What is EVM and how will you use it in managing projects?

Answer 1

EVM is Earned Value Management.

Different steps in the project are assigned percentages of the complete work. E.g.: Designing a feature gives you 10%, starting to code another 10%, finishing coding another 30%, etc.

By tracking EVM you can have a fairly accurate feeling as to the process of the project.

A common technique to assess cost variance is called the earned value technique (EVT), also called earned value management (EVM). It is a commonly used method of performance measurement that has various forms. Most often, it integrates scope, schedule, and cost performance by comparing the baselines to the actual progress made. For example, you calculate the cumulative value of the budgeted cost of work performed in terms of the originally allocated budgeted amount and compare it to the following:

1. Budgeted cost of work scheduled; i.e., planned

2. Actual cost of work performed

Don't worry if these terms sound confusing right now; we will go through an example very soon. However, as you will see; the greatest difficulty in understanding EVT (or EVM) stems from the coupling of cost and schedule. You must realize that the project cost and the project schedule are inherently related to each other. Schedule relates to performing certain work over a certain time period, whereas cost refers to the money spent to perform the work on a project over that period of time. The relationship between cost and schedule can be realized by understanding that it costs money to perform a schedule activity. The "time is money" principle can be considered here to understand the situation better. For example, a project activity can be looked upon in terms of an amount of work that will be needed to complete it or in terms of its monetary value, which will include the cost of the work that needs to be performed to complete the activity.

The EVT involves calculating some variables where you will see the interplay of schedule and cost.

Let's look at an example to understand the concepts better:

Assume you are a project manager for the construction of a 16-mile road. Further assume that the work is uniformly distributed over 12 weeks. The total approved budget for this project is Rs. 600,000. At the end of first four weeks of work, Rs. 125,000 has been spent, and four miles of road have been completed.

We will use this example to perform the cost performance analysis and the schedule performance analysis in terms of cost.

Cost Performance

Cost performance refers to how efficiently you are spending money on the project work, measured against the expectations set in the project management plan, i.e., the cost baselines. The total cost approved in the baseline is called the budget at completion (BAC).

Budget at completion (BAC) - This is the total budget authorized for performing the project work, also called the planned budget. In other words, it is the cost originally estimated in the project management plan. You use this variable in defining almost all the following variables. In our example, the value of BAC is Rs. 600,000.

Earned value (EV) or budgeted cost of work performed (BCWP) - This is the value of the actual performed work expressed in terms of the approved budget for a project or a project activity for a given time period. In this variable, you see the relationship of schedule (work) and cost in action. BAC represents the total value of the project. But when you perform some work on the project, you have earned some of that value, and the earned value is proportional to the fraction of the total work performed, as shown by the formula here:

EV=BAC * (work completed/total work required)

So, in our example, EV can be calculated as:

EV=Rs. 600,000 * (4 miles/16 miles) = Rs. 150,000

This is the earned value of the work, which may or may not be equal to the actual money that you spent to perform this work.

Actual cost (AC) or actual cost of work performed (ACWP) - This is the total cost actually incurred until a specific point on the timeline in performing the work for a project. In our running example, Rs. 125,000 has already been used up to this point. So the actual cost at this point in time is Rs. 125,000. This cost is to be compared to the earned value to calculate the cost variance and cost performance.

Cost variance (CV) - This is a measure of cost performance in terms of deviation of reality from the plan, and it is obtained by subtracting the actual cost (AC) from the earned value (EV), as shown in the formula here:

CV = EV - AC

So, in our example, CV can be calculated as shown here:

CV = Rs. 150,000 - Rs. 125,000 = Rs. 25,000

The expected value of CV is zero because we expect the earned value to be equal to the actual cost. The positive result indicates better cost performance than expected, whereas a negative result indicates worse cost performance than expected. Deviation is one way of comparison, and ratio is another.

Cost performance index (CPI) - Earned value represents the portion of work completed, and actual cost represents the money spent. So, the CPI indicates whether you are getting a fair value for your money. This is a measure of cost efficiency of a project calculated by dividing earned value (EV) by actual cost (AC), as shown in the formula here:

CPI = EV / AC

So, the CPI for our example can be calculated as:

CPI = Rs. 150,000 / Rs. 125,000 = 1.2

This means you are getting Rs. 1.20 worth of performance for every dollar spent. A value of CPI greater than one indicates good performance, whereas a value less than one usually indicates bad performance. The expected value of CPI is one.

So both the CV and the CPI indicate that you are getting more value for each dollar spent.

But, before you start celebrating, read the example again. Four out of 12 weeks have already passed, and only four out of 16 miles of road have been built. That means that only one-fourth of the work has been accomplished in one-third of the total scheduled time. This means we are lagging behind in our schedule. Although cost performance is good, schedule performance might end up hurting us towards the end.

Schedule Performance in Terms of Cost

Schedule performance refers to how efficiently you are executing your project schedule as measured against the expectations set in the project management plan. It can be measured by comparing the earned value to the planned value, just like cost performance is measured by comparing the earned value to the actual cost. Planned value refers to the value that we planned to create in the time spent so far.

Planned value (PV) or budgeted cost for the work scheduled (BCWS) - This is the authorized cost for the scheduled work on the project or a project activity up to a given point on the timescale. The planned value is also called the budgeted cost for the work scheduled (BCWS). PV is basically how much you were authorized to spend in the fraction of schedule time spent so far, as shown in the formula here:

PV = BAC * (time passed/total schedule time)

Therefore, the planned value for the project in our example at the end of the first four weeks is calculated as shown here:

PV = Rs. 600,000 * (4 weeks/12 weeks) = Rs. 200,000

So, PV represents the planned schedule in terms of cost. You can calculate the schedule performance by comparing the planned schedule to the performed schedule in terms of cost.

Trivia:

The total planned value (PV) of the project is the same as the budget at completion (BAC).

Schedule variance (SV) - This is the deviation of the performed schedule from the planned schedule in terms of cost. No confusion is allowed here because you already know that the schedule can be translated to cost. SV is calculated as the difference between EV and PV, as shown in the formula here:

SV = EV - PV

So, the SV in our example can be calculated as:

SV = Rs. 150,000 - Rs. 200,000 = -Rs. 50,000

The negative value means we are behind schedule. Deviation represented by schedule variance is one way of comparison, and ratio represented by schedule performance index is another.

Schedule performance index (SPI) - Earned value represents the portion of work completed in terms of cost, and planned value represents how much work was planned by this point in time in terms of cost. So, the SPI indicates how the performed work compared to the planned work. This is a measure of the schedule efficiency of a project calculated by dividing earned value (EV) by planned value (PV), as shown in the formula here:

SPI = EV / PV

So, the SPI for our example can be calculated as shown here:

SPI = Rs. 150,000 / Rs. 200,000 = 0.75

This indicates that the project is progressing at 75% of the planned pace. Not at all good.

You should note that all these performance variables except the BAC are calculated at a given point in time.