Earned Value Management System – Concepts Explained

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

Department of Defence (DOD) in 1960’s developed Earned Value Management System to keep track of defence projects. It is currently the most preferred project management technique world over. Earned Value Management system provides organisations with methodology to integrate the management of project scope, schedule and cost. Thus it provides a platform to integrate the three important baselines namely schedule, cost and scope.

The Earned Value Management System.

The Earned Value Management System also known as EVM is an effective technique to track and report project progress. Additionally, it is also forecasts the future performance of the project. Earned Value Management System is an analytical tool. EVM systematically integrates measurement of cost, schedule, and scope accomplishments on a project.  Thus it offers an integrated Performance Measurement Baseline. The succeeding paragraphs will elaborate how evm is different from the traditional project management approach.

Project Monitoring & Controlling – The Traditional Approach.

In the traditional approach of project review there are two data sources namely the project budget and the actual expenditure.

The traditional system reports cost incurred over a period of time. This periodic reporting of actual cost facilitates comparison of plan versus actual project costs. This merely compares the two set of numbers. However, the traditional system does not measure and report the actual work completed for the amount of money spent. Neither does it provide any information on the status of project deliverable. The traditional system also fails to indicate the rate of work completion. Moreover, it also lacks to specify if the project is on schedule and as per the approved scope.

Other serious drawback with the traditional approach is that it does not alarm the team at the right time. It raises an alarm only after completion of the activity. Mostly after handing over the deliverables to the customer. By this time, it is generally too late to take any corrective action. Consequently, the project team has to explore means to bring key performance indicators under acceptable limits.

Further, the traditional approach also fails to track of scope changes. The scope creep goes unnoticed. Moreover, this system does not integrate overall project schedule in the review process. Thus making project monitoring exercise highly unproductive and futile.

In other words, the traditional approach does not correlate among the cost performance, the deliverables status, and project scope changes. As a result of which the traditional system is highly incapable to predict future health of the project.

Earned Value Management System In Project Management?

Earned Value Management System 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 relationship between the three key elements of Earned Value Management System. The succeeding paragraphs describe definitions of basic earned value management terms.

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. Planned Value 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 BLUE line in the graph above represents Planned Value (PV). Performance Measurement Baseline is the time phased budget allocated to activities over the complete project duration.

Earned Value (EV)

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

Actual Cost (AC)

It is the actual cost incurred while performing the scheduled activity or the WBS component. Actual Cost is also known as Actual Cost of Work Performed (ACWP). The RED line in the graph above represents Actual Cost (AC).

As shown above, the three elements of EVM system clearly establish a link between budget, actual costs, and work completion.

The Earned Value Management System Performance Baseline

The Earned value management system consists of mathematical tools to calculate the schedule and cost variances from the approved baseline. It can also report schedule and cost efficiency indicators in the form of indices. EVM also uses forecasting tools to predict an estimate of cost required to complete the project. It can also forecast the estimated time for the balance work and the efficiency required to achieve the project goals.

Earned value management system integrates the three most important baselines namely; schedule, cost and scope baselines. Hence offers a performance measurement baseline in order to measure and report project performance. 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.  Moreover, it also advocates the need for incorporation of scope change control system.

Notably, the earned value management system generates valuable project data. As a result of which it provides timely insights of project health. This can further assist in accurate forecasting of project performance. It also helps the project manager and the project team to know the problem areas of project well in advance. It further specifies their criticality so that project team can initiate timely corrective and preventive actions.

Conclusion

No doubt, earned value management system can assist project team in taking control of the project. However, it requires good degree of understanding of the concept. It further requires a great deal of discipline in collecting and reporting the project data. The organizations cost reporting processes plays 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 earned value management is bound to face serious roadblocks.

Undeniably, earned value management is an appropriate tool for managing cost, schedule and scope in an integrated manner. Hence, it integrates the three most crucial baselines viz; scope, schedule and cost and offers an integrated performance measurement baseline to monitor and control the project work. Especially, if implemented right from the early phases of the project, it can solve numerous problems during project execution, reduce risks, prevent cost overrun, ensure schedule compliance and improve project profitability.

For solved example and challenges faced in implementation of evm technique you may also read

In order to understand application of EVM in project monitoring and controlling you may also visit

For detailed understanding of how to forecast project cost please read my post

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

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