end date and final cost of the project, which then can be used to visualize the project status. Visualization is often very powerful within projects as it can be used to make sure that all stakeholders in a project have the same picture. Visualization also makes it easier to identify issues which allows the stakeholders, such as the project manager, to make efficient decisions based on objective data. [1][8][5] Due to the characteristics of EVM it can be used in various key areas within projects such as cost management, schedule management, scope management, risk management and integration management.[1] EVM can be seen as a critical method when it comes to project planning, execution and control as these areas often are related to measuring, analyzing and forecasting. [2]
Application
Prerequisites
In order to successfully apply earned value management there are a few requisites that should be fulfilled where one of the most crucial is to define the different baselines of the project. The baselines that need to be decided are the scope baseline, schedule baseline and budget baseline, or sometimes known as the performance measurement baseline. These baselines are used to generate the performance measurement baseline which will be used as the planned values when the model is applied to the project. As the performance baseline will reflect what the project is expected to deliver at different times it is important that the underlying baselines are determined correctly. It is also important that the performance measurement baseline is determined with consideration to the fact that the changes may occur to the budget, scope or schedule during the project.[2][7] In the planning phase it is important to convert the scope of work into a more distinct component which can be done systematically by using the Work Breakdown Structure (WBS). A well defined WBS is a core component in EVM as the different baselines are developed with the WBS used as the base. The lowest level of the WBS, also known as the work package, usually consists of a small number of measurable activities such as a product, service or action that needs to be delivered.[5][2] In addition to the WBS the WBS dictionary is also developed, this is a document that explains each activity in the WBS more in detail. At this step the scope of work, WBS and WBS dictionary can be approved and form what is known as the scope baseline for the project.[1] Further, the schedule of the project can be decided with the scope baseline and resource breakdown stucture as a base. When the project schedule is approved the schedule baseline for the project is set. When applying EVM the schedule baseline will work as a base to compare the actual outcome of the project from a time perspective. [2] The final baseline that needs to be set is the budget baseline. In order to set this baseline the budget itself first has to be decided and approved which is done by assigning costs to each element in the WBS. However, the budget also needs to include a lot of other elements such as the management reserve - a pot of money reserved for unknown management control purposes, and the contingency reserve - a pot of money reserved to manage risk. When deciding on the budget baseline it is important to keep in mind that the project may change along the way as well as make sure that all costs are included. [2][5]
Measurement method
It is important to decide which method that should be used to measure the Earned Value (EV) of the project. As different work packages have unique charactheristics there are three different classes of work that are used depending on the character of the work package. These three work classes are discrete effort, apportioned effort and level of effort. Work packages are identified to belong to the discrete effort work class if it is an activity that is tangible product or service that can be measured. An example of a an activity that belongs to this work class could be to put the tires on a car. If this is expected to take four hours then we can assume that after one hour 25% of the tires are mounted.[2] However, measuring the work done using this method is only one way that discrete effort can be measured. Discrete effort can also be measured by for example using fixed formula, weighted milestone or as the example suggests, physical measurement. Fixed formula is a method where a certain percentage of earned value is gained when the activity is started and the rest is assigned when it is finished, this is suitable for work packages that can be finished quickly. Weighted milestones are suitable for work packages that take a long time to finish, several milestones are setup for the work package and add a certain amount of earned value when reached. [2][9]
If the work does not deliver a specific output but is a support activity for the discrete effort activities, such as quality checks or inspection, the work can be considered to be apportioned effort. As the apportioned effort is directly to the discrete activity, known as the "measurement base", the appointed effort activities are equal to the value of the measurement base.[9] The final work class that activities can be assigned to is level of effort. An activity is considered to be a level of effort activity if it does not directly produce a product or service that can be measured but is a necessary activity for the project. Example of a level of effort activities could be team lead, accounting or customer relationship management. Earned value for Level of effort activities are often very difficult to calculate, hence it is usually calculated as money spent on the activity divided by the total budget for that activity.[9] Too much time is often spent trying to find the perfect technique to measure the specific activity, it is important to remember that this measurement is an estimate. It is more important to focus on finding the optimal technique for larger value work packages as these have a larger impact on the overall than the smaller work packages. [9]
Applying EVM
In order to be able to understand earned value management a few terms that are commonly used needs explaination. The three most important terms to understand is planned value (PV), actual cost (AC) and earned value (EV). Planned value is the cost budget for the work that needs to be done related to a certain point in time, the total budget for the project is referred to as budget at completion (BAC). The actual cost is simply the money that has been spent to accomplish the work that has been done. While the earned value is the percent of the total budget that has actually been completed at the time. It is simply calculated by multiplying the budget with the percentage of how much has been done. How much has been finished can be calculated in various ways depending on the charactheristics of the activity. To be able to compare these different values it is important that all the variables use the same unit. It is common that either work hours or currency is the unit of choice.[9][7]
When all the necessary measures are collected the next step is to analyse the results. The analysis can be done by calculate by calculating various variances as well as indices such as schedule variance(SV), cost variance(CV), schedule performance index(SPI), cost performance index(CPI). The SV can describe whether the project is on time or not by subtracting PV from EV (EV-PV). A positive number here indicates that the project is ahead of the schedule as a greater EV than what was expected has been reached. The CV can be used to evaluate how efficiently the money is spent and is calculated by subtracting AC from EV (EV-AC). A negative value here indicates that the project has spent more money than expected to reach a certain EV level, meaning the project is overrunning the budget. This is usually more critical than overrunning the schedule as it is more difficult to recover from.[7][9] CPI and SPI are indices that indicates how well every dollar was spent. CPI is calculated by dividing EV with AC (EV/AC) where a value above one is preferred as this indicates that more EV was gained from each dollar spent than what was anticipated, the project runs ahead of plan. Just like CPI, SPI measures how much was expected to be completed at the current time by dividing the EV with PV (EV/PV). A value greater than one indicates that more work has been accomplished than what was planned at the current time, meaning the project is running ahead.[7] It is important that these measurements are individual for each project and therefore the performance between different projects cannot be compared to eachother by for example looking at the index values. However, when monitoring a certain project these values can be very useful as trigger levels can be set to make sure that actions are taken whenever a certain measure is crossing a certain value.[7]
Once the analytic measures are calculated the future progression of the project can be forecasted, calculating the final outcome of the project if it continues at the current pace with regards to cost and time. By using CPI and SPI it possible to forecast the expected additional cost needed to complete the project known as estimate to completion (ETC), as well as the estimate at completion (EAC). EAC can be compared to the total budget at completion, BAC, to assess the current risk of the project.[7][9] There are different ways to calculate the EAC which will give different results, some punishing late projects more and give a more pessimistic view while other ways of calculation are more optimistic. The three most common formulas used for EAC are presented in figure 1.[9] While it may be possible to forecast using only one EAC value, calculating a range by using two value may be favourable as both the optimistic and pessimistic values can be displayed. The ETC can be calculated by subtracting AC from EAC, resulting in a value that shows how much money that is expected to be spent in order to complete the project.[7]
A practical example on how to apply EVM
Here is a practical example to explain this further. Imagine the following, a construction project is ongoing and has just begun hence, the foundation of the building needs to be constructed. The foundation for this particular construction is planned to cost $60000 and be finished in week 4, while the total budget for the project is set at $125000. When week 4 comes around it turns out that only $50000 has been spent so far. By using a measurement method that was decided before the project begun the project manager notices that 60% of the work has been completed. As it turns out, the PV is $60000 while the AC is $50000, however, the EV is only 0.60*60000 = $36000. This means that while $50000 has been spent the EV achieved at this point is only $36000. A graphical example of this can be seen in Figure 2.
By applying the analysis measures CV, SV, CPI and SPI it can be noticed that the CV is $-14000 while the SV is $-24000, turns out that the project is behind both with regard to time and cost. This can also be seen by looking at the index values where the CPI is 0.72 and the SPI is 0.6.[9] A graphical illustration can be seen in Figure 3. The project manager makes the other stakeholders aware of the situation and the investors ask for a forecast of the final cost if the project proceeds in the same manner. The project manager decides that EAC1 is a good way to calculate the EAC in this case, resulting in a final cost for the project of $139000, $14000 above budget. In order to not overrun the budget actions must be taken by the managers in charge.
Further readings?
Have developed and evolved over the years; combination with agile for software development, https://findit.dtu.dk/en/catalog/2448672247 - to measure sustainability goals in projects,
Limitations
Critically reflect on the tool/concept/theory and its application context. What can it do, what can it not do? Under what circumstances should it be used, and when not? How does it compare to the “status quo” of the standards – is it part of it, or does it extent them? Discuss your article in the context of key readings / resources provided in class. Substantiate your claims with literature
When is it applicable? EVM has proven to be benefitial for use in a large variety of different projects in various industries such as construction[10], software development[11] and energy[12]. However, as EVM often requieres a significant investment it is more suitable for larger projects. EVMLITE [13][6]
Annotated bibliography
Provide key references (3-10), where a reader can find additional information on the subject. The article MUST make appropriate references to the and reference material provided in class – either incorporating it as a source, or critically discussing aspects that are missing from it but covered by this article. Summarize and outline the relevance of each reference to the topic (around 100 words per reference). The bibliography is not counted in the suggested 3000 word target length of the article.
References
- ↑ 1.0 1.1 1.2 1.3 Project Management Institute (2017) A guide to the Project Management Body of Knowledge (PMBOK guide). 6th ed. Newton Square, PA: Project Management Institute.
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Project Management Institute (2012) Practice standards for earned value management. 2nd ed. Newton Square, PA: Project Management Institute.
- ↑ Sparrow, H. (2002). Integrating scheduling and earned value management (EVM) metrics. Paper presented at Project Management Institute Annual Seminars & Symposium, San Antonio, TX. Newtown Square, PA: Project Management Institute.
- ↑ Levine, H. A. (2005) Project portfolio management: A practical guide to selecting projects, managing portfolios, and maximizing benefits. London, England: Jossey-Bass.
- ↑ 5.0 5.1 5.2 5.3 Stephen P Warhoe (2004) The Basics of Earned Value Management. AACE International transactions. CS71–.
- ↑ 6.0 6.1 Vanhoucke, M. (2009) Measuring time: Improving project performance using earned value management. 2010th ed. New York, NY: Springer.
- ↑ 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 Chen, M. T. (2008) ‘The ABCs of earned value application’, in AACE International Transactions. 2008 Morgantown: American Association of Cost Engineers. p. EV31.
- ↑ Anbari, F. T. (2011). Advances in earned schedule and earned value management. Paper presented at PMI® Global Congress 2011—North America, Dallas, TX. Newtown Square, PA: Project Management Institute.
- ↑ 9.00 9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 9.09 9.10 9.11 Joseph A Lukas (2008) ‘Earned Value Analysis - Why it Doesn’t Work’, in AACE International transactions. 2008 Morgantown: American Association of Cost Engineers. p. EV11–.
- ↑ Kwon, O.-C. et al. (2008) “Application of earned value in the Korean construction industry — A case study,” Journal of Asian architecture and building engineering, 7(1), pp. 69–76.
- ↑ Hanna, R. A. (2009) “Earned Value Management Software Projects,” in 2009 Third IEEE International Conference on Space Mission Challenges for Information Technology. IEEE.
- ↑ Urgilés, P., Claver, J. and Sebastián, M. A. (2019) “Analysis of the Earned Value Management and Earned Schedule techniques in complex hydroelectric power production projects: Cost and time forecast,” Complexity, 2019, pp. 1–11.
- ↑ Forman, J. B. & Somerville, D. (2009). EVM "lite"—a deliverables-based approach. Paper presented at PMI® Global Congress 2009—North America, Orlando, FL. Newtown Square, PA: Project Management Institute.
