Earned Value Management (EVM) Analysis in Project Cost Management

By Fahad Usmani

What is the progress of the project?
If you have gotten into project management, you will be used to answering these questions from clients.
Clients are not interested in your day-to-day activities; they are only interested in the status and progress of the project because it helps them visualize the money spent on the project and the money earned from the project.
In the early days, project managers used to have only two data sources: planned (budgeted) expenditure, and actual expenditure.
With this information on hand, they can only compare how much was planned to be spent and how much has been spent to date.
This information was not complete because it did not talk about the work completed; moreover, with this traditional method, there was no way to relate the work completed to the amount of money spent on it.
In other words, you can say that they cannot get the cost performance of the project.
Therefore, there was a need to develop a new method which could provide them with a complete insight of the project.
This is where Earn Value Management (EVM) came onto the scene, which helped them overcome the shortcomings of traditional project management.
Earned Value Management (EVM) is sometimes also knows as Earned Value Analysis (EVA).

Earned Value Management (EVM)

The concept of Earned Value Management came into the limelight in the sixties when the US Air Force made it mandatory to use EVM in their programs. And since 2005, it has become a part of general federal project risk management.
Earned Value Management is an enhancement over traditional project management. The traditional method focuses on planned vs. actual expenditure, while the EVM method also makes you aware of actual accomplishment, which gives project managers a clearer picture of the project’s insight.
In Earned Value Management you can analyze the project schedule performance, cost performance and other milestones. Afterwards you can find variances by comparing work performed and work planned.
Nowadays, Earned Value Management is a mandatory requirement for US government contracts.
The concept of Earned Value Management has also been adopted by the PMI, and in the PMBOK Guide, PMI discusses this topic great detail.
As per the PMBOK Guide,
“Earned Value Management (EVM) in its various forms is a commonly used method of performance measurements. It integrates project scope, cost, and schedule measures to help the project management team assess and measure the project performance and progress.”
Earned Value Management (EVM) has three primary elements:

1. Planned Value (PV): Scheduled cost of work planned in a given time. This term is also known as Budgeted Cost of Work Scheduled (BCWS).
2. Earned Value (EV): The Amount of money earned from completed work in a given time.  This term is also known as Budgeted Cost of Work Performed (BCWP).
3. Actual Cost (AC): Actual amount of money spent to date. This term is also known as Actual Cost of Work Performed (ACWP).

With these EVM primary data sources you can develop many other derived data elements, such as:

• Budget at Completion (BAC): Total budget for the project.
• Schedule Variance (SV): The difference between Earned Value (EV) and Planned Value (PV).
• Cost Variance (CV): The difference between Earned Value (EV) and Actual Cost (AC).
• Schedule Performance Index (SPI): The ratio between Earned Value (EV) and Planned Value (PV).
• Cost Performance Index (CPI): The ratio between Earned Value (EV) and Actual Cost (AC).
• Estimate at Completion (EAC): Expected total budget for the project.
• Estimate to Complete (ETC): From a given point, how much it will cost to complete the project.
• Variance at Completion (VAC): How much expected under or over budget.
• To Complete Performance Index (TCPI): The estimate of the cost performance required by the project to meet the project’s budget goal.

Now the project managers were in a very comfortable position in analyzing the project performance and forecasting the future performance.
(If you’re not aware of these terms, don’t worry, I am going to explain them my next posts.)

Benefits of Earned Value Management (EVM)

There are immense benefits of EVM for the project manager and the sponsors.
EVM gives project managers better control over the project constraints such as scope, cost and schedule. They can identify the problems in the early stages of the project and manage them proactively.
And for the client, they will have a better view on the project and they will be confident about the success of the project.
The following are a few benefits of Earned Value Management (EVM):

• Improves the planning process.
• Relates time-phased budget to the project tasks.
• Shows you the project’s status and progress objectively.
• Helps you in measuring the project’s cost and schedule performance objectively.
• Improves communication and project visibility.
• Prevents scope creep.
• Helps you in forecasting.
• Informs you if you’re deviating from any performance measurement baseline (scope, cost and schedule baseline).
• Helps you identify the potential risk areas.
• Helps in forecasting (most likely future performance).

Earned Value Management is one of the few techniques in the PMBOK Guide that involves mathematical calculations. Therefore, many people find it difficult and ignore it.
However, if you understand the concept of EVM, these calculations are not really as difficult as they appear to be.
Before I conclude this blog post, let’s revise some key points.

• Earned Value Management (EVM) analysis is a technique in Project Cost Management that determines the current status of the project, and tracks the progress.

It shows you the current status of the project, such as:

• How much work has been completed and how much is remaining?
• How much budget has been spent and how much is left?

Tracks actual progress vs planned progress, such as:

• Work completed vs planned work for a given time.
• Work completed vs planned work for a given cost.

It answers various performance related queries such as:

• Is the project over budget or under budget?
• Is the project behind schedule or ahead of schedule?
• How much work (scope) is completed.

If you have understood the concept of Earned Value Management, you can move on to my next blog post which explains the three basic elements of Earned Value Management (EVM): Earned Value (EV), Planned Value (PV), and Actual Cost (AC).
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