Basic Earned Value: What does it Mean?
Anyone who first met earned value management as part of their PMP® exam preparation course will probably have cursed it for giving them a whole list of formulae to remember. However, anyone who has tried to track a schedule and a budget will appreciate that it provides excellent insights into the health of a project at any given time.
If you recall from your PMP® course, earned value management revolves around three basic measures: (1) Earned Value – what you have done to date; (2) Planned Value – what you expected to have done to date and (3) the Actual Cost – what you have spent to date.
In planning, every activity is given a monetary value, reflecting the time it is estimated to take and the cost of the resources needed for completion. These values are then totalled together to give the project’s overall Planned Value. As activities are completed, their Planned Values are added to the project’s overall Earned Value. At the same time, of course, we need to track the budget and record all spending on the project as it happens.
The Earned Value figure is the critical one. This tells the project manager what we have completed to date. Depending on industry, this is calculated in different ways. In some situations, if an activity is 50% complete, 50% of the Planned Value is added to the Earned Value total. However, in other industries (software development comes to mind), where percentage complete figures are rarely accurate, no Earned Value is attributed until the activity is 100% finished.
At any point in time, the project manager can compare the Earned Value with the expected Planned Value at that time and also with the estimated budget. So for instance, our project is three months in and our baseline schedule suggests we should have €250,000 worth of work completed at this point. However, our Earned Value figure is €245,000 and our Actual Cost is €255,000! What does this mean?
Clearly, we have spent more money than we have earned and we have earned less than we had planned. Putting this more formally (as I’m sure you will have remembered from your PMP® exam days), the Schedule Variance is negative (Earned Value – Planned Value = €245,000 - €250,000 = -€5,000). The Cost Variance is also negative (Earned Value – Actual Cost = €250,000 - €255,000 = -€5,000).
These are extremely useful formulae to determine the project’s status at any given point in time. However, it is important for project managers to be aware of their limitations. For instance, how do we calculate the Actual Cost? Suppose, at the start of the month, a highly paid engineer spends five days working on an activity. Factoring in overheads, we have estimated these five days as costing €10,000. At the end of the week, the activity is 100% complete, so we can add €10,000 to the Earned Value total. However, should we also add €10,000 to our Actual Cost total, or should we wait until payday and add all the wage costs incurred by the project?
Similarly, if our project rents equipment or buys materials, do we increment the Actual Cost value as we consume resources, or wait until the invoices are paid? To make Earned Value Management anyway meaningful, the project manager should relate Actual Costs to activities. On completion of each activity, a total of resources used needs to be calculated and associated with the Earned Value. As an example, suppose our five days’ work (estimated at €10,000) actually takes seven days, we need to increment the Earned Value by €10,000 but the Actual Cost by €14,000. It is useful to associate the Actual Costs with individual activities, so we can identify where we are over- or under-spending.
Tracking the schedule also has caveats. The project is complete when the Earned Value equals the total Planned Value. While not mentioned on your PMP® course, what this means is that the Schedule Variance (remember Earned Value – Planned Value) will approach zero over time. Suppose our project is scheduled to finish at the end of December with a Planned Value of €1,000,000. At the end of the year the Earned Value is €950,000. This means that we are not finished; we have missed our deadline. However, we do complete by the end of January. So our final Schedule Variance is zero, because the Planned Value has not increased after the deadline.
At the end of the day, Earned Value Management is a powerful tool to track projects. However, you do need to be careful with it. Tie your costs into individual activities, in order to identify cost variances. Also, be aware that Schedule Variances will converge on zero towards the end of the project, making them less useful in seeing where things are. Another limitation with the Schedule Variance is that it is of no help in pin-pointing the causes of variance. For instance, the sequence of activities could mean that we are tackling the high-risk tasks first (e.g. exploring novel technologies), which are difficult to estimate.
The important thing for any project manager is to flag these variances. We have a tendency to be wildly optimistic and believe that we can make up time later on. It is much better to report schedule and budget slips as they happen. It will force you to consider corrective actions, as well as demonstrating that you are in control of the project.
Earned Value Management – both tracking and forecasting – is covered in our project management training courses. We hold our PMP® project management certification courses online in our virtual classroom. Find out more by contacting us.
#3461 - 12/2020 - 08/2022