Customer Focus and UX: Introduction and Project (Online)
Does the diagram below tell us good news or a bad news story?
Earned value management is the way you can assess what the project is worth at a given moment in time, based on the work that has been performed, versus the work that was planned to be done at that time. It will give an objective view to the sponsors of a project to know if the project is on course or if we were to stop the project at that moment in time what the value would be of the project in its current state. It helps decision-makers to take a decision whether to go ahead and complete the project or not.
Earned value is a term used to describe a value placed on the products that have been produced or belong to a project and cannot be taken away.
It provides the sponsor or project board with:
- An objective measure of project status
- Estimation of completion time and final cost
- Trends that indicate future changes and the use of resources
- Information to facilitate decision making
It is a measurable, objective and reasoned method of reporting.
How is earned value calculated?
In order to complete an earned value management report, you would need:
- The work breakdown structure
- The overview of the tasks that needed to be done
- The organisational breakdown structure
- Knowing who is part of the project team to come up with the budget based on the work breakdown structure:
- All the real costs that are available
- The forecasts of the budget's plans
- The baseline plans or the initial plan of where you should be at that moment in time
Key data elements
To calculate the earned value management, there are a few key data elements that will be named. BAC (budget at completion) is the budget that the project cost at completion, original duration is the planned timeline of the project, PC all the planned costs, AC are the actual costs, and ATE is the actual time that has been spent.
As you see those key data elements will put actual costs (AC) and actual time (ATE) versus planned cost (PC) and planned times (OD).
Here are the key formulae for Earned Value.
- Earned Value (EV) = BAC x % compleye
- Cost Performance Index (CPI) = EV / AC
- Eastimate at Completion (EAC) = BAC / CPI
- Cost Variance (CV) = EV – AC
- Schedule Variance (SV) = EV – PC
- Schedule Variance (SPI) = EC – PC
- Earned Value Example
At a certain point in time, we measure the value of a project.
We can see actual costs on the black line.
Planned costs on the light blue line.
The orange line shows time spent. Using the formulae, you can calculate the state of the project.
Let’s add some data:
Work Packages and BACs
This is a simple overview of some tasks to be completed, its duration and if that task is completed what value it adds to the project. Overall, the project BAC would be 16000 – what is unknown at this point, is if the tasks need to be performed consecutively or not and even though the sum of the tasks are higher than 11 weeks, that it should only take 11 weeks to do the job.
We create 2 axes, one for the costs and one for the time.
In the next diagram, the blue line solid line are the planned costs, the orange line what the value would be in 5 weeks, you see that the Actual Costs are actually lower than the Planned ones, but looking at this we don’t know if that is because of budgeting or because the work hasn’t been done.
Earned Value Calculations
Negative CV or SC is not good.
A schedule performance Index SPI or CPI of less than 1 is also NOT GOOD.
So, in this example, it is clear that the cost is off-budget and time is off planning.
Using those calculations, you can create trends forecasting and estimating completion time and projected costs.
When you calculate Earned Value, you can also predict the trends to come. So, if the project is projected to take longer to be delivered, the costs will also be higher.
You see that the EV is below the AC and therefore indicates that there is an issue.
You want to see Earned Value above Actual Costs. If it’s below your project is over budget.
Earned Value advantages and disadvantages
- Provides an index that can be used to help understand whether the project is going to fulfil its success criteria
- Provides insight into how the project has been performing to date by providing KPIs for schedule and cost performance
- Helps to identify issues that allow for corrective actions to be taken
- Consistent and measurable way to communicate with stakeholders
- Needs rigour and tight control of cost (otherwise the data is incorrect)
- Needs a properly established WBS so that costs can be tracked accurately
- Requires openness and honesty
- EVM might not be understood by sponsors or stakeholders
- Doesn’t report underlying issues such as ‘fit for purpose'
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