The Use and Benefits of Earned Value
These factors have been used to manage projects in the past, yet can they alone describe the real health of a project? In a word, no. An earned value management tool is a valuable partner when determining the answers to these and many other questions about the ongoing state of a project. Earned value fills the need when project success and the success of the company hang in the
balance in this fast paced, budget conscious 21st century.
Earned Value Management (EVM) is a methodology that has been in use since the 1960’s when the US Department of Defense adopted it as a standard method of measuring project performance. Its principles were set down as Cost/Schedule Control Systems Criteria
in the DoD’s financial management orders in 1967. However, the idea has actually been in existence since the 1800’s when industrial engineers wanted a way to measure performance on the factory floor.
My actual costs are less than my budget. Is my project doing well, or is
it behind schedule?
Earned value may be defined as the sum of the budgets for the work that is complete. Therefore, earned value for completed activities is equal to the total budget. For activities not yet begun, the earned value is zero. In order to measure the performance of activities in progress, you must come up with a system of measurement that includes objective judgments. The Earned Value Management System (EVMS) guidelines give a number of alternative methods for measuring the earned value of an activity in progress. These methods are often called earned value methodologies or performance measurement techniques (PMT). The basic theory behind all of the methodologies is to multiply the budget by a percentage complete to get the earned value.
In fact, results show that the average EAC based on the cumulative CPI was the lower end of the average cost at completion (Christensen 1996). Other common index-based EACs that are found to be higher are more accurate. In particular, studies show EACs based on both the CPI and the schedule performance index (SPI) tend to be significantly higher and are generally more accurate (Christensen 1996).
Using indicators such as the CPI and SPI, you can develop forecasts that are very accurate because they take into account both project
status and past cost performance.
My project manager or engineer keeps telling me not to worry about the cost overruns. The
rest of the work will cost less than budgeted. Is this probable?
Despite the widely known fact that the recoveries from cost overruns on defense contracts are extremely rare, analysis of 64 completed contracts shows that the final cost overruns estimated by the contractor were less than the current cost
overruns (Christensen 1993).
Upon reaching the 15% stage of completion, project performance seldom improves. As a matter of fact, after this point is reached, performance seldom exceeds the average performance-to-date and often deteriorates. The to complete performance index (TCPI) is the ratio of the remaining work to the remaining cost. It indicates the level of performance that you must achieve to reach a particular estimate at complete. The TCPI will help you examine the probability of the project costs matching a particular forecast.
To Complete Performance Index
The TCPI is an index used to rate the probability of a forecast. It is also known as the CPI to EAC index as it is the CPI that is
required to meet a particular EAC.
TCPI = (budget – earned value)/(estimate at complete – actual cost)
The TCPI should be compared to the CPI of the project to date. Since the CPI of a project rarely improves once the project is greater than 20% complete, the TCPI should not be higher than the CPI. A TCPI that is greater than the CPI, shows an improvement in the performance and means that the EAC used in the formula is not probable.
Many conditions cause cost variances. You need to ask yourself if your project is taking more resources to do the work than you originally planned or if the resources are more expensive than planned. To accomplish this analysis, you compare the earned rate
to the actual rate and the budgeted hours to the actual hours.
For example, you might earn 100 hours and there are 100 actual hours. If your actual cost is much higher than the earned value,
then you have a rate variance as opposed to an efficiency variance. The rate variance is calculated using the following formula:
Any time that a cost variance is incurred during a project, it is important to determine what is causing the variance. Is it a rate variance or an efficiency variance? In addition to simply changing the final project cost, the work being performed should be investigated to see if there are any means of improving the situation. Earned value gives you the early warning you need to solve problems while the work is in progress before the actual costs are above the total budget.
In today’s competitive marketplace, the ability to deliver a project on time and within the agreed upon budget is imperative. Whether the contract is several months or several years in length, there is no time for games. We don’t want to monkey around keeping our eyes, ears, and mouths covered about problems such as cost overruns and schedule delays
that can – and do – inevitably rear their ugly heads. We want to be prepared for all eventualities, and earned value gives us the
early warning signs needed to accomplish our goals.