Earned Value Management and its Significance

Earned Value Management

Facts on Earned Value Management to Help in Exam Preparation

The topic of Earned Value Management is an important one for the PMP® exam. This topic is also generally considered to be one of the tougher topics, partly as it involves number crunching and partly as it deals with 3 most important concepts of Project Management.

EVM, as it is popularly known, is primarily used for measuring project performance and to forecast project performance at the end of the project. When applied properly and consistently, it takes the guesswork out of estimating project progress and performance. The “project performance” is measured on scope, time & cost.  Essentially, EVM is a management methodology for integrating scope, schedule, and cost and for measuring project performance and progress.

Very simply put, EVM measures the progress of an activity, deliverable and/or project by comparing the actual value to planned value, thereby indicating the probability of meeting the scope, time & cost budget of the activity, deliverable and/or project, and need for any corrective action/s.

Let’s consider an example. Consider a project that has been well planned, including estimates for each activity in a time-phased and resource-based manner, and all other aspects have been planned. 5 weeks into the 20th week & USD 75,000 project, PM finds that $ 20,000 has been spent and work on 5 out of 25 activities is nearing completion, with another 2 activities completed. Now the management wants to determine the actual project performance & estimate date of completion basis the actual performance to date. Without an objective method of measuring performance, there is no way for the Project Manager to come up with that kind of information. A method is needed to measure technical performance objectively and quantitatively, and that is what EVM does.

An important tip for exam seekers: Scope, Schedule or time & cost each have their own baseline for the project. These 3 baselines are collectively known as “performance baseline”.

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History of Earned Value Management

EVM emerged as a financial analysis specialty in United States Government programs in the 1960s, but it has since then become a significant branch of project management and cost engineering. Early EVM research showed that the areas of planning (remember: planning is iterative!) & control is significantly impacted by the use of an objective technique such as EVM. The use of EVM also provides a useful analysis of overall project performance. The use and popularity of EVM have grown significantly prompting many to rely on it extensively over the years and in multi-faceted projects.

The importance of EVM can be exemplified by the fact that in 1991, Secretary of Defense Dick Cheney canceled the Navy A-12 Avenger II Program due to performance issues detected by EVM.

An overview of EVM was included in first PMBOK® Guide in 1987 and expanded in subsequent editions. The construction industry was an early commercial adopter of EVM. Closer integration of EVM with the practice of project management accelerated in the 1990s

Understanding EVM

The foundation principle of EVM does not depend on the size or complexity of the project. However, the implementations of EVM can vary significantly depending on the circumstances.

1. The first step is to define the work. This is typically done through WBS, or work breakdown structure which is a hierarchical arrangement of activities. A WBS is a top-down approach, breaking down project deliverables into activities which can be controlled & measured. (PMBOK® chapter 3 & PMP® Exam Prep 7th Edition by Rita Mulcahy Chapter 5).
   
   
2. The second step is to assign a value, called planned value (PV), to each activity. This value can be in units of currency or labor hours and is a part of the total budget allocation of the project for that particular deliverable. (PMBOK® guide & PMP® Exam Prep 7th Edition by Rita Mulcahy chapters on Time & Cost Management).
   
   
3. The third step is to define “earning rules” for each activity. This simply means how the progress of each activity is measured. Some popular rules are 0/100, which means that no credit is available for starting the activity & 100% credit is applied when the activity is finished. 50/50, 25/75 & 20/80 are some other rules which are applied basis the activity complexity & significance. (See PMP® Exam Prep 7th Edition by Rita Mulcahy,  Chapter 7).
   
   
4. The final step is to execute the project according to the plan and measure progress. When activities are started or finished, EV is accumulated according to the earning rule.

Henceforth, Earned value is used to analyze the project performance, calculate the variance for schedule and cost and indicates where the project stands in comparison to the estimates calculated earlier for this point in time.

The measurements resulting from Earned Value analysis of the project indicate if there are any potential deviations from the scope, schedule & cost baselines. Many a time one could easily be on time, however, may overspend, or maybe on time & within budget however scope may be incomplete. In simple terms, EV analysis is better than comparing actual to planned results or by simply guessing the project status.