https://i0.wp.com/milestonetask.com/wp-content/uploads/2023/10/Finance-pana.png?resize=300%2C200&ssl=1 300w, https://i0.wp.com/milestonetask.com/wp-content/uploads/2023/10/Finance-pana.png?resize=150%2C100&ssl=1 150w, https://i0.wp.com/milestonetask.com/wp-content/uploads/2023/10/Finance-pana.png?resize=768%2C512&ssl=1 768w, https://i0.wp.com/milestonetask.com/wp-content/uploads/2023/10/Finance-pana.png?resize=720%2C480&ssl=1 720w" sizes="(max-width: 800px) 100vw, 800px">Earned Value Analysis (EVA) in project management is an analytical tool that uses data generated during the course of project execution. Analysis of the collected data reveals the present state of the project. Further, analysis of the data trends can forecast the future project performance. Comparison of collected project progress data with a well established baseline indicates variances in project performance. Analysis of these variances reveal reasons affecting project performance. The analysed data also assists project manager and the project team in initiating corrective actions and recommending preventive actions that can put the project back on track.
Table of Contents
Earned Value Analysis In Project Management
The earned value analysis technique of measuring project performance can help the project manager know if the project is ahead or behind schedule, is the project over or under budget?, and the utilization of funds? In order to measure project performance earned value analysis technique is grouped under the following three categories. For the sake of simplicity we will take up only the first two as it helps to understand the core concepts.
Variance Analysis
- Schedule Variance (SV)
- Cost Variance (CV)
Efficiency Indicators or Performance Indices
- Schedule Performance Index (SPI)
- Cost Performance Index (CPI)
Forecasting Project Performance
- Estimate To Complete The Balance Work (ETC)
- Estimate At Completion (Manual) (EAC)
- Variance At Completion (VAC)
- Estimate At Completion (Calculated for the balance work)
- at budgeted rate
- at current CPI
- considering impact of both CPI and SPI
- To Complete Performance Index (TCPI)
Earned Value Analysis Variance Calculation
Earned Value Analysis uses variance analysis that compares the planned schedule and cost data with the actual schedule and cost performance. Comparison of planned vs actual schedule and cost performance data helps to establish if the project is ahead or behind schedule and if the project is experiencing any cost overruns.
Variance analysis consists of establishing schedule variance and cost variance. This measures the deviation between the schedule and cost baseline with the actual schedule progress and the actual cost booked on the project.
Schedule Variance
Schedule Variance (SV) is a measure of schedule performance of the project. It is expressed as the difference between the budgeted cost of work scheduled (planned value) and the budgeted cost of work performed (earned value). One method of arriving at earned value of a work package is multiplying percentage of physical work completed with the planned value.
In the graph above, Green line represents Earned Value (EV), Blue line represents Planned Value (PV) and Red Line represents Actual Cost (AC). Dashed line in grey color represents the review date. Data date indicates this in the above graph.
In the above graph the earned value is less than the planned value, the resulting variance is negative which indicates that the project is behind schedule.
Had the project progressed as per the baseline plan, EV would have been equal to PV and the resulting variance would have been zero. This is the ideal condition for any project and indicates that the project is on schedule.
If the EV is more, the green line will be above the blue line and the resulting difference will be a positive number. In such case, project is ahead of schedule.
Schedule Variance Formula
Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
When Schedule Variance is equal to zero (SV = 0)
Schedule Variance equals to zero indicates there is no variance and the project is progressing as per the baseline schedule.
- if EV is equal to (=) PV then SV = 0, project is on schedule.
When Schedule Variance is greater than zero (SV > 0)
A positive schedule variance indicates project is ahead of schedule.
- if EV is greater than (>) PV then SV = (+) ve number implies project is ahead of schedule.
When Schedule Variance is less than zero (SV < 0)
A negative schedule variance implies project is behind schedule.
- if EV is less than (<) PV then SV = (-) ve number implies project is behind schedule.
The schedule variance is represented in units of currency, the schedule delay in units of time is indicated by horizontal line on X axis and mentioned as label A.
Cost Variance
Cost Variance (CV) is the budget deficit or surplus measured at a given point in time. It is expressed as the difference between the budgeted cost of work performed (earned value) and the actual cost incurred while performing the scheduled work.
In the above graph the actual cost incurred while performing the scheduled work is more than the earned value, the resulting variance is negative number which indicates that the project is experiencing cost overruns (over budget).
Had the project progressed as per the baseline plan then AC would have been equal to EV and the resulting variance would have been zero. This is the ideal condition for any project and indicates that the project is on budget.
If the AC is less than EV, the red line will be below blue line and the difference will be a positive number which implies that less cost has been incurred in performing the scheduled work. In such case, project is not experiencing any cost overruns (under budget).
Cost Variance Formula
Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
When Cost Variance is equal to zero (CV = 0)
Cost Variance equals to zero indicates there is no variance and the project is progressing as per the baseline schedule.
- if AC is equal to (=) EV then CV = 0 implies cost is as per baseline cost.
When Cost Variance is greater than zero (CV > 0)
A positive cost variance implies that the project is within the budget
- if AC is less than (<) EV then CV = (+) ve number which implies no cost overrun (under budget).
When Cost Variance is less than zero (CV < 0)
A negative cost variance implies that the project is experiencing cost overrun.
- if AC is greater than (>) EV then CV = (-) ve number which implies cost overrun (over budget).
The cost variance for the project at completion is indicated by AC minus Budget At Completion (BAC) which is cumulative PV for the project or the project cost baseline. This is known as Variance At Completion (VAC). However, if the Project Manager feels that the AC will not be valid until project completion AC needs to be replaced with EAC.
Earned Value Analysis Graphs
While reviewing the project status a number of conditions of schedule and cost variance are possible. Some typical conditions are represented in graphical form for easy understanding of the application of earned value analysis in project monitoring and controlling.
Earned Value Analysis Performance Indices
Earned Value Analysis converts schedule and cost variances into efficiency indicators or performance indices. Project efficiency indicators specify how efficiently time and cost is being utilized on a project.
Schedule Performance Index (SPI)
SPI is a measure of schedule efficiency of the project and indices if the project is ahead of behind the baseline schedule. It is mathematically expressed as Earned Value divided by Planned Value.
Schedule Performance Index (SPI) = Earned Value (EV) / Planned Value (PV)
When Schedule Performance Index is equal to One (SPI = 1)
Schedule Performance Index (SPI) equal to one indicates that the project schedule is progressing as per the baseline plan.
- if SPI is equal to (=) 1 then project is on schedule
When Schedule Performance Index is greater than One (SPI > 1)
Schedule Performance Index (SPI) greater than one indicates project is ahead of schedule.
- if SPI is greater than (>) 1 implies EV is more than PV and hence project is ahead of schedule
When Schedule Performance Index is less than One (SPI < 1)
Schedule Performance Index (SPI) less than one indicates project is behind schedule.
- if SPI is less than (<) 1 implies PV is more than EV and hence project is behind schedule.
Similarly,
Cost Performance Index (CPI)
CPI is the measure of how efficiently are the budgeted resources being utilized on a project. It is mathematically expressed as Earned Value divided by Actual Cost
Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)
When Cost Performance Index is equal to One (CPI = 1)
Cost Performance Index (CPI) equal to one indicates that the project is as per the budget.
- if CPI is equal to (=) 1 then project is on budget
When Cost Performance Index is greater than One (CPI > 1)
Cost Performance Index (CPI) greater than one implies project is within budget.
- if CPI is greater than (>) 1 implies AC is less than EV hence project is under budget.
When Cost Performance Index is less than One (CPI <1)
Cost Performance Index (CPI) less than one implies project is experiencing cost overrun.
- if CPI is less than (<) 1 implies AC is more than EV hence project is over budget (cost overrun)
Earned Value Analysis Performance Measure Summary
The following table summarizes all conditions of earned value analysis variances and performance indices
Earned Value Management Quiz
Take the Earned Value Management Quiz
Earned Value Analysis Further Reading
For detailed explanation of earned value parameters, please read the following post
To understand how to forecast project cost please, read the following post
For solved example of earned value management please, read the following post.
To know about practical problems encountered while implementing earned value management system, please read the following post.
For details of Project Variance Analysis, please read the following post.
Also read the following post for a comprehensive list of project management formulas for pmp examination.
You may download all EVM Formulas in pdf format from the resources section.
Conclusion
In a nutshell, the project manager and the project team should strive to ensure that earned value of their project is always more than the planned value and the actual cost booked on the project. Success of earned value analysis lies in proper collection of data and calculation of percent work completed on the project. Each individual has its own interpretation of the percentage of work completed. Therefore, The Practice Standard on Earned Value Management highlights methodologies to be adopted for calculation of percent work complete for different types of project activities and for different situations.
Reblogged this on Atul Gaur.