Blog Barista: Bob Marquis, CPA, PMP, PgMP | May 26, 2020 | Project Management | Brew time: 5 min
What does a project sponsor or project executive want to know about their project?
In simplest terms, they want to know, “How are we doing? Is the project going as planned?” These questions, of course, cover a number of dimensions such as schedule, cost, quality, scope, and ultimately actual benefits. Looking at these factors gives us an indication of the health of the project. All of these factors are important, particularly actual benefits delivered. However, in this post, I’d like to focus on two primary indicators of a project’s health: schedule and cost. Earned Value Management can be very valuable in this regard. It is the best method available to assess a project’s schedule and cost performance.
It is important to note that in order to use Earned Value Management, we have to have an actual project. Projects by definition are finite. In other words, they have a defined start and an end. If work is ongoing and doesn’t have a defined end state, then it’s not considered a project. It’s just regular operations. Measuring continuous operations is done differently than measuring projects. Earned Value Management depends on having a planned schedule of work and a final cost so that we can compare how we are doing to what we had planned.
That’s all earned value is really about, comparing actuals to plans. Some project management practitioners will shy away from using earned value because they think it is too complex. It’s not. It’s actually a simple concept that is measured with a few formulas and data points. So, how do we do it then?
Without worrying about formulas yet, the comparisons are simple. There are three key elements to determining earned value: schedule, cost, and work. From a schedule perspective, we would say, “per the schedule, I planned to have this much work done by now. How much work have I actually gotten done; more, less, or exactly as planned?” The same is true for costs. I planned to have spent this much of my budget by now to complete the work to date. How much have I actually spent? The comparison of the actuals for the three elements (schedule, work, and budget) versus the planned elements will tell us if we are on track, ahead, or behind on our project.
There is one other aspect to this. Based on where we are now, we want to know where we might end up. In the end, are we likely to finish early or late? Are we going to be over or under budget? By knowing where we are now and where we are headed, we can make adjustments to maximize the value of the project. This is the essence and value of Earned Value Management.
The formulas used to conduct the comparisons of our planned schedule and costs versus our actuals are straightforward if you understand the concept outlined above. For example, if we had planned to spend $50,000 for a defined amount of work in the project, but we’ve already spent $60,000 to get that work done, we’re over-budget. Our cost variance is -$10,000. The formula below is simplified a bit, but the cost variance is essentially what you would expect:
Cost Variance (CV) = Budgeted Cost (BC) – Actual Cost (AC): $50K – $60K = -$10K.
*Note: As a percentage, we would say that we are over budget by CV/BC, $10K/$50K, or 20%.
Of course with any comparisons, other variables and more specific formulas are used to provide even more insight. A detailed description of the Earned Value formulas and their use can be found here. A great 3-minute video can also be found here. I have to acknowledge that getting a full understanding of Earned Value Management does take some effort, particularly to understand the terminology. But if you understand the objective (i.e. how are we doing) and the concept, the formulas will naturally flow.
Earned Value Management can be used for traditional Waterfall projects as well as Agile projects. As with any tool or technique, there are limitations. Like any measurement system, the biggest challenge in applying earned value is capturing the data. This means that time, cost, and effort estimates have to be developed at the start of the project to determine the planned amounts. Then, actuals need to be tracked during the project. On the other hand, these factors don’t have to be determined to the penny or to the minute to be of value. An appropriate level of detail can provide significant value in monitoring and reporting project progress. Earned Value Management is a proven tool to not only keep projects on track but to concisely report status to sponsors and executives.
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