Earned value management

From Free net encyclopedia

Earned value management is a project management technique for estimating how a project is doing in terms of its budget and schedule.

Earned value compares the work finished so far with the estimates made in the beginning of the project. This gives a measure of how far the project is from completion. By extrapolating from the amount of work already put into the project, the project manager can get an estimate on how much resources the project will have used at completion.

This technique is related to the critical path concept. An alternative project performance measurement and management technique is critical chain, which utilizes buffer management instead. The reason is that the earned value management method does not distinguish between the progress on the project constraint (i.e. its critical chain) from progress on the non-constraints (i.e. other paths in the project network). This can sometimes lead the project manager to expedite non-critical work at the expense of critical work in pursuit of better earned value measures, resulting in delayed project completion. This is a case of local optimization, resulting from a lack of subordination of local measures to global measures.

To apply earned value to a project, the project manager needs the following primary data:

a work breakdown structure (WBS): a list of all tasks broken down in a hierarchical structure
project master schedule (PMS): a Gantt chart of what task will be done when and by whom
budgeted cost of work scheduled (BCWS) or planned value (PV): for every period the budgets of the tasks that were planned to be finished in this time unit. 'How much work should be done?'
budgeted cost of work produced (BCWP) or earned value (EV): for every period the budgets of the tasks that actually finished in this time unit. 'How much work is done?'
actual cost (AC) of work produced (ACWP) or effort spent: for every period the actual costs of the work. 'How much did it cost?'
estimate to complete (ETC), the projection of remaining costs to be incurred; this is an estimate based on best current information, irrespective of budget
budget at completion (BAC): ∑BCWS, the total budget estimated to be spent to complete the project
total funding available (TFA): the budget the client has committed to
negotiated period of performance (NPOP): the time period the client has agreed upon with the project manager
planned period of performance (PPOP): the time period thought required to finish the project
cost accrual ratio (CAR): the total average cost per person per time unit
forecast of remaining work (FCST) or current schedule: the work that still needs to be done after this time unit

Generally, the Planned Values are based on labour costs only, and the Earned Values and Actual Costs are calculated on the same basis.

When a task is complete, the Earned Value in respect of a task is set (allocated) to be equal to the Planned Value of the task, irrespective of the Actual Costs spent on its accomplishment.

For tasks partly complete, it may be possible to measure the amount of work completed. In such cases, the Earned Value can be calculated accordingly as a fraction of the total Planned Value. Other alternative conventions exist for partially completed tasks, based on, for example:

50% notional progress for partial completion
elapsed time
... and others

Whatever the basis of calculation, the Earned Value for a project is the sum of the Earned Values for its separate tasks.

From these data, the project manager can calculate:

Cost Variance (CV)

<math>\begin{matrix}CV & = & BCWP - ACWP \\ \ & = & EV - AC \end{matrix}</math>, greater than 0 is good

Schedule Variance (SV)

<math>\begin{matrix}SV & = & BCWP - BCWS \\ \ & = & EV - PV \end{matrix}</math>, greater than 0 is good

If the cost or schedule variance deviates from the budget by more than a percentage threshold, then the project manager must provide an analysis of the cause, including corrective actions. Such an explanation is required even if the deviation is a favorable one, to ensure that any tradeoffs made are visible. For example, more staff could be hired to complete a task faster but the cost may be higher. The threshold percentage is set by each individual project but is typically 10 percent.

Cost Performance Index (CPI)

< 1 means that the cost of completing the work is higher than planned (bad)

= 1 means that the cost of completing the work is right on plan (good)

> 1 means that the cost of completing the work is less than planned (good or sometimes bad).

Having a CPI that is very high (in some cases, very high is only 1.2) may mean that the plan was too conservative, and thus a very high number may in fact not be good, since the CPI is being measured against a poor baseline. Management or the customer may be upset with the planners since an overly conservative baseline does not free up available funds for other purposes, and the baseline is also used for manpower planning.

Schedule Performance Index (SPI)

<math>SPI = {BCWP \over BCWS }</math>, greater than 1 is good

Estimate At Completion (EAC)

EAC is the manager's projection of total cost of the project at completion.

To-Complete Performance Index (TCPI)

The TCPI projects what the CPI will be for the remaineder of the project based on the manager's projection of subsequent performance. The TCPI should be compared to the CPI. Any significant difference should be accounted for to explain why the manager projects either improved or degraded performance in the future.

<math>TCPI = { \left( BAC - BCWP \right) \over ETC }</math>

Independent Estimate At Completion (IEAC)

The IEAC is a metric to project total cost using the performance to date to project overall performance. This can be compared to the EAC, which is the manager's projection.

<math>IEAC = \sum ACWP + { \left( BAC - \sum BCWP \right) \over CPI }</math>

<math>IEAC = \sum AC + { \left(BAC -\sum EV \right) \over CPI }</math>

[edit]