Being in control of a project budget involves an ongoing comparison of the actual cost of work versus the allocated amount in the budget, and adjusting the project plan to respond to the variances. It is important to monitor, analyze, and report on the variances, or differences, between the actual amounts and budgeted amounts. Earned Value Management (EVM) is a tool to use for keeping track and taking control of your project. Simply put, EVM was developed to provide information on the money expended versus the work completed, and to provide a forecast for the project final cost and completion date (Zouncourides-Lull).
To be honest, I found EVM difficult to grasp at first. The key to my understanding came when I learned the difference in using the cumulative values represented in the project data as opposed to the instantaneous (month-to-month) metrics. Using a road construction project, I will try to analyze and highlight the difference between instantaneous versus cumulative metrics and how they reflect on the earned value of the road project. We will also try to forecast the estimated cost at completion.
(see list of key terms below)
(For the full excel breakdown of the road construction project, contact me.)
Month-to-Month
To get a quick view of performance, one can plot the planned value (PV), actual cost (AC), and earned value (EV). In this case, we see that this project is underperforming. The actual costs are higher than planned, and the value being earned is less than the amount expended. The instantaneous cost performance index (CPI) for the first four months was 0.85, 0.73, 0.79, and 0.69 respectively. This tells us that for each dollar spent, the project has earned less value, with the fourth month only producing 69 cents worth of value for every dollar. Other than for comparative analysis, using the instantaneous metric does give us the true benefit EVM, which lies in its ability to forecast based on current project performance.
Cumulative
The cumulative data, on the other hand, shows us trends in the performance of the project. The trend is still not a positive one, but from this cumulative data we can determine the estimate at completion (EAC) and the estimate to completion (ETC) which tells us how much more money it would actually take to complete the project. The difference between the budgeted cost (BAC), and the estimate at completion (EAC) will show us the variance at completion (VAC) which forecasts how much more costs this project will incur if performance trends do not improve. In this case, we see that this project will realize a 31.15% ($457,919.53) negative variance between budgeted and actual costs.
EVM also provides a metric that can aid a project manager in her efforts to correct the project trajectory in the form of the TCPI index (To Complete Performance Index) which is the percentage increase the project needs to realize in order to get back on track and hit the planned budgeted values. In this case, by the fourth month, the project team has to be 121% more efficient in order to meet the budgeted costs (BAC). At 40% into a 10 month long project, we notice a 76% (cumulative) cost performance index (CPI) which means that for every dollar spent so far on this project, only 76 cents of value has been realized.
Unfortunately for this project, it has been determined that once a project is 15% complete, the CPI does not improve (DOD, Hatfield, Stratton 2005).
The following are key terms in understanding the overall methodology:
PV = Planned Value
-This is the work I should do
EV = Earned Value
-The work I did do
AC = Actual Costs
-The actual cost of the work completed
CV = [Cost] Variance
-EV – AC
SV = [Schedule] Variance
-EV – PV
CPI = Cost Performance Index
-cost efficiency of work accomplished
-measures if you are on, ahead or under budget
-CPI = EV/AC
SPI = Schedule Performance Index
-scheduling efficiency
-measures if you are on, ahead or behind schedule
-SPI = EV/PV
BAC = Budgeted Cost at Completion
-total budgeted cost of the time-phased baseline
-[cumulative] PV for all of the work packages
ETC = Estimate To Complete
-what it will take to complete the remaining work.
-How much work is remaining in cost to complete project
-ETC = (BAC-EV)/CPI
EAC = Estimate at Completion
-forecasted amount of how much the project will cost at the end
-EAC = AC + ETC
TCPI = To Complete Performance Index
-How efficient you need to be in order to complete the project
-what it will take to complete the remaining work to meet BAC or EAC
-(BAC-EV)/(EAC-AC)
VAC = Variance at Completion
-indicates the actual – over or under – run cost at completion
-VAC = EAC – BAC
References
DOD. Department of Defense as cited by Tiffany, D (2012). Real Life EVM Experience Message to AD644 class.
Hatfield, M. Taking on Project Management Myths, Part 2. Retrieved from: http://blogs.pmi.org/blog/voices_on_project_management/2009/09/in-my-continuing-series-on.html
Stratton R. (2005). Not Your Father’s Earned Value. Reprint from Projects at Work: http://www.projectsatwork.com. Retrieved from: http://www.earnedschedule.com/Docs/Not%20Your%20Father’s%20Earned%20Value.PDF
Zouncourides-Lull, A. (2012). Lecture 5 – Project Cost Management – Control Costs. MET AD 644 Project Risk and Cost Management. 2012 Spring 01. Boston University
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