Control Costs and Measure Success With Earned Value Management

Earned Value Management

Earned value management, or EVM, allows for mesuring project performance by project managers. Really it all comes down to measuring progress and success compared to goals and desires. This management process is used to find discrepancies between project work planned and project work performed, as well as the results of completion or achievement. 

This EVM system is often used to forecast projects both from a cost standpoint as well as in regards to scheduling. Cost and speed of completion are the foundations of success rate in business management. These data points allow for the generation of very valuable performance statistics. EVM allows for a quantification of project data that can be used towards future planning, adaptation and adjustment, and potentially even full direction change or refocus. 

EVM systems have been used since the sixties and have radically changed how value is assessed and how that value is used for project decisions. This methodology is used to this day in the industries it was developed in, as well as many other industries it has grown to. Originally, EVM was introduced in development by the Department of Defense (DoD) to track programs and to manage expenditures through one of the United State’s most active agencies. EVM is actually now mandatory as a checklist of accountability in the US government. All that being said, the private sector has also found great benefits in employing EVM systems. These are often related to planning, budgetary measures, and acquisition management and project management education. 

In 1996 a memorandum of understanding concerning common cost and schedule management for acquisitions was signed by Australia, Canada, and the United States. This has made EVM an acknowledged management system worldwide. 

Earned Value Analysis VS Earned Value Management

EVA exists to compile cost and scheduling variances across a project. This is really just the computation part of an EVM system. EVM however is the greater project management function of utilizing data points to identify trends, predict future outcomes, and devise strategies. EVA is the data gathered, while EVM refers to the actions taken with regards to said data. 

EVM has been implemented with various standards and protocols, but the core concepts of EVM systems are not as complicated or difficult as they may seem within certain standards. 

Key Benefits Of Earned Value Management

Studies have shown that as early as 20% into a project, data statistics can be used to forecast future results and possible discrepancies in an ongoing project. This significant predictive power makes EVM one of the most valuable project tools for successful cost control. 

EVM systems allow for a comprehensive breakdown and understanding of key cost and scheduling variances that can be used for powerful prediction and forecasting strategy. Some of the most key abilities and processes that EVM can enable include:

  • Mapping work against costs and breaking down unknowns into measurable and quantifiable metrics. 
  • Creating a data framework with which to design future actions and plan decisions. 
  • Comparing benchmarks to project status to highlight and identify crucial project paths. 
  • Noticing and predicting problems early on and making investment or approaching changes accordingly before problems take hold in the project in effect. 
  • Increased visibility, transparency, and accountability for project investors with clear and measurable statistics.
  • Zooming out for greater context on a project as a whole and deeper insights into each connected step of a project system. 

Key Concepts Under The EVM Systems Umbrella

There are a number of terms associated with the Earned Value Management systems description. Understanding these terms and how they apply to the system as a whole can give a greater understanding of the processes. 

Planned Value (PV)

This can also be talked about as the budgeted cost for work scheduled. This largely depends on the scope of the work at hand and the point you are currently at in a project’s schedule. 

What this breaks down into is the total project cost, modified by the percentage of the project being examined. So if the total budget is $50,000 for a 5 month project, the completed project PV = $50,000. The halfway PV at 2.5 months would be $25,000.

Actual Cost (AC)

This is simply the actual cost of work performed in a project. With adequate cost management systems and software, actual cost monitoring should be quite simple. That being said, it is important to be aware of and account for hidden costs that may have been omitted from initial budgeting. Things can change and problems can be encountered. 

Earned Value (EV)

The real key to EVM is that there are bound to be divisions from estimated costs to actual costs. This can be especially noticeable when a project becomes behind schedule. Your EV is the budgeted cost for work performed, held against the actual cost. This can be useful when held against project benchmarks for completion. 

How Are Variances Analyzed?

Scheduling and cost variances are determined using these data points. Scheduling variance and cost variance are the two key indicators. 

Schedule variance simply refers to divergence from a planned schedule. This is found by taking your earned value and subtracting your planned value. This will show how a project is placed within its schedule. This breaks down scheduling divergence as quantifiably related to budgeting. To fully understand what the costs side of things mean strategically however, it is important to consider the scope of the project and inner-project work. 

Cost variance does a similar analysis on budgetary divergences. In this case, you take your earned value and subtract your actual cost. The result will show where a project is along budgetary guidelines. 

These variances give us key performance indexes that further simplify this data representation. Schedule Performance Index (SPI) gives an evaluation of a project in relation to schedule. Cost Performance Index (CPI) gives an evaluation of a project in relation to budget. 

When it comes to effective project management, knowledge is power, and understanding is the powerup. EVM systems allow for a large amount of data information to be simplified and contextualized for planning and strategizing. EVM systems can be quite complex and require sophisticated implementation of larger systems and standardizations. That being said, any business can benefit from understanding how to break down project achievement progress into quantifiable data points for future analysis and planning. 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.