Is your project over budgeted or behind the planned schedule? Are you looking to understand true state of the project status (which is free from biased interpretations) so that you can apply right solution?
"You cannot manage what you cannot measure" Project has to be measured on multiple levers that also include Scope, Cost and Schedule as well. Our Core stakeholders want to be up-to-date day after day to steer the project on the right direction.
Time is Money. Earned Value management integrates the critical aspects of Projects management (scope, time and cost) and provides a framework to measure these in the units of money. It addresses below questions quite effectively and provides a framework to measure Project progress.
Earned Value Management integrates Scope, Schedule and Cost and provides Performance indicies through below:
1. The Authorized budget Assigned to the scheduled/planned work that should be done (i.e. Planned Value, PV)
2. The work performed expressed interms of Budget Authorized for the performed work that has been done (i.e. Earned Value, EV)
3. Actual Cost spent to complete the Work done (i.e. Actual Cost, AC)
4. The budgetted work for the total planned work ( Budget At Completion, BAC)
Describe Today with Data we have on hand:
1. Cost Variance = The amount of budget deficit or surplus as on today expressed as a difference between Earned Value and Actual cost as on today (Postive = Under Planned Cost, Neutral = On Planned Cost, Negative = Over Planned Cost) [ CV= EV-AC]
2. Schedule Variance = The amount by which the project is ahead or behind the planned delivery date as on today expressed as the difference between the earned value and the planned value (Postive= Ahead of the schedule, Neutral = On Schedule, Negative = Behind the schedule) [SV=EV-PV]
3. Cost Performance Index (CPI) = This is like Cost Run Rate as of today
For every 1 dollar spent, we are getting value of worth $0.893 (say)
CPI= 1 on planned Cost
CPI >1 We are getting more than 1 dollar for each dollar we spent (i.e. Under planned cost)
CPI < 1, we are getting less than 1 dollar for each dollar we spent (i.e. Over planned cost)
4. Schedule Performance Index (SPI) = It is Scope Run Rate = Rate at which Scope is being achieved
SPI = EV/PV
SPI = 1, we are progressing on planned speed
SPI > 1, we finished more scope than planned (i.e. Ahead of Schedule)
SPI < 1, we finished less scope than planned (i.e Behind the Schedule)
Describe Future (i.e. Project Completion Scenario) with Data we have on hand:
1. Estimate At Completion (EAC)= The expected total cost of completing all work expressed as the sum of the acutal cost to date and the estimate to complete.
EAC = BAC/CPI ==> [If CPI is expected to be the same for the reminder of the project work period]
EAC = AC + (BAC-EV) ==> [If future work will be accomplished at the planned rate]
EAC = AC + Bottomup Estimate To Complete ==> [If the initial plan no longer valid]
EAC = AC + [ (BAC-EV) / (CPI*SPI) ] ==> [If both CPI and SPI influences future work]
2. Estimate To Complete (ETC) = The Expected Cost to Finish all the remaining project work.
ETC = EAC-AC ==> [Assuming the work is proceeding on plan]
ETC = Re-estimate the remaining work from bottom up
3. Variance At Completion = The Projection of Budget Deficit or Surplus, expressed as difference between the budget at completion and the estimate at completion
VAC = BAC-EAC
4. To Complete Performance Index (TCPI) = A measure of the Cost performance that must be achieved with remaining resources inorder meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the budget available.
TCPI = [ Cost to FInish the outstanding work / Budget Available ]
TCPI = [ (BAC-EV) / (BAC-AC) ]
(The efficiency that must be maintained in order to complete the plan. Use BAC in the calculation)
TCPI = [ (BAC-EV) / (EAC-AC) ]
(The efficiency that must be maintained in order to complete the Current EAC. Use EAC in the calculation)
TCPI = 1 (Same complexity to complete as we are incurring now)
TCPI < 1 ( Easier to complete compared to the current complexity)
TCPI > 1 (Harder to complete compared to the current complexity)
Thus, Earned Value Management can be useful to find out below statistics
1. For each dollar I pour in to the project, how much dollar worth of
a. Budgeted cost I am getting back?
b. Budgeted scope I am accomplishing?
2. As on today, what is the budgeted Cost for the Work
a. Scheduled or Planned
b. Performed or Earned
3. From now, what is the Balance to go cost to complete my Project?
a. Will I be within Budgeted Cost when I complete the project?
b. Will I be able to deliver the project within the agreed scope?
Budgeted Cost for the Work Scheduled as on today
· Budgeted Cost for the Work Performed as on today.
· Are we under budget or Over Budget?
· Are we ahead or behind the schedule?
· For each dollar I pipe in to the project, how much dollar value of budgeted cost I am getting back (Overrun or Under run)
· For each dollar I pipe into the project, how much dollar value of budgeted scope I am achieving (Ahead or Behind the Schedule)
· What is the Total Estimated Cost of the Project
· What is the Estimate To Cost to complete the project from today
Let us understand Earned Value Management through below two examples
Example-1: You have a project to build a new fence. The fence is four sided as shown below. Each side is to take 1 Day and budgeted for USD 1000 per side. The sides are supposed to be constructed one after another (i.e. they have Finish to Start relationship). At the end of the Day 3 is depicted below:
At the end of Day 3:
Planned Value is the Budgeted Cost for the Work Scheduled as on todayPV [Planned Value] = $1000 + $1000 + $1000 = $3000
Earned Value is the Budgeted cost for the work performed as on today.EV [Earned Value] = $1000+ $1000 + $500 = $2500(We completed $2500 worth of work at the end of Day 3).
AC [Actual Cost] = $1000 + $1200 + $600 = $2800 (What we have spent as of today)
BAC [Budge At Completion] = $1000+$1000+$1000+$1000 = $4000 (Our Project Budget )
Describe Today considering the past:CV [Cost Varaiance] = EV-AC = $2500-$2800 = -$300 (i.e we are over budget by $300)
SV [Schedule Variance]= EV-PV = $2500-$3000 = -$500 (i.e. we are behind the schedule)
If you see above picture, we clearly know that we are behind the schedule and incurring cost overrun. Earned Value Management describes the same interms of CV (Cost Vairance) and SV (Schedule Variance)
Cost Performance Index (CPI) = It is Cost Run rate = Rate at which Cost is spent = EV/AC= $ 2500/$2800 = 0.893 (i.e. For every 1 dollar spent, we are getting value of worth $0.893).
Schedule Performance Index (SPI) = It is Scope Run Rate = Rate at which Scope is being achieved = EV/PV= $2500/$3000 = $0.833 [We are progressing @83% of the rate of the planned scope]
Budget At Completion (BAC) = $1000+$1000+$1000+$1000= $4000
Estimate the Future:EAC [Estimate at Completion] = BAC divided by CPI (This is because CPI tells us the Cost Run rate so far. Assuming the same Cost Run Rate continues)
EAC = BAC / CPI = 4000 / 0.893 = $4, 480
Alternatively, In our general math thinkingWe spent $2800 (Actual Cost) for the value of worth $2500 (Earned Value)
What will be Estimate At Completion (EAC) for the value of the worth $4000
2800 --- 2500X ------4000
X * 2500 = 2800 *4000X= (2800 * 4000)/ 2500 = $4480
Estimate To Complete [ETC] = Estimate At Completion (EAC) – Actual Cost IncurredETC = 4480-2800 = $1680
VAC [Variance At Completion] = BAC [Budget At Completion] - EAC [Estimate At Completion]= 4000 – 4480 =- $480
Example-2: You have a project to build a new fence. The fence is four sided as shown below. Each side is to take 1 Day and budgeted for USD 1000 per side. The sides are supposed to be constructed in a Finish to Finish relationship. This means any day more than two sides can be started. At the end of the Day 3, Progress is represented below:
Earned Value [EV] = $1000 *100%+$1000*100%+$1000*50%+$1000*75%=$(1000+1000+500+750)= $3250 (Budgeted Cost for Work Performed. i.e $3250 worth value has been accomplished so far)Actual Cost [AC] = $1000+$900+$1000+$300 = $3200 (Total Cost incurred so far)
BAC (Budget At Completion) = $4000 (i.e.1000 for each side X 4 sides)
CV (Cost Variance) = EV-AC = 3250-3200 = $50 (Positive Variance - We are under budget by 50%)
CPI (Cost Performance Index) = EV/AC = 3250/3200 = $ 1.0156 (i.e. We are getting $1.0156 worth of work for every one dollar spent)
SV (Schedule Variance) = EV-PV = $3250-$3000 = $250 (Positive Variance – We are ahead of Schedule as we completed $250 work of worth more than planned at the end of Day 3)
Schedule Performance Index (SPI) = It is Scope Run Rate = Rate at which Scope is being achieved = EV/PV = 3250/3000 = $1.0833 = We are progressing @108% of the rate of the planned scope.
Estimate At Completion (EAC) = BAC/CPI = 4000/1.0156 = $3938 ( We currently estimate that total project will cost $3938)
ETC (Estimate To Complete) = EAC – AC = 3938-3200= $738 (We need to spend $738 to finish the project)
VAC (Variance At Completion) = BAC-EAC = $4000-$3938=$62 (We currently Expect the project will be under budget by $62)
If you understand above two examples, you can understand how to effectively leverage EVM framework effectively.