A Beginner’s Guide To Earned Value Analysis in 3 Important Points

Introduction

For every project one commences, it is imperative to track performance for ensuring constant growth. Today, project managers are required to be skilled in data-related concepts which can help them build an efficient team. Under project management, Earned Value Analysis is an age-old practice for analyzing team performance. It uses statistics and numerical computation to analyze the productivity of a team. 

In this edition, you shall learn everything about earned value analysis, its basic concept, examples, requisites, and types. 

1. What is Earned Value Analysis?
2. What are the Requirements and Indexes of Earned Value Analysis? 
3. What is Earned Value Types?

1. What is Earned Value Analysis?

Earned Value Analysis or EVA is an evaluation technique used in project management to analyze a project’s progress at any given time. EVA takes into account the total work done so far in a project in relation to time, cost, and schedule status. The earned value method enables project managers to assess the team’s achievements while matching them with associated budgets and time. 

According to the famous author of ‘Practical Guide to Project Planning’, Ricardo Viana Vargas, earned value definition can be summarised as the relationship between the actual costs incurred and the physical work done on any project. 

More simply, he says the focus in earned value analysis is on what we have got for what we have spent so far.

To elaborate, let’s take a simple earned value analysis example. 

Suppose your team lands a project of constructing pillars on a large area of land.

The plan is laid down as below-

1. 30 batches of 20 pillars that makes 600 pillars
2. 5 batches per day, i.e. 100 pillars
3. The cost budgeted per pillar $2.90 
4. The total budget is $1740

On your team’s first day, 70 pillars were constructed due to a stone covered patch that needed to be removed before constructing pillars. The cost incurred in renting a stone removal machine was $147 for a day. 

The earned value calculation would be as such-

Earned Value	= 70 pillars constructed x $2.90	= $203
Budgeted Cost	= 100 pillars constructed per day x $2.90	= $290
Actual Cost	= 70 pillars constructed x $2.90 + $147 for the machine	= $350

The above-mentioned earned value calculation example is visualized by Plainsware, a software toolkit to practice earned value management as below-

By visualising the actual, budgeted, and earned costs, we can calculate the cost variances that are essential to evaluate profitability.  

The project is witnessing 58% more spend on costs (203/350) over the budget. This is called the cost performance index.

In the next section, we shall study several other indexes that can be extracted from earned value analysis in project management. 

2. What are the Requirements and Indexes of Earned Value Analysis? 

The foremost prerequisite to earning value analysis is a well-defined project plan as exemplified in the above-mentioned scenario. A plan can be drafted as a step-by-step breakdown of all the tasks to be accomplished within the project. 

The entire cycle of collecting prerequisites, monitoring resource performance, and evaluating cost, time, and schedule variances are known as ‘Earned Value Management” or EVM. 

Below is a list of all the elements that factor in EVM calculation for successful project management-

• Work Breakdown Structure (WBS)

WBS is a hierarchical distribution of the total work to be performed by a team to achieve a project’s final objective. It is usually presented in the form of a document or spreadsheet. WBS lists down all the deliverables along with the respective budget, time, cost, and schedule to be followed. 

• Planned Value

Once WBS sets the foundation of EVM analysis, we need to estimate the planned value or the Budgeted Cost of Work Scheduled (BCWS). Simply put, planned value is the percentage of tasks that should be completed at a given time.

Referring to the above example, 

PV = $290 (100 pillars constructed per day x $2.90 budget per pillar) 

• Earned Value

Earned value or EV is the number of tasks that stands complete at a given time. EV, also known as Budgeted Cost of Work Performed (BCWP), can be expressed in percentage or monetary terms. 

The basic earned value analysis formula is as such-

EV = Work actually complete x Task Budget

• Actual Cost

The actual cost is the sum of all the efforts that are invested in a project at a given time. It encompasses several factors like labour hours, material, equipment, fixed cost items, and more.

Remember, the actual cost can be expressed both in terms of work hours or monetary terms. However, to maintain a standard for EVM analysis, it is advisable to derive all the requirements in a common monetary unit.  

• Scheduled Variance

Scheduled variance (SV) reflects the scheduled status in terms of the cost of the project. 

SV = EV – PV

Citing the pillar example, 

SV = $203 – $290

      = -$87

Apparently, a negative schedule variance denotes that the team is lacking behind the schedule and vice versa. 

• Cost Variance

The cost variance provides the cost status of the project at the given time. It can be expressed in monetary and percentage formats. 

CV = EV – AC

Again, the above example can be used to calculate CV-

CV = $203 – $350

      = -$147

The project was well over the budget by as much as 58% [(203/350) x100]. Had the CV been positive, the team would have made a considerable profit at the project completion. 

• Other Performance Indicators

There are some other indicators and parameters of project status that are equally significant to earn value analysis. These are-

1. Schedule Performance Index = EV / PV
2. Cost Performance Index = EV / AC
3. Estimate at Completion = AC + BAC -EV
4. Estimate to Complete = EAC – AC
5. To Complete Performance Index = (BAC – EV) / (BAC – AC)

All these metrics and parameters are essential components of earned value analysis. In the last section, we shall learn more about earned value analysis in software project management by exploring some important earned value types.

3. What is Earned Value Types?

Earned value types are numerous ways in which a project’s performance will be claimed or drawn upon the baseline. Here’s are various earned value types that can be employed in earned value analysis in software engineering or other project niches-

• 50/50 and XX/YY

Claiming the first 50% of the performance as soon as the project is started and the remaining 50% on completion.

• 0-100

Claiming nothing before the completion and delivery of the project at which 100% is claimed. 0-100 EVT is usually preferred for projects that involve tasks rendered in one period. 

• Incremental Milestones

Setting budgetary milestones throughout the project’s trajectory and claiming performance after achieving every milestone, say 25%. 

• Units Complete

Calculating the percentage of work complete based upon the units complete. For instance, 70% of a day’s job was complete after constructing 70 pillars out of the 100 planned. 

• Percentage Complete

Evaluating performance or work complete based on experience without any solid evidence or metrics supporting the calculation. 

• Apportioned Effort

Supporting activities performed by other direct activities such as QA testing in software development and assurance. 

• Level of Effort

Claiming performance following a uniform set of work performance rates over a period of time throughout the project completion. Often referred to as LoE, it can be measured by keeping the baseline values parallel, i.e. EV = PV. 

Conclusion

Earned value analysis is a broad technique that mirrors the performance of a team throughout a project. Especially for software development cycles, earned value management is a highly demanded skill for project managers and leaders. If you are interested in learning more about such concepts, our Postgraduate Diploma in Data Science can be of help!

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