What is Earned Value Management?
Earned Value Management (EVM) is a project control methodology that integrates schedule, costs, and scope to measure project performance against the project baseline.
Earned Value Management (EVM) is the best practice in project control. It is a collection of methods with which you can effectively monitor your project and detect deviations from the plan data at an early stage. EVM provides you with objective values for project progress and early warning signals through trends and statistical predictions.
Earned Value Management is Becoming Increasingly Important in Project Control
Too many government and commercial projects fail. Every year, more than 70% of all projects end far above the defined budget, the planned deadline or they do not deliver the originally specified features or functions. More than 25% of all projects fail and are terminated. Every year, U.S. companies lose several billion dollars. This is probably not news to you.
Controlling and reporting project costs, schedules, technical progress and risks is of ever increasing importance in project management. Earned Value Management (EVM)—now in use for several decades—has provided to be the most efficient project control methodology.
Once the sole domain of the U.S. Department of Defense, EVM has now been in use for a long time, especially in commercial enterprises around the world. In the early days, EVM was criticized, due to its inflexible and dogmatic approach. This was overcome in the last 20 years through developments in international standards and adaption to the “real world” showing that the basic principles of managing projects with EVM are relatively easy to understand.
Read more about The History of Earned Value Management
What Questions Does Project Control Have to Answer?
Successful project control gives answers to difficult questions, such as:
- The actual costs are lower than the planned costs. Does this mean that the project is working well or that it is behind schedule?
- The actual costs are higher than the planned costs, and the project is half completed. What are the estimated costs of the project when it is completed?
- When will the project be completed?
- How efficiently are we using our time and resources?
- How much will the profit or the ROI be at project closure?
The traditional project cost analysis does not provide answers to these questions. It often deals only with the actual costs of completed work, compared to the planned costs or the budget. However, this comparison has a major shortcoming—the effective project performance is not considered at all. Earned Value Management, however, is a method for measuring, monitoring and communicating of the real performance of a project.
Earned Value Management Definitions
The various Earned Value Management terms often lead to confusion. Earned Value Analysis is often associated with Earned Value Management, which is incorrect. “Analysis” describes only a small part of this management methodology. Others speak of Earned Value Management and mean the Earned Value with a few key figures like CPI and SPI. This is also not quite correct, because Earned Value Management includes a lot more.
The three different definitions of Earned Value used in my EVM books all have their own meaning and are defined in the EVM Standard EIA-748. The following figure shows the hierarchy of the different terms
Earned Value Management System (EVMS)
An Earned Value Management System is a number of integrated processes, which implements the defined standards and criteria. The Standard EIA-748 (Earned Value Management Systems) defines the appropriate guidelines. In its simplest form, EVMS can be implemented without software, which is merely a means to an end and increases productivity, allows for a more economical implementation of EVM and enhances the management of complex projects. EVMS is not software.
Earned Value Management (EVM)
Earned Value Management is a program management tool, which integrates project scope, schedule and cost parameters. This allows comprehensive project monitoring with various performance indicators as well as forecasts about the final project costs and the project end date.
Earned Value (EV)
The Earned Value is the budgeted cost of work performed. If the EV is compared with the planned work and the Actual Costs, performance and progress of the project can be determined.
EVM – More Than Just Key Figures
Earned Value Management is a structured project management method that has the following four main tasks:
- Defines the basis for performance measurement (baseline)
- Measures, analyses and presents the performance of the project
- Shows schedule and budget variances during the project duration
makes predictions about the project end date and project end costs
Calculating the Earned Value and the EVM Performance Figures
You already receive all the data EVM needs to deliver valuable results through professional project planning and good project management.
Software packages such as Microsoft Project can perform earned value calculations automatically, and they’re simple calculations that can quickly be performed manually as needed. Earned value calculations require the following:
- Planned Value (PV) = budgeted cost through the current reporting period
- Actual Cost (AC) = actual costs to date
- Earned Value (EV) = the value of the work performed at a given time, based on the planned (budgeted) value for this work
With these readily available numbers, we’re ready to do some basic calculations.
- Cost Performance Index (CPI): CPI = EV/AC
The CPI measures the value of work completed against the actual cost. A CPI value <1.0 indicates costs were higher than budgeted. CPI >1.0 indicates costs were less than budgeted.
- Schedule Performance Index (SPI): SPI = EV/PV
SPI measures progress achieved against progress planned. An SPI value <1.0 indicates less work was completed than was planned. SPI >1.0 indicates more work was completed than was planned.
- Cost Variance (CV): CV = EV – AC
A negative Cost Variance means that the approved budget for the work performed to date has been exceeded
- Schedule Variance (SV): SV = EV – PV
A negative Schedule Variance means that the work performed to date is behind schedule
The Benefits of Earned Value Management
In large project an Earned Value Management System helps both the contractor and customer. The benefits of implementing an EVMS can be summarized as follows:
- Improves the planning process
- Fosters a clear definition of the work scope
- Establishes clear responsibility for work effort
- Integrates technical, schedule, and cost performance
- Provides early warning and analysis of potential performance problems
- Identifies problem areas for immediate and proactive management attention
- Enables more accurate reporting of cost and schedule impacts of known problems
- Enhances the ability to assess and integrate technical, schedule, cost, systems analysis, and risk factors
- Provides consistent and clear communication of progress at all management levels
- Improves project visibility and accountability.
The Pitfalls to Watch Out For
- Take care not to rely solely on earned value performance figures — they represent a single objective data point. The performance figures can change quickly, especially in the start phase of a project, and actual costs and project progress rarely occur as budgeted.
- Consider reporting and analyzing the personnel effort on a weekly basis. With monthly data, control measures often come too late.
- Customer satisfaction and quality aren’t captured within earned value calculations. While earned value management is helpful for measuring project performance relative to schedule and budget, use additionally other project control methods.
- If you’re reporting earned value calculations, make sure the recipients know what the numbers mean and how they’re used. I recommend presenting them in non-project management terms to project sponsors and other key stakeholders.
Read more about Earned Value Management
Get the Best Earned Value Management Books
Earned Value Management – Fast Start Guide
The Most Important Methods and Tools for an Effective Project Control
This book covers the basic concepts of EARNED VALUE MANAGEMENT in an easy understandable way. You will find on more than 200 pages comprehensive knowledge about Earned Value Management, simply explained with more than 50 illustrations – and aligned with the PMBOK® Guide 6th Edition
Earned Value Management – 60 Minutes Compact Knowledge
In Just 60 Minutes You Will Learn Everything You Need to Know About Earned Value Management.
This book is perfect as an introduction and as a reference guide for everyday work, but also for education. It is the best preparation for the EVM questions in the PMI PMP® certification. It has over 115 pages and 35 illustrations.