1. What is Earned Value Management?
Earned Value Management is a critical Construction Project Management method that enables project managers to forecast project costs and additionally shows current performance and productivity metrics throughout a project's execution.
Earned Value Management sounds way more complicated than it is. It is actually something that you’ve likely done many times before - both when managing projects, as well as in day-to-day life - but you may not have known that it had such an elaborate name as 'Earned Value Management' (EVM). The concepts of EVM are not complicated, but they’re not necessarily familiar to most people; so this document provides an explanation that describes what EVM is, how the numbers are calculated, and most importantly, what they should mean to you.
Earned Value Management (EVM) is described as an effective method of analyzing your project costs objectively. So what does that mean? Here’s a simple example to give you some context (you’ll have to reach back to a little 3rd grade math):
“I’m half-way through replacing the sink in my bathroom, but I’ve just realized that I’ve already spent $600 of my $1,000 budget that I originally estimated for the job. My initial $1,000 estimate included all labor and materials, and it’s taken a bit longer and cost a bit more than I thought.”
With that description, I’ve just done an earned value assessment of my little job. To run Earned Value calculations, I only need three numbers: 1) the original estimate, 2) the percent complete, and 3) how much I've spent so far. Here’s what it looks like from an EVM perspective:
Percent Complete: 50%
Current Actual Costs: $600
Percent Spent: 60%
Estimate to Complete: $500. I’m only half done, so I’ll guess that it’s going to cost another $500 to finish based on my initial $1,000 estimate (50% of $1,000).
Estimate At Complete: $1,100. I’ve spent $600 already and have another $500 to go.
Variance: -20%. That reads, “20 percent over budget”. You might be thinking, hey wait, I’m only 10% over budget! But you have to think of it like this: I should have spent $500, but I’ve spent $600. So I’m $100 over budget when I’m only half way through. So that’s: 100 of the 500 – or one fifth – which is 20%.
Variance At Complete: -10%. That reads, “10 percent over budget”. This tells me that if all goes to plan from here on, I'll be 10% over budget at the end of the project
With that simple example, you can get the idea of how EVM works. With more complex projects, things obviously can get a bit trickier, but at the end of the day, EVM is about one thing: trying to figure out where you’re at with your project. There’s an excellent discussion of EVM in the Project Management Institute (PMI)’s Practice Standard for Earned Value Management (www.pmi.org). Here's an excerpt:
"EVM has been called management with the lights on because it can help clearly and objectively illuminate where a project is and where it is going—as compared to where it was supposed to be and where it was supposed to be going. EVM uses the fundamental principle that patterns and trends in the past can be good predictors of the future.
EVM provides organizations with the methodology needed to integrate the management of project scope, schedule, and cost. EVM can play a crucial role in answering management questions that are critical to the success of every project, such as:
- How efficiently are we using our time?
- Are we currently under or over our budget?
- How efficiently are we using our resources?
- What is the remaining work likely to cost?
- What is the entire project likely to cost?
- How much will we be under or over budget at the end?”
2. How does 4castplus use EVM?
Using EVM to analyze your project’s performance includes cost analysis as well as schedule analysis. Throughout 4castplus, you will see reference to Earned Value metrics that focus on cost analysis. This guide will give you an idea of how those metrics are calculated and what they mean to you.
You Need a Progress Measurement
As mentioned above, to calculate EVM, there needs to be three fundamental input values in place: Budget, Actual Cost, and Percent Complete. These are typically input at the lowest level of the project's work breakdown structure and rolled-up through the hierarchy. Establishing a budget and tracking actual costs are the first two parts to feeding the EVM calculation; the last is to measure progress at regular intervals. The progress measurement provides the third input value of Percent Complete.
EVM Values are Automatically Calculated
Budget At Completion is the total budget allocated to the project and represents the total planned value of your project. Budget At Completion can be calculated from your project’s Work Breakdown Structure (WBS) by allocated budgeted costs to each of the project activities.
Budget At Completion = Hourly or Unit Rate * Baseline Estimate Hours or Units
Planned Value is the total cost of the work planned or forecasted as of a reporting date. Planned Value can be derived from your project’s WBS by allocating planned or forecasted costs to each of the project tasks. In 4castplus, you can use Time-Phased estimates to pinpoint and schedule out exactly when you anticipate expenditures are going to hit the project. Using this method, "planned value" is much more accurate on any particular date during project execution. Planned Value can only vary during project execution if approved Change Orders are added to the project. Without Change Orders, the PV is locked to the initial Baseline.
Planned Value = Hourly or Unit Rate * Total Hours or Units Planned/Scheduled on this date
Actual Costs Value is the total cost to complete the work as of a reporting date. Actual Costs can be calculated from your project’s WBS by allocating actual costs to each of the project tasks. With the eight project tracking systems, 4castplus can calculate up-to-the-minute actual costs.
Actual Costs = Hourly or Unit Rate * Total Hours or Units Spent
Earned Value is the total budgeted cost of the work that has been completed as of a reporting date. Earned Value can be calculated from your project’s WBS by taking the budgeted cost of each project task and then multiplying by that task’s percent of completion. When compared to the Planned Value and the Actual Cost Value, Earned Value can let you know the actual state of your project by comparing your current project performance against your planned performance. In 4castplus, regular forecasts will provide an accurate representation of project progress as a percentage of completion. Forecasting on a regular (weekly) basis, will keep progress in step with Actuals and Planned Value.
Earned Value = Budget at Completion * % of Project Completed
[EV = BAC * PC]
Cost Performance Indicator is an index that shows how efficiently used the project resources are. A CPI value above 1 indicates efficiency in using project resources is good; a CPI value below 1 indicates efficiency in using project resources is weak. In 4casplus, you can watch CPI trended over time. This is tremendously valuable as a measure of whether project performance is improving or declining.
Cost Performance Indicator = Earned Value/Actual Cost
[CPI = EV/AC]
Estimate To Complete is the estimated cost required to complete the remainder of the project. Please see the section below on "Outlier Exceptions" to understand any exceptions to this calculation.
Estimate To Complete = (Planned Value - Earned Value) / CPI
[ETC = (PV - EV)/ CPI]
Estimate At Completion is the estimated cost of the project at the end of the project, if current performance trends continue. (Note: When calculating Estimate At Completion, there are different calculations that can be used, depending on your assumptions if cost variances will not occur in the future, will occur in the future, or if your estimate is no longer valid. The Estimate at Completion calculation in 4castplus uses the assumption that the cost variances in the project will be reasonably expected to continue in the future). Please see the section below on "Outlier Exceptions" to understand any exceptions to this calculation.
Estimate At Completion = Estimate to Complete + Actual Cost
[EAC = ETC + AC]
% Completed Actual is the percentage of work which was actually completed.
% Completed Actual = Actual Costs/Estimate At Complete
Cost Variance shows how much over or under budget a project currently is. A cost variance less than zero means your project is over budget.
Cost Variance = Earned Value – Actual Costs
CV = EV - AC
Cost Variance % indicates how much less or more money has been used to complete the project as planned in terms of percentage. A positive variance % indicates the % under budget; a negative variance% indicates the % over budget.
Cost Variance % = Cost Variance / Earned Value
[CV % = CV/EV]
Variance At Completion is the variance on the total budget at the end of the project. It is the difference between what the project was originally expected (Baselined) to cost, vs. what is now expected to cost and answers the question “Will we be under or over budget?”.
Variance At Completion = Budget At Completion – Estimate At Completion
[VAC = BAC – EAC]
Cost Estimate Mark-up is the percentage mark-up that is applied to the Baseline Estimate cost to calculate the total revenue on a cost-plus project, or a fixed price project. The Target Profit Margin % is the difference between the project revenue and the Baseline Estimate cost, as a percentage of project revenue.
Cost Estimate Mark-up % = (Revenue – Baseline)/Baseline Estimate Hourly or Unit Rate
Target Profit Margin % = (Total Revenue – Baseline Estimate)/Total Revenue
The above calculations are those used when the software has enough information to fully calculate the entire equation. There are, however, situations that commonly occur when all the variables for an equation are not available. In these situations, the program has to make assumptions in order to complete the calculation. These situations are referred to as "Outlier Exceptions". All of these exceptions are rooted in the problem of what do you do when CPI is zero? As noted above, CPI typically falls on the bottom (denominator) of EVM calculations. Since dividing by zero will cause an illegal Div-Zero math error the system will assume a CPI=1 in most of these cases. Following is a list of these exceptions:
- BAC > 0, AC=0, PC >0. This means there was an estimate, but no actual costs; and percent complete is greater than zero. In other words, progress was made without spending any money. Performance, in this case, is infinite (which is mathematically impossible). 4castplus will override the CPI to be 1.0.
- BAC>0, AC>0, PC=0. This means there was an estimate, there have been costs incurred, but no progress. Again this would result in a CPI of zero. 4castplus again will override the CPI to be 1.0. EAC & ETC will calculate out to equal Estimate.
- BAC>0, AC=0, PC=0. This is a common case where no cost activity or progress has occurred on the task. EAC & ETC are equal to Estimate.
- BAC=0, AC>0, PC=0 or PC>0. There was no estimate for the task, but costs have been incurred; and progress is greater or equal to zero. 4castplus ignores the EVM calculations and sets EAC to equal AC, with ETC=0.
It's very important to understand the effects these exceptions can have in the overall calculations of forecasted metrics. Especially those metrics that are rolled-up to folder-tasks or project-level view.
We're happy to discuss any of these underlying calculations and what they mean. Please feel free to contact us on: [email protected]