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04 February 2015

Understanding Earned Value Management: Part 5 – Earned Value in the Bigger Picture

David A. Zimmer
David A. Zimmer, PMP
Chief Project Professor
American Eagle Group
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Understanding Earned Value Management:
Part 5 – Earned Value in the Bigger Picture


PMBOK® Guide Definition:


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

Work Breakdown Structure (WBS): A hierarchical decomposition of the total scope of work to be carried out by the project team to accomplish the project objectives and create the required deliverables.

Work Package: The work defined at the lowest level of the work breakdown structure for which cost and duration can be estimated and managed.

Practical Definition:


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

Work Breakdown Structure (WBS):  A deliverable-oriented, hierarchical decomposition of the project. Deliverables create the results of the project so the project objectives are met.

Work Package:  The project deliverables defined so they can be accurately scheduled, resourced, and budgeted. They are described as the “nouns” of the project – tangible project results.

Note: This article is the fifth in a series of articles describing Earned Value Management (EVM). The first article used a conceptual model describing the current state of a project. The second article used a conceptual model describing the forecasting of the project. The third article defined the mathematics behind the current project state conceptual model of the first article. The fourth article put the mathematics behind the second article’s conceptual model for forecasting the project. This article provides the bigger picture of Earned Value Management within the context of the overall project.

What is the Purpose of Earned Value Management

When we ask our students what they think the purpose of Earned Value Management (EVM) is in a project, most simply wince and shrug their shoulders, clearly indicating it is a pain subject to be memorized and endured to pass the Project Management Professional (PMP®) certification. Some will spew out a few formulas, others state it provides status information about a project, but most don’t understand how it ties to anything else discussed while learning project management. They see it simply as a stand-alone, torture chamber of memorization.

In fact, we felt the same way while studying for our PMP® exam. Only after teaching it several times and spending effort to understand it better did we see the light.

Leveraging the Work Breakdown Structure (WBS) and the associated work packages (sometimes referred to a “work packets”), we can see, as we complete work packages, the “earned value” we’ve achieved.

In the previous four articles, we established a conceptual and mathematical model for EVM. We can understand the mechanics for smaller, home-based projects (our example used). Yet, how do we apply this to larger, corporate initiatives? How do we begin to calculate EVM for million dollar projects or larger?

We are making a wild assumption in this article that the project actually followed reasonable practices in its journey from inception to the current point in the project. We are assuming the project was conceived, determined feasible and cost-effective, and the organization’s risk-tolerance to launch the project effort. We assume the project charter was written to authorize the project’s expenditures of funds and use of resources to accomplish the project’s goals and objectives. A project manager was assigned and recommended practices followed; two practices in particular: requirements gathered and documented, and a work breakdown structure and WBS dictionary constructed. Earned Value Management ties directly to the work breakdown structure.

Let’s say, we are remodeling a room in the basement. The current condition is
  • Concrete floor
  • Walls currently dry-walled with insulation with some water damage at bottom
  • Suspended ceiling
The remodeling goal is to provide a den for children and their friends. Room should be comfortable and inviting.

Below is a simple work breakdown structure of the four major components of the project:
  • Floor
  • Ceiling
  • Walls
  • Audio/Visual

The WBS decomposes to 13 work packages outlined in red dashed lines. Each work package is considered a deliverable in the project. Once the work package is completed, it has an Earned Value. The cost to produce the work package will be tracked through receipts for the materials. Labor is being provided by the home owner, so no charge.

Earned Value Management - Work Breakdown Structure
Basement Den Remodeling Project Work Breakdown Structure (click to enlarge)

Placing the WBS in Microsoft Project, we see how it represents the WBS and estimated total time and cost.

Earned Value Management - Work Breakdown Structure in Microsoft Project
Basement Den Remodeling Project Work Breakdown Structure shown in Microsoft Project (click to enlarge)

We can see the indented levels in Microsoft Project represent the successive levels of WBS. At the top in the Project Summary Task, we see Basement Den Remodeling Project just as we see it in the WBS. The next level of indent list Floors, Walls, Ceilings and Audio/Visual represent the next level of decomposition in the WBS, and so forth. Finally, the work packages are listed with their associates time estimates and costs.

At this point in the project, 5 work packages are completed:

Work Package Earned Value Actual cost
Floor Insulation
$250.00
$450.00
Floor Underlayment
$125.00
$175.00
Lighting Selection and Order
$450.0
$650.00
Audio Equipment Selection and Order
$2,500.00
$1,800.00
Video Equipment Selection and Order
$1,250.00
$1,700.00
Total
$4,575.00
$4,775.00

The project is scheduled for 33 days. So far, we have completed 9 days of efforts. Here are our EVM numbers:
  • BAC = $8,350.00
  • EV  = $4,575.00
  • AC  = $4,775.00
  • PV  = $4,575.00 (same as EV since we completed the work packages on the scheduled days)

Calculate the Current State of Project

Using our current state equations from the third article:
  • CV = $4,575 - $4,775 = -200
  • SV = $4,575 - $4,575 = 0
  • CPI = $4,575 / $4,775 = .96
  • SPI = $4,575 / $4,575 = 1
We see on all counts, we are within tolerable limits of an on-time, on-budget project even though we are slightly over-budget (found an excellent sale on audio equipment but we were suckered into a larger screened TV than planned and didn’t estimate too well on insulation, underlayment and lighting).

Forecasting Project Values

For this project, the forecast numbers and the current state numbers will be close because of what we learned above – on-time, on-budget.
  • EAC = BAC / CPI = $8,350 / .96 = $8,698
  • ETC = EAC – AC = $8,350 - $4,775 = $3,923
  • VAC = BAC – EAC = $8,350 - $8,698 = -348
  • TCPI = (BAC – EV) / (BAC – AC) = ($8,350 - $4,575) / ($8,350 - $4,775) = 1.06
As we see from our example, each work package completed increases the earned value of our project. If we mark the work packages completed in the WBS, we can visually see the work completed versus the remaining work.  Even if we don’t remember the EVM formulas, we can more easily understand the current status of the project and future overruns.

Earned Value Management - Work Breakdown Structure illustrating completed work packages
Basement Den Remodeling Project - Work Breakdown Structure
illustrating completed work packages 
(click to enlarge)

When Does Earned Value Management Not Work

Companies try to implement EVM within their organization in hopes of improving project performance. They develop the documentation, train the project managers in its use, and wait for the results to come.  Sometime later, results are the same or worse than before EVM implementation and project managers wince at the additional burden of calculating EVM for their projects. Why didn’t EVM produce the results the companies wanted?

In many cases, EVM is implemented in a vacuum. It cannot stand alone or be implemented in an immature environment. Fundamental project management practices must be in place such as proper portfolio management providing solid project selection methodologies, project charter development so project managers understand the purpose and authorization of projects, formal scope development with robust requirements, work breakdown structure decomposition, and so forth.  In other words, the project management practices must be developed and followed, project managers trained, expectations set, and so forth.  If the engine does not work and the transmission is shot, fixing a burned out turn signal bulb is not going to make the car run.  EVM is a tool which measures the maturity level of project management practices as much as it measures the current state of a project. Implemented by itself is a waste of time, money, resource, moral and so much more.

Conclusion

This article concludes the five part series which explains Earned Value Management. The first article conceptualized the current state of a project without delving into the mathematics. It illustrated many of us practice EVM without necessarily calculating the formulas and results. The second article showed how we forecast a project in our heads without running the numbers. The third article applied the mathematical model to concept of determining the current state of the project. It formalized the concept described in article one. The fourth article added the mathematics to the forecasting model described in article two. We concluded the series by describing how EVM applies to real-world applications if the projects are developed using proper practices, especially the work breakdown structure.

Earned value management is a powerful technique for understanding project performance. Aligned with mature project practices, EVM delivers valuable insight into a project and gives guidance for correcting wayward projects. Used properly, it becomes invaluable to organizations.

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