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Wednesday, June 26, 2013

Learn About Earned Value Management (EVM) (Part 1 of 2)


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Learn About Earned Value Management (EVM)(Part 1 of 2)
Have you ever been asked how far along you were on a project? Of course you have. If you do not have a valid schedule, or if you are not keeping the schedule up-to-date, you know that your answer is pretty much a guess. If you have a good schedule and you are keeping it up-to-date, you should have a sense for how much work is remaining and what the projected end-date is. But are you 50% complete? Or 90% complete? It is not always easy to know.
Earned value metrics were established to remove the guess work from determining where you are at in relation to a baseline. Using it allows a project manager to know precisely how far along he is, how much work is remaining, what the expected cost will be, and all sorts of other interesting information.
Are you using earned value on your project today? Probably not. You are not using earned value because your organization has not adopted it. Implementing earned value on your project requires a tremendous level of discipline and a common set of processes. It is hard to apply earned value one project at a time, since no one else would understand what you are doing and why. It required an organization focus.
History
Earned value has not been around for hundreds of years. You can actually trace its beginning to the late 1800s and early 1900s, as managers attempted to make the factory floor and the production line as efficient as possible. The drive for efficiency requires a foundation in metrics and earned value was a way to measure things more precisely.
In the 1960s, the US Department of Defense began to mandate the use of earned value on defense related projects. As you might expect, if the government is contracting out projects worth hundreds of millions or billions of dollars, they want project progress updates to consist of more than "we seem to be on target." Earned value calculations can provide a better sense for exactly where the project is against the baseline and provide an early warning if the trends indicate that the project would be overbudget or over its deadline.
EVM is based on just three core values.
  • Actual cost (AC). The actual cost of work completed as of a point in time.
  • Planned Value (PV). The budgeted cost of work you planned to complete as of the same point in time.
  • Earned Value (EV). The budgeted cost of the work actually completed as of the same point in time.
Earned Value is calculated by adding up the budgeted cost of every activity that has been completed. (Remember, this is not the actual cost of the work activities. This is thebudgeted cost.) Look at the following example:       
 Today's Date is March 31
Completed Activity
A
B
C
D
Remaining Work
Target Date
March 10
March 15
March 31
April 5
July 31
Budgeted Cost
20
10
15
5
500
Actual Cost
20
5
20
10
?
Let's say that as of March 31 you have actually completed activity A, B, C and D. Let's calculate AC, PV and EV.
  • AC is the actual cost of the work completed. This is 55 (20 + 5 + 20 + 10).
  • PV is the budgeted cost of the work planned to be completed. This is 45 (20 + 10 + 15). Note that Activity D is not counted since it was not planned to be completed as of March 31.
  • EV is the budgeted cost of the work completed. This is 50 (20 + 10 + 15 + 5).
These three numbers seem to be interesting, but by themselves they do not tell you too much. So, we need to combine and compare the values to determine our status against schedule and budget. Sorry, but this next bit of information must wait until next week's email.
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