Earned Value Management Explained

Despite recent market turbulence, we are currently witnessing sustained growth among software companies that build apps for mid-market, enterprise, and multinational clients. However, from the perspective of these software companies, managing a project remains a tedious task. It requires a lot of close monitoring in the form of project timelines, cost analysis, project milestones, risk analysis, and so forth.

This need to constantly monitor several factors isn't a new problem. In fact, over a half-century ago, it prompted the creation of a project management framework that came to be known as Earned Value Management. Let's explore this framework in detail for a better understanding as to how it can deliver value for your software company.

What is the Definition of Earned Value Management?

Earned Value Management (EVM) is an analysis technique used in project management to track and monitor the progress of any project. A project involves a lot of planning, which is done prior to initiating the actual execution. Several projections are made to define the scope, total cost, milestones, scheduled reports, progress tracking, project deadlines, and likely contingencies. Most project managers use EVM to track scope, time, and cost as the primary metrics.

What is the History of EVM and Where Has It Been Used in the Past?

How did Earned Value Management come into existence? What was the problem that it initially solved? Let's understand the history of EVM to learn more about it.

This concept in its nascent form dates to the turn of the last century when it was used in industrial manufacturing. The essential principle, as conceived of by Frank Gilbreth, was to identify the "one best way" to accomplish a task. Gilbreth was specifically focused on reducing the effort and fatigue of manual labor, but the process of tracking different work methods within an industrialized workplace and identifying the optimal approach had applications beyond its initial use.

EVM eventually rose to prominence in the 1960s, when the Defense Department of the U.S. started using it as a PERT (Program Evaluation & Review Technique) for Air Force programs. It evolved over time until the early 1990s, when it was adopted by civilian project managers. By then, the EVM technique was employed by NASA, the Department of Energy, and other such government agencies.

The construction sector and other real estate-adjacent industries were known to be early adopters of EVM in the U.S. EVM has now been an integral component in federal project risk management since 2005. Even today, the Office of Management and Budget prefers using EVM in software projects as a performance management system.

How Does EVM Work?

Like many project management methodologies, EVM begins with collecting statistics needed for informed decision making. This calculation-intensive methodology computes the value of work completed at a specific stage in the project. Then, it compares the computed value with the value of work that should have been completed according to the initial plan.

The calculation aims to find variances in project execution by comparing work performed vs. work planned. Project forecasting is done using cost and schedule control which provides quantitative data for informed decision making.

Planned Value, Actual Cost, and Earned Value

Planned Value (PV) in EVM means the total estimated costs that will be incurred by completing the project. Actual Cost (AC) is the value of actual work done at a particular time in the project. Earned Value (EV) quantifies the total worth of work done at that particular moment in the project. EV is computed by multiplying the total budget and percentage of work done.

Let’s understand these terms with an example: Suppose a software company like Crowdbotics is given a project to develop a mobile application composed of 10 modules of $500 each. Crowdbotics estimates that the total cost will be $5000 and the time taken would be 2 months. Thus, the PV here is $5000. After a month, Crowdbotics sends a bill of $2300 to the client after developing 4 modules. This $2300 is the AC of work done in one month. Ideally, 50% of the work amounting to $2500 should have been done by now, but only 40% ($2000 worth) of work is done so far. Thus, the EV is 0.40 * $5000 =$2000. Now, a graph is plotted like the one below for a pictorial representation to answer three main questions. These questions are:

  1. Where are we currently?
  2. Where are we going?
  3. How long will it take to finish it?

The graph below shows the progress of the project at the time of the EVM analysis.

Image courtesy of PMI.org

After computing the above, a Crowdbotics project manager will conduct a variance analysis to know the deviation of the current completion from what was planned during the project baseline. This process of variance analysis includes computing cost variance and schedule variance. Cost Variance (CV) can be measured by subtracting the actual costs (AC) from the earned value (EV) of a project.

Here it is mathematically:

CV = EV - AC

If the resulting cost variance is a positive number, then the project is below the budget. However, if the cost variance is negative, then you are overshooting the budget. Lastly, if the variance is zero, then you are on the right track.

Schedule Variance (SV) tells you how much you have progressed with the schedule that was set initially. Are you ahead of what was planned or behind?

It is calculated by subtracting planned value (PV) from the earned value (EV).

Here it is mathematically:

SV = EV - PV

If the resulting schedule variance is positive, then you are ahead of schedule. If it is negative, then you need to pull up your socks, as you are behind schedule. A value of zero indicates you are right on schedule.

In the software development example provided above, Crowdbotics’ CV is -300, and its SV is -3000, which means the Crowdbotics is behind schedule and over budget. In such situations, Crowdbotics’ project manager will pay close attention to the reasons behind delays and resolve them to bring the project back on schedule.

Indexing Performance

The next considerations are a project's performance indices, which are its cost performance index (CPI) and schedule performance index (SPI). CPI and SPI signify the CV and SV in proportion to the scale of work done by far. They are calculated using the following formulae:

CPI = EV/AC

SPI = EV/ PV

Image courtesy of Praxis

In the example above, CPI is 0.86 and SPI is 0.40. These indices will help you forecast the current trend of the project and where it will lead you. This forecasting is done by computing the estimated cost at completion (EAC) and estimated time at completion (ETC). The former figure gives you the forecasted final cost of the project, and the latter gives you the forecasted number of days to finish the project. They are calculated as follows:

EAC = BAC (Budgeted At Completion – in the Crowdbotics example, $5000)/CPI

ETC = OD (Original Duration – in the Crowdbotics example, 60 days)/SPI

In the example above, EAC is $5,814, which means the current project is on pace to cost $5,814. This is how EVM methodology helps you track the progress of the ongoing project during its lifecycle and forecast the eventual cost and time it will take to complete.

What Types of Projects Are Best for EVM?

EVM methodology is best suited for projects that come with a deadline and a well-defined project requirement guide. The project manager will then be in a better position to allocate resources (time and money) to the project. These projects can be in the real estate sector, IT sector, government projects, manufacturing sector, etc.

What Types of Projects Are Not a Good Fit for EVM?

However, the EVM method is not a good fit in projects like a new product launch, drug development in the pharmaceutical industry, R&D project in space sciences, and various others which lack a defined scope and timeline. This is largely due to the fact that R&D can take a week, a month, a year, or even longer.

Merits & Drawbacks of Using EVM

Some of the benefits of using EVM to manage projects are:

  • It gives a realistic picture of where you are at any particular stage of the project, enabling you to decide whether you need to increase your pace or not.
  • EVM helps in estimating the future costs and time required in finishing the project at hand.
  • As a manager, you can identify the loopholes or pain points in the project which are outside the scope, time, and cost estimates.

However, not everything is hunky-dory with EVM, as there are certain limitations involved in using it:

  • Though EVM methodology calculates variances for you, it does not tell you how to correct these variances.
  • It can produce bizarre results if the data used has been manipulated or is inaccurate.
  • EVM fails to ensure the quality of work in the project and customer satisfaction subsequently.
  • You cannot use this method in projects involving extensive research.

Can EVM Be Used By Agile Teams? If So, How?

Image courtesy of CodeTiburon

You might think that EVM methodology is only for waterfall projects, but EVM works equally well with agile-based projects as well. This approach is referred to as Agile EVM and offers EVM benefits for Scrum using the three main EVM characteristics of cost, time, and scope.

There are several stages in an agile EVM implementation. It starts with the planning stage, which has a project manager triangle consisting of scope, time, and cost. There are four metrics used here which include story points, planned value, length, and starting date.

After every sprint, project managers collect the actual data. Then, the methodology described earlier in this blog is repeated where PV, SPI, and CPI are calculated to get the estimated number of iterations needed, total cost, and duration. One problem of employing EVM in agile is that it requires scope quantification, which makes agile teams apprehensive.

Assessing Project Performance via EVM Methodology

The above calculations are enough to help you analyze a project's performance and your employees’ productivity. The cost variance and schedule variance calculation show how the project has been progressing so far. Are your employees following the schedule and working within the boundaries of initial cost assessments? Or do some changes need to be made to put the project back on track?

Conclusion

Now you have a better understanding of Earned Value Management, what it is, when and how it came into existence, how it works, what its advantages and disadvantages are, and how it is used. We hope you are in a better position now to understand and implement it in your software company to effectively manage projects.

As experts in managed app development, we utilize a range of strategies to ensure that client builds come in on time and under budget. If you're looking for vetted PMs and developers, get in touch with Crowdbotics today.

Originally published:

September 30, 2020