Using earned value management for predicting project performance
Blog: Monday Project Management Blog
Even the most ambitious and well-planned projects sometimes stray off course. Take the case of the International Space Station, a five-nation collaboration that started off with a $36.75 billion budget. It was eventually completed six years behind schedule at a final cost of $105 billion, going over budget by an astronomical 186%.
There are dozens of similar examples closer to earth. The Olympics, for instance, see budget overruns almost as a matter of routine. The 2014 Sochi Winter Olympics went a colossal $39 billion over budget, and the London Summer Games required an extra $11.9 billion.
Sadly, cost overruns and delays aren’t the only challenges facing high-value projects. Efficient project management calls for versatile tools and techniques that managers can use to track multiple deficiencies and improve operational productivity.
What is earned value management?
Put simply, earned value management (EVM) is a method of measuring and monitoring the amount of work completed on a given project against the plan. More specifically, EVM is a project management methodology that measures performance based on a combination of factors like project schedule, costs, technical scope, and risks. It assesses progress against a baseline by comparing planned and actual values, using the information to identify problems and predict cost and schedule at project completion. Project managers can use these insights to plug operational loopholes and make other necessary adjustments on the go.
Earned value (EV) is a key performance indicator (KPI) that signifies a quantified value of work accomplished on a project at a given date. EV for an ongoing project is calculated according to a preset rule that avoids subjective estimates and biases to deliver an objective measure of project performance. Earned value management helps project managers develop corrective actions, increase efficiency, and keep project parameters within budget.
Although earned value management is one of the most accurate project forecasting techniques, it’s a complex methodology that calls for the use of comprehensive EVM platforms for optimal implementation.
How does earned value management work?
Earned value management works by maintaining a baseline of measurable units like hours, dollars, and other project values. It uses these values to provide a more detailed and accurate assessment of project status than a basic comparison of budget and actual values would allow. Effectively, it tells project managers if they’re behind schedule or over budget on an ongoing project. It does this by allowing them to ask and answer three key questions:
- Past project progress: Where have we been?
- Present project progress: Where are we now?
- Future project progress: Where are we going?
Unlike traditional project management systems, EVM relies on three sources of data to answer the above questions. They are:
- Planned value of scheduled work (budget)
- Actual value of work done
- Earned value of work done
EVM uses these three data sources to compare the planned value of work against the actual value of work completed. Based on this comparison, it arrives at the “earned value” of work completed at a given time. Let’s take a look at how earned value management helps assess project progress.
Earned value management and evaluating project progress
Project plans are abstract concepts until they’ve been fully executed. However, project execution is likely to be inefficient without effective ways to measure progress and performance. A precise estimation of where you are on a project requires that you have a baseline against which to compare actual work done.
Determining how far off you are from the project baseline requires variance calculations. There are two types of variance in an earned value management system:
- Schedule Variance (SV): This is an indicator of how far a project has diverged from its planned schedule. A negative SV reading indicates a project is behind schedule, while a positive SV means you’re ahead of schedule. Zero SV means your project is right on schedule.
- Cost Variance (CV): This indicates how far a project has diverged from its planned budget. A zero CV reading indicates your project is on budget. A negative CV value means your project is over budget, while a positive value means it’s under budget.
EVM provides project managers with a dependable tool for accurate progress evaluation, which they can then use to implement course-corrective measures.
Benefits of using earned value management
EVM brings unparalleled benefits to any project with strict cost and schedule-compliance requirements. One study found that EVM could make completion forecasts within a 10% accuracy once you’re just 20% into a project. It’s no surprise that it’s considered one of the best project management systems to ensure on-time and on-budget completion.
Optimally implemented, EVM brings several benefits for project managers. They include:
- Accurate progress measurement: Instead of using overall percentages to determine work done, EVM breaks down projects into measurable packages or milestones. It then uses the project plan to assign a weight to each completed package and provide a summarized percentage for work completed.
- Accurate forecasting: EVM remains one of the best forecasting tools, enabling project managers and stakeholders to plan resources, optimize efficiency across multiple dimensions, and ensure timely completion.
- Project discipline: EVM integrates project data across four dimensions: schedule, cost, scope, and risk. It maintains discipline in all four dimensions to ensure optimal project efficiency and completion within plan parameters.
- Cost-effective: By giving project managers information to make targeted adjustments, EVM ensures measurable results with very little additional cost.
- Fast intervention: EVM insights lets project managers intervene ahead of time to tweak functionalities, invest in better technologies, and set end-user expectations.
- Increased visibility: Clear metrics provided by EVM improve project visibility and raises accountability among all stakeholders.
Examples of earned value management in practice
Project managers track EVM metrics throughout the course of a project, looking for deviations to spot issues and implement corrective actions. Here are two scenarios of EVM in practice:
Scenario 1: Real estate project
Let’s take a real estate project set to complete in 10 months with an estimated cost of $1 million. The project has been ongoing for 5 months; $400,000 has been spent, and work worth $450,000 has been completed. The EVM values for this project are:
Project Value (PV) = $500,000 (Because 50% of project time has passed, we calculate the total project value at 50%)
Earned Value (EV) = $450,000 (This is equal to the estimated value of work completed so far)
Actual Cost (AC) = $400,000 (The actual amount of money spent so far)
Based on the above values, we can calculate a cost performance index (CPI).
CPI = EV / AC (450,000 / 400,000)
So, the CPI for the project is 1.125.
This means the project is under budget and likely to be completed at a cost lower than estimated.
Scenario 2: Road construction project
Imagine a road construction project divided into five stages, each worth $30,000 and expected to complete in one month. Two months into the project, 3 stages have been completed at a cost of $120,000.
The EVM values for this project are:
PV = $60,000 (Two months should have completed two stages, each worth $30,000)
EV = $90,000 (Since three stages of the project have been completed)
AC = $120,000 (The actual cost incurred so far)
Based on these figures, we can calculate the schedule performance index (SPI)
SPI = EV / PV (90,000 / 60,000)
So, SPI for the project is 1.5
This means the project is ahead of schedule and likely to be completed earlier than estimated.
monday.com tools for easy earned value management
Even the most experienced project managers need software and tools to stay on top of their game.
monday.com offers a customizable, open platform you can use to optimize project management requirements. You can work with our features, including dashboards, automation, and integration, to streamline your entire project life cycle across its stages.
You can also use our project management tools to plan, manage, and collaborate to get the most out of earned value management systems.
Frequently asked questions
Earned value management is a complex tool that offers highly cost-effective benefits to project managers and other stakeholders. Here are some of the most common questions asked about EVM with their answers.
Does earned value management indicate a project is over or under budget?
Yes, but it does much more than that. An effective EVM platform will not just tell you how much you’re over or under budget but also provide insights into corrective measures you can implement to bring the project around and deliver it on time and within budget.
How does one calculate earned value?
Earned value is calculated by multiplying the project budget by the percentage of work completed. For instance, if the project budget is $100,000 and the percentage of work completed is 40%, the earned value is 40,000.
What does EVM stand for?
EVM stands for earned value management. It’s a progress management tool that measures the level of work completed on a project by comparing it with the initial plan. Insights gathered with EVM allow project managers to intervene and tweak project details to achieve optimal completion.
The importance of using EVM across complex projects
While it’s mostly used in high-value projects, It can be scaled and tailored for almost any type of project, including short-term, low-risk projects. EVM helps quantify the value of project progress in real time, enabling project managers and stakeholders to anticipate future challenges based on past and present progress reports. Most importantly, it provides them with actionable data that can be used for proactive decision-making throughout the course of a project.
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