Earned Value Management Tutorial Accounting Essay

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Earned value management is a project management tool used to measure the success of a given project at a certain point of time with the use of criteria such as scope, schedule and budget. It takes a critical look at factors such as whether the project is ahead or behind budget, whether the project is ahead or behind schedule or whether the actual work is getting done. Founded in the 1960's, earned value management has become a standard for US government departments when projects are undertaken, with most of them making it a mandatory tool for measuring the success and effectiveness of a project.

In short, "Earned Value Management (EVM) helps project managers to measure project performance. It is a systematic project management process used to find variances in projects based on the comparison of worked performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting. The project baseline is an essential component of EVM and serves as a reference point for all EVM related activities. EVM provides quantitative data for project decision making."(Dwivedi, n.d.)

Terms and concepts used in earned value management

Earned value management is driven by 3 main concepts. They are, according to (Price, n.d.), scope (tasks), schedule (time) and budget (cost). There are three principal metrics used in earned value management to determine the success of a project. According to (Marshall, 2007), they are,

"1. Budgeted cost of work performed

(BCWP or EV) = Earned Value

2. Actual cost of work performed

(ACWP or AC) = Actual Cost

3. Budgeted cost of work scheduled

(BCWS or PV) = Planned Value".

Another metric that can be added to the primary metrics of EVM is Budget at Completion (BAC), which in turn gives out the total cost of the project. Formulas are available to determine the primary data sets that have been described above.

Planned Value(PV), or the amount of work scheduled to be done as per the initial time phased baseline can be calculated using the formula of,

PV=BAC*Percentage(%) of planned work

Earned value(EV), or the percentage of the original budget that has been earned because of the work that has been actually completed, can be calculated using the formula of,

EV=BAC*Percentage(%) of actual work

Actual Cost(AC), which can be calculated once all the actual costs incurred are summed up

Using the above primary metrics or data points, a set of derived metrics can be calculated.

Cost Performance Index (CPI) can be defined as the ratio between EV and AC

CPI=EV/AC

If CPI value is equal to 1, it indicates that the activity is on budget

If CPI value is smaller than 1 (CPI<1), it indicates a cost overrun

If CPI value is larger than 1 (CPI>1), it indicates a better than planned cost performance

Scheduled Performance Index (SPI) can be defined as the ratio between EV and PV

SPI=EV/PV

If SPI is equal to 1, it indicates that the activity is on schedule

If SPI is smaller than 1 (SPI<1), it indicates a schedule overrun

If SPI is larger than 1 (SPI>1), it indicates that the activity is ahead of schedule

Scheduled Variance (SV), indicates the difference between work performed and work scheduled

SV = EV-PV

Cost Variance (CV), indicates the difference between the amount of money that was actually spent against the work that was actually performed

CV = EV-AC

Estimate at Completion (EAC), indicates the estimated cost that would be incurred to complete the project

EAC = BAC/CPI

Advantages and disadvantages

Earned value management has become the preferred choice for most US government departments and agencies when it comes to determining the effectiveness and success of a given project. However that does not mean it is without it flaws. First we shall examine some advantages of earned value management that help it garner such accolade amongst project managers across the US. According to (Clayton, n.d.), earned value management has four principal advantages that set it apart from the rest of project management tools.

"A Single System

Perhaps the biggest benefit to implementing EVM is that it is a single system that can track the project in terms of work, time and money; Project managers do not have to learn multiple systems. EVM can measure the amount of work actually completed; forecast the cost and completion date; compare the actual performance of the project versus the plan; and track the project's budget in real time.

Variance

Variance is an examination used in EVM of what caused a difference between the projected baseline and the actual performance. This can be measured on three different levels: estimated to planned, planned to actual and estimated to actual. The process for determining variance depends on many factors including the industry, the parameters used and standards. Always verify the data when analyzing variance. It is critical to have complete, accurate information when performing the calculations. The difference discovered in calculations can show you how far away the project is from "normal." It can also help track down the root of the problem.

Performance Indices

The schedule performance index (SPI) and the cost performance index (CPI) are both advantageous tools in EVM. These metrics can help determine the current status of the project, be early warning signals if the project goes off track and estimate the total cost and time frame. The SPI measures all of the work completed on the project and calculate whether the project will meet, beat or miss its planned finish date. The CPI is considered by most project managers to be the most valuable EVM metric. This measures cost efficiency for the work completed. Simply put, it can tell you if your project is under or over budget at any point during the process.

Flexibility

When the results of the metrics used in EVM show that changes are needed, the project manager can adjust the work or budget to help bring the future performance of the project back in line with projections. The metrics can also pinpoint where any troubles are within the project. The project manager can then take preventive efforts to reduce the possibility of those troubles occurring again. Most importantly, EVM allows for these changes to be made in a flexible, timely manner at any point during the project's development and implementation."

Given the advantages it is clear why project management has such a high degree of trust from project managers when measuring performance of a project. However as with most project management tools it is not without its collection of faults.

One of its principal disadvantages is that it does not take quality in to consideration. Earned value management tests whether the project is under budget or if the work is ahead of schedule, however the quality of the work that is being produced goes unchecked. Since quality is an important aspect of the overall product, earned value management does a lackluster task of keeping a tab on the overall quality. According to (Price, n.d.), quality is not the only weakness of earned value management.

"EVA uses the planned schedule and budget along with what has actually occurred to develop three values that indicate the relative health of a project. These values are: Planned Value (PV), which is the budgeted cost of tasks that should be complete; Earned Value (EV), which is the total budgeted cost of complete tasks; and Actual Cost (AC), which is the total expenditures to-date.

Example: The project budget is $100,000. Sixty percent of the tasks should be complete, so PV is $60.000. Only 50 percent of the tasks are actually complete, making EV $50,000. AC is $65,000.

EVA Variances

EVA calculates two variances: cost variance (CV) = EV - AC, and schedule variance (SV) = EV - PV.

Using the values in Section 1, CV is minus $15,000. It has cost $65,000 to complete $50,000 of planned work. SV is minus $10,000. The project is behind schedule by $10,000 worth of work.

EVA Indexes

Two indexes indicate the performance of the project. Cost performance index (CPI) = EV/AC. Schedule performance index (SPI) = EV/PV. Using the data in Sections 1 and 2, CPI is 0.77 and SPI is 0.83.

If the indexes are equal to one, the project is on schedule/on budget; less than one, the project is behind schedule/over budget; and greater than one, the project is ahead of schedule/under budget.

CPI Issues

Once a project is over/under budget, CPI remains essentially the same for the remainder of the project, unless EV or AC changes significantly. CPI is dependent on AC for accuracy. If AC does not include all appropriate costs and payments, CPI can be unreliable.

SPI Issues

EVA cannot tell a critical task from a noncritical task. SPI may be misleading when an ahead-of-schedule noncritical task overshadows a behind-schedule critical task. The SPI may indicate a healthier project than actual reality.

Why Not EVA?

Project managers give many reasons for not using EVA, including expense to implement, requires EVA software, involves many others in many departments, divulges more information than desired and it is too complex.

If the project scope, schedule or budget is ill-defined, its goals and outcomes are vague, the Work Breakdown Structure (WBS) is incomplete, the AC collection system does not report costs timely, management exerts undue influence or distraction, or the time to properly setup data is not available, EVA may be a waste of time."

Earned value management and its relevance to project management

Since its inception earned value management has had a specific interest in the ability to manage a project effectively and efficiently and to make maximum use of the resources available to the project manager. By taking in to account cost/budget, schedule and scope, it allows project managers to make sound decisions when all matters have been considered. It also allows flexibility to the management to make radical new decisions in case some adverse and unexpected changes occur to the scope or any other important metric. However the most important aspect of earned value management can be considered as its ability to allow management to always measure the success and effectiveness of a project at a given point of time, thus allowing management to make any changes if any are required to redirect the project along the intended path, which is also the view echoed by (Kerby & Counts, n.d.).

"EVM is a tool that integrates the cost, schedule and technical

requirements of a project. It requires discipline in all aspects of the project; it requires

that the organization performing the tasks to plan the work and then to work to that plan.

Obviously, some problems will occur that could not be predicted and therefore will not

be a part of the initial plan; however, good planning does allow a manager to better

mitigate those issues and concerns that are known. The use of EVM also helps the

project manager in determining the current project status by answering questions such as: Are we on schedule? Are we on cost? Do the costs reflect the true accomplishments?

What are our variances? An added advantage of EVM is the identification of trends that

helps a manager better predict where the project or a particular element is headed and a

better method to establish a realistic Estimate At Completion (EAC) for the project. In

essence, EVM gives personnel more reliable information to make better management

decisions"

Case Study

A non-profit organization has commissioned Invictus Technologies to build the organization a website in order to carry their message across to a wider audience. After negotiations, the organization has agreed to a budget of $100,000 to complete the project. Invictus Technologies has agreed to hand over the product to the non-profit organization in 10 weeks. They have also decided to adopt Earn Value Management as its preferred project management tool to ensure the project is completed within the designated time and within the pre-agreed to budget.

Assessment

Answer the following questions based on the case study that has been given.

What are the principal factors Invictus Technologies should consider when adopting Earned Value Management as their project management tool?

What are the 3 main metrics of earned value management?

After 6 weeks, Invictus Technologies have calculated that the actual progress they have made is 70% and that the scheduled progress for that time period should be 60%. The actual cost they have incurred up to week 6 is $75,000.

Calculate the Planned Value for week 6

Calculate the Earned Value up to week 6

What is Scheduled Variance? Calculate the scheduled variance for week 6 and determine whether the project is ahead or behind schedule and by how much.

What is Cost Variance? Calculate the cost variance for week 6 and determine whether the project has a cost overrun or if the project is under budget.

Calculate the Scheduled Performance Index (SPI) and state your observations.

Calculate the Cost Performance Index and state your observations.

Calculate the Cost Estimate at Completion and Variance at Completion.

Calculate Estimate Time to Complete

State your observations on the project.

Answers

The principal factors Invictus Technologies should consider when earned value management selected as the preferred project management tool are Scope, Schedule and Budget.

The three main metrics of earned value management are Actual Cost, Earned Value and Planned Value.

Calculations are listed below. The formulas that will be used are, PV=BAC*Percentage (%) of planned work, EV=BAC*Percentage (%) of actual work.

PV = BAC*Percentage (%) of planned work

PV = $100,000*60%

PV = $60,000

EV = BAC*Percentage (%) of actual work

EV = $100,000*70%

EV = $70,000

Scheduled Variance indicates the difference between work performed and work scheduled.

SV = EV - PV

SV = $70,000 - $60,000

SV = $10,000

Project is ahead by $10,000 (1 week).

Cost Variance indicates the difference between the amount of money that was actually spent against the work that was actually performed.

CV = EV - AC

CV = $70,000 - $75,000

CV = -$5,000

Project has a Cost Overrun of $5,000.

SPI = EV/PV

SPI = $70,000/$60,000

SPI = +1.16

Activity is ahead of schedule.

CPI = EV/AC

CPI = $70,000/$75,000

CPI = 0.93

Project has a cost overrun.

Cost Estimate at Completion

EAC = BAC/CPI

EAC = $100,000/0.93

EAC = 107,526.88

Cost Variance at Completion

VAC = BAC - EAC

VAC = $100,000 - $107,526

VAC = $7,526

ETC = Original Estimated Duration/SPI

ETC = 10 Weeks/1.16

ETC = 8.62 Weeks

The Project will have a cost overrun of $7526 but will be completed 1.4 weeks ahead of schedule.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.