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Earned Value Management

Dick Billows, PMP

Dick Billows, PMP
CEO 4pm.com
Dick’s Books on Amazon

Earned Value Management data gives you information about “where we are on the project as of today” versus “where we should be as of today.” In that sense, earned value data is much more valuable to a project manager than simple variance information. Earned value management is an integrated set of tools for managing project progress and spotting variances from the plan.  These tools help you identify variances between actual performance and the project’s schedule and variances between actual costs and the project’s budget. Earned value management can also provide forecasts of the likely completion date and final cost of the project. It can provide insights and forecasts on even small projects.  But it is a particularly useful tool on larger projects. Although many project management software programs automatically calculate earned value data for you, it’s worth learning how to do the manual calculations. That’s because the Project Management Institute (PMI®) certification examinations often ask questions about earned value calculations. Yet many people who have passed the PMP® exam don’t have an understanding of how earned value works. So let’s dig into it. Project Tracking Reports Main Page

Earned Value Management Example 

Let’s say an amusement park entrepreneur hires you to manage a project to build 1,000 miles of railway track.  earned value managementThe client wants it done in 10 days for a cost of $10 per mile, or $1,000. Because tracking progress and spotting variances in the project’s cost and duration are important, we’ll review the basics of earned value analysis and the three variables we always use. We always calculate each of the three variables as a dollar amount. That includes the schedule data (which seems unusual at first). Let’s look at the three variables:

Planned value is the “perfect world number.” In our railway track example if everything goes perfectly according to plan, we would lay 100 miles of track every day at a cost of earned value management$10 per mile and would spend $1,000 a day. So the planned value is the “perfect world number” of how many units we should have produced and the cost for those units.

Earned value in our railway example is the number of miles of track we actually laid times the $10 planned cost per mile. So we base the earned value on what we actually delivered at the planned cost for delivering it.

Actual cost is what we actually spent producing what we’ve delivered as of today. It comes from the invoices we pay vendors and the payroll we have to fund.  earned value managementThis table shows each of the 10 days of the project with the daily totals for the miles of track laid per day and the actual dollars we spent for the track we laid that day. Overall, we should have laid 100 miles of track each day and we should have spent $1,000 each day. As we see on day 1, we only laid 80 miles of track, which is under the plan. But we spent $1,200, which is more than we should have spent if we had laid 100 miles of track. The variance is very bad because we only laid 80 miles of track instead of 100 and we were still over budget.

Things got even worse on the second day. We only laid 60 miles of track and we spent $1,400. We’re digging quite a hole for ourselves here.

On the third day, we recovered a little bit. We laid 130 miles of track and we only spent $190. You can follow the ups and downs of a project by looking at this data in any project management variance report.

The table shows the same data on the mileage and the actual costs but we’ve added a calculation for the earned value and the planned value of the project. Let’s go back and look at the unhappy results from the first day of the project. earned value managementWe know we should have laid 100 miles and we should have spent $1,000. So we know that the 80 miles of laid track is bad and so is the $1,200 cost. Now let’s look at it from the earned value perspective. On the first day, our earned value was $800, which is calculated by multiplying the miles of track we actually laid by the planned cost per mile. We see that there’s a $400 difference between the actual cost and the earned value. In fact, that $400 difference is the amount that we’re over budget.

The last row of numbers is the planned value which is the perfect world number. We calculate it by multiplying the planned cost times the planned mileage. And as you can see, the amount is the same every day because we planned to lay the same miles of track each day at the same cost per mile.

So on the first day, the planned value was $1,000 and our earned value was $800. Why? Well on the first day we only laid 80 miles of track when we should have laid 100 miles at a cost of $10 per mile. So we are $200 behind schedule. We have produced $200 less value than we planned to produce. How are we able to express schedule variance in dollar terms? Here’s the way earned value works: it rests on the fact that we have produced less than we should have by quantifying the value (in dollars) of what we didn’t produce. That’s the $200.

We also see that the planned value on day 1 was $1,000 and the actual cost was $1,200. So we spent $200 more than we planned to spend/ But more importantly, we also produced less than we planned. A better way to calculate how much over budget we are is to compare the earned value to the actual cost. We see that the actual cost is $1,200 and the earned value is $800 so we have been much less efficient from a cost point of view. We can measure that inefficiency as the difference between the actual cost and the earned value, which is $400.

So by using the data our project software calculates for us, we can figure out that we’re $200 behind schedule and we’re $400 over budget because we’ve been less efficient than planned.

Everything in earned value is a comparison of what we actually did to what we planned to do.

Let’s Look At Earned Value Management Report Information

I’ve added two more rows at the bottom on this version of our earned value table where
earned value managementwe calculate the project’s schedule variance and the cost variance. We can express the schedule variance as the earned value (EV) minus the planned value (PV).  We can express the cost variance as the earned value (EV) minus the actual cost (AC). Most project software calculates this data for you but you need to know what all of it means.

 

Forecasts – Let’s Add One More Set of Numbers

The last row of numbers deals with our estimate at completion (EAC), which the earned value table calculates.  We start calculating an estimate of the cost to complete the project based on how things have been going to date. Then we add to that the actual cost to date and come up with our estimate at completion. That’s data the project sponsors always like to see.

If you can remember the information in this brief summary, you can use earned value management to quickly quantify where you are on your project and to estimate how things are going to finish. To master these techniques and the way to present them to the project sponsor, take a look at our advanced techniques courses in your specialty.

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