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21 January 2015

Understanding Earned Value Management: Part 1 – Understanding Current State of the Project

David A. Zimmer
David A. Zimmer, PMP
Chief Project Professor
American Eagle Group
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Understanding Earned Value Management:
Part 1 – Understanding Current State of the Project


PMBOK® Guide Definition:

Earned Value Management (EVM): A methodology that combines scope, schedule, and resource measurements to assess project performance and progress.

Actual Cost (AC): The realized cost incurred for the work performed on an activity during a specific time period.

Planned Value (PV): The authorized budget assigned to scheduled work.

Earned Value (EV): The measure of work performed expressed in terms of the budget authorized for that work.

Budget at Completion (BAC): The sum of all budgets established for the work to be performed.

Practical Definition:

Earned Value Management (EVM): A set of mathematical formula for determining current project performance and progress and used to forecast anticipated results; strikes the greatest fear in PMP® aspirants seeking certification.

Actual Cost (AC): The amount of money spent to date on the project.

Planned Value (PV): The planned amount of money to be spent or the amount of progress expected to date on the project.

Earned Value (EV): The value earned or the progress made to date on the project.

Budget at Completion (BAC): The budget value determined after planning the required work for the project.

Note: This is the first article in a five part series of articles concerning Earned Value Management.

What is Earned Value Management?

I have heard from many of my students, earned value management is the toughest subject in the project management curriculum. I fully identify with them since I had the same notion when I was studying for my PMP® certification. I decided to spend time developing a way of explaining this important methodology so people could understand it. This is the first article in a series of putting that explanation into writing.

Without a doubt, earned value is a tough subject to understand because of the myriad equations one must memorize for the exam. When I first started memorizing the equations, we still used the arcane terms of Actual Cost of Work Performed (ACWP), Budgeted Cost of Work Scheduled (BCWS) and Budgeted Cost of Work Performed (BCWP). Fortunately, we have replaced those confusing terms with Actual Cost (AC), Planned Value (PV) and Earned Value (EV), respectively. Trust me, the current terms are much easier to understand. The older terms are so arcane, even the PMBOK® Guide has removed them from its dialect. Unfortunately, Microsoft Project 2013 still displays the old abbreviations in the Earned Value table, but it does use the new terms and abbreviations alongside them for easy translation.

Out with the Old, Forward with the New

In this series of articles, we use the new terms because they have become the industry accepted terms and they are much easier to understand. Before we get into the hard core understanding of Earned Value Management, let’s set a bit of context around the topic. We have learned that many people actually use Earned Value without realizing it.

Let’s frame it this way. Earned Value Management (EVM) helps us understand if we are getting value for the money and time spent on the project. In other words, if we have spent $10.00 for materials, do we have $10.00 worth of project completeness? Or, if we spent two weeks of effort on the project, can we show we have made two weeks of progress? While the answers to these questions seem obvious, in reality, we often find ourselves in a position where we neither have $10.00 of value or two weeks of progress. Maybe rain held us up, family issues have distracted us, team members have not performed or many other reasons. We find ourselves as project managers, managing a project which is behind schedule and over-budget. EVM helps us understand:
  • Project performance: over-budget, under-budget, on-budget, behind schedule, ahead of schedule, on schedule;
  • Project condition: if not on-budget and on schedule, how far off we are – positive or negative; and
  • Forecasting: new estimates for project variables based on current performance and what performance level we need to achieve to bring it back to original plans.
Interestingly, when we speak with people about home projects, we find they calculate these values in their heads without knowing the formulas or EVM concepts. They just do it. They know when they are not completing as much work as they originally planned, they calculate how much over-budget they are at this point in the project and they can usually tell us how much more time and money they need to complete it. That, in a nutshell, is EVM – Earned Value Management.

A Graphical Approach to Understanding Earned Value Management

Let’s try to understand this from a pictorial perspective. The rectangle below represents the project in both duration and budget.

Earned Value Management - EVM - depicting a project
Project Depiction
BAC represents the Budget At Completion or simply the original budget determined during the planning sessions of the project. For illustration purposes, let’s set the budget value to $10,000.  We expect this project to cost $10,000 to complete.

At the 50% mark, we expect half of the budget to be spent ($5,000) and half of the work to be completed. If at the halfway mark, we don’t feel half of the work is done, we intuitively know we are behind schedule. If we have more than half of the work completed, again, we intuitively know we are ahead of schedule. Additionally, at the halfway point, we tally our receipts from the materials purchased and the labor paid to discover we've spent 60% of our allocated money. We know we’ve overspent and need to make some adjustments. We typically do these calculations and observations in our heads. We don’t apply any mathematics. We just know.

Essentially, we are “doing” Earned Value Management. When we put formal mathematics around what we do in our heads, our brains goes tilt. We panic.

More Pictures

Using our diagram, let’s add a few more labels based upon our current situation.

Earned Value Management - EVM - Simple project depicting earned value, planned value, actual cost and budget at completion
Project with conceptual Earned Value, Planned Value, Actual Cost and Budget at Completion
In this diagram, we have drawn in PV – Present Value, EV – Earned Value and AC – Actual Costs.

Planned Value (PV) is the amount of work we expect to finish at a given time within our schedule and the expected amount of money spent from the budget. As we’ve stated, we have spent half (50%) of the planned time on the project, therefore, we should have spent half of the money and have half of the work accomplished. We should have spent $5,000 of the $10,000 budget.

Earned Value (EV) is the amount of progress made to date. At the 50% mark, we’d expect half of the work to be completed and half of the money spent. In our diagram above, we see EV is behind both PV and AC. We can easily interpret the situation as we are not progressing the way we had planned and we are not getting a dollar of value for every dollar spent to achieve that value. In other words, this project is in sorry shape.

Actual Costs (AC) are easy to figure because we add up the receipts for the materials, supplies, labor costs, etc. To our chagrin, we learn we’ve spent $6,000. Immediately, we know we are over-budget, correct? And, if we were to diagram the values, as we have done, we see AC is closer to BAC than PV – another clear indication of over-spending, which means, we need to tighten our spending controls if we hope to stay within budget. We can lower our “burn rate” – the rate the money is being spent by (and being careful to not sacrifice quality)

  • Finding cheaper labor,
  • Buying cheaper material,
  • Change the scope of the project so we need to do less,
  • Increase output of current labor force to accomplish more, or
  • Ask for more time or money to finish the project.

Back to Our Home Project

Using our simple home remodeling project, by graphing our progress (EV), planned schedule (PV) and dollars spent (AC), we see we need to adjust something. So we do. We start to do some of the work ourselves eliminating some of the labor costs, we look for paint and blinds on sale, we decide to re-use the couch we have and realize we like it after all, and still replace the carpet because we can fit it into the budget.

We do all these “calculations” in our heads without the benefits of Earned Value Management’s equations. Of course, our example uses a much simpler example than most projects we manage professionally and additionally, we are the project sponsor, project manager and key decision-maker all rolled into one. In our workplace though, rarely do we get to occupy all those roles, therefore, we need a more formal methodology to present our case.

Conclusion

In this article, we set a conceptual basis for understanding the current state of our project using the terminology of Earned Value Management without listing the mathematical formulas yet.

Understanding the conceptual model aids understanding the formulas once they are introduced.
In the next article, we develop the conceptual model for the forecasting formulas of EVM.  The third article develops the mathematical formulas with tips to easily memorize the formulas. And finally, the fourth article ties these formulas back to the Work Breakdown Structure (WBS) from whence they are derived.

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