Basics of Earned Value Analysis
What is Earned Value Analysis?
Earned Value Analysis (EVA) or Earned Value Management (EVM) is considered to be one of the more difficult concepts for PMP Exam. PMP aspirants are just afraid EVA terms. PMP aspirants dread EVA formulas and calculations associated with them.
Let me be honest here. My first experience with Earned Value Analysis was on similar lines. I did not find the concept intuitive when I started preparing for my PMP exam. Even though my first experience was not a pleasant experience, I persevered. I understood Earned Value Analysis with the help of a small example. One of my friend helped me in the process. After, I understood the topic, Earned Value Analysis seemed like a walk in the park. Since then my opinion about Earned Value Analysis has changed completely.
[infobox color=”#bee7e1″ textcolor=”#000000″ icon=”lightbulb-o”]You need a good teacher to get you started with a new concept.[/infobox]So,
- Is Earned Value Analysis as bad as it is made out to be?
- Why do PMP aspirants find Earned Value Analysis difficult?
- Is there a easy way to understand Earned Value Analysis?
Earned Value Analysis concept is lot simpler than it is made out to be. I believe the current situation is a combined result of poor teaching and poorly written PMP reference books.
The basic principle of EVA is based on the fact that everyone understand Language of Money. In EVA everything is measured and reported as Money or Monetary Equivalent. The project team determines the equivalence between Scope, Schedule, Cost. From thereon everything is reported as Money. EVA provides a singular view of Schedule and Cost.
Earned Value Analysis (EVA) using an Example
I have written this article to explain EVA using a small example. In another post, I have explained EVA in simple and easy language. You should read both these articles together. Let us consider a small project for building wooden tables to understand EVA.
Project Plan
Project Scope | Build 80 tables |
Project Schedule Estimate | 5 Days |
Cost Estimate per Table | 1000 units of money |
Project Cost Estimate | 80000 units of money |
The above table provides a equivalence between Project Scope, Project Schedule and Project Cost. Following table provides detailed Schedule and Cost Estimates.
Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | |
---|---|---|---|---|---|
Tables Planned to be Built | 10 | 13 | 17 | 20 | 20 |
Estimated Cost for the Day | 10000 | 13000 | 17000 | 20000 | 20000 |
Estimated Cumulative Cost | 10000 | 23000 | 40000 | 60000 | 80000 |
Project Tracking
Let us assume that, the project has been started and we are evaluating the progress at the end of Day 3. Following table provides status at the end of Day 3. Two new rows depict the progress of the project.
Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | |
---|---|---|---|---|---|
Tables Planned to be Built | 10 | 13 | 17 | 20 | 20 |
Estimated Cost for the Day | 10000 | 13000 | 17000 | 20000 | 20000 |
Estimated Cumulative Cost | 10000 | 23000 | 40000 | 60000 | 80000 |
Actual Cost for the Day | 8000 | 12000 | 16000 | ||
Actual Cumulative Cost | 8000 | 20000 | 36000 |
Is the Project Team making good progress?
Work Scheduled at the end of Day 3 (Cumulative) = Tables that are worth 40000 units of money (Instead of talking about tables, EVA talks about Monetary Value of Work)
Actual Cost at the end of Day 3 (Cumulative) = 36000 units of money
On the face of it, it looks like, Project Team is making good progress. Planned Work was worth 40000 units whereas as Actual Cost is 36000 units.
Hey! Let’s wait a minute. What is the Value of Actual Work? Or, in other words, how many tables were produced at the end of Day 3? So we need a third variable to determine Project Progress. Let us introduce some more data in the above table.
Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | |
---|---|---|---|---|---|
Tables Planned to be Built | 10 | 13 | 17 | 20 | 20 |
Estimated Cost for the Day | 10000 | 13000 | 17000 | 20000 | 20000 |
Estimated Cumulative Cost | 10000 | 23000 | 40000 | 60000 | 80000 |
Tables Actually Built | 8 | 12 | 15 | ||
Value of Tables Actually Built | 8000 | 12000 | 15000 | ||
Cumulative Value of Tables Actually Built | 8000 | 20000 | 35000 | ||
Actual Cost for the Day | 8000 | 12000 | 16000 | ||
Actual Cumulative Cost | 8000 | 20000 | 36000 |
Introduction of a new variable changes the whole scenario
Work Scheduled at the end of Day 3 (Cumulative) = Tables that are worth 40000 units of money
Actual Cost at the end of Day 3 (Cumulative) = 36000 units of money
Work Performed = 35 tables or 35000 units of money at Budgeted Cost (Instead of talking about tables, EVA talks about Monetary Value of Work)
Let us re-write these terms again
Budgeted Cost of Work Scheduled (BCWS) = 40000
Budgeted Cost of Work Performed (BCWP) = 35000
Actual Cost of Work Performed (ACWP) = 36000
These are the 3 basic terms/values of EVA. The modern names for these terms are
[custom_list icon=”plus-circle” iconcolor=”#5e9c19″]
- Planned Value (PV) = BCWS
- Earned Value (EV) = BCWP
- Actual Cost (AC) = ACWP
Project Status
[custom_list icon=”arrow-circle-right” iconcolor=”#5e9c19″]- The project is Behind Schedule. The Project Team Planned to build 40 tables but they Actually built only 35. Or in EVA parlance we can say Project Team Planned to do Work worth 40000 units but Actually completed the Work worth 35000.
- The project is Over Budget. The Project Team Actually built 35 tables but Spent 36000 units of money. Or in EVA parlance we can say Project Team Actually completed Work worth 35000 but Actual Cost of Work was 36000 units of Money.
Variance Formulas
Schedule Variance (SV) = EV – PV
Cost Variance (SV) = EV – AC
Efficiency Formulas
Schedule Performance Index (SPI) = EV/PV
Cost Performance Index (CPI) = EV/AC
Calculations
SV = 35000 – 40000 = -4000
CV = 35000 – 36000 = -1000
SPI = 35000 / 40000 = 0.875
CPI = 35000 / 36000 = 0.97
Important Points to Remember
[custom_list icon=”arrow-circle-right” iconcolor=”#5e9c19″]- EV is the first term in all the 4 formulas.
- Negative variance means Project is behind.
- Positive variance means Project is ahead.
- Efficiency less than 1 means Project is behind.
- Efficiency of greater than 1 means Project is ahead.