Earned value management is a tool that allows project/program managers to have a very high visibility into technical, cost, and schedule progress on their contracts. The implementation of an earned value management system is a recognized function of program management. It ensures that cost, schedule and technical aspects of the contract are truly integrated. EVM has the unique ability to combine measurements of technical performance (completion of planned work), schedule performance (behind or ahead of schedule), and cost performance (below or above budget) within a single integrated methodology. EVM also provides an early warning of performance problems while there is time for corrective action.
What is Earned Value Management?
Earned Value Management (EVM) is a project management system that combines schedule performance and cost performance to answer the question, “What did we get for the money we spent?”
Basic concepts of EVM:
- All project steps “earn” value as work is completed.
- The Earned Value (EV) can then be compared to actual costs and planned costs to determine project performance and predict future performance trends.
- Physical progress is measured in dollars, so schedule performance and cost performance can be analyzed in the same terms.
Earned Value has been used since the 1960’s by the Department of Defense as a central part of the C/SCSC (Cost/Schedule Control Systems Criteria). Recently, the DOD revised the 35 criteria contained in the C/SCSC and produced the 32 criteria for EVMS (Earned Value Management Systems).
These criteria have since been accepted by the American National Standards Institute/Electronic Industry Association as a new standard, called ANSI/EIA 748. Now, EVM is being used in a wider variety of government contracts, and is spreading through the private sector as a valuable tool for project managers.
History of EVM:
The genesis of EVM was in industrial manufacturing at the turn of the 20th century, but the idea took root in the United States Department of Defense in the 1960s. The original concept was called PERT/COST, but it was considered overly burdensome (not very adaptable) by contractors who were mandated to use it, and many variations of it began to proliferate among various procurement programs. In 1967, the DoD established a criterion-based approach, using a set of 35 criteria, called the Cost/Schedule Control Systems Criteria (C/SCSC). In 1970s and early 1980s, a subculture of C/SCSC analysis grew, but the technique was often ignored or even actively resisted by project managers in both government and industry. C/SCSC was often considered a financial control tool that could be delegated to analytical specialists.In the late 1980s and early 1990s, EVM emerged as a project management methodology to be understood and used by managers and executives, not just EVM specialists. In 1989, EVM leadership was elevated to the Undersecretary of Defense for Acquisition, thus making EVM an essential element of program management and procurement.
In 1991, Secretary of Defense Dick Cheney cancelled the Navy A-12 Avenger II Program due to performance problems detected by EVM. This demonstrated conclusively that EVM mattered to secretary-level leadership. In the 1990s, many U.S. Government regulations were eliminated or streamlined. However, EVM not only survived the acquisition reform movement, but became strongly associated with the acquisition reform movement itself. Most notably, from 1995 to 1998, ownership of EVM criteria (reduced to 32) were transferred to industry by adoption of ANSI EIA 748-A standard.EVM was not limited to the DoD for long. It was quickly adopted by the National Aeronautics and Space Administration, United States Department of Energy and other technology-related agencies. Many industrialized nations also began to utilize EVM in their own procurement programs. The construction industry was an early commercial adopter of EVM. Closer integration of EVM with project management profession accelerated in the 1990s. The primary professional association for EVM, called the Performance Management Association merged with the Project Management Institute (PMI) in 1999 to become PMI’s first college, the College of Performance Management. An overview of EVM was included in first PMBOK Guide® First Edition in 1987 and expanded in subsequent editions. Efforts to simplify and generalize EVM gained momentum in the early 2000s. The United States Office of Management and Budget began to mandate the use of EVM across all government agencies, and for the first time, for certain internally-managed projects (not just for contractors). EVM also received greater attention by publicly traded companies in response to the Sarbanes-Oxley Act of 2002.
Advantages of EVM: Cost and Schedule Variances:
The traditional method to report Cost and Schedule Variances in Project is exposed to be weak and inaccurate by the EVM variance reporting method. A typical example is provided below: A Project was awarded to Xinz Corporation to lay a railway track 6 miles long. The Project duration was pegged at 12 months while the budget for the same was 2,400,00$ linearly divided for 6 units of tracks. At the end of 4 months, the Project schedule progress showed that only 1 mile of track was completed against the planned 2 miles of track. The Project Manager reported that he had spent 60,000$ for the completed track.
Under conventional tracking system the Schedule variance would be reported as “delayed by 2 months” while not providing the actual lose to the company in $’s, while also not providing any forecast for the completion of the Project due to the current delay.
The traditional Cost Variance would show that against the budgeted 80,000$ for 4 months, the actual cost of 60,000 $ would mean that the Project manager has additional fund of 20,000$. EVM provides a totally different figure for Cost Variance ( a negative variance in the above example) and also provides ways to forecast the Project completion.
Project Reporting – SPI,CPI curve:
The SPI and CPI graphs provide a powerful bird’s eye view of the entire projects performance. Both the Schedule and Cost performance indicators are presented in a single view giving Management a quick and comprehensive understanding of the projects true performance.
EVM doesn’t stop with providing the true progress indications as the project progresses but also provides ways in which the Project Managers can project the timelines and the budget that they expect at the end of the project. The EVM system provides various methods to forecast project performance based on the types of projects and the possible circumstances the Project is going through.
|Estimate to Completion||ETC||The expected additional cost to complete.||Estimate at Completion–Actual Cost
|Estimate at Completion||EAC||Expected total cost based on the current cost efficiency ratio.||Budget at Completion/Cost Performance Index
|Variance at Completion||VAC||Estimated cost overrun at the end of project.|