The use of earned value management in projects can prove to be a very useful tool for the project manager and his team, however, when the query of how many projects use it is made, it becomes clear that it is not widely used. Although there may be various reasons for the aforementioned limited use of earned value management, in this article the basic principles that sustain it are explained in a simple way, in order to facilitate understanding, and ideally motivate this way managers and team members to use it consistently and systematically to evaluate the time and cost performance of their projects.
This first article of a series of two, is oriented to explain the basics and how to use earned value management for project time and cost performance evaluation by using variances. The second article of the series will focus on the use of performance indexes as well as forecasts.
First thing first when talking about earned value management it is necessary to define the concept. According to the Project Management Institute (PMI) in its compendium of best practices for project management called Project Management Body of Knowledge (PMBOK® Guide) earned value management is a methodology that combines measures of scope, schedule and resources to assess the performance and progress of the project. It integrates the scope baseline with the cost baseline, along with the schedule baseline to generate performance measurement baseline, which facilitates the evaluation and performance assessment and progress of the project by the team project. It is a project management technique that requires the establishment of an integrated baseline with respect to which performance can be measured throughout the project.
Thus we have the scope baseline that consists of the Project Scope Statement (PSS), the Work Breakdown Structure (known as WBS) and its associated WBS dictionary. Once the scope is clearly defined in the PSS and the WBS is created, activities are derived from the work packages in the WBS, activities which once sequenced, with its durations established and its resources allocated to determine durations, allow us to create the project schedule, schedule which once approved will become the baseline schedule.
Similarly, the project schedule is used as input by integrating activities costs on the schedule to establish planned costs at each moment of time, which when approved become in turn the cost baseline.
Finally, we have thus a cost baseline which also includes the schedule baseline, which in turn also integrates the scope baseline. This baseline that integrates the other is what we call the performance measurement baseline (PMBL), which will be used for comparative purposes to compare what was planned with what has actually been done, and allow us through the application of earned value management, to determine time and cost performance of the project, including implicitly also the project scope.
Three Key Dimensions
The next essential element for implementing earned value management is constituted by the three key dimensions that can be established and monitored at the activity, work package, control account or general project level.
Of these three dimensions, the first, the planned value, is known since the planning stage and is obtained from the performance measurement baseline once it has been established. The planned value, which can be denoted by its acronym (PV) is the budgeted cost of work scheduled. It can be obtained at the activity level as the budgeted cost authorized for the planned work to a certain point in time, or at the work package level by adding the planned values of the activities in a given work package. Similarly, we can get it to a control account level, or even by adding all the planned values of all activities to a certain point we can get it for the complete project. For the entire project, the planned value is represented by each one of the points of the continuous curve representing the performance measurement baseline.
The second dimension corresponds to the actual cost, which represents the actual cost incurred to produce the amount of work performed to the date on which the performance evaluation is done. The actual cost (AC) for its acronym can be obtained once the project is in the execution process, and as in the previous case, can be obtained at an activity, work package, control account level, or for the entire project.
The third dimension is the earned value (EV) for its acronym, which represents the amount of work performed to the assessment date, stating that work in terms of budgeted cost authorized for such work (the planned value). Similarly, it can be obtained at activity, work package, control account level or to the general level of the entire project. Earned value can also be obtained once the project is in the execution process, and it should be noted that the earned value of an activity is proportional to its planned value.
We’ll study the aforementioned proportionality with an example and three scenarios. Let’s suppose we have an activity lasting two days, and with a planned value for each day of one hundred dollars ($100), i.e., a total planned value at the end of its two days of two hundred dollars (PV = $200) and an amount of work to be done each day corresponding to fifty percent (50%) to end the activity with one hundred percent (100%) at the end of the second day; suppose also that the actual cost (AC) in which we incurred to achieve the amount of work that has been done at the end of the first day, in each of the three scenarios, is one hundred and twenty five dollars (AC = $125 ).
Suppose in the first scenario, that we want to determine the earned value of the activity at the end of the first day, and at that time the amount of work performed in such activity, i.e., its progress corresponds to twenty five percent (25%) of the total work in two days, that is only half the amount of work of that activity for the day has been made, then the earned value will be equal to twenty-five percent (25%) of the two hundred dollars ($ 200) of planned value, i.e., fifty dollars (EV=$50) (EV = 25% x $200 = 0.25 x $200 = $50).
Let us now consider a second scenario for this same example, and let’s see in this case what happens if the amount of work performed had been a fifty percent (50%) of the total task for two days, meaning that the entire work planned after the first day he has been done, then its earned value would have been one hundred dollars (EV = $100) (EV = 50% x $200 = 0.5 x $200 = $100).
To finish this example, let’s assume now a third scenario where there has been more work done than planned after the first day, say that there has been a one hundred fifty percent (150%) of the planned work at the end of the first day done, which is equivalent to saying that there has been a seventy-five percent (75%) of the total amount of total work to be done. So in this case our earned value will be one hundred fifty dollars (EV = $150) (EV = 75% x $200 = 0.75 x $200 = $150).
At this point, it is important to analyze the above example and the three dimensions of earned value management. First note that for purposes of simplifying the example was developed for a single activity, however, in a real project we would have to do it for each one of the activities done or under execution when the analysis is being made, and thus we would have to total to the level where we want it, it is at work package level, control account or even a general project level.
Second note that each of the three dimensions clearly represent something. The planned value, as its name implies, represents what was planned. The actual cost, as well as its name indicates, represents the actual cost incurred to achieve the amount of work progress that has been done. Earned value represents the amount of work we performed in terms of its planned value. Third note that the three dimensions have resource units which are mutually compatible, in this case the three have dollars as its unit. This unit compatibility is essential to calculate the variance and performance indicators that are explained below.
Now that we have an understanding of the basics, we can study how earned value management is applied. First by using it we can establish variances both for schedule and cost.
Let’s analyze first the schedule variance (SV) which is a project schedule performance measurement that allows us to establish, at any given time, if the project is ahead or behind schedule. It is calculated as the earned value minus the planned value (SV = EV – PV). When calculating the schedule variance we have three possible outcomes: a) a negative value which represents that the project is delayed, b) a positive value which represents the project goes ahead of schedule, and c) a value equal to zero representing that the project is exactly as planned on the schedule.
Second is cost variance (CV) which is a project cost performance measurement that allows us to establish, at any given time, the amount of cost under of overrun from the performance measurement baseline. It is calculated as the earned value minus the actual cost (CV = EV – AC). When calculating the cost variance, we also have three possible outcomes: a) a negative value representing that the project is spending more than planned for the progress we have, b) a positive value representing the project is spending less, and c) a value equal to zero representing that the project is spending exactly as planned for its current progress.
Let us now see now the results that schedule and cost variance provides for each of the three scenarios developed in the example above.
On the first scenario we had a planned value of one hundred dollars, an earned value of fifty dollars and an actual cost of one hundred twenty five dollars (PV = $100, EV = $50 and AC = $125). Then our schedule variance gives us a result of minus fifty dollars (SV = EV – PV = $50 – $100 = – $50), which represents that the project is delayed. On the other hand, our cost variance gives us a result of minus seventy five dollars (CV = EV – AC = $50 – $125 = – $75), which shows that we are spending more than planned for the progress we have.
required that good project management practices are applied so that we can create the baselines and to have the information necessary to provide traceability. Second should not underestimate the amount of information that is necessary to have available at the time of each cut test to apply. Third is counterintuitive measuring the performance of time in terms of resources (in our dollars example), and also in making this assessment, in the final stages of the project, its performance using schedule variance and index performance schedule it may not be representative under certain scenarios.
As showed, earned value management is a useful tool that can help project managers and their teams to do schedule and cost performance evaluation of their projects by using variances. The tool can also be used to calculate other important information such as performance indexes and to do time and cost forecasts, as will be discussed in a second article of this series by the author.
PMI. (2013). A Guide to the Project Management Body of Knowledge (PMBOK Guide). Fifth Ed. Pensilvannia: Project Management Institute, Inc.
PMI. (2011). Practice Standard for Earned Value Management. Second Ed. Pensilvannia: Project Management Institute, Inc.
Professor of the Time and Cost course in the Master in Project Management Program at the University for International Cooperation.