Dec 20 2013

EVM explained

We have talked about earned value management (EVM) several times recently, starting with the launch of our SaaS-based EVM capability last month, and a look at the history of the discipline. But how does EVM work?

Many consultants will seek to blind you with science, but the approach is relatively straightforward, particularly if you compare it with other approaches to project tracking. This is something that Wikipedia’s EVM article does very well, so I am reusing its explanation and three of its diagrams to explain the difference.

EVM fig1
EVM fig2
EVM fig3

Project tracking without EVM

The first diagram shows project tracking without earned value performance management. The cumulative budget (cost) for the project is shown as a function of time (blue line labelled PV); this is the Budgeted Cost of Work Scheduled (BCWS) or ”what am I going to spend over what duration” and often gives often this “S” curve profile. This is normally created by cost loading activities in a scheduling tool such as Primavera.

The cumulative actual cost of the project through to week 8 is shown by the red line. To those unfamiliar with EVM, it might appear that this project was over budget through week 4 and then under budget from week 6 to week 8. However, the chart does not convey how much work has been accomplished during the project. If the project was actually completed at week 8, then the project would actually be well under budget and well ahead of schedule. Alternatively, if the project is only 10% complete at week 8, the project is significantly over budget and behind schedule. A method is needed to measure technical performance objectively and quantitatively, and that is what EVM accomplishes.

Project tracking with EVM

If we look at the same project project plan but quantify the accomplishment of work, we get a different picture. Here, at the end of each week, the project manager identifies the completed elements of work, and sums the Earned Value (EV) or Budgeted Cost of Work Performed (BCWP),  for each of these completed elements. Put simply, this is “what I have actually completed at this point in time” (normally month end). This is done by recording % complete in the scheduling tool. The second diagram shows EV plotted in green. It indicates that technical performance (progress) started more rapidly than planned, but slowed significantly and fell behind schedule at week 7 and 8. This chart illustrates the schedule performance aspect of EVM.

Our third diagram shows all three curves together in a typical EVM line chart. You can now compare the actual cost data or Actual Cost of Work Performed (ACWP) – typically provided by a ‘back office’ accounting tool such as COINS  and describing “what it has cost me so far” with the EV (or BCWP) data, which suggests a cost variance: the project was actually under budget, relative to the amount of work accomplished, since the start of the project (a much better conclusion than could be derived from Figure 1).

The best way to read these three-line charts is to identify the EV curve first, then compare it to PV (for schedule performance) and AC (for cost performance). But remember: a true understanding of cost performance and schedule performance relies first on measuring technical performance objectively. This is the foundation and key principle of EVM.

The four stages of simple EVM

  1. The first step is to define the work, which typically relies on some kind of work breakdown structure (WBS) comprising detailed activities (or tasks).
  2. Next, assign a value, called planned value (PV), to each activity. Typically this is an allocation of the total project budget, and may be measured by currency (dollars, pounds, etc) or in man hours, or both.
  3. Then define “earning rules” for each activity. The simplest method is to apply just one earning rule. Different rules can be used. For example, using the ‘0/100 rule’, no credit is earned for an element of work until it is finished; under the ’50/50 rule’, 50% credit is earned when an element of work is started, and the remaining 50% is earned upon completion. These simple rules work well for small or simple projects because generally each activity tends to be fairly short in duration.
  4. Finally, execute the project according to the plan and measure progress. When activities are started or finished, EV (or BCWP) is accumulated according to the earning rule. This is typically done at regular intervals (weekly or monthly), but can also be accumulated in near real-time, when work elements are started/completed.

The great challenge with EVM is you typically plan and build against activities (say 1000 items) but cost against cost codes (say 100 codes). This makes doing EVM in scheduling tools too laborious: back-filling costs into activities is too time-consuming and inaccurate. However, all scheduling tools allow activities to be grouped by cost codes, and CONJECT’s cloud-based EVM toolset works effectively as “middle ware” taking feeds from costs and feeds from schedules to deliver EVM information.

About the author

Nick Sansome

CONJECT customer services director Nick Sansome has worked in the construction industry since 1990 (including over a decade at Trafalgar House and Skanska), joining the SaaS collaboration vendor in 2001. He specialises in financial commercial systems and contract administration.

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