Department of Defense (DOD) in 1960’s developed the Earned Value Management (EVM) methodology to keep track of defense projects. It is currently the most preferred project management technique world over. The succeeding paragraphs elaborates basic concepts and definitions of earned value management methodology. Further this post also describes differences between earned value management and the traditional project management approach.
The Earned Value Management Methodology.
Earned Value Management (EVM) is a methodology that helps to effectively plan, monitor and control project performance. Additionally, earned value management methodology also assists to forecast the future project health.
Further, earned value management technique is a project management methodology that systematically integrates measurement of cost, schedule, and project scope. Thus earned value management methodology offers an integrated Performance Measurement Baseline.
However, the earned value management system is a set of tools, process and guidelines that an organization uses to implement Earned value Management (EVM).
Earned Value Management In Project Management
The Earned Value Management Methodology (EVM) uses three important data sources namely;
- Planned Value (PV)
- Earned Value (EV)
- Actual Cost (AC)
The following graph depicts the relationship between the three key elements in earned value management methodology.
The succeeding paragraphs describe definitions of basic terms in earned value management.
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. It specifies the physical work that should have been accomplished by the review / data date.
In fact, Budgeted Cost of Work Scheduled (BCWS) the old notation for planned value clearly conveys its definition.
The BLUE line in the graph above represents Planned Value (PV).
Sometimes, planned value is also referred as Performance Measurement Baseline (PMB). It is the time phased budget allocated to activities over the complete project duration.
Budget At Completion (BAC) in nothing but the total planned value of a project.
Earned Value (EV)
Earned Value is the budgeted value of work completed until the review date. EV represents the planned cost of work performed by the project team until the review date.
Moreover, Budgeted Cost of Work Performed (BCWP) the old nomenclature of Earned Value makes its definition easy to understand.
The simplest method to calculate earned value of an activity, is to multiply % of actual work completed and the planned value of that activity.
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.
Earned Value Management Performance Measurement Baseline
The earned value management methodology 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. The earned value management methodology also uses forecasting tools to predict an estimate of cost required to complete the project. It can also forecasts the estimated time to complete the balance work and the efficiency required to achieve the project goals. Therefore, EVM allows project teams to carry out earned value analysis in order to identify variances in project performance and predict future project health.
Earned value management methodology 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. Earned value management methodology uses quantitative techniques to measure work performed to report project progress. 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 methodology 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 critical nature so that project team can initiate timely corrective and preventive actions.
Earned Value Management Methodology Vs 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 deliverable 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 deliverable status, and project scope changes. As a result of which the traditional system is highly incapable to predict future health of the project.
No doubt, earned value management methodology 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 methodology allows to integrate cost, schedule and scope performance. 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
- Project Monitoring Using Cost, Schedule Variance & EVM Performance Indicators
- Project Variance Analysis
For detailed understanding of how to forecast project cost please read my post
For practical problems encountered while implementing earned value management please read my post
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