Earned Value Analysis - Improving Performance and Profitability

Earned Value Analysis answers the basic question all project managers must ask themselves at different checkpoints in the life of a project – “Have we done what we said we would do within this time-period?”

What is Earned Value Analysis (EVA)?

As a project manager, I’m sure you have heard about Earned Value Analysis and all the hype surrounding it. As complicated as this may sound (or simple, depending on how much math you like), EVA is a financial tool we have all been using as project managers in some way or other, whether we’ve resorted to paper napkin scratches or complicated excel formulas. And if you have moved onto more sophisticated software to help manage your projects, make sure it can process EVA to compare actual cost, planned cost and output at certain milestones in your projects and to provide you clear and concise financial reporting. Earned Value Analysis is arguably one of the most important tools to have on hand when executing a project. It gives a great snapshot of a project’s status – is it on time and on budget so far? It allows the project manager to get a better handle on any issue before it becomes unmanageable. So Earned Value is the planned value of the total amount of work scheduled to be performed by the status date. It is also known as BCWP: “Budgeted Cost of Work Performed.”

How does EVA benefit project management?

It’s most important benefit is that it allows you to constantly monitor your project at every status date and alerts you to issues long before the issue snowballs into a problem that will end up costing the owner time and money.

Now, we have an idea of the importance of the earned value to a project manager. Earned value means nothing unless we have status dates within a project’s lifetime to measure project progress. It also helps if the project is compartmentalized into measureable units/tasks with a well-planned Work Breakdown Structure (WBS).

Let’s assume we have already decided on status dates (or milestones) to measure the on-going project. We have also been able to breakdown the project into measurable units, such as tasks. Now, we need to identify these measurable components:

• BCWS (Budgeted Cost of Work Scheduled): What was the budgeted cost of the work that was scheduled to be performed by the status date?
• BCWP (Budgeted Cost of Work Performed): What was the budgeted cost of work that was actually completed by the status date?
• ACWP (Actual Cost of Work Performed): What was the actual cost of the work performed by the status date?

Once we are able to identify these components, we can obtain the coefficients (CPI, SPI & CSI) that give us a birds-eye view of our project and help us get better control over cost and schedule.

• CV: Cost Variance (BCWP - ACWP)
• SV: Schedule Variance (BCWP - BCWS)
• CPI: Cost Performance Index (BCWP / ACWP)
• SPI : Scheduled Performance Index (BCWP / BCWS)
• TCPI: To Complete Performance Index (BCWS - BCWP) / (BCWS - ACWP)

What relevant information do you get from these coefficients? They act as Key Performance Indicators (KPI) that help monitor the health of the project time to time. The cost variance (CV) and schedule variance (SV) indicate the differences between what was expected in terms of cost and time and what was actually performed.

So, the CPI and SPI can be either positive or negative. Positive variances signify that the project is ahead of schedule and under budget. And a negative variance signifies that a project is either behind schedule or over budget or both. The CPI and SPI have been proven to be statistically accurate performance indicators.

This chart shows an overview of the earned value in relation to the actual and planned cost and schedule.

So what does all this mean in plain English?

If these indicators fluctuate too much from the baseline (budgeted cost and time) then it is cause for concern for the project manager. A negative coefficient below 1 can translate to various scenarios – budget needs to be increased in order to get the project back on track, or, the project needs to be reset or cancelled. How much fluctuation is allowed depends on each individual project and a number of other factors such as life-cycle phase, length of project, type of estimate etc.

Closing Thoughts

One way to manage a project is to closely monitor the project status using the Earned Value Analysis and use the results to make informed decisions about the project. For instance, if EVA is showing negative cost or schedule variances, indicating that the project is behind time or over schedule or both, project managers can add some buffers in terms of extra time or increased budget to a project. This should not be added as part of the estimate for the cost and time for the project completion and this should not be allowed to change the scope of the project. But it will add some safeguards and ensure that in the event a project is off-track (moving away from the baseline) it can be restored by careful status monitoring (EVA) and by buffering it with some extra time and budget.

OMB Requirement

EVA is not just an important facet of project management, but in some cases where government contracts are concerned, almost a necessity. The Office of Management and Budget requires agencies to use a standardized earned value management process to check performance against expectations. Government contractors working on public projects that exceed $20 million must conduct EVA at regular ‘checkpoints’ in the project lifetime. This mandate is not just for government contracts alone, but also for certain internally-managed projects in the OMB. In response to Sarbanes-Oxley Act of 2002, publicly traded companies have started to pay closer attention to EVM (Earned Value Management) as well.

Earned Value Management and Projectmates

Any good project management software must have the ability to provide Earned Value Analysis as part of its financial reporting (module).

Projectmates provides an excellent earned value management system in its new and improved 10.0 version. The version 10.0 financial module now includes EVA, Budget tracking, Risk management (Issue tracking), and Portfolio management among other things. You can have every project management tool (including EVA) housed in one effective & easy-to-use solution at your disposal enabling you to manage your projects better and allowing you to make careful, informed decisions. It takes the risk, and hassles of number crunching out of your hands and provides you with clear-cut results that reflect your project’s progress.

About Systemates, Inc.
Founded in 1995 by leading architects and software engineers, Systemates developed Projectmates to equip owners and owner’s representatives with a secure, sophisticated Web-based construction management software solution. Projectmates’ collaborative platform dramatically improves project execution and cuts costs and delays, increase accountability and reduces risks. With its cutting edge technology, Projectmates creates one seamless platform for managing the complete lifecycle of a building, from planning, bidding, and building to maintaining the facilities. Over 25,000 users from organizations such as Retailers, Real Estate developers, Educational and Government agencies rely on Projectmates to manage billions of dollars in capital construction programs. Systemates is privately held and headquartered in Dallas, Texas. To learn more about Projectmates by Systemates visit www.projectmates.com. To learn more about Projectmates by Systemates visit www.projectmates.com.

For more information contact:
Hemant Bhave
Systemates, Inc.
Dallas 214-217-4100
www.Projectmates.com

Systemates and Projectmates are trademarks or registered trademarks of Systemates, Inc.

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