Understanding Earned Value Management: Basics for Beginners


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Posted on May 26, 2024 at 09:05 PM


Earned Value Management (EVM) is a key tool that enables project managers to measure performance and estimate project costs during the planning phase.

Accordingly, the concept of EVM emerged as a solution to common project delays and cost overruns, which affect the achievement of desired goals.     

Most organizations use the EVM technique to track project progress, such as in software development projects, where it provides insight into a milestone.          

In this article, we will give you an overview of the EVM concept.

 

What is Earned Value Management (EVM)?     

Earned value management (EVM) is a project management methodology that integrates expenses, scope, and schedule to measure project performance.  Based on planned and actual values, EVM predicts the future of the project, enabling project managers to take appropriate technical and managerial measures before failure.   

In turn, earned value management systems (EVMS) refer to the technology, processes, tools, and templates that help achieve and organize EVM.

Additionally, Earned Value Management (EVM), also known as Earned Value Analysis (EVA), is an efficient method of evaluating the progress of a project by comparing the expenses incurred with the planned expenditure on scheduled work.  This allows the project manager to evaluate whether the project is exceeding its financial targets or progressing according to its economic requirements.

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Basic concepts of earned value management     

 Sometimes the application of the EVM concept may seem confusing in the fields of oil and gas project management in particular.  This is due to the many terms associated with this concept.  Here are the basic principles with formulas:

  •  Planned value (PV):

 It represents the budgeted cost of work scheduled (BCWS), while the total planned value of the project's is referred to as the budget at completion (BAC).

The PV is calculated using the formula:

 PV = total project cost x percentage of planned work.

You can calculate the planned value of work by distributing time information that can be obtained from the work schedule.  So a well-prepared work schedule, with the help of a work breakdown structure (WBS), provides disaggregated data on the planned value.

  •  Actual Costs (AC ):

 It is known as the Actual Cost of Work Performed (ACWP). It means the amount of money spent up to the present moment on the project's activities.

  •  Earned Value (EV):

 It is also called Budget Cost of Work Performed (BCWP) and stands for an evaluation of the value of work completed to date.  In other words, if you were to complete the project today, the earned value would show you the value of the work completed.

  •  Analysis variance:

 This stage is an essential step in earned value management.  Here, project leaders must possess personal skills to analyze how far the project is from its baseline, which can be done through a schedule and CV at the task level.   

  •  Schedule Variance  (SV):

 It is calculated as ( EV - PV).     

If SV is equal to zero, it means the project is exactly on schedule.

  •  Cost Variance (CV):

 It is calculated as (EV - AC).     

This helps determine if the project is over or under its allocated financial resources. 

  •  Schedule Performance Index  (SPI):

 It is the process of measuring project performance according to schedule.     

 (SPI = EV/PV).

 SPI > 1 indicates that the project is ahead of schedule.  While SPI < 1 means the project is behind schedule.  

  •  Cost Performance Index (CPI):

 It evaluates project performance from a financial perspective.     

 (CPI = EV/AC).

 A  CPI > 1 indicates that the project is under budget.  While CPI < 1 means that the project is over budget.

     

The importance of earned value management in project management          

  1. Improve communication:     

 Earned value management improves the language of communication and common understanding among stakeholders, ensuring that information is conveyed effectively.

Project management training courses in London seek to establish a solid foundation for professionals, enabling them to grasp and execute EVM principles with proficiency.

     

  1. Discover the problem:

The EVM technique makes it easier for project leaders to detect deviations or issues in the project plan. If the EV is less than the PV or if the AC is higher than the EV, it indicates that the project is not proceeding according to the planned path.

At this stage, project managers with strong project management skills should take immediate corrective action. The goal is to prevent minor problems from escalating into major setbacks.

         

  1. Cost and schedule control:     

 Earned value management allows project leaders to control project costs and schedules, which means allowing them to predict the cost and closing date of the project based on current performance compared to the planning phase.

In turn, this helps them make the correct decisions regarding adjusting the schedule, allocating resources, or changing the scope to keep the project going as planned until it is complete.

     

Final thoughts,       

The systematic implementation of earned value management combines quantitative measurement with the tracking of variances. Its benefits include the establishment of phased baselines for decision-making, ensuring an objective assessment of project progress. 

EVM also relates to the real-time forecast of milestones, establishing a framework for the assessment of acquisitions. Remember, EVM is about understanding how to assess relative value against the original objectives!