Earned Value Management (EVM) Part 1

1. INTRODUCTION

Earned Value Management (EVM) is an industry standard method of measuring a project's progress at any given point in time, forecasting its completion date and final cost, and analyzing variances in the schedule and budget as the project proceeds. It compares the planned amount of work with what has actually been completed, to determine if the cost, schedule, and work accomplished are progressing in accordance with the plan. 

As work is completed, it is considered "earned". The Office of Management & Budget prescribed that EVM is required on construction projects.

Earned Value Management (EVM) is a snapshot in time, which can be used as a management tool as an early warning system to detect deficient or endangered progress. It ensures a clear definition of work prior to beginning that work. It provides an objective measure of accomplishments, and an early and accurate picture of the contract status. It can be as simple as tracking an elemental cost estimate breakdown as a design progresses from concept through to 100% construction documents, or it can be calculated and tracked using a series of mathematical formulae. In either case, it provides a basis for course correction. 

It answers two key questions:

1. At the end of the project, is it likely that the cost will be less than, equal to or greater than the original estimate?
2. Will the project likely be completed on time?

2. Work Breakdown Structure (WBS)

Earned Value Management (EVM) works most effectively when it is compartmentalized, i.e. when the project is broken down into an organized Work Breakdown Structure, or WBS. The WBS is used as the basic building block for the planning of the project. It is a product-oriented division of project tasks that ensures the entire Scope of Work is captured and allows for the integration of technical, schedule, and cost information. It breaks down all the work scope into appropriate elements for planning, budgeting, scheduling, cost accounting, work authorization, progress measuring, and management control. The indirect costs of design, oversight, and management must be included in the WBS to reflect the full budget.

3. Calculating Earned Value

Earned Value Management measures progress against a baseline. It involves calculating three key values for each activity in the WBS:

1. The Planned Value (PV), (formerly known as the budgeted cost of work scheduled or BCWS)—that portion of the approved cost estimate planned to be spent on the given activity during a given period.
2. The Actual Cost (AC), (formerly known as the actual cost of work performed or ACWP)—the total of the costs incurred in accomplishing work on the activity in a given period. This Actual Cost must correspond to whatever was budgeted for the Planned Value and the Earned Value (e.g. all labor, material, equipment, and indirect costs).
3. The Earned Value (EV), (formerly known as the budget cost of work performed or BCWP)—the value of the work actually completed.

These three values are combined to determine at that point in time whether or not work is being accomplished as planned. The most commonly used measures are the cost variance:

Cost Variance (CV) = EV - AC

and the schedule variance:

Schedule Variance (SV) = EV - PV

These two values can be converted to efficiency indicators to reflect the cost and schedule performance of the project. The most commonly used cost-efficiency indicator is the cost performance index (CPI). It is calculated thus:

CPI = EV / AC

The sum of all individual EV budgets divided by the sum of all individual AC's is known as the cumulative CPI, and is generally used to forecast the cost to complete a project.

The schedule performance index (SPI), calculated thus:

SPI = EV / PV

is often used with the CPI to forecast overall project completion estimates.

A negative schedule variance (SV) calculated at a given point in time means the project is behind schedule, while a negative cost variance (CV) means the project is over budget.

Earned Value Management System (EVMS)

A list of guidelines is provided which covers areas such as planning, scheduling & budgeting; accounting issues; management reports, and so forth, however there are no "approved" systems identified. But the basics of any EVMS are:

1. A methodical, organized, thorough, and complete WBS
2. A baseline schedule
3. A baseline budget, organized into control accounts
4. Measurement of the work by control account (e.g. $, units in place, man-hours, etc.)

Scheduling the authorized work is no different than in any large construction project—it is a necessary activity for the success of the project. However in an EVMS the schedule will integrate all of the technical, cost, and schedule aspects of the work, resulting in the expected sequence of work. Interdependencies are established that result in the total work time and reveal the critical path, which is also the shortest project duration.

Within each task it is then necessary to identify objective interim measures to allow for accurate performance assessment each month. A sufficient number of these interim measures will be defined after the detailed schedule is established to ensure the performance is measured as accurately as possible.

On at least a monthly basis, generate schedule variance data that provide visibility into root causes and establish actions to achieve project completion. The first intent if this criterion is to establish the fact that analysis, to remain viable, must be accomplished on a regular, periodic basis. The second intent is to foster analyses and identification of root cause and resulting impacts at the control account level."

The monthly performance report must include:

• BCWS, BCWP, ACWP
• Cost Variance (CV)
• Schedule Variance (SV)
• SPI (Schedule Performance Index)
• CPI (Cost performance Index)
• Variance at Completion (VAR)
• A variance analysis narrative