Overview of Performance measurement and Earned Value Management

Overview of Performance Measurement and Earned Value Management

Performance measurement and earned value management principles have been established as sound business practices and used by successful businesses for years.

Earned Value is a specific metric that can be used to manage any project. Earned Value is a reliable performance metric that helps project managers take control of their projects by showing how well or how bad they are doing.

*Earned Value* Criteria are standards for management and control systems that use earned value. The purpose of the earned value criteria is to assure the reliability of the earned value metric.

Although the earned value metric does not require criteria, it does require a management system and methods that foster proper planning and integration of work in the project.

Performance measurement is at the backbone of all successful businesses. Without measure, managers do not know how things are progressing, and making improvements and taking corrective actions becomes difficult (if not impossible).

Earned value analysis is used to determine the overall health of a project. It can show whether the project is ahead of schedule or falling behind, help forecast your project’s final cost, and predict when it will likely be completed. It can also highlight issues that are causing problems. Earned Value provides better project visibility; a project can quickly fail without it.

Earned Value Management (EVM) is a project management method and procedure used to evaluate a project in terms of cost and schedule. It provides project managers and clients a structured approach for reviewing cost and schedule performance.

By measuring the value of work performed against the work that has been scheduled, EVM puts schedule variances in the spotlight—something that generally cannot be done with traditional financial reporting.

Several aspects need to be in place to establish an EVM system. The ANSI/EIA - 748A standard lists 32 criteria for an EVM system. The 32 criteria fall into five broad categories that pertain to significant project management activities:

(1) organization,

(2) planning and budgeting,

(3) accounting,

(4) analysis, and

(5) revisions.

The 32 criteria may seem high, but they fit within the PDCA project management loop: Plan - Do - Check - Act for project management practitioners.

Earned value-based performance measurement is central to all Safran solutions, especially the Safran Project.

Earned Value – The Objective Metric

There is nothing complicated about earned value. The simplest way to think of it is to equate earned value with physical progress. Earned value is a measure of progress, and a direct relationship exists between your earned value and percent complete. Earned Value is the only project control methodology that integrates cost, schedule, and technical performance into a single method from which objective project performance measures are available, including variance metrics and indices (cost and schedule). Analyzing these metrics, variances, and indices will help you confirm performance to date and provide guidance into areas needing corrective action. You can also apply the earned value indices to predict cost at completion and when the project will likely finish.

The Earned Value, in cost terms, also called the Budgeted Cost of Work Performed (BCWP), is the planned cost or resource usage (manhours) for the work accomplished within a given time frame. Earned value tells you how much work has been completed for the resources or money spent. By its most straightforward equation, the earned value is the physical percent complete multiplied by the budget baseline (%PC* BBL). Two fundamental project management requirements must be met to implement any form of earned value-based project management system. First, you must establish what you will do—the scope of work must be fully defined. Second, you must schedule the defined scope within a fixed time frame. Earned value requires a scheduling system. To determine the planned cost of the work performed, you need to know its planned value—hence, a scheduling system is required. You can compare your achievement with actual and planned expenditures by applying earned value to your project management system. It gives you a three-dimensional immanent system instead of a two-dimensional spend vs. planned comparison. This is a fundamental difference.

Example 1

Five drawings were scheduled to be completed in May, and each was budgeted 10 hours to complete, making the total budget 50 hours. Only four drawings were completed when progress was monitored at the end of May. Using the same budgeted values for calculations, 10 hours per drawing, the earned value for May is 40 hours. The earned value element differentiates a performance measurement system from the financial budget and actual cost comparison. A manager would know how much time had elapsed on the project and how much actual cost was expended. To realize how much work has been accomplished in the same period for the actual cost takes an objective measurement like earned value.

Example 2

Your project is scheduled to last six months and has a budget of $100,000. After three months, you planned to spend $60,000. Collecting the actual expenditure to date shows that you have spent $50,000.

​TotalBudget = $60,000
​BudgetForPeriod = $60,000
​Actual Expenditure = $50,000

UsedTimeThisPeriod =3 months

TotalAvailableTime =6 months

From this information, all you know is that half the time has elapsed,

TimeElapsed = UsedTime / TotalAvailableTime = 3 / 6 = 0,5

Half the money is gone,

UsedAmount = AmountSpent - EarnedValue = $50,000 - $20,000 = $30,000

FinancesUsed = UsedAmount / PlannedAmount = $30,000 / $60,000 = 0,5

and you have spent $10,000 less than planned,

​RelativeExpence = PlannedAmount - AmountSpent = $60,000 - $50,000 = $10,000

You do not know what you accomplished in that period for that amount of money!

When you add that you have completed 20% of the project, worth $20,000, you have a valuable additional element for management control and analysis.

Your Budget is $60,000
Your Actual Expenditure is $50,000
Your Earned Value is $20,000

Comparing these figures shows that $40,000 of planned work has not been accomplished.
The work that has been accomplished cost $30,000 more than planned.

The conclusion is that you are behind schedule ($40,000) and above budget ($30,000), even though you have spent $10,000 less than planned. Relying on comparing planned and actual expenditures could mislead you into thinking this project is doing well. Adding the additional information on earned value reveals you are overspending by $30,000, and your project is likely in trouble.

Variances

When you use a performance measurement system to monitor and control project performance, information about the past, present, and future is available. It can show what has happened, what is happening, and what will likely occur against the plan. You can view performance data from the available information and compute schedules and cost variances. Analyzing and monitoring the Cost and Schedule variances allows you to focus on the areas of interest.

• Schedule Variance is the difference between the earned value and the plan.
• Cost Variance is the difference between the earned value and the actuals.
• Budget Variance is the difference between the plan and the actuals.
• Variance at Completion is the difference between the Budget at Completion and the independent Estimate at Completion. That is what the total project is supposed to cost, less what the entire project is expected to cost.

Variances can be calculated and reported for periodic and cumulative to-date values. With Safran Project, you can add variance thresholds to your variance analysis. Confusing as it might seem, Schedule Variance—SV—does not relate to the “real schedule” and does not measure time. The schedule variance does not identify specific work performed or if any part is out of sequence. Therefore, in addition to focusing on the cost variance, schedule variance, and variance at completion, you should also analyze your actual schedule. Even if your project is late, the SV will converge and become zero when the project is completed, no matter how late.

Indices

Once you have the earned value in place, you can also compute cost and schedule efficiencies—the cost efficiency of the money you have spent and the schedule efficiency of your work. Your efficiency is also used to calculate and predict the future outcome of the project.

The Schedule Performance Index (SPI) is the result of dividing the earned value by budgeted or planned value. If the SPI exceeds 1, more work has been completed than planned (favorable). An SPI below 1 indicates less real work has been achieved than scheduled (unfavorable).

The Cost Performance Index (CPI) divides the earned value by the actual expenditure to date (Earned Value/Actual). When the CPI is above 1, it indicates that work was achieved at a lesser cost than planned (favorable). If the CPI is less than 1, work was accomplished at a higher cost than planned (unfavorable).

Forecast

Using earned value-derived metrics, you can compute an Estimate at Completion forecast based on a formula-driven approach. Often referred to as Independent Estimates at Completion (IEAC), these figures do not rely solely on subjective user input. The IEAC provides a simple, credible method for double-checking the claimed estimate at completion.

There are several formulas in use. The generic IEAC formula is:

This represents the Actual or Expended to date, plus the Estimate to Complete. Different performance factors from your earned value metrics may weigh the estimate to completion.

EVMS

EVMS is a structured method for project and investment management and is primarily a business process and project method, not a ‘software thing.’ EVMS is a methodology for:

• Planning all work for a project or program to complete
• Breaking down the scope of work into manageable finite pieces for control of technical, schedule, and cost objectives
• Integrating project or program work scope, schedule, and cost into a performance measurement baseline plan against which achievements and completed work may be measured
• Track actual cost and work incurred and recorded.
• Objectively measure the work performance level.
• Analyzing significant variances from the plan, forecast impacts, and preparing estimates at completion based on performance to date and work to be performed
• Applying earned value information and analysis as part of your status reporting

These steps take you through establishing an earned value-based performance measurement system. It helps you build a practical project and program management planning, execution, and control system. Well-managed projects and effective project and program management require a systematic process supported by reliable and relevant data, such as the earned value metrics. As previously mentioned, the ANSI/EIA standard is based on 32 criteria that are guidelines for implementing an EVMS-based management system. Governmental agencies have mandated that you must comply with this standard.

What Can You Do With EVMS?

To state the obvious, you can do quite a bit:

Integrated with your project management software, EVMS gives you an idea of how you are doing regarding schedule and cost and whether you will finish the project above or under budget, ahead or behind schedule.

EVMS results can be summarized visually with S-curves, performance index charts, Bull’s-eye charts, and other reporting tools. Projects over budget, behind schedule, or heading for disaster will be identifiable immediately.

As an early warning signal, it identifies cost risk early in the project life cycle and allows for corrective actions with most of the budget intact.

When performance is measured, performance improves. When performance is measured and reported, performance improves and accelerates.

EVMS can quickly identify work packages, project phases, disciplines, contracts, and other elements causing the problem. It is a tool for monitoring performance at all levels, and it gives management some leverage; shape up!

Well-managed projects or programs look good, which can be a competitive edge for winning the business. Furthermore, the project is tracked by the value of work completed, providing a good idea of whether the project or program is profitable or at a loss.

As you know, good management does not happen by itself. It takes qualified managers, a carefully planned work scope, a work breakdown structure, milestones, realistic metrics, and a realistic, workable baseline. Accurate, updated data about the schedule, work performed, and actual expenditure (cost and hours) are needed monthly. Use the EVMS results to monitor projects and take corrective actions to improve performance.

Earned Value Terminology

As a quick reference, we have included some of the most common terms associated with the Earned Value Management discipline. For a complete definition and listing of terms and glossary, you should consult the relevant EVMS documents and specifications.

Budgeted Cost of Work Scheduled (BCWS) – Plan the planned cost (or hours) for a defined scope of work scheduled to finish within a given time frame. BCWS may be referred to as ‘Planned Value.’

Budgeted Cost of Work Performed (BCWP) – Earned Value, the planned cost (or manhours) for a defined scope of work that has been completed or partly completed within a period. The BCWS is more often referred to as the Earned Value. This value shows what you got for the resources spent and the value of work completed.

Actual Cost of Work Performed (ACWP) – Actual cost (or manhours) spent and recorded in accomplishing the work performed within a time frame.

Schedule Variance – SV is the arithmetic difference between the Earned Value (BCWP) and Planned Value (BCWS). BCWP - BCWS

Cost Variance – CV is the arithmetic difference between the Earned Value (BCWP) and the Actual Cost (ACWP). BCWP - ACWP.

Budget At Completion – BAC is the sum of all costs (or manhours) allocated and approved for completing the work of a project. It is synonymous with ‘Performance Measurement Baseline’ or Baseline for short.

Estimate To Completion – ETC Estimate to Completion can be expressed in either cost or hours and represents the value of work required to complete a task or project.

Estimate At Completion – EAC is the value, either in dollars or hours, representing the project's final cost or hours when the project is finished. The EAC represents the sum of actuals plus the estimated cost or hours to complete the project.

Variance At Completion – VAC VAC is the numeric difference between the Budget at Completion (BAC) and the Estimate at Completion (EAC).

Schedule Performance Index – SPI Ratio of the budgeted cost of work performed to the budgeted cost of work scheduled (earned/planned).

Cost Performance Index – CPI Ratio of budgeted cost of work performed (earned) to actual cost of work performed (earned /actual).