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Wednesday, 10 August 2016 20:32

Learn About Earned Value Management (EVM) (Part 2 of 2)

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This content is from the TenStep weekly "tips" email dated 2016.04.07

Learn About Earned Value Management (EVM)
(Part 2 of 2)

There are many ways to build and manage a schedule. Here we are discussing Earned Value Management. Let's recap where we ended last week.

 Today's Date is March 31

Completed Activity

A

B

C

D

Remaining Work

Target Date

March 10

March 15

March 31

April 5

July 31

Budgeted Cost

20

10

15

5

500

Actual Cost

20

5

20

10

?




Let's say that as of March 31 you have actually completed activity A, B, C and D. Let's calculate AC, PV and EV.

  • AC is the actual cost of the work completed. This is 55 (20 + 5 + 20 + 10).
  • PV is the budgeted cost of the work planned to be completed. This is 45 (20 + 10 + 15). Note that Activity D is not counted since it was not planned to be completed as of March 31.
  • EV is the budgeted cost of the work completed. This is 50 (20 + 10 + 15 + 5).
Now let's put these fundamental metrics together in ways that provide value about the current status of schedule and budget.

Schedule Variance (SV)

The Schedule Variance (SV) tells you whether you are ahead of schedule or behind schedule, and is calculated as EV - PV. In our example above, the EV is 50 (20 + 10 + 15 + 5) and the PV is 45 (20 + 10 + 15). Note that the difference is activity D. Since this activity is completed, it is included in the EV. However, since it was not scheduled to be completed by March 31, it is not included in the PV.

The Schedule Variance is 5 (50 - 45). If the result is positive, it means that you have performed more work than what was initially scheduled at this point. You are probably ahead of schedule. Likewise, if the SV is negative, the project is probably behind schedule.

Cost Variance (CV)

The Cost Variance gives you a sense for how you are doing against the budget, and is calculated as EV - AC.  In our example above, the EV is 50. The AC is 55. This means that the budget for the work completed was 50 but it actually cost 55 to complete the work. Therefore, the Cost Variance is -5 (50 - 55). If the Cost Variance is positive, it means that the budgeted cost to perform the work was more than what was actually spent for the same amount of work. This means that you are fine from a budget perspective. If the CV is negative, you may be overbudget at this point.

Schedule Performance Index (SPI)

This is a ratio calculated by taking the EV / PV. This shows the relationship between the budgeted cost of the work that was actually performed and the cost of the work that was scheduled to be completed at this same time. It gives the run rate for the project. If the calculation is greater that 1.0, the project is ahead of schedule. In the example above, the SPI is equal to (50 / 45) or 1.11. This implies that your team has completed approximately 11% more work than what was scheduled. If that trend continues, you will end up taking 11% less time to complete the project than what was scheduled. That is a good thing.

Cost Performance Index (CPI)

This is the ratio of taking the EV / AC. This shows the relationship between the Earned Value and the actual cost of the work that was performed. It gives the burn rate for the project. If the calculation is less than 1.0, the project is overbudget. In our example, the CPI is (50 / 55) or .91. A CPI of .91 means that for every $91 of budgeted expenses, your project is spending $100 to get the same work done. If that trend continues, you will end up overbudget when the project is completed. 

Budget at Completion (BAC)

This calculation can be in terms of dollars or hours. It is the Actual Cost (AC) plus the budgeted cost of the remaining work. If the Cost Performance Index (CPI) is not 1.0, it means that you are spending at a different rate than your plan, and this needs to be factored in as well. So, the better formula for the Budget at Completion (BAC) is the AC + (Budgeted Cost of Work Remaining / CPI). In other words, if you are running 10% overbudget to get your work done so far, there is no reason to believe the remaining work will not also take 10% more to complete, and your final budget at completion would be 10% over as well.

In our example above, the AC is 55 and the Budgeted Cost of Work Remaining is 500. The estimated budget at completion would be 55 + (500 / .91) or approximately 604.5. Since our total budget is 550, this shows that you will be approximately 10% overbudget.

At TenStep we are dedicated to helping organizations achieve their goals and strategies through the successful execution of critical business projects. We provide training, consulting and products for organizations to help them set up an environment where projects are successful. This includes help with strategic planning, portfolio management, program / project management, Project Management Offices (PMOs) and project lifecycles. For more information, visit www.TenStep.com or contact us at admin@TenStep.com
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