The Ultimate Guide to What Is Earned Value Management
Cost overruns on critical projects have become a significant problem. The budget for building the International Space Station was initially set at $36.75 billion. However, the actual expenses incurred were $105 billion, showing an increase of 186% over the original estimate. Additionally, it took an extra six years to complete the project.
No project manager wants to be in charge of projects that go off-course. To overcome these challenges, project managers turn to effective project management procedures. Earned value management is one of these tried-and-tested techniques.
Earned Value Management (EVM) is a project performance tracking approach that integrates risk, technical scope, cost, and schedule to measure progress against a baseline. Managers use the data produced by an Earned Value Management System to anticipate completion costs and identify threshold violations.
The Core Concepts of Earned Value Management
Some project managers may find EVM daunting because of all the terms it uses. So, let’s start by dissecting this into more manageable, smaller ideas. Every one of these concepts is essential to improving project performance.
1. Planned Value (PV)
The budgeted cost for scheduled work is known as the “planned value.” PV varies according to the type of task that you consider and where you are in the overall timetable.
PV = Total Project Cost Percentage of Scheduled Work
Example:
Let’s say you have a project with a total budget of $100,000, scheduled to be completed in 10 months, and it is at the end of month 4.
Step 1: Determine the percentage of work that should have been completed by month 4 according to the schedule. Assume the project is scheduled to complete 40% of the work by the end of month 4.
Step 2: Calculate the Planned Value (PV) at the end of month 4.
Using the formula:
PV =100,000 × 40%
PV= $40,000
According to the schedule, the project should have spent $40,000 by the end of month 4.
2. Actual Cost (AC)
The concept of actual costs is quite simple. Tracking actual expenses should be easy using a reliable project cost management tool. But it’s important to consider hidden expenses, such as overhead, software licensing, hardware, materials, and resources.
Project managers can view actual costs cumulatively, considering all of the tasks completed from the start of the project to the present or over a predetermined period.
Actual cost provides a reality check to those working on the project by revealing the true costs incurred on a project. Evaluating how much money has been spent compared to what was planned (PV) is essential.
3. Earned Value (EV)
Earned value is where things get interesting with EVM. You have budgeted and planned to finish a specific amount of work. However, you are aware from experience that there will inevitably be some variation from your estimate.
So, the question is: How much is the work expected to cost? The answer is provided by EV, also known as the budgeted cost for work performed.
EV = Total project cost % of actual work
Example:
Let’s say you have a project with a total budget of $100,000, scheduled to be completed in 10 months, and it is at the end of month 4.
Step 1: Determine the percentage of work the team completed by the end of month 4. Assume that 35% of the work has been completed.
Step 2: Calculate the Earned Value (EV) at the end of month 4.
Using the formula:
EV= 100,000 × 35%
EV= $35,000
By the end of month 4, the project had earned $35,000 worth of work, according to the budget.
4. Earned Value Analysis
Earned value analysis, or EVA, identifies and quantifies problems and evaluates risk and project completion costs using the Earned Value(EV) metric with other project Key Performance Indicators, project value (PV) and Actual Cost(AC).
| Condition | Project Performance |
| EV > AC | The project is performing well in terms of cost, as the value of work done exceeds the actual cost. |
| EV < AC | The project is over budget, as the actual cost is higher than the value of the work done. |
| EV > PV | The project is ahead of schedule, as more work has been completed than was planned. |
| EV < PV | The project is behind schedule, as less work has been completed than was planned. |
Caption: Table projecting KPIs of earned value management and project performance.
An expert EV Analyst applies fundamental and advanced techniques to evaluate project
performance and provide project managers with the data they require to make important choices.
The Fundamentals of Earned Value Management
The fundamental principle of earned value management is benchmarking and measuring against a clear plan. As a result, this can only be done in companies where a few essential components are taken care of.
If you’re using earned value management for your project, ensure you understand these guidelines correctly.
Project Organization and Scope
- Determine “What”:
You should begin by gathering requirements and defining the project’s scope to determine the “what” of the work. Then, you’ll need to create a work breakdown structure (WBS) that divides major deliverables into more manageable work bundles.
- Determine “Who”:
Create an organization breakdown structure, a type of organizational chart that lists all the individuals, groups, and departments engaged in a project, along with their duties and organizational hierarchy. The structure takes care of the “who” component.
- Establish Responsibility Assignment:
Establish a responsibility assignment matrix that specifies which work will be carried out by whom. In later phases, each of these mappings will be measured to determine the amount of work completed.
Scheduling, Planning, and Budgeting
The scheduling, planning, and budgeting concepts will assist you with a more precise definition of the project baseline. Based on these parameters, you can observe and manage the project throughout its existence.
The work breakdown structure (WBS) is a helpful place to start for the planning stage.
- Group different tasks into a single work package.
- Combine all the work packages into a single control account.
- Assign a single account manager for each control account.
- The account manager will be responsible for keeping track of the control account’s development.
Now that you have established the “when” component, you can specify each activity’s due date and set high- and low-level milestones.
Next, allocate the entire budget at the level of each task within a work package using a time-phased budgeting approach. The budgeting covers expenses for labor, supplies, and subcontracting.
Additionally, you should also allocate progress measurement techniques to each work package, which determines the future method of calculating EV for a task-in-process.
The performance measurement baseline is the total of all budgeted work. You can also set up management reserves for unexpected increases in the project size as a project manager.
Analyzing and Reporting Project Performance
Analyzing and reporting project performance refers to computing PV, EV, and AC with their variances and indexes. The goal is to regularly share these figures with team members, executives, and clients so they can track the project’s status.
However, determining the necessary corrective measures is as important as measuring against the baseline and reporting data. Define a threshold for variations for performance. If a control account’s cost performance shows a threshold breach, the team can identify the problematic tasks.
Revisions and Maintaining Data
The project baseline has to be flexible, making room for budget fluctuations when challenges arise. However, you can’t update a baseline each time you exceed budget or a task takes longer than expected.
The revision and data maintenance fundamentals suggest updating a baseline in certain situations, such as when there is a change in the project’s scope, cost, or timeline that has been approved or when rates fluctuate.
It includes tasks such as developing plans for risk and change management, obtaining the required permissions, and determining whether to use the management reserve.
Is Earned Value Management Right for Your Project?
It is important to remember that not every project is a good fit for earned value management. This approach works well with process-driven development projects. Projects, including engineering and manufacturing, construction, some kinds of R&D, etc., are a few examples.
Short-term projects, those with low cost/schedule risk, or projects with very flexible scopes may not justify the effort needed to maintain a good time-phased baseline.
| Projects suitable for using EVMs | Projects unsuitable for using EVMs |
| Large, intricate projects for development | Agile approaches being used in software projects |
| Projects for capital investments in engineering and construction | Projects involving rapid prototyping |
| Large cost-plus agreements (often valued at more than $20 million or deemed otherwise high-risk) | Short-term and low risk projects |
| Projects involving several fixed-price subcontracts or procurement |
Caption: Table projecting suitability of project for EVM
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