Earned Value

Posted by Kevin Brady on Mon 25th August 2008 at 01:34 PM, Filed in Programme ManagementProject ManagementEarned ValueKey Articles

This post demystifies via a simple scenario the practical application of EVA. An ideal post to read for beginners to the subject.

If you are not sure what Earned Value Analysis is and why it is important then click on the following posts:-

Many Project Managers undertake earned value analysis everyday without realising it. For example a quick project performance health checks often compare the percentage of project time used against the percentage of budget spent. If they match then the project is supposed to be OK! The other unwitting use of EVA is the Budget vs. Actual performance indicator.

EVA is nothing new!

 

It is just a more formalised, refined and meaningful way of presenting project performance statistics Project Managers commonly do anyway.
EVA is based around a small number of baseline indicators which can be fed into a variety of formula which really get under the bonnet of a project, and provide revealing insights into a project’s health in terms of schedule, cost and work accomplished. These are detailed as follows :-

  • BCWS - Budgeted Cost of Work Scheduled - Planned cost of the total amount of work scheduled to be performed by the milestone date.
  • ACWP - Actual Cost of Work Performed - Cost incurred to accomplish the work that has been done to date.
  • BCWP - Budgeted Cost of Work Performed - The planned (not actual) cost to complete the work that has been done.

Using the following example “Ice Cream Project” I will show you how these indicators are calculated and articulated further through a variety of EVA formulas giving valuable and revealing insight into the projects performance :-
ICE CREAM PROJECT SENARIO
My daughter Jackie had an idea to use my grandmother’s secret ice cream recipe, she felt sure she could create such a superb and unique kind of ice cream that she was confident that she could capture 90% of the local ice cream market in just 50 short days, it seemed ambitious but I encouraged her to follow her vision smile.
According to Jackie all she needed was some ice cream making equipment, a second hand freezer and a little venture capital. I asked Jackie for a business plan and she responded in short order with the following headline figures.
She had worked out that she needed to sell 1000 blocks of ice cream at the rate of 20 blocks/day and the local competition would be history!!  Her only problem was that it would cost her 50 pence per block to make the ice cream and she had no money and wondered if I would put up the £500 of initial seed capital she needed.
I agreed and gave her the £500 budget that she required.
Ten days later, I asked Jackie how she was doing in the ice cream business.  She replied, “Things are doing well”.  “I have only spent £90 of my £500 budget.” I asked her how many ice cream blocks she had made.  She said, “I am doing well here as well!!  I have made a total of 130 blocks of the most wonderful ice cream.”
So what is the actual status of Jackie’s project?  She is 20% into her planned schedule and has spent less than 20% of her budget – looks like the projects status is quite positive and upbeat smile.
I then used EVA to see if this initial view on Jackie’s project was right. Earned value analysis starts with the calculation of three indicators detailed earlier in this post.  With these three baseline indicators further earned value analysis is possible, enabling the potential for the correction of any discovered project deficiencies:-
ACWP = £90 - or the cost of the work that has been accomplished to date
BCWS = £100 – or the budgeted cost of the work that was scheduled to be performed to date, Jackie was scheduled to make 20 blocks per day at £0.50 per block. At the close of day ten she should have made 200 blocks at a budgeted cost of £100.
BCWP = £65 – or the “earned value” of the work performed to date, 130 blocks at £0.50 per block or £65.
I am now ready to investigate the performance of the project as a whole. I first decide use the baseline data above to see how the Project budget is really doing:-
CV (Cost Variance) = BCWP – ACWP = £65 - £90 = - £25.  This shows that the project is over budget! To be on budget CV = 0
Cracks in our initial optimistic view of the projects performance is starting to be revealed :(
However, this information doesn’t tell me just how badly over budget we are, but it lets me know that me know that I need to check further using CPI /SV and SPI detailed below:-
CPI (Cost Performance Index) BCWP /ACWP = £65/£90 = 0.72  This means for every £ Jackie spent so far she only accomplished 72 pence worth of the work she had planned to do with that £.  If the CPI equals 1.0 then we are getting exactly what we budgeted for.  A CPI less than one indicates we are not as efficient as we had planned (earning less than £1 for every £1 spent) and a CPI over one indicates we are more efficient than originally planned (earning more than £1 for every £1 spent). I then decide to look at the impact of this on the schedule.
SV (schedule variance) BCWP-BCWS = £65 - £100 = - £35. Jackie is also behind schedule. Again a SV of zero means the project is right on schedule.  A negative SV indicates a project behind schedule and a positive SV indicates a project ahead of schedule. This is not good so I decide to look further at the project schedule efficiency.
SPI (Schedule Performance Index) = BCWP/BCWS = £65/£100 = 0.65.  This means that you are only accomplishing 65% of the work that you had planned on accomplishing on your schedule.
It is clear to me that the above EVA calculations show that the initial positive view of the projects performance was unfounded when put under the spotlight.  I started to get worried that Jackie would run out of capital if things continued as they were currently going.
 
How much additional budget might she need to complete the project?
I decided to work this out by calculating the estimate to complete or EAC and then use this to calculate the estimate to complete or ETC.
EAC (Estimate at Completion) = BAC/CPI = £500/0.72 = £694.44 – This was worked out by dividing the total project budget (known as the Budget at Completion (BAC)) by the cost performance index (CPI).
ETC (Estimate to Complete) = EAC – ACWP = £694.44 - £90.00 = £604.44.
So during my next chat with Jackie I am expecting her story about her projects performance to change to a focus on the need to borrow another £104 if the project is to complete. I am not happy and wonder could she turn round the situation and get the project back on target without the need for a cash injection!
I decide to make one more quick calculation.  What efficiency would Jackie have to achieve from now through to project completion to remain within the original budget (known as To-Complete Performance Index for Budget at Completion (TCPI (BAC))?  This efficiency index is calculated by dividing the work remaining by the money remaining.  The work remaining is determined by subtracting the budgeted cost of the work performed (BCWP) from the budget at completion (BAC).  The money remaining is determined by subtracting the money spent to date (ACWP) from the budget at completion (BAC)
TCPI = (BAC – BCWP)/(BAC – ACWP) = (£500 - £65)/(£500 - £90) = 435/410 = 1.06. 
From today forward, Jackie will have to perform at 106% of her originally budgeted efficiency, i.e. she will have to do £1.06 worth of work for every £ spent.  While this doesn’t sound impossible, project experience indicates that very few projects are able to perform much beyond 104%.  If we couple this rule of thumb with the fact that so far Sue has only performed at 72% of her budgeted efficiency (only got 72 pence worth of work for every £ spent), you might understand why I have decided to write off my original £500 as an educational expense wink
This example is only a small subset of what you can do with earned value management but I hope this makes it easy to understand the basic principles.  Earned value also provides a wealth of other predictive tools to aid early identification of problems.
However, it is fair to say that EVA is not the “silver bullet” of project performance monitoring and does have its limitations:-

  • EVA has no capability to measure project quality, so it is possible for EVA to indicate a project is under budget, ahead of schedule and scope fully executed, but the clients are displeased because the quality of the deliverables is poor.
  •  
  • EVA requires a full life cycle project plan, and as such is not suitable for Agile Software Development Projects. Such projects do not lend themselves to planning everything upfront and using short weekly sprints to inch the project towards success. Applying EVA to the management of agile projects is a problem currently being researched at this present time.
  • Traditional EVA is not intended for projects which have significant levels of non-discrete (continuous) effort (also called “level of effort” (LOE)). If a project plan contains a significant portion of LOE, and the LOE is intermixed with discrete effort, EVM results will be misleading. This is problem area which is under research.

I intend over the coming weeks to deliver two further EVA posts with FREE template EVA calculation tools, one for simple projects based on EXCEL and the other for more complicated projects using MSProject.

 

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READER COMMENTS:

I really like the idea of Earned Value but I have never figured out how to apply it to my electrical development projects.  I current track BAC, ACWP, and BCWS.  The tricky number is how to get to BCWP?  In classes they have simple examples like you are building 50’ of fence and by the time in question you have built 20’.  How do I apply this for a new product development project (hardware and software)?

Posted by Diana  on Sun 22nd November 2009 at 04:19 PM | #

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