There seems to be some perverse human characteristic that likes to make easy things difficult.
Most aspiring project managers are scared of Earned Value Analysis. Terms like BCWS, BCWP, PV, EV, SPI, CPI look more out of a quantum physics textbook than a project management one.
But one thing that project managers should never forget – almost all concepts are to help people answer some pretty basic questions.
Earned Value Analysis (EVA) is no different.
Why is Earned Value Analysis needed?
Imagine you are a project manager of a big project. It has thousands of tasks, hundreds of people. And the project is midway. The client asks you two simple questions – is everything going according to plan? if not, what is the deviation?
Earned Value Analysis aims to provide objective answers to these questions.
What the client is really asking you:
1) Is the project on schedule? If not, by how much will we slip?
2) Is the project on budget? If not, by how much will we slip?
Earned Value Analysis Example
We will now use Earned Value Analysis to answer these questions objectively. To do that, we will first learn how to calculate the earned value of a project.
Suppose you are the project manager of a project that involves laying cables for 100 miles in 100 days i.e every day you are supposed to complete laying cable for 1 mile. The total budget is $100 million i.e $1 million per mile (very expensive cables!).
In other words, you are supposed to spend $1 million per day and lay 1 mile of cables.
Now let’s say that 50 days are over and you have the following information:
Work completed = 40 miles of cables
Money spent = $30 million
Let’s analyze at the schedule first:
You were supposed to complete 50 miles in 50 days but you have completed 40. You are behind.
Now we need an objective number to quantify this. That’s where Schedule Performance Index (SPI) comes in.
SPI = Actual % Complete ÷ Planned % Complete
From the above formula, you can see that if you are:
- Behind schedule (Actual % < Planned %), SPI < 1
- Exactly on schedule (Actual % = Planned %), SPI = 1
- Ahead of schedule (Actual % > Planned %), SPI > 1
In our case, SPI = 40/50 = 0.8 (less than 1, we are behind schedule)
The 0.8 means that we are proceeding at 80% of the planned rate. Hence we expect the project to complete 20% slower than expected. (You can calculate that this translates to 25 days more. Enter your calculations in the comment section at the end of this article.)
Just one number of 0.8 quantifies the schedule status of the project. Pretty neat, right?
Now let’s analyze at the cost aspect:
You were supposed to spend $1 million per mile. You have completed laying cables for 40 miles; you were expected to spend $40 million. But you have spent only $30. This is great! You have spent less than expected.
Again, we need an objective number to quantify this. That’s where Cost Performance Index (CPI) comes in.
CPI = Planned Cost ÷ Actual Cost
Planned Cost is the planned spend to perform the actual work done.
So, Planned Cost = Actual % Complete x Budget
From the above, you can see that if you are:
- Over budget (Actual Cost > Planned Cost), CPI < 1
- Exactly on the budget (Actual Cost = Planned Cost), CPI = 1
- Under budget (Actual Cost 1
In our case:
Planned Cost = 0.4 x 100 million = 40 million
Actual Cost = 30 million.
So, CPI = 40/30 = 1.33
1.33 means that we are spending 33% less than expected. Hence we expect the project to complete with a saving of 33%.
Some more Earned Value terms
I have deliberately avoided using the term Earned Value earlier because most people have difficulty understanding it and the term in itself is quite misleading. But it is not required to appreciate SPI and CPI which are the key numbers in EVA. But let’s look at it anyway just for the sake of completeness.
Earned Value (EV) is nothing but the “Planned Cost” described above i.e Actual % Complete x Budget. It is also called BCWP (Budgeted Cost of Work Performed). To me, this term makes more sense.
In our case, BCWP = EV =40% x 100 million = 40 million
Planned Value (PV) is Planned Completion (%) x Budget. It is also called BCWS (Budgeted Cost of Work Scheduled). Again, this term makes more sense to me.
In our case, BCWS = PV = 50% x 100 million = 50 million
I hope you have an appreciation for Earned Value Analysis now. Many advanced tools, including Celoxis (the portfolio management tool we develop), automatically calculate all these numbers for project managers, thus ensuring they spend more time managing projects than number crunching.
Simple and easy to understand
This article is great because the author is straight to the points and easily understood even for those who are not involved in project management.
This is one the best articles I have read on EVM. I have bookmarked this page but I don't think I will need to read it again :). I also like your other project management articles. Thanks!