What is Earned Value?
By Duncan Haughey
Current performance is the best indicator of future performance and therefore using trend data it is possible to forecast cost or schedule overruns at quite an early stage in a project. The most comprehensive trend analysis technique is the Earned Value method.
In a nutshell Earned Value is an approach where you monitor the project plan, actual work and work-completed value to see if a project is on track. Earned Value indicates how much of the budget and time should have been spent, with regards to the amount of work done to date.
Here are four other definitions:
- Englert and Associates, Inc define it as, "A method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned."
- Project Magazine defines it as, "A methodology used to measure and communicate the real physical progress of a project taking into account the work complete, the time taken and the costs incurred to complete that work."
- The user guide for Microsoft Project 2003 defines Earned Value as, "a method for measuring project performance. It indicates how much of the budget should have been spent, in view of the amount of work done so far and the baseline cost for the task, assignment, or resources."
- Field Operative defines it as, "The physical work accomplished plus the authorised budget for this work. The sum of the approved cost estimates, (which may include overhead allocation), for activities, (or portions of activities), completed during a given period, usually project-to-date."
- NASA defines it as, "An integrated management control system for assessing, understanding and quantifying what a contractor or field activity is achieving with program dollars. EVM provides project management with objective, accurate and timely data for effective decision making."
Earned Value differs from the usual budget verses actual costs incurred model, in that it requires the cost of work in progress to be quantified. This allows the project manager to compare how much work has been completed against how much he expected to be completed at a given point.
The project manager needs to agree the project scope, create a Work Breakdown Structure [1] (WBS) and assign budget to each work package [2], the lowest level of the WBS. Next he/she will create a schedule showing the calendar time it will take to complete the work. This overall plan is baselined (this is the planned value) and used to measure performance throughout the project. As each work package is completed (earned) it is compared with planned value, showing the work achieved against plan. A variance to the plan is recorded as a time or schedule deviation.
It is necessary to obtain the actual costs incurred for the project from the organisations' accounting system. This cost is compared with the earned value to show an overrun or under run situation.
Earned Value provides the project manager with an objective way of measuring performance and predicting future outcomes. This can enable him/her to report progress with greater confidence and highlight any overrun earlier. This in turn enables the management team to make cost and time allocation decisions earlier than would otherwise be the case.
It is generally true that past performance is a good indicator of future performance and as such Earned Value is a very useful tool for predicting the outcome of projects in terms of time to completion, cost to completion and expected final costs.
Earned Value is also known as Performance Measurement, Management by Objectives, Budgeted Cost of Work Performed and Cost Schedule Control Systems.
Definitions
- A Work Breakdown Structure (WBS) is a hierarchical structure used to organise tasks for reporting schedules and tracking costs.
- Work Packages are a small-defined set of tasks or activities that form part of an overall project scope, usually the lowest level of the Work Breakdown Structure.
How to Implement Earned Value
By Kay Wais
Earned value (EV) is one of the most sophisticated and accurate methods for measuring and controlling project schedules and budgets. Earned value has been used extensively in large projects, especially in government projects. PMI is a strong supporter of the earned value approach because of its ability to accurately monitor the schedule and cost variances for complex projects.
Although it is sophisticated, earned value can be scaled to be appropriate for any size of project. The key is in the project planning.
There are three primary advantages to using earned value:
- Accuracy in reporting
- Ability to deal with the uneven rate of project expenditures and work
- The early warning it provides project managers, allowing them to take the necessary corrective action should the project be spending more money than it is physically accomplishing
Other less professional methods for measuring budget and schedules generally only monitor the percent of the time through the schedule and make the often mistaken assumption that this is also the percent that the project should be through the budget. But cost and project progress generally are not evenly expended through a project. The reason earned value stands above the alternatives is that it accurately deals with this reality. Earned value warning signals become available to management as early as 15 to 20 percent into a new project, in ample time to take corrective measures.
How to Implement Earned Value
In order to employ earned value, we must have a baseline plan (including a detailed, workload levelled, progress schedule) in place that will allow us to continuously measure seven points of data. The textbooks, including the referenced ones at the end of this paper, say that this is easy. However in my reality it often is not easy because scheduling to this level of detail at the beginning of the project is challenging and dynamic.
Earned value requires the kind of data most projects have, but we may not look at the data in quite the same way. Earned value has a focus on its percent-complete position...against its (100 percent) defined scope.
In order to employ earned value we must first know at all times what the "planned value" is as at any point in time. So earned value is built on a very structured project plan. It requires a detailed WBS, time and cost estimates for all of the work packages, a workload levelled master schedule, and a meticulous change management methodology (with this last part being the hardest for my projects).
To determine the planned value, we need to calculate two important base factors, 1) how much physical or intellectual work we have scheduled to be completed as of the point of measurement, and 2) what was the budgeted value of the work scheduled.
To measure earned value we need two new points of data: 3) how much of our scheduled work have we actually accomplished? And 4) what is the budgeted value of the work actually performed?
The next item is for the earned value work we have accomplished, what 5) costs have we actually spent and/or incurred.
The Planned Value = Items 1 and 2
The Earned Value = Items 3 and 4
Actual Costs = 5
Next we need to understand 6) the "schedule variance" which in earned value is the difference between our planned value scheduled and our earned value achieved. Lastly, we need to know 7) what our "cost variances" have been. This is determined by relating our earned value accomplished against the actual costs pent or incurred.
These are the basics. There are many calculation tables, charts, at graphs that can help visual display this data, variances, and trends. These are frosting on the cake and not necessary to use earned value. Earned value summary reports often will provide a revised estimate to complete based on the extension of the current trends.
Summary
Implementing earned value is well worth the effort. The advantages of building a detailed plan, controlling and monitoring the project, and accurate reporting and forecasting are all critical to professional project management.
The biggest challenge our company experienced when implementing earned value was changing our time reporting and accounting system to decompose projects, allowing time and cost to be attributed to specific project deliverables. Also, as mentioned earlier, the detailed schedule must be planned early and translated to project costs - to give us the planned value at any specific point in time.
Once armed with the earned value information, the project manager and stakeholders can truly understand the current status of a project, the rates of variances, and (once significantly into the project) often accurately predict the end schedule and budget compared to the original estimates.
References/Resources
Fleming, Quentin and Koppelman, Joel from Primavera Systems (a project management software company). Earned Value Project Management ... an Introduction. http://www.stsc.hill.af.mil/crosstalk/1999/07/fleming.asp 
Fleming, Quentin and Koppelman, Joel, Earned Value Project Management, Second Edition (Kay read this book in Feb. of 2001).
Milosevic, Dragan, Project Management Toolbox, ISBN 0-471-20822-1, Wiley Press. 2003
source: http://www.projectsmart.co.uk/what-is-earned-value.htmlDownload:
http://www.projectsmart.co.uk/docs/earned-value.pdf
Earned value by NASA
Earned Value Management (EVM) is a program management technique that integrates technical performance requirements, resource planning, with schedules, while taking risk into consideration. The major objectives of applying earned value to a contract are to encourage contractors to use effective internal technical, cost and schedule management control systems, and to permit the customer to rely on timely data produced by those systems for better management insight. This data is in turn used for determining product-oriented contract status, and projecting future performance based on trends to date. In addition, EVM allows better and more effective management decision making to minimize adverse impacts to the project.
Project management component circle
Earned value provides an objective measurement of how much work has been accomplished on a project. Using the earned value process, the management team can readily compare how much work has actually been completed against the amount of work planned to be accomplished. All work is planned, budgeted, and scheduled in time-phased "planned value" increments constituting a Performance Measurement Baseline (PMB).
Let's look at a simplified example:
Baseline plan
The baseline plan shown in the above graph illustrates a task with a total budget amount of $240k, which is planned for accomplishment over 24-month time frame. The "time-now" line shows that $100k of the project resources was planned to be completed at this point in the project. Another way to look at this is that the project was planned to be 41.6% complete ($100k / $240k) at this point in time.
As work is performed, it is "earned" on the same basis as it was planned, in dollars or other quantifiable units such as labor hours. Comparing earned value with the planned value measures the dollar value of work accomplished versus the dollar value of work planned. Any difference is called a schedule variance.
Earned Value - Planned Costs = Schedule Variance (SV)
Schedule variance chart
In our example the task was planned to have accomplished $100k worth of work in twelve months, but the real accomplishment was only $60k. The graph shows a "behind schedule" condition. The schedule variance in dollars would be a negative $40k, the difference between the earned value accomplished ($60k), and the value of the planned work ($100k) to date. According to our formula then:
$60k - $100k = ($40k)
The value earned for the work performed compared with the actual cost incurred for the work performed (taken directly from the contractor's accounting systems), provides an objective measure of cost efficiency. Any difference is called a cost variance.
Earned Value - Actual Costs = Cost Variance (CV)
A negative variance means more money was spent for the work accomplished than was planned. Conversely, a positive variance means less money was spent for the work accomplished than was planned to be spent.
Cost variance chart
From the performing organization's own accounting system, we determine the actual costs for performing the $60K work was $110K.
When the actual costs are compared with the earned value of $60k, the difference is the cost variance. The earned value of $60k less the actual cost of $110k, is a negative cost variance of $50k. In this example, the task is in an overrun condition by $50k.
$60k - $110k = ($50k)
Analysis of these variances should reveal the factors causing the deviation from plan.
The Task Manager uses this information in conjunction with his knowledge of the task, to project an estimate to complete for this task. The Task Managers analyzes variances resulting from comparisons of these five basic data elements; planned work, work accomplished, actual costs, total budget at completion and the estimate at completion. The work breakdown structure provides a useful framework for summarizing this performance information for all levels of management.
Earned value improves on the "normally used" spend plan concept (budget versus actual incurred cost) by requiring the work in process to be quantified. The planned value, earned value, and actual cost data provides an objective, quantifiable measurement of performance, enabling trend analysis and evaluation of any cost estimate at completion within multiple levels of the project.
EVM is a valuable tool in the Project Manager's "toolbox" for gaining valuable insight into project performance and is the tool that integrates technical, cost, schedule and risk management. In addition, EVM provides valuable quantifiable performance metrics for forecasting at-completion cost and schedule for their project.
