Controlling project costs with earned value management
As the current economic downturn places pressure on businesses to cut, or at the very least, control costs, there becomes an increasing need for project managers to closely monitor expenditure, report project developments in monetary terms, and
provide accurate forecasts of project completion.
Earned Value Management (EVM) offers project managers a solution to the issues they face in controlling project costs, and provides a simple and effective way of generating accurate estimates and quantifying work in progress. In addition to maintaining an efficient, cost-effective and on-target project, EVM can also be used to build stronger relationships with project sponsors and partners.
The following article examines the concept of Earned Value Management and assesses its worth as an objective measurement of project performance in terms of both labour and expenditure.
What is Earned Value Management?
Earned Value Management (EVM) is a valuable tool for project managers attempting to determine the health of a project. It fills the need when project delivery and potential business success are at risk in today’s fast-paced, budget– conscious marketplace.
EVM is a methodology developed to achieve meaningful comparisons between work scheduled on a project, and actual work completed. The physical progress of a project is calculated by taking into consideration the work completed to date, the time taken to complete that work, and the costs incurred in reaching an identified point in the project. Earned Value allows project managers to evaluate project progress in monetary terms, and hence identify and control risks to the planned project budget and completion date.
By capturing a particular stage of the project and applying the earned value methodology, project managers can compare the planned and actual activity, and make an assessment of project health in terms of the initial forecast. If necessary, amendments can then be made to ensure the project completes on time and within budgetary constraints. The technique provides the foundation for cost performance analysis. Any project manager who wishes to understand the cost implications of a project before it reaches its end needs to know not only the planned cost at any stage, but also the cost of all work completed. Analysing only the planned cost (budget) versus the actual costs to date (as in figure 1 below) can be misleading.
From this graph, a project manager would determine that, at this point during the life of the project, actual costs are less than planned costs, and may conclude that the project is doing well. However, without the inclusion of Earned Value, it is impossible to determine whether actual costs are less because, say, work is progressing at a slower rate than planned.
Calculating Earned Value
Earned Value represents a quantifiable monetary value for project status, making it easier for project managers to assess the health of their project and report back to sponsors and partners on whether the project will be completed on time and in line with budgeted expenditure. Taking repeated measurements of earned value provides an indication to all concerned of where overspending is occurring, and can be used to quantify the impact any such overspend may have on the final outcome of the project.
Earned Value provides for a balance of management oversight for performance, resources and time. Using EVM, project managers can easily compare how much work has actually been completed against the amount of work planned. All forecast work for a particular project is planned, budgeted for, and allocated a time schedule. This gives rise to the `planned value’ of a project, which can be displayed as a time and cost measurement baseline (see figure 2 opposite).
The measurement baseline illustrated in figure two maps out a project with a timeline of six months and an overall budget of L200,000. Drawing a line from any point on the time and cost axes to where they meet along the baseline, the project manager can determine the quantity of project resources that were planned to have been used at any given point during the project (the planned value).
For example, at three months L65,000 of the project budget was forecast as complete. As work on the project is accomplished, it is ‘earned’ in a similar manner to which it was planned: in other words, in quantifiable units such as expenditure in pounds sterling or labour in hours worked. Comparing the planned value of a project with the calculated earned value results in a quantifiable cost value of the work complete to date over the work planned in the initial project forecast. This figure is known as the schedule variance.
Figure 3 shows the earned value to date in red and the planned work in blue. The difference between these two values is illustrated on the graph as the schedule variance. The planned value at the three month stage was L65,000, but the earned value is only L53,000, highlighting a behind schedule project status in this example. The schedule variance in this instance is L12,000 – the difference between the planned and earned values.
For a project manager to obtain an objective measure of the cost efficiency of a project, a comparison needs to be made between the earned value for the work completed and the actual cost incurred for all work completed to date. The figure generated from the difference between these two measures is known as the cost variance. If a negative value is produced from this calculation, then the project manager is able to conclude that more money has been spent for the work completed to date than was forecast in the initial budget. It, therefore, follows that a positive cost variance means that less money than initially budgeted for has been spent on work completed to date.
The yellow line in figure 4 represents the actual cost of the project – from inception to the three month period. This actual cost of L71,000 at the three month stage of the project is then compared to the earned value calculated in the previous example (L53,000) to find the cost variance. In this example the cost variance is -L18,000 (L53,000 – L71,000), which alerts the project manager to the fact that the project is overrunning by L18,000 at the three month stage of the six month project.
The calculations performed in the above examples provide project managers with an effective way of assessing the health of any given project, and enable them to use the information gathered to predict any adjustments to the original forecast for the completion of a project. EVM improves on the more commonly used project monitoring technique of simply comparing the initial budget with the actual costs of the project (shown in figure 1). The planned value, earned value, and actual cost measurements provide project managers with an objective measurement of project performance, which in turn allows for a monetary evaluation of the initial budget estimate within all layers of the project.
EVM is at present a vastly underrated project management tool in the UK but is one that can be highly beneficial in monitoring the health of a project. BAE Systems is one company that has recognised the value of EVM and now uses it as a ‘benchmark’ for best practice project management. More and more customers are beginning to recognise the value of Welcom’s Cobra software, and credit EVM with bringing about more informed and accurate decision-making among project managers and senior management. With EVM, those individuals with project management responsibilities have access to factual information about the health of their projects, and are able to make predictions about the future performance of the project.
Project managers only have to look at some of the high profile project failures such as the Millennium Dome and the Channel Tunnel to realise the benefits of a project management tool such as EVM. In today’s competitive marketplace, the ability to deliver a project on time and within the agreed budget is imperative, and earned value gives project managers the early warning signs necessary to accomplish these goals.
Eric Pavyer is vice president of marketing and European operations at Welcom. Eric has a wealth of experience in the project management software and services marketplace, and has extensive global experience.
Before joining Welcom, he was Director of TeamPlay International for Primavera Systems following 15 years with Hoskyns Group – now CAP Gemini UK and the ABT Corporation where he was responsible for the ABT product suite including PMW (Project Manager Workbench) outside the USA.
Eric has also held a number of positions managing IT development projects and implementing software packages. He holds a Bachelor of Science degree from London University.
Welcom helps organisations optimise project delivery across the enterprise through serious project management solutions. The company offers comprehensive software for planning, resource management, earned value, and project collaboration combined with consulting expertise in process improvement and smooth implementation,
Further information is available from their website: www.welcom.co.uk
Copyright Institute of Management Services Mar 2002
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