Earned value provides powerful forecasting tool
Earned value is a tool for tracking real progress of a project that allows for more accurate forecasting and provides a sense of urgency early in a project, before things have gotten out of hand. The key word in the previous sentence is “real.” In the past, project performance was measured by how much was spent versus the budget. What this method fails to address is the value of the work being done.
For example, let’s say there was a project with a scope of work to drive from Chicago to Cleveland in six hours spending $50 in gas. If we called the driver after an hour and they said they’ve gone 75 miles so far, we would say that was really good progress. However, what if they had driven 75 miles around the suburbs of Chicago but made no progress east? What if they had driven 75 miles west instead of east? Now, not only does the 75 miles they’ve gone so far count for nothing, they are actually 75 miles farther away from the goal, meaning they will be late and over budget.
What if they finally arrive in Cleveland on time and on budget, and then the customer asks where their package is? The driver says, “I didn’t know about any package!” To which the customer replies, “I told the project manager very clearly that I needed a package delivered. What is the point of your trip if it wasn’t to bring my package?!?”
Earned value measures real progress
Earned value attempts to measure the amount of real progress being made (i.e., a driver heading east with the right package in hand), quantify it, and compare it to baseline values relative to cost and schedule. In order to do this, there are three key values that need to be understood:
- Earned value – how much have we actually accomplished?
- Actual cost – how much have we spent to date?
- Planned value – how much does the schedule say we should have spent to date?
Proper tasks in a work breakdown structure, integrated into a schedule, with accurate budgets for each task, and accurate manpower loading for those tasks, allow us to track and calculate these three key indicators needed for earned value analysis.
But it’s not just math; it’s common sense. Earned value is the ultimate forecasting tool because it provides a comparison of your current status against a baseline plan. The plan baseline is a graph of your planned value over the life of a project. Another way to portray this is as your projected spending curve.
How do you develop this initial plan and spending curve for a project? It starts at the beginning with a proposal.
The proposal provides the basis
The proposal needs to describe the project’s scope, schedule and budget in a clear way so that the client understands what they are getting, how much it will cost, and how long it will take. The proposal is your first chance to define your baseline and tell the client how long the project will take, how much it will cost, and what you can deliver within that time and budget. In our trip example, if the delivery of the package wasn’t included in the proposal and it should have been, this is the opportunity for the client to spot this and make sure it gets included.
Project plan makes expectations clear
Once we have the project, we pull the team together and lay out the project plan using the proposal as a basis, making sure all the stakeholder’s expectations are clear. Using this information, we assemble a schedule. By using the estimate and manpower loading the schedule, we get a budget for each task. Once we have an established baseline with this information, we can check and see if our proposal and expectations match. This is an opportunity to refine and put details into the schedule and baseline. The culmination of this is the planned value projection.
Doing an analysis
Once you have completed a portion of the work and are into the project, you can perform an earned value analysis. Doing an earned value analysis before you have significant portion of work done or the project team has not necessarily stabilized can lead to some misleading results at a given point in time.
There are two means to determine earned value: percent complete estimates and rules of credit.
Percent Complete – This uses a task-by-task basis for completing the work. We go down each item on the work breakdown structure and estimate percent complete, then aggregate that information into a percent complete of the total project. It’s essentially a weighted average.
Rules of Credit – Under rules of credit, we establish milestones and give credit on the basis of reaching milestones on an item-by-item basis. Let’s say the client does not trust percent complete estimates and wants tangible proof of progress. We work with them to establish rules of credit. These can be thought of as milestones within a task. Ultimately, the percentages are still estimates, but they are tied to subtasks and milestones.
Using either of these methods, we arrive at the three key values at a given point in time: earned value, actual cost, and planned value. For example, let’s use the sample values below at 3:00 based on our planned value spending curve above:
- Earned value = $350
- Actual cost = $280
- Planned value = $410 (what the curve shows at 3:00)
Now we need to use these numbers to evaluate our performance relative to budget (CPI), our performance relative to schedule (SPI), and our forecasted final totals. Let’s run the numbers
CPI = Cost performance index = earned / actual = $350/$280 = 1.25
SPI = Schedule performance index = earned / planned = $350/$410 = .85
ETC = Estimate to completion = (total budget-earned)/ CPI = ($500-$350)/1.25 = $120
EAC = Estimate at completion = actual cost + ETC = $280 + $120 = $400
Now we have some calculations that we can analyze. Let’s take them one at a time. First, if our CPI is 1 or greater, we are doing well on our budget. If our CPI is less than 1, we are behind on our budget.
Next, if our SPI is 1 or greater, we are doing well on our schedule. If our SPI is less than 1, we are behind on our schedule.
The last two numbers are our project projections based on the performance so far. Our ETC, or estimate to completion, is how much more we are projected to spend from this date forward based on our current performance. Our EAC, or estimate at completion, is how much total we are projected to spend on the project.
Earned value prompts the “why” questions
This analysis can provide us with some powerful forecasting tools that can be used to make informed decisions about the project throughout the project lifecycle and track real progress of project against a baseline plan. The real power here is not in the numbers, but in the fact that EV forces us to ask the “why” questions about the numbers we are seeing:
- Why is my CPI what it is?
- Why is my SPI what it is?
- Why aren’t we complete with a certain task yet?
- Why are we so far over/under budget on a task or on the project as whole?
Understanding the answers to these questions provides us with a clear understanding of the state of a project and ability to make educated decisions. An earned value analysis provides a sense of urgency early in a project when the projections are showing problems and allows us to form a corrective action plan to get things back on track.
This is the first of a two-part series on earned value analysis. The second part will focus applications of earned value analysis in project management.
Matrix Technologies is one of the largest independent process design, industrial automation engineering, and manufacturing operations management companies in North America. To learn more about our manufacturing operations management capabilities and manufacturing process control solutions, contact Jason Perry, PE, Senior Director of Operations.
© Matrix Technologies, Inc.
Tags: Jason Perry, PE / Earned Value / Engineering Consulting Services / Forecasting / Industrial Automation Engineering / Manufacturing Operations Management / Project Management / Planning / Data Management
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