Your client is depending on you, but their critical project is over budget and now they are upset. How did this happen? Why didn't you know there were problems sooner?
Are you having trouble keeping your projects within budget and on schedule? Would you like to forecast project performance problems accurately? You can identify and prevent a runaway project before it gets out of control using an analysis tool called Earned Value Management (EVM).
EVM is a proven method and best practice used by large organizations all over the world to understand and control project success. You can measure and control your project by understanding your project's "earned value."
As work is accomplished, it accrues "earned" value. Understanding your project's earned value can help you to predict cost amounts and schedule dates at project completion when the project is as little as 20 percent complete.
A Quick History of EVM
The concept of earned value has been around in one form or another since the industrial revolution in the late 1800s. It was used to track cost and schedule performance of large government projects in the U.S. in the 1960s. It came into its current form in the 1990s when the U.S. government started requiring the use of EVM for government contracts. Since then it has been adopted as a project management methodology by the Project Management Institute, and today many organizations and governments use earned value as a means of keeping projects on schedule and within budget.
EVM is a sophisticated and adaptable methodology. In any description of EVM it is easy to go deep and wide. This article is an introduction to the basic concepts of EVM and what it can do.
- At its core it has two parts—primary data and derived data.
- Primary data is basic core information you gather about your project.
- Derived data consists of formulas that use the primary data to report and predict project performance. The derived data is where the real magic happens.
Using Primary Data
To understand your project's earned value you need to know these four basic bits of project information:
- The date when you want to report project status (Status Reporting Date)
- Your total budget (Planned Value)
- The actual costs incurred (Actual Costs)
- The value of the work you have completed on the project (Earned Value)
Status Reporting Date is when the status of the project is reported and it is key to calculating the below values.
Planned Value (PV) is your project budget. It shows you how much money you have planned to use to complete the project in a given time, your budget. PV is (the total budgeted cost of the project) x (percent of work planned to be completed).
- Project will build 10 storefronts (1 per month for 10 months).
- Total budget for a 10-month project is $100,000.
- 4 months have now elapsed. So, according to the project plan 40 percent of the work should be complete.
- To calculate: (total budgeted cost of $100,000) x (planned work completed 40 percent).
- So the PV is $40,000.
Actual Cost (AC) is the actual cost incurred to complete project work. AC includes all hourly costs and fixed costs as of a given date.
- On the fourth month of a project, your billing department reports that your project has spent $30,000 to date.
- So the AC is $30,000.
Earned Value (EV) is the value of the completed work. As work is accomplished, it accrues "earned" value. EV shows you how much work you have actually completed and its value as of a given date. It is sometimes referred to as the budgeted cost of work performed. EV is (the total budgeted cost of the project) x (percent of work actually completed).
- Total budget for a 10-month project is $100,000.
- 4 months have now elapsed, but only 25 percent of the work has been completed.
- To calculate: (total budgeted cost of $100,000) x (actual work completed 25 percent).
- So the EV is $25,000.
Simple EVM Example Project
Let's take the above examples and combine them for a simple EVM analysis:
- Our project will build 10 storefronts (1 per month for 10 months).
- We have a total budget for a 10-month project of $100,000.
- 4 months have now elapsed.
- According to the project plan 40 percent of the work should be completed.
- So the planned work completed (Planned Value) = $100,000 x 40 percent = $40,000.
- Your accounting department reports that your project has spent $30,000 to date.
- So the actual costs expended (Actual Cost) = $30,000.
- Your project manager reports that only 25 percent of the work has actually been completed (only 2.5 storefronts have been done).
- So the actual work completed (Earned Value) = = $100,000 & 25 percent = $25,000.
The diagram below shows our Primary Data mapped against a calendar. Sometimes project managers only compare Actual Costs against the budget (Planned Value). If you did that and saw the chart below, you might conclude that your project is doing pretty well. You planned to spend $40,000, but have actually spent only $30,000. It looks like good news since less money has been spent than allocated.
However, EVM provides us with a deeper analysis of our project status by applying our Primary Data to the Derived Data formulas.
Using Derived Data
The true costs and future of the project are shown more clearly when you use Derived Data to inspect the status of your project. If you have gathered all of your Primary Data, calculating Derived Data can be as simple as plugging numbers into a spreadsheet. What is amazing is that it takes the guesswork out of determining project status. You run a formula, and in a few seconds you have a solid no-nonsense answer.
The following are Derived Data examples that show cost and schedule performance and forecasting for the above sample Project. Each example asks an important status question.
Is the project over or under budget? Use the Cost Performance Index (CPI).
- The formula: EV / AC = CPI.
- Applying this to the simple example above: $25,000 / $30,000 = 0.8333.
- If CPI is less than 1 the project is over budget.
- If CPI is greater than 1, the project is under budget.
- RESULT: This project is over budget.
How much is the project over or under budget? Use the Cost Variances (CV).
- The formula: EV-AC = CV.
- Applying this to the example above: CV = $25,000 - $30,000 = -$5,000.
- If CV is less than zero project is over budget.
- If CV is greater than zero project is under budget.
- strong>RESULT: This project is over budget by $5,000.
Is the project ahead or behind schedule? Use Schedule Performance Index (SPI).
- The formula: SPI = EV / PV.
- Applying this to the example above: SPI = $25,000 / $40,000 = 0.625.
- If SPI is less than 1 the project is behind schedule.
- If SPI is greater than 1 the project is ahead of schedule.
- RESULT: This project is behind schedule by about 38%.
How much is the project ahead or behind schedule? Use Schedule Variances (SV).
- The formula: SV = EV-PV
- Applying this to the example above: SV = $25,000 - $40,000 = -15,000
- If SV is less than zero project is behind schedule.
- If SV is greater than zero project is ahead of schedule.
- RESULT: This Project is behind schedule.
What will it cost to complete the entire project? Use Estimate At Completion (EAC).
- The formula: EAC = BAC / CPI.
- Applying this to the example above: EAC= $100,000 / 0.8333 = $120,000.
- RESULT: The cost to complete all work in the project = $120,000 ($20K over budget).
What will it cost to complete the remaining work? Use Estimate to Completion (ETC).
- The formula: ETC = EAC -AC.
- Applying this to the example above: $120,000 - $30,000 = $90,000.
- RESULT: The cost to complete remaining work in the project = $90,000.
EVM has unique value
Identify projects before they fail—The main advantage of EVM is to anticipate project problems early and to take action to prevent over-spending, and to stay on schedule.
Improve project visibility and accountability—EVM requires more interaction and data input (hours/expenses) from workers and managers in order to accurately generate project reports. Project predictions and outcomes (good and bad) are reported, and where everyone can see the results both personally and for the project. EVM helps to identify problems quickly for immediate management attention.
Improve the planning process—EVM requires good data. It forces you to clearly and concisely plan the details of a project.
Marketing advantage to new and potential clients—EVM is a well-known methodology that is used by many companies nationally and internationally and requires commitment and organizational maturity to implement successfully. It allows your firm to have statistical and objective information about a project and can provide accurate reports for clients on their project's status.
Challenges to using EVM
Bad baseline = Bad reports—EVM requires a project to have a solid starting baseline for costs and schedule. It is critical to any earned value analysis. Collection of solid Primary Data is a critical component in making EVM work. A hastily or poorly done baseline means that any earned value analysis may be inaccurate. A good baseline is critical.
Quality—Quality of work is a critical component in any project. Unfortunately, EVM has no way to quantify quality. A project may be getting done well according to EVM, but the quality of work may be low.
May require new software applications—All of the data EVM requires is data that should already be routinely collected by project managers. Often the data exists, but is in different systems (time and billing, accounting, scheduling) and is cumbersome to routinely collect. It is tempting to buy a new application that does everything. Unfortunately, the initial cost of a new system, training, and data migration are usually cost prohibitive, and a dedicated system is usually best purchased when your organization really needs and values such a system. With a bit of ingenuity, EVM may be implemented using existing applications. Data can be exported from existing systems into an EVM repository. This might be an existing SQL database or something as simple as a desktop spreadsheet.
EVM may be too rigid—EVM emphasizes detailed front-end project planning and often appears to be intimidating. While data must be as accurate as possible in the beginning, EVM can be extremely flexible. A flexible EVM implementation is the result of creating a flexible work breakdown structure (WBS) to help scope the work. The WBS is a hierarchically related list of tasks in a project.
EVM creates extra work and cost—Sometimes it is very time consuming to collect actual costs in an organization. Data required for EVM may be spread across several enterprise applications and departments in an organization. Integrating the data from disparate systems and departments is a challenge, but once done, the benefits from the acquired knowledge and increased project control are well worth the initial effort it takes to collect and integrate data for EVM.
EVM is only for large-scale projects—EVM is usually implemented as a requirement or control measure on larger projects. However, the project control gained by using EVM makes it a very attractive tool for anyone to use with projects large or small. In order to adapt EVM to smaller or shorter projects, you may need to make some accommodations:
Increase the project reporting frequency to weekly or even daily for very short projects.
More frequent reporting puts pressure on an organization's cost reporting systems, which may not be able to accommodate these short periods. Project managers may need to do manual tracking of actual costs or make other arrangements like project timesheets to all project participants.
EVM in Law Firm
EVM is a new and unexplored practice for most law firms. EVM has too many advantages to ignore. As firms continue to embrace project management disciplines to help control work product, expect to see some form of EVM adopted. Also, tracking billable hours is already a discipline at law firms. This may make understanding actual costs easier when required for an EVM analysis.
EVM may require some work to set up initially, but the payoff of having an "early warning" project management tool that enables the firm to forecast project performance accurately is invaluable.
Back to Contents