Earned Value Management techniques enable a manager to be aware of potential project schedule disruptions at the earliest possible stage. Research shows that the efficiency of invested funds and the scale of schedule deviations change only slightly after 15-20% of work is completed. Therefore, based upon these indicators, a project’s completion date as well as its entire cost could be forecasted in early stages with a high degree of accuracy.
Earned Value Management as a method for estimating project performance emerged in 1965. It was created in the United States Department of Defense, where employees devised a set of criteria to monitor order fulfillment by contractors.
Before Earned Value Management emerged, PERT (Program/Project Evaluation and Review Technique) was often used to make routine analyses and forecast construction. PERT/Cost was used for forecasting total costs and for forecasting the time required to execute a project. Improved implementation of Earned Value Management was developed in 1963. Instead of comparing planned and actual costs, this new method required users to correlate earned value and actual costs to determine capital efficiency.
The modern implementation of Earned Value Management was created by the National Security Industrial Association (NSIA) based on analysis of the techniques used from 1967 to 1996. It was approved by United States Department of Defense in 1996, and comprises 32 criteria - considerably simplified compared to the previous edition, which used 35 criteria. Even in this edition, Earned Value Management is intended essentially for large projects and includes many requirements which are not of great importance. It is generally believed that due to high complexity of the techniques in its current interpretation, this method will not be practical for the vast majority of project managers.
Simplified implementation of Earned Value Management
There is a simplified variant of Earned Value Management that was developed by Oracle. It comprises only 10 steps and can be tailored to projects of all sizes and complexities. Certain project performance indicators should be measured in accordance with Earned Value Management techniques at every step.
- Define the total work planned value
In the initial stage the total work planned value should be measured. Later it will be compared with earned value (EV) at regular intervals as the project develops. Measuring total work value is a complex task because many essential details are unknown, particularly for large projects; nevertheless, the work should be defined comprehensively, usually in a WBS. That is, all projects tasks are to be broken down into smaller ones until they became simple enough for planned value to be measured easily.
- Assign responsible persons to tasks
To measure planned values and costs realistically, a responsible person should be assigned to every task. The cost of these personnel should be taken into account, because experienced employees do the job faster and with higher quality, but with higher costs.
- Devise a plan and schedule
Earned Value Management is a scheduling system combined with budget control. The project schedule reflects approved work value that has been calculated using tasks’ sequence and the interrelation among them.
- Estimate necessary resources and draw up a budget
After the schedule is made up, estimates of resources and budget should be done for every task. Budgets should be as realistic as possible for the schedule to be feasible.
- Set up milestones where the schedule performance will be measured I
n order to measure schedule performance, planned values should be set up for every milestone in the schedule. Milestones are the fixed time moments where the earned value will be compared with planned ones.
- Devise performance measurement baseline and cost monitor procedures
Planned values make up the performance measurement baseline. Earned values and cost performance should be monitored at regular intervals against this baseline.
- Monitor all direct expenses
Project managers must have actual data about the project’s costs. It can be difficult to obtain the information in some companies, due to the peculiarities of some organizations’ internal structures; e.g., the scope of information security. To get the best from Earned Value Management techniques, actual costs must be compared with planned budget.
- Monitor earned values at a regular base
Earned values should be monitored at least monthly. Accordingly, project manager must obtain all the necessary information: accounting reports, performance reports, etc., for the same time period.
Key project performance indicators
PV (Planned Value) — an estimation of planned work
AC (Actual Cost) — actual cost of work performed
EV (Earned Value)— sum of the PV for each completed task for the period, usually accumulated monthly, weekly, etc.
Key Earned Value Management indicators
CV (Cost Variance) — equals EV – AC
SV (Schedule Variance)— equals EV − PV
CPI (Cost Performance Index) — equals EV / AC
SPI (Schedule Performance Index) — equals EV / PV
Treatment of key indicators of Earned Values management techniq
- Control total cost projection of the project at completion
One of the principal advantages of Earned Value Management is the ability to forecast project total cost quickly. This estimate allows managers to detect budget overruns and take appropriate measures.
- Revise project plan on a timely basis
As the project advances, numerous corrections are made – new work appears, others are excluded. Every change in projects should be examined immediately and either approved or declined. Each approved change should be adjusted in the baseline, in order to use the baseline for accurate indicators and/or estimations. Changes should be made both in schedule and in budget.