Earned Value Analysis

Figure 1: National Children's Hospital, which has run over budget

Earned Value Analysis is a process used to plan, monitor and control project performance by graphing the project’s actual cost, budgeted cost and work completed. It is a calculation method that helps determine if your project is within budget and schedule.

Proper planning can significantly reduce the extent and cost of poor performance and time or cost overruns, and hopefully avoid overruns such as those experience in the National Children's Hospital Project (Figure 1). The key elements that need to be planned, monitored, and controlled are:

- Time (the schedule)

- Resources (people and budget)

- Work specifications (deliverables and tasks)

Monitoring data can alert the team to a problem at an early stage. A wide range of data must be collected, collated, and assessed. This includes operating data, customer reactions and accounting data.

The project manager is often reliant on the team members to report these problems.

Benefits of monitoring data include:

• Mutual understanding of the goals of the project

• More realistic planning for the needs of all groups

• Understanding the relationships of individuals tasks to one another and the overall project

• Early warning signals of delays or potential problems

• Faster management action in response to unacceptable or inappropriate work

• Higher transparency on the project for top management

Earned Value Chart

A difficulty with comparing actual cost against the baseline or budgeted cost is that the comparison fails to consider the work performed relative to the cost incurred. The measurement of expenditure alone is insufficient for project management purposes. There is a need to know what has been achieved as a result of the expenditure. A process called Earned Value Analysis can be used to calculate project performance in this way. The Earned Value Chart is used for comparing how much has been spent to what has been achieved so far.

The difference between the work completed and the budgeted cost of the work gives the schedule variance. The difference between the work completed and the actual cost gives the cost variance.

Earned Value Analysis operates by firstly assigning a value to each task identified in the work breakdown structure (WBS). The assigned value is the original budgeted cost for the item. This is known as the baseline budget or Budgeted Cost of Work Scheduled (BCWS). A landscape project will be used to demonstrate the terms in this blog and Table 1 firstly calculates the pro-rata cost per day of each activity.

Table 1: Pro Rata Cost Per Day of Landscape Project

Once the pro-rate budgeted cost per day for each activity is calculated, the BCWS can be calculated for the whole project (See Table 2a and Table 2b)

Table 2a - Budgeted Cost of Work Scheduled

Table 2b - Budgeted Cost of Work Scheduled

The Earned Value of a task is then found by multiplying the estimated percent completion by the budgeted cost for that task. The result is the amount that should have been spent on the task to date as per the original projections.

Table 3 outlines the Earned Value of the project on day 6:

Table 3: Earned Value / BCWP on Day 6 of Project

The cumulative Budgeted Cost of Work Scheduled on day 6 from Table 3 can be compared against the Budgeted Cost of Work completed from Table 2b. See Table 4.

Table 4: Comparing the BCWS to the BCWM

This means the cost of the work performed is behind the cost of work scheduled, ie the project is behind schedule. The results on a day-by-day basis can be graphed over time..

Figure 2: Depiction of Stressed Out Project Manager Whose Project is Behind Schedule

The Earned Value Indices is a series of calculations that are carried out to ascertain if the project is on schedule, or behind schedule; on budget, or behind budget; on time, or behind time.

Table 5: Budget Cost vs Actual Cost of Work Performed

On day 6, the actual cost of work performed ended up being EUR2,100. Table 5 compares this to the BCWP for that date and demonstrates that the cost variance is - 974, which means the project has overspent by EUR 974. The Actual Cost of Work Performance can also be graphed over time to compare the cost variance over time.

ECAC, CTC, CV & TV

• Estimated Cost At Completion (ECAC) is the cost of work required to complete the project using the budgeted cost. ECAC = PB - CV (PB is project budget). An ECAC higher than the PB means the project is over budget.

• Cost To Complete (CTC) is the cost of work to still be completed. Subtract the ACWP from the ECAC to find CTC. If CTC is higher than estimated, it should be considered whether the project should be completed.

• Schedule Variance (SV) is monitoring performance against schedule. It is calculated by subtracting BCWS from BCWP. SV will show if work is progressing more, less or the same as planned.

• Time Variance (TV) or time slippage is the STWP (Scheduled Time of Work Preformed) - ATWP (Actual Time of Work Preformed).
  

Earned Value Indices

The earned value indices are ratios to be used in conjunction with the earned value chart to find out the status of a budget and schedule in a project.

• Cost Performance Index (CPI) is BCWP ÷ ACWP. If the ratio is under 1, the value earned is less than planned.

• Schedule Performance Index (SPI) is BCWP ÷ BCWS. If the ratio is under 1, the project is behind schedule.

Acronyms:

BCWS - Budgeted Cost of Work Scheduled

BCWP - Budgeted Cost of Work Performed

ACWP - Actual Cost of Work Performed

STWP - Scheduled Time for Work Performed

ATWP - Actual Time of Work Performed

CV - Cost Variance

SV - Schedule Variance

TV - Time Variance

CPI - Cost Performance Index

SPI - Schedule Performance Index

ECAC - Estimated Cost At Completion

CTC - Cost To Complete

Figure 3: Project Manager having a Sleep After Learning All the Acronyms