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Earned Value Management

 

What is Earned Value Management? It is a project controls tool with a focus on “earned value” of progressed work that allows for an effective measurement of project status both in terms of cost and schedule. Two important metrics that result from earned value management are the Cost Performance Index and the Schedule Performance Index.

 

There are three main cost parameters to a project: the budgeted costs, the actual costs and the forecasted costs. The budgeted costs would normally be the expected estimated costs prior to work commencement. The actual costs are what is actually costing while the forecasted costs are the estimated costs to complete the work.

 

There’s also a time dimension to these cost parameters. Say a particular work package (the fabrication of a 60 tonne steel structure) has a duration of 3 months and the progress is expected to be even with a linear relationship between resources and progress. Hence if the estimated cost prior to work commencement is $300,000, then the monthly budgeted cost for work scheduled (BCWS) would be $100,000 per month. Now at the end of the second month the project manager receives from the project cost engineer a project status report that states actual cost of work performed (ACWP) of $180,000. This by itself tells only a partial story. The project manager knows that he’s got a budget of $300,000 and now at the end of the 2nd month that he’s used up less than 2/3rds of the total budget.

 

The above common scenario – without any further analysis – is unfortunately common. The project manager could possibly have a false impression that the project is on track and quite happily continue business as usual without an awareness that there might be a problem with the project.

 

And this is where earned value management comes into play. Continuing with our above sample case let’s suppose that only 30 tonnes of the steel structure had been fabricated and installed. That would mean that the project has been progressed by only 50% (60 tonnes/ 30 tonnes), with an earned value - the budgeted costs for the worked performed (BCWP) of $150,000 only, that is 50% of the total $300,000. Yet actual costs had been reported at $180,000, meaning that the project costs are running over budget. We can index the cost performance with the Cost Performance Index CPI which is equal to earned value divided by actual costs, that is CPI = BCWP/ ACWP.

 

In this example the CPI would be, CPI = 150,000/ 180,000 = 0.83, where an index below 1 signifies cost under performance.

 

Now how do we measure the project from a schedule standpoint? The schedule performance index SPI is a measure of project schedule performance, with SPI equal to budgeted earned value divided by budgeted costs of work scheduled, that is SPI = BCWP/ BCWS.

 

Hence the SPI would be, SPI = 150,000/ 200,000 = 0.75, where an index below 1 signifies schedule under performance.

 

Summarizing earned value indices below we have:

 

CPI = BCWP/ ACWP

SPI = BCWP/ BCWS

 

Additionally we can describe project status with the use of the cost variance and schedule variance which continuing with our case study, these would be:

 

CV = 150,000 - 180,000 = -30,000

SV = 150,000 - 200,000 = -50,000

 

With the formulas for these being:

 

CV = BCWP - ACWP

SV = BCWP - BCWS

Earned Value Management

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Settings do matter: pick the wrong settings and your schedule’s output will be meaningless.

What the text books didn’t tell you
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