Earned Value Management: An Integrated Approach To Performance Measurement

Earned Value Management: How It Differs From The Traditioanl Approach
Earned Value Management – Integrated Approach To Project Performance Measurement

The Performance Measurement Baseline

EVM as Earned Value Management is popularly known, is a technique used to track the progress and report current status of a project, it is also used to forecast the future performance of the project. EVM is an analytical tool that systematically integrates measurement of cost, schedule, and scope accomplishments on a project.

EVM was developed in 1960’s by Department of Defence (DOD) to keep track of defence projects and currently is most preferred project management technique world over. EVM provides organisations with methodology needed to integrate the management of project scope, schedule and cost and provides a platform to integrate the three important baselines viz; schedule, cost and scope and is hence referred to as Performance Measurement Baseline.

The Traditional Management Approach

In the traditional approach of project review there are only two data sources, the budget (or planned) expenditures, and the actual expenditures.

The cost incurred over a period of time is reported periodically and is compared against the planned expenditure, this comparison of budget versus actual expenditure merely indicates, what was planned to be spent versus what has been actually spent over a given period of time. It does not measure and report what has actually been produced for the amount of money spent, neither does it provide any information, if the project deliverable are being produced at the desired rate, or according to the planned schedule and as per the approved scope.

An alarm is raised only when excess cost is booked against a deliverable especially when it is ready to be handed over to the customer. By this time, it is generally too late to take any type of corrective action. Consequent to this fallout, the project team then has to explore other areas of the project to cut costs and bring the project key performance indicators under acceptable limits.

Further, with the traditional approach there is no track of scope changes, the scope creep goes unnoticed, moreover, the overall schedule is never considered during the review process, thus making the project monitoring exercise highly unproductive and futile.

In other words, the traditional review approach does not correlate among the true cost performance of the project, the actual status of the deliverables, and changes to the project scope. As there is no relationship between the three critical success factors of a project viz; schedule, cost and scope the traditional system becomes highly incapable to predict the future health of the project.

How Earned Value Management Differs

EVM is an analytical tool that uses three data sources namely Planned Value (PV), Earned Value (EV), and the Actual Cost (AC). The appended graph depicts the realtionship between the three key elements of EVM.

EVM_S_CURVE
Earned Value Management (EVM) S-Curve

Planned Value (PV)

It is the authorized time phased budget for a scheduled activity, or a WBS component, without management reserves at any given period of time. PV is also known as Budgeted Cost of Work Scheduled (BCWS). It defines the work that should have been accomplished by the review  / data date. The PV is represented by BLUE line. The budget is allocated by phase over the life of the project and forms the Performance Measurement Baseline.

Earned Value (EV)

It is the value of work completed as on the review date. It is achieved by multiplying % of actual work completed and the planned value of that activity. It represents the theoretical cost of work performed by the project team as on the review date. EV is also known as Budgeted Cost of Work Performed (BCWP). Earned Value (EV) is represented by GREEN line in the graph above.

Actual Cost (AC)

It is the actual cost incurred while performing the scheduled activity or the WBS component and is also known as Actual Cost of Work Performed (ACWP). AC is represented by RED line.

The three main elements of earned value very clearly establishes a link between the project budget, actual costs incurred while performing the scheduled work, and the percentage completion of physical work performed on the project.

How Earned Value Management Adds Value

EVM integrates the three most important baselines namely; schedule, cost and scope baselines and hence offers a performance measurement baseline against which the project performance can be measured and reported. The other critical differentiating factor is that it uses measurement of physical work completed on the project, it also emphasis the need to have a sound cost collection methodologies in the organization and incorporation of approved scope changes requests.

The EVM methodology consists of mathematical tools to calculate the schedule and cost variances from the approved baseline, report schedule and cost efficiency indicators in the form of indices, and forecasting tools to predict an estimate of cost required to complete the project, the estimated time for the balance work and the effeciency required to achieve the project goals.

Since the process is data driven, it provides timely insights into current project health and can assist in accurate forecasting of the project performance trends, it helps the project manager and the project team to know the problem areas of the project well in advance, their criticality and initiate timely corrective and preventive actions to bring the project back on track.

EVM The Ideal Tool For Project Success

No doubt, EVM can assist project team in taking control of the project, but it requires a good degree of understanding of the concept and a great deal of discipline in collecting and reporting the data, the organizations cost reporting processes do play a vital role in successful implementation of the process. In large organizations support from functional managers is required and if there exists a matrix organization structure then implementation of EVM is bound to face serious roadblocks.

However, there cannot be any denying to the fact that earned value management is an appropriate tool for managing cost, schedule and scope in an integrated manner. If implemented, right from the early phases of the project, it can solve a lot of problems during execution of the project, reduce risks, prevent cost overrun, ensure schedule compliance and improve project profitability.

You may also visit the Resources page to download all EVM Formulas in PDF format

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