Earned Value Management (EVM) is a project management technique that integrates scope, schedule, and cost performance to provide a comprehensive view of project performance. It helps project managers measure project progress, forecast future performance, and identify areas where corrective action may be needed. Let’s delve into the details of EVM with examples from both Engineering, Procurement, and Construction (EPC) projects and Information Technology (IT) projects.
1. Key Concepts of EVM:
a. Planned Value (PV):
Planned Value, also known as Budgeted Cost of Work Scheduled (BCWS), represents the authorized budget for the work scheduled to be completed up to a specific point in time. It is typically expressed in monetary terms.
b. Earned Value (EV):
Earned Value, also known as Budgeted Cost of Work Performed (BCWP), represents the value of the work actually completed up to a specific point in time. It is measured in monetary terms based on the completed percentage of work.
c. Actual Cost (AC):
Actual Cost, also known as Actual Cost of Work Performed (ACWP), represents the actual costs incurred for the work performed up to a specific point in time. It is measured in monetary terms.
d. Schedule Variance (SV):
Schedule Variance indicates the difference between the Earned Value (EV) and the Planned Value (PV). It measures whether the project is ahead of or behind schedule at a specific point in time.
e. Cost Variance (CV):
Cost Variance indicates the difference between the Earned Value (EV) and the Actual Cost (AC). It measures whether the project is under or over budget at a specific point in time.
f. Schedule Performance Index (SPI):
Schedule Performance Index is the ratio of Earned Value (EV) to Planned Value (PV). It indicates how efficiently the project team is progressing against the planned schedule. SPI = EV / PV.
g. Cost Performance Index (CPI):
Cost Performance Index is the ratio of Earned Value (EV) to Actual Cost (AC). It indicates how efficiently the project team is utilizing budgeted resources. CPI = EV / AC.
2. EVM in EPC Projects:
Example:
Suppose an EPC project involves constructing a new power plant. The project has a budget of $10 million and is scheduled to be completed in 12 months. After 6 months, the project team evaluates the progress:
- PV (Planned Value): $5 million (50% of the project duration has elapsed).
- EV (Earned Value): $4.5 million (45% of the project’s work is completed).
- AC (Actual Cost): $5.2 million (Actual costs incurred for the completed work).
Calculations:
- SV = EV – PV = $4.5M – $5M = -$0.5M (The project is behind schedule by $0.5 million.)
- CV = EV – AC = $4.5M – $5.2M = -$0.7M (The project is over budget by $0.7 million.)
- SPI = EV / PV = $4.5M / $5M = 0.9 (SPI indicates that the project is progressing at 90% of the planned rate.)
- CPI = EV / AC = $4.5M / $5.2M ≈ 0.865 (CPI indicates that the project is utilizing 86.5% of the budgeted resources efficiently.)
3. EVM in IT Projects:
Example:
Consider an IT project to develop and implement a new enterprise resource planning (ERP) system. The project has a budget of $2 million and is scheduled to be completed in 18 months. After 9 months, the project team assesses the progress:
- PV (Planned Value): $1.125 million (62.5% of the project duration has elapsed).
- EV (Earned Value): $1.05 million (58.3% of the project’s work is completed).
- AC (Actual Cost): $1.2 million (Actual costs incurred for the completed work).
Calculations:
- SV = EV – PV = $1.05M – $1.125M = -$0.075M (The project is behind schedule by $75,000.)
- CV = EV – AC = $1.05M – $1.2M = -$0.15M (The project is over budget by $150,000.)
- SPI = EV / PV = $1.05M / $1.125M ≈ 0.933 (SPI indicates that the project is progressing at 93.3% of the planned rate.)
- CPI = EV / AC = $1.05M / $1.2M ≈ 0.875 (CPI indicates that the project is utilizing 87.5% of the budgeted resources efficiently.)
Forecasting – Estimate at Completion (EAC)
Estimate at Completion (EAC) is a forecasting technique used in Earned Value Management (EVM) to predict the total cost of completing a project based on current performance trends. EAC provides project managers with an estimate of the final project cost, taking into account actual performance data and adjustments for future performance expectations. There are several methods for calculating EAC, depending on the assumptions made about future performance. Here are the commonly used methods:
- EAC = AC + (BAC – EV):
- This method assumes that the project’s original budget (BAC) is still valid, and any remaining work will be completed at the original budgeted rate. It calculates EAC by adding the actual cost (AC) incurred to date to the remaining planned value (BAC – EV) for the remaining work.
- This method is suitable when the past cost performance is considered atypical, and the original budget is still expected to be accurate for the remaining work.
- EAC = AC + (BAC – EV) / CPI:
- This method adjusts the remaining work’s budget based on the project’s cost performance to date, as measured by the Cost Performance Index (CPI). It calculates EAC by dividing the remaining planned value (BAC – EV) by the CPI and adding it to the actual cost (AC) incurred to date.
- This method is suitable when the current cost performance is expected to continue for the remaining work.
- EAC = AC + [(BAC – EV) / (CPI * SPI)]:
- This method adjusts the remaining work’s budget based on both cost and schedule performance to date, as measured by the Cost Performance Index (CPI) and Schedule Performance Index (SPI). It calculates EAC by dividing the remaining planned value (BAC – EV) by the product of CPI and SPI and adding it to the actual cost (AC) incurred to date.
- This method is suitable when both cost and schedule performance are expected to continue for the remaining work.
- EAC = AC + Bottom-Up ETC:
- This method involves re-estimating the remaining work’s cost based on detailed bottom-up estimates for each remaining task. It calculates EAC by adding the actual cost (AC) incurred to date to the new estimate to complete (ETC) for the remaining work.
- This method is suitable when significant changes in project scope, requirements, or assumptions warrant a re-estimation of remaining work.
- EAC = Latest Revised Estimate:
- This method uses the most recent estimate of the total project cost provided by project stakeholders or subject matter experts. It calculates EAC by simply using the latest revised estimate of the total project cost.
- This method is suitable when new information or changes in project circumstances justify updating the total project cost estimate.
By using one of these methods to calculate EAC, project managers can obtain a more accurate forecast of the total project cost and better manage project finances and resources accordingly.
To complete performance index – TCPI
The To-Complete Performance Index (TCPI) is a forward-looking metric used in Earned Value Management (EVM) to assess the efficiency required for the remaining work to meet specific project objectives, such as budget or cost targets. TCPI helps project managers understand the performance needed for future work to stay within budget or achieve other project goals. There are two primary types of TCPI:
- To-Complete Performance Index for Budget (TCPI-B):
- TCPI-B measures the efficiency needed for the remaining work to be completed within the project’s budget. It is calculated as the ratio of the remaining work’s budget to the remaining work’s remaining funds.
- TCPI-B = (BAC – EV) / (BAC – AC)
- Where:
- BAC: Budget at Completion (total budget for the project)
- EV: Earned Value (value of work completed)
- AC: Actual Cost (cost incurred to date)
- To-Complete Performance Index for Estimate (TCPI-E):
- TCPI-E measures the efficiency needed for the remaining work to be completed within the latest revised estimate (EAC). It is calculated as the ratio of the remaining work’s budget to the remaining work’s remaining funds.
- TCPI-E = (BAC – EV) / (EAC – AC)
- Where:
- BAC: Budget at Completion (total budget for the project)
- EV: Earned Value (value of work completed)
- EAC: Estimate at Completion (forecasted total cost of the project)
- AC: Actual Cost (cost incurred to date)
To interpret TCPI:
- TCPI > 1: Indicates that more efficient performance is required in the remaining work to meet the project’s objectives (budget or cost targets). This means that the remaining work needs to be completed at a lower cost per unit of work than what has been achieved so far.
- TCPI = 1: Indicates that the current project performance is sufficient to meet the project’s objectives (budget or cost targets). This means that the remaining work needs to be completed at a similar cost per unit of work as what has been achieved so far.
- TCPI < 1: Indicates that less efficient performance is required in the remaining work to meet the project’s objectives (budget or cost targets). This means that the remaining work can be completed at a higher cost per unit of work than what has been achieved so far.
Project managers use TCPI to assess whether the project’s performance needs to improve, remain the same, or can be relaxed to meet budget or cost targets. It helps guide decision-making and resource allocation to ensure successful project completion within constraints.
Conclusion:
EVM provides project managers with valuable insights into project performance, allowing them to identify schedule and cost variances, assess project efficiency, and take corrective actions if necessary. By leveraging EVM, project managers can make informed decisions to ensure project success and meet stakeholder expectations.