Hello everyone. In this video, I will briefly explain and talk about Earned Value
Management (EVM) as a tool to check project health and performance. During project
execution and at specific dates, we need to check project status and progress
with respect to cost and schedule. In other word, we need to know if the
project is on schedule, ahead of schedule, behind schedule, on budget, over budget,
under budget, so we identify issues as well as potentials and make corrective
or proper decisions. Let's have better understanding of Earned
Value Management (EVM) using an example of a project with a budget of $10,000 and a
schedule for 10 months. In this example, we assume budget will be spent equally,
say 10% every month, which is equivalent to $1,000 worth of work each month. After
three months, we observed that only 15% of work was actually completed and a sum of
$2,000 was actually spent. For your information, Earned Value Management (EVM) has
four key elements. Budget At Completion (BAC), Planned Value (PV), Earned Value (EV) and
Actual Cost (AC). Budget At Completion (BAC) is the project's total budget. In our
example $10,000. Planned Value (PV) is the budgeted $ value of work planned to be
performed by a specific date. In our example,
it is BAC X 10% X 3 Months = $3,000 worth of work.
Earned Value (EV) is the budgeted $ value of work already performed by a specific
date. In our example, it is BAC X 15% =
$1,500 worth of work. Actual Cost (AC) is the $ value
spending on work already performed by a specific date. In our example, it is $2,000
Before we proceed with further calculations, keep in mind that
any negative results from variances calculations or any <1 results
from indices calculations reflects a project with unhealthy situation that
needs further review and decisions to bring it back to proper situation.
Let's check cost performance. Here, there are two formulas, Cost Variance (CV) and Cost
Performance Index (CPI). Cost Variance (CV) = EV - AC
= -$500 or in other word, the project is over budget by $500. Cost
Performance Index (CPI) = EV / AC = 0.75
Again, it is <1, reflecting low Cost Performance Index. Now, let's
check schedule status. Here, there are also two formulas, Schedule Variance (SV)
and Schedule Performance Index (SPI). Schedule Variance (SV) = EV - PV = -$1,500.
Remember that each month, we should
complete a volume of work worth $1,000, that means, the project
is behind schedule by 1.5 months.
Schedule Performance Index (SPI) = EV / PV = 0.5
Again, it's <1, which means low schedule performance. Overall, our
project in this example is behind schedule and above budget.
This leads us to re-forecast project budget which is called Estimate At Completion (EAC).
EAC = BAC / CPI
= $13,333
So, to complete the project, we have Estimate To Complete (ETC).
ETC = EAC - AC
= $11,333, and Variance At Completion (VAC)
VAC = BAC - EAC = -$3,333
Now the last formula
is about recalculating the future CPI. it is
called To Complete Performance Index (TCPI)
This formula has two versions. if the current CPI > 1
TCPI = (BAC - EV) / (BAC - AC).
However, if the
current CPI < 1, which is the case in this example
TCPI = (BAC - EV) / (EAC - AC).
= 0.75
Based on all the pre-mentioned information, calculations and results,
there should be
an investigation and review about project issues, covering for example,
multiple scope changes, wrong scheduling, poor human resources, wrong procurement
process, unhealthy team spirit, communication problem, etc... That's all for
now. In case you have any question, idea or
feedback, please don't hesitate to leave a message in the comment section, or
otherwise you can send an email. Let's keep in touch. I wish you all the best.
Bye