Earned Value Management explained
Earned Value Management is a topic covered in APM’s Project Management Qualification; it tends to be something that appears quite complicated on paper, but when you drill down into its key parts, it’s not that tricky.
To show you what we mean and to give you an insight into the content of our online APM PMQ course, here is a film of our lead APM trainer explaining the topic in simple terms. There is also a transcription of the film below so you can refer back to key parts easily.
What is Earned Value Management?
We begin today by looking at a straightforward example that hopefully you can relate to. Earned value management is a way of tracking progress on a project in terms of cost and in terms of schedule. It does not consider quality though, that’s something we need to consider separately.
Earned Value Management explained
I like to think of earned value management as a satnav for the project. If you think about how a satnav works, it tells you what time it expects you to arrive at your set destination. If you get stuck in traffic, for example, your satnav will update to reflect this; you are not where I expected you to be at that point in time and therefore are going to turn up at a different time. Similarly, if you are ahead of schedule and you’re ahead of where the satnav thought you were going to be, it will change the time to reflect you’re going to be earlier than it is expected.
This is what earned value management is helping us to do with our project; it is checking progress and seeing if we are where we expected to be compared to our plans, and if not, how much longer or how much more money is it going to cost us to get where we need to be. Or how much shorter is it going to take us and how much less money is it going to cost.
When you see earned value management or EVM explained in textbooks, it always uses a simple example and I am going to use a simple example today to explain it. EVM was actually invented to monitor very complicated projects and therefore all the maths and the graphs we’ll look at shortly can be used on complicated projects. So, do not let the simplicity fool you; it’s a very useful tool on multi-million-pound projects, as well as simple ones.
An example of Earned Value Management
The example I’m going to use is a wall; I’m going to construct a wall.
- I need 1,000 bricks, this will cost me £250
- I also need to consider labour and labour costs. So, I contact a builder and they say, it is going to take 10 days to build this wall. They will charge £750 for labour, including any additional materials. That is not per day, that’s overall.
So, 1,000 bricks at £250 plus £750 labour means I am planning to spend a total of £1,000 on this wall. And I am expecting it to take 10 days to construct.
Using a graph to plot EVM
Earned value management information can be displayed in a couple of different ways. I am going to use a graph initially, and then I’ll start using some numbers and some maths to explain it differently. But for now, let’s look at the graph.
I’m planning to spend after 10 days, a total of £1000 pounds on this wall. This value, once I plot it onto the graph, is known as my budget at completion; how much money do I plan to spend by the end of my project, hence budget at completion.
This is the first question earned value management can help us to answer; what did we plan to do. Budget completion is the first step of answering that question; what do we plan to spend overall by the end of the project.
In a project it is very unusual to be spending all your money at the end or all your money up front, you tend to find is incremental payments throughout the project. And that’s what’s going to happen with this wall; we speak to the builder and they say they’d like a payment of £500 five days into the project. I can plot that onto my graph as well; this is known as planned costs or planned value. Those two terms are interchangeable; planned cost is the same as planned value.
So on my graph I’ve got a plan, the value of £500 because I’m planning to spend £500 at that point in time. Notice how I’ve drawn a line between the two points. This line now shows me the rate at which I’m planning to spend money throughout my project.
The second question earned value management can help us answer is where are we now.
We are now at five days into this project, the builder sends an invoice through to me £375. I can plot this onto my graph. This is known as actual cost because if I pay this, I’ve actually spent this money. If I draw a line, this now shows me the rate at which I’m actually spending money on my project. What would this imply to you then? We planned to spend £500 at five days into the project, that was our original plan cost. Yet we’ve actually spent £375. Does this mean we’re under budget? Are we behind schedule? We don’t know why we’ve only spent £375.
Earned value management is helping us to understand, or at least prompt us to ask the question, why have we perhaps not spent as much money as we planned to spend. Because it could mean any number of things.
Earned value management isn’t really tracking percentage complete and using that as progress, it’s really interested in that cost and time. In order to do this, we need to establish how much 25% of the wall is worth to me. And this is the where the word value comes back into play and why you have the terms planned costs and plan value.
Now I have with me here, one of my guitars and I bought this for £1,500. What’s the value of this guitar to me then? So sentimentally, it’s very important to me. It’s one of my favourite guitars actually. I’ve used it a lot, I’ve used it at many gigs and I’d say it’s priceless. However, earned value management isn’t really helping me with that; it’s not tracking sentimental value. What is looking at here is value in terms of money.
So the value of this guitar to me in terms of money is £1,500 because I paid £1,500 for it. Therefore, its value is £1,500 to me. If I go online and see the same guitar for £1,200 pounds, the value it doesn’t change, it’s still £1,500 pounds to me. Equally, if it was advertised for more than £1,500, it’s value would still be the same to me. That is what the value is talking about.
So if I had the completed wall in front of me, that would be worth £1,000 pounds. If I’m planning to spend £1,000 on it, I expect to get £1,000 worth of value. At this point in time, I plan to have £500 worth of value, hence the term planned cost or planned value. I’ve received 25%, therefore, I’ve received £250 worth of value of my wall, which is known as the earned value; I have earned £250 worth of value. I can now plot that onto my graph because it’s now a cost figure. Now I’ve plotted my own value onto my graph I can now compare it to the planned value and the actual cost.
I planned to receive £500 worth of value at this point in time, or £500 worth of wall. I’ve received £250 when I expect it to have £500 worth of wall, this means I’m not receiving wall or value of wall at the rate I expected to get it. This is telling me I’m behind schedule.
If I compare my earned value to my actual costs, I’ve actually spent £375, but I’ve only got £250 worth of wall for it, which now tells me this looks like it’s going over budget. If everything was going okay, the graph would be one straight line. However, because the lines are all separated, it means something isn’t going quite as expected.
Using formulas to plot EVM
Graphs are great, but some people prefer values, especially in spreadsheets. So let’s look at some formula then to look at the next steps of earned value management to help us understand where are we going.
Before we know where we’re going, though we need to understand how we’re doing. And I’ve reflected on that a little bit with talking about the graph, but there’s some mathematical formula we can use to show us the same information. The first of which is called cost variance. So the formula for this is cost variance equals earned value, subtract actual cost.
If I do that with my project, I have an earned value of £250 and actual cost of £375. Therefore £250 subtract £375 equals -£125. Now, if everything was going as expected, it would be zero. That would tell us we’re meeting our estimates, we’re meeting our baseline expectations. However, a minus number tells us going badly, a positive number going better than expected.
We can do something similar for our schedule with what’s called schedule variance, which is earned value, subtract plan value. So with our project, £250 is the earned value and the planned value is £500. So therefore the formula is going to be £250 subtract £500 equals -£250. It’s a minus number, so this would tell me things aren’t going as expected.
Performance index in EVM
Before we can look at where we’re going in terms of cost and in terms of schedule and what this delay and this over budget currently means to us, what it will mean for us if we continue like this, we need to work out how efficient we’re being. This leads to performance index or performance indices, depending on who you speak to.
The first of these performance indexes is called cost performance index and the formula is very similar, we just change it slightly to add a division into this instead of subtract. So we have cost performance index equals earned value divided by actual costs. If we look at my project to build this wall £250 is the earned value, actual cost is £375, £250 divided by £375 equals 0.67, which I’ve rounded up to make it a bit simpler. With a performance index this formula should give us a result of one if everything is going to plan, anything below one isn’t going very well. Anything above one means it’s going better than expected.
If we look at scheduled performance index, again, a very similar formula to before; scheduled performance index equals earned value, divided by planned value. Looking at my wall project, then £250 divided by £500 equals 0.5. If it was going okay, this would show me one, less than 1 or 0.5 in this case means things aren’t going as expected.
We may be asked what our percentage efficiency is going to be, and this is fairly easy to calculate. We’ve got an all 0.67 number here, so cost performance index is 0.67. All you need to do is times that by 100, to establish how efficient we’re being. So 67% efficient. We can look at that schedule performance index of 0.5 as well; if we times that by 100, it tells us we’re being 50% efficient in terms of schedule. We want to be a hundred percent efficient. Anything less than 100 means things aren’t going quite to plan.
Estimate at completion in EVM
Now we’ve established efficiencies and performance indexes, we can now think about if things continue like this, what will this look like. So the formula to help us calculate where we’re going, estimate at completion, which is our new predicted cost. We take our original planned cost of budget at completion, and we divide that by our cost performance index.
So looking at this project, our budget at completion was £1,000. Our cost performance index was 0.67. If we divide 1,000 by 0.67 this equals just shy of £1,500. So that tells me I’m going to need another 500 pounds to deliver this project if things continue like this.
Let’s do the same thing for scheduling then. So you have an estimated completion date, which will equal our duration. So our planned duration of 10 days on this particular project, and we divide that by our schedule performance index. So 10 days divided by 0.5 equals 20 days. So this now tells me if things continue like this, it won’t take 10 days, it’s going to take 20.
Earned value management isn’t a magic wand making problems go away. It’s really just a tool that helps us make decisions earlier than perhaps if we were reacting to them; it’s a proactive way of managing your project.
So what does earned value management allow us to do? Firstly we can think about where we are in this project; we halfway through and we know now things aren’t going very well because we’re tracking it. So we’ve got this early warning that earned value management helped give us. It allows us to then make decisions, pre-emptively and proactively rather than reactively.
Constraints in EVM
In projects, as you have been exploring topics, you may have encountered these things called constraints. We often talk about triple constraints in project management, and these are often portrayed on a triangle. These three things are quality, time and cost.
So we now can make decisions in terms of what’s most important to us here. For example, our project may be a quality driven project. It might have very specific, set specifications it has to meet, otherwise it won’t be a success. In which case, in order to achieve the specification, we’re going to have to probably spend another 10 days over what we plan to have and another £500 more than we expected to spend, if that quality is paramount to us.
Equally though, if there is a deadline and we have not got any more time in the calendar than those 10 days we originally planned for, then how much wall are we going to get for 10 days or how much more money we’re going to have to throw at it to get it done in 10 days. Or if the £1,000 budget it was all we have in the kitty as it were, then how much wall are we going to get for £1,000 or how much longer is it going to take us, or what specifications or scope do we sacrifice in order to get it in budget.
Again, we’re making these decisions proactively rather than reactively. That is what earned value management helps us to do; is not a magic wand, it just helps us make decisions.