2_anbari_paper1eng

8/3/2019 2_Anbari_paper1ENG

http://slidepdf.com/reader/full/2anbaripaper1eng 1/6

1

Time

Cost

PlannedValue (PV)

ActualCost (AC)

Status dateEarnedValue (EV)

SV =-10 CV = -20

TV

Budget AtCompletion

(BAC)

60

50

40

Figure 1: Planned Value, Actual Cost, Earned Value, and Variances

THE EARNED VALUE ANALYSIS METHOD:

EXTENSIONS AND SIMPLIFICATIONS

FRANK T. ANBARI, PH.D., P.E., PMP (THE GEORGE WASHINGTON UNIVERSITY)

1. BACKGROUND

An early form of EVM can be traced back to industrial engineers on the factory floor in the late 1800s [1 and 2].Around 1967, EVM was introduced by agencies of the U.S. Federal Government and used in large acquisition

programs. EVM was widely and successfully applied in projects associated with the U.S. Federal Government. Useof EVM in government and private industry projects, as well as support by popular project management software

packages have been growing rapidly in recent years.

Current and past users of EVM tend to agree that use of this method can improve cost, schedule, and technical performance of their projects. Non-users of EVM indicate that they do not need the method, that it is hard to use, andthat it applies primarily to large federal projects [1 and 2]. This paper shows that EVM can be used in private and

public sector projects, regardless of project size.

2. KEY COMPONENTS OF EVM

EVM uses cost as the common measure of project cost and schedule performance. It allows the measurement of costin currency, hours, worker-days, or any other similar quantity that can be used as a common measurement of thevalues associated with project work. EVM uses the following project parameters to evaluate project performance:

Planned Value (PV): This is the time-phased budget baseline (Figure 1). It is the approved budget for accomplishing the activity, work package, or project related to the schedule. This graph of cumulative PV is oftenreferred to as the S-Curve. This could be an abbreviation for the Spending Curve, or because, with a littleimagination, it looks like the letter S. This was previously called the Budgeted Cost of Work Scheduled (BCWS).

Budget at Completion (BAC): This is the total budget baseline for the activity, work package, or project (Figure 1).It is the highest value of PV, and the last point on the cumulative PV curve.

Actual Cost (AC): This is the cumulative actual cost spent to accomplish an activity, a work package, or a project,and to earn the related value up to a given point in time. This was previously called the Actual Cost of Work Performed (ACWP). Figure 1 illustrates a project in which the planned value as of project status date is PV =$50,000 and the actual cost is AC = $60,000. All figures, the table, and subsequent statements in this paper showdollars in thousands. This is intended to demonstrate that EVM applies to a small project. Those involved in smaller or larger projects can consider these amounts to be in hundreds, or millions of dollars, if they wish.

Earned Value (EV): This is the cumulative earned value for the work completed up to a point in time. It representsthe amount budgeted for performing the work which was accomplished by that given point in time. This was previously called the Budgeted Cost of Work Performed (BCWP). To obtain EV for an item, its total budget ismultiplied by its proportion complete. Table 1 shows the Work Breakdown Structure (WBS) of a project with a total



2

budget of BAC = 100 and an earned value of EV = 20 + 20 = 40. This translates project accomplishments from physical units of measure (such as cubic yards of concrete, linear feet of cable, percent complete, anddeliverables completed) to financial units of measure.

3. PERFORMANCE MEASUREMENT

Cost performance is determined by comparing the Earned Value (EV) to the Actual Cost (AC) of the activity, work package, or project. Schedule performance is determined by comparing the Earned Value (EV) to the Planned Value(PV). This can be accomplished by calculating the variances and the performance indices at the desired levels of theWBS.

It is important to synchronize the status date for data in the analysis. This can be accomplished by using the concept

of accrued cost which includes expenditures made but not yet reflected in the financial system, to accomplish thework up to status date.

Variances

The following formulas are used to calculate the variances, generally based on cumulative data, also called inception-to-date data and project-to-date data (Figure 1, using the data from the above project):

Cost Variance (CV) is a measure of the conformance of actual cost of work performed to the budget:CV = EV - ACFor the above project: CV = 40 - 60 = -20

Schedule Variance (SV) is a measure of the conformance of actual progress to the schedule:SV = EV - PV

For the above project: SV = 40 - 50 = -10

Time Variance: The average Actual Cost (AC) per time period is often called the Spend Rate or Burn Rate.Similarly, the average PV per time period can be called the planned accomplishment rate, planned value rate, or thePV Rate. It is defined as the baseline Budget at Completion (BAC) over the baseline Schedule at Completion (SAC):PV Rate = BAC / SACSV can be translated into time units by dividing SV over the PV Rate. The result is the Time Variance (TV):TV = SV / PV RateIf the above project were scheduled for forty weeks, then:PV Rate = 100 / 40 = 2.5 per week TV = -10 / 2.5 = -4 weeks

TV can also be obtained graphically by drawing a horizontal line from the intersection of the EV curve and the

status date to the PV curve, and measuring the distance on the horizontal time axis [1] (Figure 1).

In the above formulas, "0" indicates performance is on target. A positive value indicates good performance. Anegative value indicates poor performance.

Budget % Complete EarnedValue

Project

Phase 1

Work Package 1.1 20 100 20

Work Package 1.2 40 50 20

........

Phase 2

Work Package 2.1 …

Work Package 2.2 …

........ …

........ …

Total 100 40

Table 1: WBS, Budget, % Complete, and Earned Value($000)



3

Performance Indices

The following formulas are used to calculate the performance indices, generally based on cumulative data (Figure 1,using the data from the above project):

Cost Performance Index (CPI) is a measure of the conformance of actual cost of work performed to the budget:CPI = EV / ACFor the above project: CPI = 40 / 60 = 0.67

Schedule Performance Index (SPI) is a measure of the conformance of actual progress to the schedule:SPI = EV / PVFor the above project: SPI = 40 / 50 = 0.80

In the above formulas, "1" indicates performance is on target. More than "1" indicates good performance. Less than"1" indicates poor performance. Performance indices are efficiency ratios, where "1" indicates target efficiency

performance. More than "1" indicates super efficient performance. Less than "1" indicates inefficient performance.

The inverse of the above formulas has been used [4, 5, 6, and 7], to facilitates using the indices in forecasting.

Critical Ratio:

The Critical Ratio is the product of CPI and SPI [8 and 9]. It can also be called the Cost-Schedule Index (CSI) [10

and 11]. It is used as an indicator of the overall health of the project:CR = CPI x SPIFor the above project: CR = 0.67 x 0.80 = 0.53

A CR of "1" indicates that the overall project performance is on target. A CR of more than "1" indicates that theoverall project performance is good. A CR of less than "1" indicates that the overall project performance is poor. TheCR can help determine the extent of tradeoffs possible to reach the desired project goals.

Graphical displays

Graphs of CPI, SPI, and CR over time provide valuable indicators of trends in project performance and theimpact of any corrective actions. These graphs can be used to quantify the traffic light approach: green indicatesgood performance, yellow indicates caution, and red indicates poor performance. It is important for the organizationto carefully establish meaningful thresholds for action on project performance. This helps ensure that when action is

needed it is highlighted, and when action is not needed, micromanagement is minimized.

CPI, SPI, and CR of say 1.0 or above can be considered green, CPI, SPI, and CR between say 1.0 and 0.8 can beconsidered yellow, and CPI, SPI, and CR below, say 0.8 can be considered red. Figure 2 depicts this concept in theTarget Performance Chart, which may be nicknamed the Rainbow Chart. Other colors can be added. For example

blue can be used to indicate the super stars, which are items with CPI, SPI, and CR above say 1.2.

A project should be carefully reviewed when in enters the yellow zone, to find the root cause(s) of performance or planning problems and eliminate them. When an item in the red zone is reviewed, this should generally be a statusreport on action(s) previously taken, or not taken. When an item enters the blue zone, it should also be reviewed, todetermine the root cause(s) of the super performance or planning and consider the lessons learned in future work.

Time

C P I , S P I , a n d

C R

1.0

1.2

1.4

.80

.60

Figure 2: Target Performance Chart

SPI

CPI

Good

Poor

Super Stars

Caution

CR



4

4. FORECASTING

Forecasting is an extremely important aspect of project management. EVM is particularly useful in forecastingthe cost and time of the project at completion, based on actual performance up to any given point in the project.

Forecasting cost at completion

EVM has been widely used to estimate the total cost of the project at completion, based on actual performance up toany given point in the project. The Estimate at Completion (EAC) is also called Cost Estimate at Completion(CEAC). Estimates at completion may differ, based on the assumptions made about future performance.

The assumption generally associated with EVM is that past performance is a good predictor of future performance,and efficiencies or inefficiencies, observed to date will prevail to completion. Using this assumption, the Estimate atCompletion (EAC) is the sum of the cumulative actual cost (AC) plus the original budget for the remaining work (BAC - EV) modified by a performance factor, usually the cumulative cost performance index (CPI):EAC = AC + (BAC - EV) / CPI

The above formula can be simplified as follows:EAC = AC + BAC / CPI - EV / CPI

= AC + BAC / CPI - AC= BAC / CPI

For the above project: EAC = BAC / CPI = 100 / 0.67 = 150

A graph of the Estimate at Completion over time provides a valuable indicator of trends in project cost performanceand the impact of any corrective actions. This graph can be particularly effective in project reviews (Figure 3).

Other assumptions can be made about future performance. Heinze [12] provides the following additional formula

for calculating the Estimate at Completion: EAC = BAC / CPI x SPI. Fleming and Koppelman [1] provide asimilar formula and support it by indicating that there is a human tendency to get back on schedule, even if thatrequired more resources for the same work. Using the earlier definition of the critical ratio CR = CPI x SPI, andfurther defining EACs as the EAC adjusted for schedule performance, the above formula can be restated as:EACs = BAC / CR For the above project: EACs = 100 / 0.53 = 187.5

The assumption implied by the above formula is that if the project were behind schedule, then additional cost will be incurred to bring the project back on schedule, through the use of overtime, additional resources, expeditingshipments, and similar actions. On the other hand, if the project were ahead of schedule, then opportunities for cost savings that require more time may be pursued, such as using fewer or less skilled resources, takingadditional time to find better prices for equipment and material, and similar actions. This formula may provide a

better indication of estimated cost at completion, when adherence to schedule is critical to the organization.

Forecasting completion time

EVM has not been widely used to estimate the total time at completion based on actual performance up to a given point in the project. However, using similar assumptions and logic to those discussed above, Anbari [8 and 14]

Time

E A

C

100

120

140

80

60

EAC

Poor

Good

160

BAC

Figure 3: EAC Graph



5

showed that the project’s Time Estimate at Completion (TEAC) can be calculated, based on the baseline Schedule atCompletion (SAC) and actual performance. Using the assumption that past schedule performance is a good predictor of future schedule performance, and that schedule efficiencies, or inefficiencies, observed to date will prevail tocompletion, then the Time Estimate at Completion (TEAC) is the sum of the cumulative actual time (AT) plus theoriginal scheduled time for the remaining work modified by the cumulative schedule performance index (SPI). Thiscan be simplified to the original baseline schedule at completion (SAC) over the schedule performance index (SPI):TEAC = SAC / SPIFor the above project: TEAC = 40 / 0.80 = 50 weeks

Project forecasting

Mathematical forecasts of cost and schedule should be reviewed with work package managers, project leaders,and functional managers, to give them an opportunity to provide their subjective forecasts. Both mathematicaland subjective forecasts could be included in project reports, to encourage work area managers to consider appropriate actions, and help avoid surprises and arguments over the numbers during project review meetings.

Forecasting in project management may well be a self-defeating prophecy, and that may be good for theorganization! Large deviations usually attract management’s attention and result in corrective action. Smalldeviations are usually left alone. By highlighting such deviations, EVM helps focus management’s attention on

projects or work packages that need it most. As a result, EVM supports effective management of projectscollectively, and enhances the management of the enterprise’s project portfolio [8 and 14].

5. FURTHER EXTENSIONS, SIMPLIFICATIONS AND APPLICATIONS

Extensions and simplifications

Using the above definitions, the following is derived [15]:% Complete = EV / BAC% Spent = AC / BAC

Taking the ratio of the above two formulas, Anbari [4, 8 and 14] showed:% Complete / % Spent = (EV / BAC) / (AC / BAC)

= EV / AC = CPIThus:CPI = % Complete / % Spent

For the example project used in this paper:% Complete = 40 / 100 = 0.40 = 40%% Spent = 60 / 100 = 0.60 = 60%CPI = % Complete / % Spent = 40 / 60 = 0.67

The simplified formulas developed above provide a more intuitive understanding of CPI based on informationreadily available in many organizations.

Determination of percent complete

Alternatives to using the percent complete to determine physical accomplishments have been used [16]. The 50 /50 rule specifies that to calculate PV, 50% of an item’s budget is recorded at the time the item is scheduled tostart and the remaining 50% is recorded when the item is scheduled to be completed. To calculate EV, 50% of anitem’s budget is recorded when work on the item starts and the remaining 50% is recorded when the item is

completed. Similarly, the 0 / 100 rule, the 10 / 90 rule, or the 20 / 80 rule, might be appropriate.

Early indications of project performance

EVM demands thorough planning, and dictates disciplined processes for planning, data collection, analysis andreporting [17]. EVM provides project managers and the organization with triggers or early warning signals that allowthem to take timely actions in response to indicators of poor performance, and to enhance the opportunities for

project success. Such indicators have been found to be reliable as early as 15% into a project. Better planning andresource allocation associated with the early periods of a project might be the cause of this reliability [1].

Application areas

An organization may elect to apply EVM uniformly to all of its projects, or only to projects exceeding its ownthresholds for cost and schedule reporting and control. EVM can be applied to projects of various types and sizes inthe private and public sectors. It can be applied at various levels of a project's Work Breakdown Structure (WBS)

and to various cost components, such as labor, material, subcontractors, and other cost components.



6

6. CONCLUSION

EVM helps focus management’s energy on projects that need most attention and enhances the enterprise’s project portfolio management. EVM provides important information for project or work packages decision-making. Its effectiveness and wider acceptance by government and private industry may depend on better understanding of its capabilities. Simplification of EVM calculations, use of graphical tools to enhanceunderstanding of performance trends, and successful application of EVM, are important factors in the efficientachievement of government project goals and sustained competitive advantage of private industry.

7. REFERENCES

1. Fleming, Q. W. and Koppelman, J. M. Earned Value Project Management, Second Edition. Newtown Square, PA:Project Management Institute, 2000.2. Kim, E. H. A Study on the Effective Implementation of Earned Value Management Methodology, Ph.D.Dissertation. Washington, DC: The George Washington University, 2000.3. Project Management Institute (PMI). A Guide to the Project Management Body of Knowledge (PMBOK Guide).

Newtown Square, PA: Project Management Institute, 2000.4. Anbari, F. T. An Operating Management Control System for Large Scale Projects. Decision Sciences Institute,

Ninth Annual Meeting, Northeast Regional Conference, Philadelphia, PA, 1980.5. Egan, Jr., D. S. The Performance Index: Combining Cost and Production Data to Show How Good (or Bad) Your

Project Really is!! Proceedings of the 7. Internet World Congress on Project Management, Copenhagen, Denmark,1982.6. Webster, J. S. Meaningful Metrics. PM Network, November, 2002, pp. 34-39.7. Cioffi, D. F. Managing Project Integration. Vienna, VA: Management Concepts, 2002, p. 49.8. Anbari, F. T. Applications and Extensions of the Earned Value Analysis Method. Proceedings of the ProjectManagement Institute Annual Seminars & Symposium, Nashville, TN, 2001.9. Lewis, J. P. Project Planning, Scheduling, & Control: A Hands-On Guide to Bringing Projects In On Time and OnBudget, Third Edition. New York, NY: McGraw-Hill, 2001.10. Barr, Z. Earned Value Analysis: A Case Study. PM Network, December, 1996.11. Meredith, J. R. and Mantel, Jr., S. J. Project Management: A Managerial Approach, Fifth Edition. New York,

NY: John Wiley & Sons, 2002.12. Heinze, K. Cost Management of Capital Projects. New York, NY: Marcel Dekker, Inc., 1996.13. Anbari, F. T. Quantitative Methods for Project Management, Second Edition. New York, NY: International

Institute for Learning, 2002.14. Anbari, F. T. An Operating System for Forecasting Project Cost at Completion. Third International Symposiumon Forecasting, Philadelphia, PA, 1983.15. Slemaker, M. S. The Principles and Practice of Cost/Schedule Control Systems. Princeton, NJ: Petrocelli Books,1985.16. Kerzner, H. Project Management: A Systems Approach to Planning, Scheduling, and Controlling, Eighth Edition.

New York, NY: John Wiley & Sons, 2003.17. Cleland, D. I. and Ireland, L. R. Project Management: Strategic Design and Implementation, Fourth Edition. NewYork, NY: McGraw-Hill, 2002.

2_anbari_paper1eng

Documents