Earned value method in project management

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In today's world, everyone can try their hand at business. There are more than enough opportunities, there are fewer and fewer restrictions, so all you need is a desire. However, this alone will not be enough. Everyone can open their own business, but only a few can keep it afloat, develop and move forward. It takes more than just a desire, it takes skills, it takes an understanding of how the business world works. Take project management as an example - many business start-ups do not use any tools to manage the projects they or their subordinates work on, thereby making a very blunder.

If you have certain tools, you will be able to do your job much more efficiently. And you don't need to be an economics genius to do this - just look at the earned value method. In project management, it allows you to achieve maximum efficiency and accuracy, but at the same time it is elementary and affordable. What is Earned Value Method? This is what this article will be about.

What is this?

MethodEarned Value is a system of practices that allows you to monitor and measure the performance of a project against a predetermined plan. This method uses several numerical indicators that are added up in formulas and allow you to accurately and clearly demonstrate what the state of the project is in a given period of time, how much it is behind schedule or ahead of schedule, how much it exceeds the budget, and also what the expected results will be. the moment the project is completed on a predetermined day, which is now called the deadline.

In the real world, the earned value method is really very popular - it is used everywhere, and among such methods it is the most used in practice. The huge advantage of this method is not only its simplicity, transparency and accessibility, but also its versatility. The fact is that you can use it in absolutely any field and for any project that you or your employees are involved in. However, no matter how simple this method may be, it still needs to be studied, as well as considered in practice, so that it can then be applied safely in any conditions. The rest of the article will discuss each of the metrics used in this method, and at the end will provide a simple example that will help you more clearly see how this method works.

PV

As you can see, the earned value method allows you tocalculate the delay from the schedule or its advance, as well as the budget expenditure. Accordingly, the calculations must contain the initial data, which will now be discussed. First of all, you need to look at an indicator called PV, which stands for “planned volume”. There is nothing complicated here - this indicator is exactly what its name indicates. This is the planned cost of the work that will be carried out within the framework of the project - in other words, this is the project budget. It is a specific value and is not calculated by any formulas. However, naturally, this indicator will be actively used to calculate other indicators used within the framework of this method. Earned value method allows you to estimate deviations from the budget as accurately as possible. But what is this most earned value?

EV

Earned value method in project management is good because it allows you to evaluate absolutely all aspects of a particular project and the features of its implementation. And this can be done, for example, using this indicator, which is in the name of the entire method. This is earned value, but what is it? If the planned volume was quite simple and clear, then with the earned value, everything is no longer so clear. The fact is that this is not an exact indicator, but an estimate - it indicates the planned cost of only those works that were actually performed as of a specific moment of the project. Accordingly, this indicatoris calculated by estimating the amount of work that was completed within the project - and it is assigned an amount that is calculated in relation to what the planned budget was at that particular moment. In words, this sounds rather confusing, but you can figure it out. If you are still not too clear about what earned value means, then you should wait for the case study using the earned value method in project management, which will be described later.

AC

As you have already understood, the earned value method in project management is not just a collection of different numbers, it is a network of relationships that will allow you to analyze how the project was carried out. But for this it is important to consider also another main parameter - the actual cost. As with the planned volume, the actual cost is extremely easy to understand. Strictly speaking, this is the amount that at a particular point in time under consideration during the implementation of the project was spent on its implementation. When you have all three main parameters, you can take on the relationship between them, which is the key point, the main goal for which there is a method of earned value in project management. The objectives of this method are simple - to compare the amount of work actually performed with the planned, and also to compare the actual budget expenditures with the planned ones. And for this you now have all the necessary tools.

SV

Now, it's time to consider what exactly this method is used for. Earned value method is used primarily to determine the cost overrun of the budget in relation to the amount of work performed. As a matter of fact, this value is used for this, which stands for “deviation from the schedule”. It is calculated quite simply - the PV indicator is subtracted from the EV indicator. What does it mean? This means that you need to subtract the earned value from the planned value. This way you can understand how much work employees have completed compared to how much they should have completed at the moment in question. Accordingly, a negative value indicates a delay from the schedule, and a positive value indicates its advance. The mastered project method is applied at the stage of the project that you are interested in - which means that you can use it on the first day, on the tenth and on the last. On each day of the project, this method will give you useful information.

CV

This indicator is very similar to the previous one - except that it changes the deviation not from the schedule, but from the budget. Accordingly, for its calculation it is necessary to use slightly different parameters. As before, you need to subtract from earned value (this indicator, as the name of the method implies, is key), but this time it is not the planned volume that is subtracted, but the actual cost of the work. Accordingly, ifthe earned value is less than the actual cost - more funds were spent than planned at a particular moment, if more - then vice versa. These two indicators are the main ones for every project manager, and it is to obtain them that the earned value method is used. These, however, are not the only stats you can end up with.

CPI

What else does the Earned Value Method formula contain? You have already familiarized yourself with the basic concepts and methods for calculating them - now it's time to look at a couple of relative indicators. For example, the deadline completion index is a very interesting parameter that will allow you to visually see how much you are ahead of the deadlines or behind them. To get this figure, you need to divide the earned value by the planned value. The result can be considered as a fractional number - or converted into percentages for greater clarity. The result can be viewed as the rate of progress as a percentage of the planned pace. You can see illustrative examples later, when a specific project is analyzed.

SPI

As with the previous pair, SPI has a strong resemblance to CPI. The fact is that this is also a relative index, but this time it does not show the speed of the project, but the cost of the budget. If CV showed how much the budget was underspent or overspent, then the purpose of this parameter is to show how much money is spent on one planned dollar. The result here may beone dollar (if the budget is one hundred percent respected), and seventy-five cents and even a dollar and a half. In general, this indicator allows you to generally assess how much the budget is underspent or overspent.

Other options

That's all the key metrics you need to keep in mind when you use the earned value method in project management. You can start looking at the example right now - but it's better to stop for a while and look at a couple more indicators that can be used on a more professional level if you want to get more detailed results. For example, professionals also enter the BAC figure, which corresponds to the amount of the budget for the entire project - and it is from this that several other parameters are derived. There is an EAC indicator, which stands for "grade at completion." It demonstrates exactly what value can be expected to be received as a result of the project at a particular moment. If the previous metrics helped you navigate the exact state of the project at a particular point in time, then this metric (and subsequent ones) will help you calculate estimated data at the time the project was completed.

So, the completion score is calculated by dividing the budget amount by the cost index of completed work. As for the ETC parameter, it shows the estimate to completion, that is, how much it will take to complete the project. It is calculated by subtracting from the estimate upon completion of the real cost of all work. Well, one more parameter - VAC. This is a departure frombudget at completion, that is, a parameter that allows you to calculate the estimated deviation from the budget at the time the project is completed. You can get it by subtracting the estimate at completion from the budget amount. That's all you need to know about this method - now it's time to look at a specific example.

Application example

Naturally, for the first contact with this method, it makes no sense to take any real project - it is better to take a simplified example that will allow you to visually consider each of the above parameters. So, the essence of the project is as follows - it is necessary to build four walls in four days, spending $ 800 on it. This is all the information you may need in the process. In this example, the earned value method is applied at a stage close to completion, that is, on the third day of the project.

In three days, only two and a half walls were built, but 560 dollars of the budget were spent. It would seem that this is less than planned - but less work was done. So are the workers doing their job well? This is where this method will help you. First you need to understand the three basic indicators - PV, EV and AC. The first is 600 dollars, since on the third day it was planned to spend that much. The second - $ 500, since that is how much should have been spent on the construction of two and a half walls. Well, the third - $ 560, that's how much the workers spent on the construction of two and a half walls on the third day of the project. You can also immediately note the BAC indicator - itis $800, the full project budget. Well, it's time to calculate the deviations - in terms of time and cost. $500 minus $560 is minus $60, which is exactly how much the budget was overspent. 500 dollars minus 600 dollars - it turns out minus one hundred dollars, that is, there is a backlog from the schedule. It's time to make the indicators more accurate, that is, to calculate the CPI and SPI. If you divide $500 by $560, you get 0.89, meaning one dollar is spent instead of 89 cents-for every dollar, there is an overspend of 11 cents. If you divide $500 by $600, you get 0.83, which means that the speed of the project is only 83 percent of the originally planned speed.

That's all - now you have received all the main indicators and have an idea of the state of your project on a particular day of its implementation. Now you can calculate the remaining parameters - EAC, ETC and VAC. Completion score is 800 divided by 0.89. It turns out that at this pace, the estimated cost of the project at the end of the work is 900 dollars instead of 800. The estimate to completion is 900 minus 560, that is, 340 dollars. This is the estimated amount needed to complete the project. Well, the deviation on completion will be 800 minus 900 - minus $100, that is, the budget will be overspent by one hundred dollars. Naturally, the earned value method is applied at a stage of the project, which may differ from the above - this method is universal and can be used at any stage.