In our previous article, we introduced the concept of Earned Value Analysis (EVA), and how it can be extremely beneficial for project-centric businesses. In case you missed it, you can read it here, as this article is in continuation to last week’s blog post.
Today, we are going to get into the details of Earned Value Metrics.
How does calculating EVA help your project get back on track? What information does the EVA method offer? How does one calculate Cost Variance or track Schedule Variance?
You’ll find the answer to all that and more with today’s article!
What Are Earned Value Metrics?
EVM Metrics are a bunch of metrics used by project managers to determine earned value of the project they’re working on, in order to evaluate its performance in terms of delivery timeline and budget.
EVM metrics are crucial for providing a comprehensive overview of any project’s health, and also, they’re usually a better way to gauge project performance when compared to traditional accounting measures which are only capable pf tracking a project one dimensionally – for example – current incurred cost vs. original budget.
In contrast, EVM metrics offer tighter, more reliable, and more effective control over budget (or cost) as well as schedule (or time), making it a far superior method to track the progress of your project and keep it from going off the rails.
How does EVM Metrics achieve this? Let’s find out!
We will discuss Earned Value Management concepts and KPIs, and what EVA calculations reveal about the status of your project, at any given point in time. Additionally, we will also see how EV metrics are calculated with the help of an example.
So, let’s get started!
Planned vs. Actuals
The core of understanding EVA is to grasp the concept of PLANNED VS. ACTUAL numbers with respect to any project’s cost and schedule.
Almost every project starts with a planned budget. It is not an arbitrary number but is calculated by using a rough estimate of
· Cost of materials
· Cost of labour
· Profits for the company, and more
It factors in all the deliverables as well as all the tasks and activities needed to complete the project and then sums up the value.
There is also a planned schedule at the beginning. This is the timeline that the project must follow, stating the sequence of tasks to be completed, their deadlines and their respective deliverables.
Now, let’s discuss the ACTUALS.
The actual cost of the project is the sum of all the costs incurred in reality. This is determined by
What you pay for a deliverable; for example, an external vendor may charge you £150/hour as opposed to the £100/hour you originally estimated for your budget.
Your actual schedule and progress of work on site; for example, you might have to change the sequence of tasks on the ground for practical reasons, and this will impact the actual cost.
In practice, the actual schedule may have to vary for a variety of reasons – unavailability of particular materials, deliberately postponing a task as it requires an external vendor, or sometimes even preponing a task that can be completed by an expert who only had a set date to devote to the project.
Planning Values Explained
BAC – or Budget at Completion is the total budget approved for the project at the planning stage.
PV – or Planned Value is the total cost your project should have incurred at this point, based on the tasks completed so far as per the original budget baseline figures.
The official definition of PV as per the PMBOK Guide is: “Planned Value (PV) is the authorized budget assigned to work to be accomplished for an activity or WBS component.”
Current Values Explained
These are the REAL values based on project status at the current time
1. AC – or Actual Cost is the cost you have incurred thus far in the project.
2. EV – or Earned Value is the value of tasks effectively completed thus far, based on original cost estimates and not the actual cost.
a. In simple words – EV is the cost you should have incurred so far based on the work actuallydone.
3. SV - or the Schedule Variance tells you how much the project timeline varies from the original plan.
a. To calculate this: SV = EV – PV
4. SPI – or Schedule Performance Index tells you how much the project is off its scheduled timeline, in ratio to the estimated project duration.
a. To calculate this: SPI = EV/PV
b. SPI value < 1 means the project is behind the estimated schedule, whereas SPI value > 1 means the project is running ahead of time.
5. CV – or Cost Variance tells you how under/over budget your project is at this current time.
a. To calculate this: CV = EV – AC
6. CPI - or Cost Performance Index tells you how above/below the project cost is compared to the original proved budget.
a. To calculate this: CPI = EV/AC
Projected Future Values Explained
· ETC – means Estimate To Complete and tells you how much money the project will cost as a whole, disregarding the money already spent on it.
· EAC – means Estimate at Completion and tells you how much money is needed to complete the project, taking into factor the money spent until now.
· VAC – means Variance at Completion, it predicts the final cost variance (CV) by assuming the pace and quality of the project remained the same until the end.
· TCPI – means To-Complete Performance Index and tells you the level of performance you must achieve to finish the project on time without overshooting the budget.
A Quick Example:
To further understand it, let's go through all the above EV metrics with an example.
Let’s say that we have to build a product for a client, in 14 days.
Here is what our project schedule looks like:
And here is our planned budget along with the list of activities:
Now, we are at the end of Day 8, and these are what the ACTUAL numbers look like:
So that is the cost we incurred at the end of Day 8, along with the percentage of work completed thus far.
Now, let us compute EVA Metrics for this example -
As you can see, this example clearly shows all the necessary values at the end of Day 8 that you might need to make a quick decision on how to bring your project (in this case…building a product for a client) back on track.
· Remember that EV is calculated by multiplying the actual percentage of work completed with the original planned cost. So, for task 3 – this would be 50% multiplied by 3,600 – which gives us 1,800 as the Earned Value for the task at the end of Day 8.
· The negative value of CV (Cost Variance) tells us that we are over budget on Day 8. And since CPI < 1, this only confirms the fact.
· Similarly, the negative SV (Schedule Variance) tells us that the project is running behind schedule, and the fact that SPI < 1 confirms this again.
· Please note that we calculate the CPI and SPI for the whole project (and not every single task) to know how off schedule/budget the entire project is running from the original plan.
We hope doing these calculations with us has further clarified the math behind Earned Value Method, while also explaining the benefits of computing these numbers.
Using EVA Method For Your Projects
Now that you understand what EVA really is and how it can tell you when you have overshot your budget or are behind schedule at any given point in your project, you might want to use this method too.
However, using EVM has certain requirements. And unless your entire business – especially the planning, budgeting, and tracking processes – are designed to support EVA, you might not reap the full benefits that come from Earned Value Analysis.
A good ERP designed specifically for Project Management definitely makes EVM computing a lot easier, allowing you to harvest the full benefits of this tool.
Some key requirements for accurate EVA are:
1. Accurate Schedule and Budget Estimate –
EVA tells you how your project is performing compared to originally planned values. For this computation to be successful, your budget and schedule must be realistic and well-planned.
2. Availability of Actual Cost Data –
Unless you have a systematic process that tracks every single expense – every invoice, every bill, every penny spent – plus also tracks the time of your people (which actually adds to the cost), you won’t have much success with EVA calculations. This data must also always stay current so you can calculate EVM numbers at any point to give your superiors or clients a realistic picture of how the project is performing. This is where a project-centric ERP that tracks every single detail of your project to become a single source of truth comes in really handy.
3. Cost Planning At Granular Level –
EVA data is only useful when cost planning can be performed at a very detailed level. Unless you have a system that tracks every cost and deliverable at a granular level, it is difficult to get a whole picture of the project without wasting endless hours tracking multiple sheets.
For example – instead of a deliverable called ‘Build Software’ it’s better to divide this into smaller segments like analysis, prototype, implementation, test runs, documentation, rollout etc. This allows you to see where you might be bleeding time and money and fix the issue faster.
4. Tracking Cost and Effort At Granular Level –
Similarly, until and unless you can see project expenses at a granular level, you will not get a clearer understanding of how to adjust the budget without affecting time or quality. A good ERP that can track your Project team’s expenses for specific deliverables allows you to better track costs and adjust the project budget.
For example – if a team member has to travel to the client’s office for a deliverable, and you did not foresee this, you should have a clear expense sheet that tells you what money was spent on travel, food, accommodation etc.
So, Is Earned Value Analysis Really Beneficial For Project-Centric Businesses?
Simple answer – YES. If you have picked the right ERP and project management software that can help you track every cost, every time-lapse, and every deliverable closely – the Earned Value Method can be an extremely useful tool to keep all projects on track.
The key is detailed level planning and very precise, accurate cost tracking. As long as your ERP can track every invoice or cost item and every hour spent on the project and then assign it to the right project, EVA analysis can keep your project on the right track at all times.
If you have a good project-based ERP system in place that allows for detailed cost tracking and planning, give EVA a go. If you have any questions regarding Earned Value Analysis, feel free to reach out to us.
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