Things To Remember About Earned Value Methodology – II

Wbs

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In my last installment, I introduced EVM as a method of tracking the progress of a project.

I introduced a few terms namely:

PV/BCWS , EV/BCWP -,AC/ACWP, CV , SV , CPI ,  and SPI.

Now, before using EVM , you first need to put in place a structure so that Earned Value Methodology can be used.

This is relatively simple if you are familiar with breaking down your project into products and/or work packages, work packages that can be broken down into its component parts.

This procedure is called creating a Work Breakdown Structure (WBS). You then make a list of the activities that produce the products and sub-products. This post will not go into the details of creating a WBS. That can be the subject of another post.

Quote of the day:
If everything seems under control, you’re not going fast enough – Mario Andretti

Each activity is allocated a certain cost based on the resources to be expended on that activity. This is made easier if the  organization follows some sort of Activity Based Costing accounting system. This is a more efficient and better way of tracking costs. It also aids in eliminating non-value adding activities and/or trimming costs. However, ABC is not rocket-science and you can easily pick up the nuances of assigning costs to activities.

Next the schedule for the activities is plotted to form the project plan. A good schedule takes into account the availability of the resources.

Earned Value Methodology is about tracking and monitoring the costs and schedules of this baselined plan. 

First the schedule is updated with the completed work.

If the work can be sub-divided into discrete components or activities, then percentage completion can be allocated.

If the work cannot be easily divided, then the 50-50 rule is usually used i.e. the work is declared 50% complete on start and 100% on completion.

“Well-begun is usually half-done”. Something to remember!

Next costs are allocated to the activities. Note these are the actual costs incurred and not the budgeted costs.

Next we go about calculating the earned value of the product.

Earned Value (EV) is simply percent complete * Planned Value (PV). It simply states what proportion of the Planned Value is achieved.

Earned Value may or may not be equal to Actual Cost (AC). If EV = AC , then the cost variance (CV) is 0.

CV = EV – AC. If CV is +ve , then costs are under control.

The Cost Performance Index (CPI) is the ratio of the Earned Value/Actual Cost. If CPI > 1 , then costs are under control.

Schedule Variance (SV), on the other hand, is Earned Value – Planned Value. If SV > 0, then schedule is under control.

The Schedule Performance Index (SPI) is the ratio of the EV to PV. If SPI > 1 , then the schedule is being adhered to.

Earned Value Methodology seems to draw its inspiration from Variance Analysis, a form of Management Accounting.

Of course, when using the above two metrics in a Project Management dashboard, none of which can be tackled in isolation, but have to be taken together to be able to present a better picture to the project sponsor and project board the progress of the project. These metrics are more understandable to them and a quick glance at these metrics is all that’s required to grasp as to whether the project is on schedule and on budget. Time is precious and theirs more than yours!

The next installment in this series will focus on how to make an informed estimate of the completion of the project and the expected actual cost.

Till then! Have a great weekend!

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I am an IT professional with over 12 years work experience. I am also a part-time blogger and currently a CFA candidate.

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