Recently we had a client call us and ask how they could better understand as projects are progressing how they were performing. We just completed a successful project launch and they liked the status reports, key statistics and real time information we provided and wanted to learn more about how they could implement a similar system. Our project was the first time their Executive Team had “measurable insight” into how a project was performing and clear understanding into the budget and go-to market schedule implications tied to numbers not just a bunch of words.
What was the “measurable insight” the Executive Team was excited about? It was Earned Value!
Earned Value (EV) and other Key Performance Indicators (KPI’s) can be invaluable project management and executive management tools. There are many compelling reasons to leverage Earned Value and develop a Business Intelligence structure around projects.
Spot schedule and budget trends and issues early, before it is too late to correct
Easily and consistently communicate and receive project status, health and performance
Provide leadership and external stockholders accurate financial projections and budgeting information
Help ensure that projects are being planned, monitored and managed
Identify areas within common projects where issues or gains are more likely to occur
Allocate and budget project and organization wide resources efficiently
Earned Value is project management’s version of accounting and financial ratios. Accounting and financial ratios often help determine and communicate the health and performance of a business. Earned Value, leveraging project focused equations and ratios, provides insight into a projects health and performance. Specifically, it can help answer questions about the amount of work completed on a project, how much work is remaining, how much money has been spent, how much money will be required to finish, is a project on budget and schedule. Earned Value builds on initial or baseline estimates and as a project progresses and key values are updated, it facilitates data driven analysis, forecasting and reporting.
Key Earned Value Performance Measures
Budget at Completion (BAC): The sum total of all budgets for the work to be performed. The amount the project is expected or planned to cost.
Planned Value (PV): Authorized budget assigned to the scheduled work. How much work should have been completed at a point based on a plan. PV = Planned % complete * BAC
Earned Value (EV): How much work was actually completed during a period of time. EV= Actual % complete * BAC
Actual Cost (AC): The costs actually incurred for the work completed during a period of time. AC = Sum of the costs for a certain period of time.
Cost Variance (CV): The difference between the amount budgeted and the amount actually expended or spent for the work performed. CV=EV-AC
A neutral CV means the cost of work equals what was budgeted
A negative CV means the work is costing more than budgeted
A positive CV means the work is costing less than budgeted
Schedule Variance (SV): The difference between the amount budgeted for the work actually completed and for the work planned to be completed. SV = EV - PV
A neutral SV means the amount of work completed equals the amount planned
A negative SV means less work is being accomplished than planned
A positive SV means more work is being accomplished than planned
Cost Performance Index (CPI): A ratio that illustrates the approved budget for work performed to what was actually spent for the work. CPI = EV / AC
CPI = 1 means the cost of the work equals the budget for the work
CPI < 1 means the work is costing more than budgeted
CPI > 1 means the work is costing less than budgeted
Schedule Performance Index (SPI): A ratio that illustrates the approved budget for the work performed to the approved budget for the work planned. SPI = EV / PV
SPI = 1 means the project is on schedule
SPI < 1 means the project is behind schedule
SPI > 1 means the project is ahead of schedule
Estimate at Completion (EAC)*: The estimated total cost of completing the project based on past project performance. BAC = BAC / CPI
* There are alternative ways to calculate EAC based on project performance and expected performance.
Estimate to Complete (ETC): The estimated cost to finish all the remaining work based on past performance. ETC = EAC - AC
Variance at Completion (VAC): The estimated budget deficit or surplus of a project based on the budget at completion and the estimate at completion. VAC = BAC – EAC
Example
A project plan is created to install 4 miles of fiber optic cable at an estimated budget of $2,000 of labor per mile with each mile of cable installation expected to take one week.
Budget at Completion (BAC) = The amount the project is expected or planned to cost. BAC = 4 * 2,000 = $8,000
Week One – 1 mile of cable installation completed and actual labor cost for week was $2,000, the week progressed as planned.
Week Two – 3/4 mile of cable installation completed and actual labor cost for week was $2,250, the team had to go around a major gas line and had to work longer during the week.
Week Three = 3/4 mile of cable installation completed and actual labor cost for week was $1,350, the team was impacted by a major rain storm and had to stop work early several times during the week.
At end of Week Three the Project Manager calculated the following Earned Value Performance measures to review the project’s progress.
Earned Value (EV) = EV= Actual % complete * BAC EV = (2.5 / 4 or 62.5%) * $8,000 = $5,000
Planned Value (PV) = Planned % complete * BAC PV = (3 /4 or 75%) *8,000 = $6,000
Actual Costs (AC) = Sum of the costs for a certain period of time. AC = $2,000 + $2,250 + $1,350 = $5,600
Cost Variance (CV) = EV - AC CV = $5,000 - $5,600 = -$600 (project is over budget)
Schedule Variance (SV) = EV - PV SV = $5,000 – $6,000 = -$1000 (project is behind schedule)
Cost Performance Index (CPI) = EV / AC CPI = $5,000 / $5,600 = 89% or .89 (work is costing more than budgeted)
Schedule Performance Index (SPI) = EV / PV SPI = $5,000 / $6,000 = 83% or .83 (work is progressing slower than planned)
Estimate at Completion (EAC) = BAC / CPI EAC = $8,000 / .89 = $8,988 (based on current performance the project will now cost more)
Estimate to Complete (ETC) = EAC - AC ETC = $8,988 - $5,600 = $3,388 (from the current point it will cost this much more to finish project)
Variance at Completion (VAC) = BAC – EAC VAC = $8,000 - $8,988 = -$988 (from current point the project will be this much over budget)
From this example, why is this information important?
In addition to knowing exactly where a project is from a schedule and budget perspective, the results may have a ripple effect organizationally. If there was a firm budget, the project manager may have to work with executive leadership to secure additional funding to finish the project. This project may impact an organization or department overall budget and now a different project may need to be adjusted. Resources from other areas may need to be pulled into a project or shifts may need to be added to make a date. If this is a public company and the projections impact reported financial projections, they may need to be communicated to shareholders. These projections may change the Return On Investment (ROI) for the project and executive management may need to determine if the project should even continue. If there is a contingent event or critical dependency, like a product launch or vendor waiting to complete a next step this may change that schedule. There may be legal implications If there is a contractual agreement to complete the project within a budget or time constraint.
Without Earned Value information the project manager may have had an idea they were behind or over budget, but using EV information they will know how far and what it may require to finish the project and can work with the team and organization to plan and react to the impacts.
Summary Reference Sheet
The following summarizes the implications of key EV Performance Measure combinations.
Figure 1 (EV Performance Measures)
Earned Value provides important insight into a project's performance. Many of today’s software packages, including Microsoft Project, incorporate Earned Value as an out of the box reporting feature. It can also be quickly calculated using a spreadsheet or calculator and the equations provided.
If your organization is struggling with accurate project status where budget and schedule surprises or worse are all too common, please contact us, we would welcome the opportunity to help. You can’t win if you don’t keep score!
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