What is Earned Value Management and How to Calculate It
Well, there is a saying that management is the key to success. If we look around and analyze, we will find this saying nothing but true. And it is not only about the business industry anymore. Anything we need to do in our professional life or personal life needs management. No one can say it is an easy thing to manage something, be it a project or an office meeting. It takes away one’s peace because there are multiple things one needs to look after when he starts managing something.
Management plays a vital role in organizing a venture. It gives the shape and makes it work smoothly. There are many benefits to management. In management, we have a plan for everything, and everything works in a chain. We know how chaotic a project can be, and we manage that chaos as well in the management. It also enforces teamwork because the manager wants results, and he wants us to work as a team and produce results. Management is all about producing better results with limited resources. As we know, there is always an allotted budget for all the projects, and when we use project management strategies, we can control cost and the risk of budget overruns. Not only it controls cost but also manages to bring the best quality. All the knowledge and experience that a project management venture requires is very high. Not always these ventures go as planned. Sometimes there are failures and mishaps, but tackling those things is also a part of project management.
Project Management Techniques
The hardest thing about a project is to start it. Once it starts, things keep fitting at their places. There is a reason why the beginning of any project is considered to be most important. Because in the beginning, you decide everything, from workflow to resources to project budget and anything you can think of. Most importantly the technique of project management you will be using throughout this venture. This technique you choose at the start helps you until your project is done. With the help of this technique, you make critical decisions during the time of the project. There are multiple techniques that we can select for our project, but few are the popular ones. Let us look at those techniques.
- Work Breakdown Structure (WBS)
As the name implies, there is a breakdown. In this technique, the activities of a big project are broken down into small chunks. With these small chunks, things become doable as small goals are easy to achieve. And, it will also be an easy thing to make your team understand these small tasks, and they will do it without getting tired.
- Gantt Charts
It is one of the first project management techniques but still works flawlessly. In this technique, there is a visual representation of the project and all the small tasks of the projects with the time-span for every task. By using this technique, you can easily predict the total time of the project and the dependencies all the tasks will have.
- Critical Path Method (CPM)
This is a project management technique that we use if we want to schedule all our project activities accurately. What we do in this technique is, we calculate the easiest and shortest path to the completion of the project. And then, we arrange all the tasks according to that path.
Kanban is the oldest and most manageable technique of project management. Kanban technique being the easiest one is always preferred by the first-timers. In this technique, we create lists of to-do tasks, ongoing tasks, and completed tasks. And then, you with your team can work the task to shift them in the lists. It is usually applied to simpler tasks, and not the critical ones.
- Earned Value Management
Another technique that is the gold standard technique in project management is EVM. It is an effective technique that helps you in managing the schedule and budget of your project. It is the most popular project management technique, even the US government uses it to manage its projects and ventures. Let’s discuss it in detail.
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Earned Value Management
Like every other technique, Earned value management is a project management tool or technique that we can use to understand the performance of our project in terms of schedule and the cost of it. It is also used to predict the future of a project i.e. how the project will be performing in the long run. It is a different thing and has nothing to do with earned value. Earned value is the value we assign to something this value can be in hours or maybe in currency. On the other hand, we are talking about earned value management, which is a technique to manage the costs of the project and to predict the future performance of that project.
EVM is one step ahead of all the traditional project management techniques we have seen before, and it gives us more precise data than any of those approaches. There are some questions EVM answers about the project. It tells us where were we standing before starting with EVM. Where we are right now as we have started with the EVM. And, where we will be going in the future.
There are components of earned value management that help us understand how a project will be performing in the future. Those four components are:
- Budget at Completion
It is the total cost of the project until now. It can be the approved budget for some tasks performed at a certain time, or it can be a total sum of all the tasks, that are to be done up to a certain date.
- Budgeted Cost of Work Scheduled
It is the estimated budget of all the work that is to be performed for the project. We can see it as the cumulative sum of all the work or the work that we have done by now.
- Budgeted Cost of Work Planned
It is the budget value for all the tasks we have completed by now. It does not include anything that is yet to be done.
- Actual Cost of Work Completed
It is the actual cost of the work that has been finished by now. There is no estimation is this one like all others. It shows the facts as they are.
Dynamics of EVM
The dynamics of earned value management are very broad. Because It is a systematic process by which we can find the variance by doing comparisons of work that is done, and the work that was supposed to be done. It is the job of the project manager to use this technique to find out the cost, and schedule of the project, apply it and get the results. In EVM, all the project related activities are there, which turns into proper quantitative data for decision making about the project. Today EVM is so powerful that whenever there is something related to management, managers prefer this technique. Even in professional certifications, the value of EVM is very high. In PMP certification training, they teach you all about EVM and let you perform this technique practically.
Indicators of EVM
If we want to find out the cost and schedule of the project, we will need some indicators to denote them. Let’s see those indicators of EVM.
- Schedule Variance (SV): It is the indicator for variance between the amount that was specified for the done work, and for the work we planned we will do. It shows if your work is behind or ahead of the schedule.
- Cost Variance (CV): It is the indicator for variance between the budget that we decided, and the budget that we spent for real. It shows if you are over your approved budget or under it.
- Schedule Performance Index (SPI): It is the indicator for the ratio between the approved amount for the work that has been done, and the approved amount for the work we planned.
- Cost Performance Index (CPI): It is the indicator for the ratio between the approved amount for the done work, and the amount we spent on the work for real.
Read more: Future of Project Management
Benefits of Earned Value Management
As we have discussed throughout, how earned value management has edge over all other traditional techniques. Most of those traditional techniques work of theoretical principles, or graphs and images. Whereas EVM is a mathematical and systematic approach, that can be trusted blindly. It has proved how strong and powerful technique it is for the monitoring and project feedback purpose. With EVM applied to the project, we have better control of our project.
How to Calculate EVM
Most of the time, there are cases in which nobody knows the true status of a project, not until it reaches its completion time. And in the end, nobody can do anything if the project is late or on time. To monitor the status of a project, the starting time is the proper time, because, at that time, you can manage the project risks and bring it back on track.
In earned value management, we measure the progress of the project from the very start. We do it by comparing the actual time we set for each task and the time this task takes. It goes the same for the budget amount. Our focus is always on two things here, Schedule of a task and cost of a task. It is better if we perform this technique in chunks exactly like our project. These steps are not hard and anyone can easily do it.
- Determine Percent Complete
We need to find out the percentage of completion for every ongoing task. There are three conditions for small tasks that are, not started, in progress, and complete. By doing this, the workload becomes manageable.
- Determine Planned Value
In this step, we find out the amount of activity that we needed to complete by now. It is in terms of money, as it is part of the task budget. For example, it would be like; Budget of the task is $3000. The starting date of the task is February 2, and the finishing date is February 15.
- Determine Earned Value
Earned value is the amount spent on the work that we have done by far. It is also in terms of money, as it is also a part of the task budget. We can take the same example as we did in determining the planned value.
- Obtain Actual Cost
It is the actual cost of the project, the cost it has taken to complete the project. It includes everything like materials, labor, equipment, and everything else.
- Calculate Schedule Variance
It tells us about the status of the schedule of the project. It goes like:
SV = EV – PV
Schedule variance is the difference between planned value and earned value.
- Calculate Cost Variance
It tells us about the status of the cost of the project. It goes like:
CV = EV – AC
The cost variance is the difference between actual cost and earned value.
- Calculate Other Status Indicators
SV and CV are the actual indicators we need to find, and they work very well with the small-sized projects. But, for big projects to work well, we will have to find some more indicators. Those indicators are:
- Schedule Performance Index: SPI = EV / PV
- Cost Performance Index: CPI = EV / AC
- Estimate at Completion: EAC = AC+ BAC – EV
- Estimate to Complete: ETC = EAC – AC
- To Complete Performance Index: TCPI = (BAC – EV) / (BAC – AC)
Here they are the indicators you need to find out to tackle big projects.
- Compile the Results
It is now the time to compile all the indicators, look for the changes that we need to do, and apply those changes according to the values we get from indicators. When all the obtained results are applied to the project, your project will be in better shape than before and you will succeed in making it successful.
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