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This paper outlines the theory and uses of Earned Value Management (EVM), its role in project management. Key concepts, metrics and calculations of EVM are described. Ways for managers to react to EVM information are given. Then, reasons why EVM can fail in a company are described, followed by a discussion of EVM challenges and their solutions. Examples of EVM implementation in construction projects are then given.
Key Concepts, Metrics and Calculations of Earned Value Management
EVM was first used by American Department of Defense to measure project performance in a standard manner. It integrates not only cost management, but also scope management and time management. It considers the costs and the time spent, along with the progress of a project in terms of money to control its risk. Using the principle that historical trends and patterns can predict the future, the EVM helps answer the questions regarding the gap between actual and budgeted costs, current status of a project, whether it is behind or ahead of schedule, its current performance, expected cost and time of the project remaining. (Vanhouke, 2009). It also shows how efficiently time and resources are used. EVM can then be used to identify where the problems are appearing, whether they are critical, and what it might take to bring the project back on track. (PMI, 2005)
To use EVM, some key practices should be present. Performance measurement baseline should be established, which includes decomposing work scope to a manageable level, assigning management responsibility clearly, developing a time-phased budget for every task, selecting earned value measurement methods for all tasks, maintaining the integrity of performance measurement baseline throughout the project. (PMI, 2005) Another important practice is to measure and analyze performance against the baseline, which includes recording resource usage during project execution, objectively measuring physical work progress, crediting earned value according to earned value methods, analyzing and forecasting cost/schedule performance, reporting performance problems and taking action.
The metrics that are used in Earned Value Systems include planned value (PV), actual cost (AC), as well as earned value (EV). Those basic metrics are used for earned value reports that integrate them in graphs and tables, variance and index calculations.
Planned value (PV) shows how much a project team plans to have spent at a given date of a project, considering all the activities that are expected to be completed by that date. The PV at the final date of a project is the total project budget. PV is also known as performance measurement baseline.
Actual cost represents actual cumulative costs up to a given point in time. The final value of AC equals the total project cost.
Earned value is the value of all the work done up to a specified project date. It is based on the initial value that is "specified for each deliverable or work package during the budgeting phase". (Brown, 2010)
Issues with Measuring Project Progress
Estimating how much work has been completed can be quite complicated. A technique to calculate EV should be chosen on the grounds of the duration of a project and the tangibility of its product. For projects with tangible product of work, a fixed formula is used for 1-2 period work effort and either weighted milestone or percent complete can be used when there are more than 2 periods of work effort. For projects with intangible product of work, apportioned effort or level of effort can be used (PMI, 2005).
Fixed formula technique includes such methods as 50/50, 25/75, 0/100 techniques. For example, when 50/50 method is used, 50% of work is credited as complete in the period work starts and the rest 50% is credited when all work is completed. (PMI, 2005)
With weighted milestone method, work is divided into segments ending with observable milestones, a value is then assigned to the achievement of milestones.
Percent complete is a subjective method when an appointed worker estimates how much work has been done in percent terms.
Apportioned effort method has a supportive relationship to some other task having its own EV. This way, the value of the supportive task can be estimated on the grounds of this base activity's EV.
When using level of effort method, PV is assigned to each level of effort and is credited as the EV at the end of the measurement period (PMI, 2005).
There are various earned value variance, index and forecast calculations. These calculatioins can help a manager answer various questions, including how the project is doing timewise and costwise. Below are the formulas of these and the information these offer.
Variances and Variance Percentages
Cost variance is the difference between EV and actual value. It shows the gap between the work performed and what has been spent to achieve it. Poor performance is indicated by negative values, demonstrating that the project is over budget. Positive values usually demonstrate good performance. At the same time, large positive cost variance can indicate either resources misallocation or serious errors in resources estimation. Cost variance percent (CV%) is calculated as cost variance divided by EV and demonstrates the percentage relationship between the cost variance and the value of the work completed to date, with positive values being good and negative being bad.
Schedule variance is the difference between the EV and the PV. It shows what the difference between the progress actually made and the progress planned to have been made up to the given point in time is. When the project is behind schedule, this value is negative and indicates poor performance. Small positive values demonstrate good performance. However, when the positive values are significant, resources might be wasted or there might have been some errors of omission. Schedule variance percent (SV%) is calculated as schedule variance divided by PV and demonstrates the percentage relationship between schedule variance and the work value intended to have been completed to date, with positive values indicating good performance and negative indicating poor performance.
Cost performance index (CPI) is calculated as EV divided by AC. It is "a ratio indicator of cost performance in relation to EV". When it equals 1, the performance is to plan; the value greater than 1 shows good performance, the value less than 1 demonstrates poor performance.
Schedule performance index (SPI) is calculated as EV divided by PV. It is "a ratio indicator of schedule performance in relation to EV". When it equals 1, the performance is to plan; the value greater than 1 shows good performance, the value less than 1 demonstrates poor performance.
The variances and performance indices can be graphed over time to get indicators of trends in project performance and help see whether corrective actions have any impact. (Anbari, 2003)
Budget at completion (BAC) equals final value of PV and it "specifies the initial budget for the entire project based on planned expenditures".
Estimate at completion in terms of cost is BAC divided by CPI. It shows what the ending cost of the project is likely to be if cost performance stays within its current pattern.
Revised duration or Time estimate at completion is planned project duration divided by SPI. It indicates how long it will take to complete the project, if schedule performance follows the same pattern as it has.
To-complete performance index is calculated as work remaining divided by budget remaining. It shows what level of performance is needed to "complete the project within the baseline budget", from the data date forward. (Brown, 2010)
When the project is on schedule and on budget, cost variance and schedule variance equal 0, cost performance index and schedule performance equal 1. The interpretation of other situations is given in the table below.
Figure 1. Interpretations of Basic EVM Performance Measures (source: PMI, 2005)
EVM data can be presented in various ways, depending on the needs of the information user. Most common methods include s-curves, tables and bar charts. S-curves are used for demonstrating overall performance of a task, a control account or a project. Typically, EVM S-curves are displayed on X-Y axis, with Time on X axis and Resources on Y axis, showing PV, EV and AC. As for tables, they are a logical follow-on to an S-curve and are useful when showing results by project component, for example, displaying various EVM calculations across and individual project components down the side can give a concise look of what the situation in every project components really is. Bar charts can then help provide comparison of data. (PMI, 2005)
Reacting to Project Variances Indicated by the Earned Value System
EVM can help managers get early warning signals or triggers, helping them take timely actions in response to poor performance indicators, thus enhancing potential project success. (Anbari, 2003)
When variances exceed control thresholds and their causes are known, a project team can get a project on track with initial commitments and plans doing one of the following. The team can compress or crash the critical activities left. Also, the team can negotiate a new date to avoid disappointment with project delays. The teams with undesirable variances need to have assistance provided to them. Critical materials should be delivered on-time or expedited, so the team can negotiate the terms with internal and external suppliers. The project scope might be reduced, the scope creep should be checked for and the change control process should be engaged. The project schedule and the budget can be revised if scope and specifications have changed. (Brown et al, 2010)
Top Mistakes When Using Earned Value Management and Reasons why EVM does not Work
There are many reasons why EVM does not work in some companies. To start with, companies that are not mature and that do not have process and procedures in all projects should not attempt to use EVM. The other reasons why EVM can fail include the following issues in companies: no documented requirements, incomplete requirements, Work Breakdown Structure (WBS) not used or not accepted, WBS incomplete, plan not integrated (WBS -Schedule-Budget), schedule and/or budget incorrect, change management not used or ineffective, cost collection system inadequate, incorrect progress; and management influence and/or control (Lukas, 2008).
Solutions to Earned Value Challenges
There are quite some challenges that EVM can pose to a company (Brown et al, 2010). These challenges and their solutions are described below. The first issue concerns the fact that some companies can change the PV as the project is in progress,AC and EV information becoming available. Doing this, they eliminate the differences between those three indicators. This eradicates historical data and gives the team an excuse to not diagnose or correct performance gaps. The cause of this behavior is a belief that a monitoring system can be used as a blame-casting or punishing tool, while the teams should be persuaded that the system is used to solve problems. Trust should be gained, using EV monitoring system first in smaller pilot projects.
Another challenge is that the project teams tend to avoid the scrutiny coming with progress variance to avoid having a failure indicated. As a result, achievements are overreported, 90 percent complete is reported continuously as the teams hope to catch up with performance thresholds. The result of this is that managers are not aware of the problems and thus no support is provided. The teams should see the advantages of accurate progress reports. This issue can be resolved by giving the teams only three progress figures: task not started (0%), task in progress (50%) and task complete (100%).
Some project team contributors might not be familiar with EV system language. Thus they should be asked how much more time they need, rather than be asked for their percent complete. This way, the data will be reported and the manager can himself or herself estimate a percent complete. This way, the manager can also react to the problems and ask how to help a team get back on schedule. At least a simple form of EVM can be used in any industry with any capital project, according to Fleming and Koppelman. (Fleming et al, 2002)
AC estimation can be a big challenge. A lot of costs should be monitored for each task, including wage rates, material and travel expenses, etc. All the factors of a multifactor cost system are important for overall project performance, however, when doing EV reporting, they can be omitted and only labor costs can be included. It is even less complicated to use person hours as the measure unit.
EVM metrics should not be used in the exclusion of other performance indicators. For example, EVM has an assumption that the remainder of work will have the same relative cost variance as the work completed, though sometimes past performance is not a perfect predictor of future performance when there were some big problems in the beginning of the project that are not likely to occur again. Furthermore, costs should be projected incorporating cost implications of a schedule variance. Another common misuse is using only Schedule Variance for schedule variance as, for instance, some tasks might be done out of sequence, with costly activities done ahead of schedule and lower-dollar critical activities being behind schedule, EVM showing a favorable situation while it is not the case. (Russel, 2008) True schedule management tools should be used along with EVM to ensure that EVM does not provide misleading information. The reasons behind EVM indicators calculated should be investigated to make sure that what EVM shows is actually true.
A team should not focus on numbers only, casual factors must also be considered when making decisions as EV data only informs decisions and should not make them for a manager. For example, a negative cost variance for an activity might not necessarily mean poor performance but indicate that the activity has the added expense because of being ahead of schedule.
Project's strategic goals should always be a priority. When a team focuses on EV monitoring too much, not enough attention might be given to what the actual goal was. "Time and cost should not be the only metrics on a project's dashboard" (Brown et al, 2010).
Example of the Use for Construction Projects
In construction projects, most data is already available, with only performance efficiency factors and forecasts to be calculated. There are six recommendations. Firstly, a schedule of values should be provided by performing suppliers. Then, all the suppliers should reflect actual costs incurred and update the schedule of values. The performance of both cumulative CPI and SPI should be monitored. The likely final costs should be continuously forecasted to ensure staying within acceptable cost risks. Fixed-price suppliers should be required to provide a projection of anticipated costs, which should resemble an S-shape. Front-loaded project baselines should be avoided to avoid paying for work not completed. When making payments to fixed-price suppliers, it should be certified that their projected costs have not been exceeded and, if they have been, then the amount should be disclosed. Using these recommendations, the financial risks of construction projects can be mitigated. (Fleming et al, 2002)
EVM can provide crucial information for decision-making within a project, putting together scope, cost and schedule status data. Its capabilities are not fully understood but what can help spread the use of EVM includes simplification of EVM calculations and the use of graphs in trends understanding as well as successful application of EVM in industry.