Validate the Concept of Earned Value Management
Earned value management (EVM) method empowers project management professionals to plan, track effectively, and forecast the status of a project’s scope, cost, and schedule. Effective implementation of EVMS depends on a workable work breakdown structure (WBS), project schedule and budget, and earned value schedule and cost metrics used to check and measure project performance quantitatively. The EVMS applies various terminologies to analyze, measure, and forecast the cost of project completion. The most salient are planned value, actual cost, and earned value. Others include an estimate at completion (EAC), estimate to completion (ETC), budget at completion (BAC), cost performance index (CPI), schedule performance index (CPI), schedule variance (SV), cost variance (CV), and to complete performance index (TCPI). The success of the Earned Value Management System also depends on top management buy-in, understanding of these terminologies, and participation of all stakeholders.
This paper attempts to validate EVMS by defining and explaining the method, showing the advantages and disadvantages of EVMS.
Definition and Explanation of Earned Value Management
Earned Value Management is a cost, schedule, and scope management method or tool. It integrates organization, planning, scheduling, budgeting, accounting, analysis, reviews in calculating risks associated with a project schedule, cost project scope, and measuring and forecasting performance.
The power of the forecast makes it possible for project professionals to understand the status of projects. Project managers must break the project scope into manageable pieces, id them, create an account budget, a work schedule, and earned value metrics to achieve the overarching objective, validate, and practice EVM best practices. The earned value metrics include cost performance index (CPI), schedule performance index (CPI), (g) schedule variance (SV), cost variance (CV), and to complete performance index (TCPI). These metrics measure, quantitatively, the performance of schedule, cost, and scope. EVM also can set up a baseline plan by which future performance and resources can be compared and measured.
The earned value management system comes with its specialized terminologies. Their mastery is the sine qua non to an effective rollout and application of EVMS. Studies show that most federal agencies, including NASA, provide rigorous training in EVM. These concepts include planned value (PV) or budgeted cost for work scheduled (BCWP), earned value (EV) or budgeted costs for work performed (BCWP), actual cost (AC), or actual cost for work performed (ACWP). Schedule variance (SV); cost variance (CV); schedule performance index (SPI); cost performance index (CPI); budget at completion (BAC); estimate at completion (EAC) and estimate to complete (ETC) are essential EVM terminologies worth of understanding.
| ID/Task | 3 Months (Jan 1-March) 31 |
3 Months (April 1-June 30) |
3 Months (July 1-Sept. 30) |
3 Months (Oct. 1-Dec. 31) |
| 1.1 Task A | ||||
| 1.2 Task B | ||||
| 1.3 Task C | ||||
| 1.3 Task D |
Figure 2 shows the interrelationships among the three major components of EVM. The blue line signifies the budget and the scope of work to do over a period. The actual cost stands for the green line. It shows the consumption or cost of resources on work activities that are completed. The red line, the earned value, tells us the number of works of the project that are done. EV is positive; the project has completed more work but used fewer resources.
EVM Application Success Factors
Work breakdown structure (WBS)
Using the parking lot renovation project as an example. Assuming that the first two tasks, A and B, are complete.
Table 1
| Project Scope | |
| Factors | Plan |
| Scope | Renovate parking lot. Broken into four manageable pieces: Task A, Task B, Task C, and Task D |
| Schedule |
12 months, beginning Jan 1, 2016, and ending Dec 31, 2016 Build each task per 3 months |
| Cost |
Total cost is $ 1,440,000 per 12 months $120,000 per month. |
Table 1 provides data on the various components of the project.
Project Schedule
Table 2
| ID/Task | 3 Months (Jan 1-March) 31 |
3 Months (April 1-June 30) |
3 Months (July 1-Sept. 30) |
3 Months (Oct. 1-Dec. 31) |
| 1.1 Task A | x | |||
| 1.2 Task B | x | |||
| 1.3 Task C | x | |||
| 1.3 Task D | x |
Table 2 is the schedule of the project from start to finish.
Project Budget
Cost: Total budget is $1,440.000, with $360,000 per 3 months’ period.
Table 3
| WBS ID/Task | Budgeted Cost for Work Scheduled (BCWS) or Planned Value (PV) |
| 1.1 Task A | $360,000 |
| 1.2 Task B | $360,000 |
| 1.3 Task C | $360,000 |
| 1.4 Task D | $360,000 |
| Total | $1,440.000 |
Table 3 shows the budgeted cost for the project scope and including the tasks that must be performed according to schedule and budget at completion. Table 4 provides a budget on a time-phased basis.
Table 4
| Task | 3 Months (Jan 1-March) 31 |
3 Months (April 1-June 30) |
3 Months (July 1-Sept. 30) |
3 Months (Oct. 1-Dec. 31) |
| 1.1 Task A | $360,000 | |||
| 1.2 Task B | $360,000 | |||
| 1.3 Task C | $360,000 | |||
| 1.4 Task D | $360,000 | |||
| Cumulative Total |
$360,000 | $720,000 | $1,080,000 | $1,440,000 |
Table 5 shows the status of the Parking Lot Renovation project by analyzing the values of some of the essential components EVM requires to work efficiently.
Table 5
| Terminology | Value | Meaning |
| BAC | $1,440,000 | The total project budget is $1,440,000 |
| PV | $720,000 | Task A and task B are complete. The budgeted cost of the two is $720,000 |
| EV | $360,000 | Only tasks A & B are complete. The budgeted value of each is $ $360,000 |
| AC | $ 1,440,000 | At the end of the 12 months, we would have spent $1,440,000 for the work that is complete |
The Schedule variance (SV)=EV-PV=$360,000-$720,000=-$360,000. This shows how much worth of work the project is behind schedule. The Schedule Performance Index (SPI) =EV/PV=$360,000/$720,000=0.50. This also shows the level of progress the project is making. A schedule variance of 0 is positive; less than 0 is negative. The goal, however, is to have an SPI > 1. Regarding Cost Variance (CV), the result is -10800,000 (CV =EV-AC=$360,000-$ 1,440,000). This shows how much the project has spent on the project more than it should. The CPI=EV/AC= $360,000/$ 1,440,000=. 25. This shows that the project gets only 25 cents on any dollar that is spent on the project.
Estimate at completion (EAC). EAC =BAC/CPI = $1,440,000/. 25 =$5,760,000. This forecasts how much cost will require in completing the project. A correct calculation of EAC is, however, based on assumptions that project practitioners will have to make with regard to spending, trade-offs, and other risk response strategies. In other words, if the project is expected to spend less or more, EAC results can be different. Estimate to Complete (ETC) tells how much more to spend over what the project has already spent. ETC =$4,320,000 (EAC-AC=$5,760,000-$ 1,440,000). VAC =$-4,320,000 (BAC-EAC =$1,440,000-$5,760,000). This is how much the project is expected to overrun the project’s planned value.
Advantages and Disadvantages of Earned Value Management
Table 6
| Advantages | Disadvantages |
| Provides early warning sign and risks | Too bulgy and complex to understand and apply |
| Has the power to forecast project schedule, scope and budget | Requires support from stakeholders and this can be a significant challenge |
| It is a workable tool to measure schedule, scope and cost performances | Requires software and a great deal of knowledge to report on a project status accurately |
| It can find or monitor specific issue in the business or project | Megaprojects pose added challenges to EVM application |
Conclusion
Earned value management is a practical tool in measuring schedule, cost, and scope performances. Its power to forecast and find risks early in a project makes EVM vital. Its primary disadvantage is that it requires a great deal of knowledge and understanding of its terminologies and jargons. It also cannot work without stakeholders’ supports.
References
Chen, M. T. (2008). The abcs of earned value application. AACE International Transactions, EV31-Ev38. Retrieved from http://search.proquest.com.proxy1.ncu.edu/docview/208185862?accounid=28180
Fleming, Q. W., & Koppelman, J. M. (2010). Earned Value Project Management (4th ed.). Retrieved from
Kwak, Y. H., & Anbari, F. T. (2011). History, practices, and future of earned value management in government: Perspectives from NASA. Project Management Journal, 43(1), 77-90. doi:10.1002/pmij.20272
Roberts, D. A., & Garrett, G. A. (2008). Earned value management leadership-the tone at the top. Contract Management, 48(12), 28-33.
Russell, S. H. (2009). Earned value management uses and misuses. Air Force Journal of Logistics, 32(33), 156-161.
