Did you know that earned value management (EVM)—a crucial tool for managing complex projects—has its roots in the late 60s? It all started when the U.S. Department of Defense needed a new way to measure project management, as existing methods were falling short.
Enter the cost/schedule control systems criteria policy (CSCSCP)—the precursor to EVM as we know it today. By measuring project performance based on a combination of time, cost, and scope, CSCSCP revolutionized project management.
And as time goes on, EVM has continued to evolve and improve, becoming an essential tool for managing projects across various industries.
What is earned value management?
Earned value management is a method for tracking the progress of a project to date and comparing it to the expected progress. This allows a project manager to get an accurate picture of where their project is in terms of cost, schedule, and scope.
If you want to manage your projects more effectively, understanding earned value management is essential. EVM helps you make better-informed decisions and achieve successful outcomes by giving you real-time insights into project progress and budgeted cost.
Using EVM, you can identify potential overruns or delays at an earlier stage, so you can take action and avoid costly mistakes. And with the ability to manage resources and budget for the project’s duration, you can be sure that your project stays on track and within budget.
How does EVM work?
Earned value management measures project performance and progress in a systematic way. It involves combining actual cost with the planned amount of work to identify potential problems early on in the project.
According to practices published by the Project Management Institute, the earned value of a project is determined by leveraging data regarding:
- How much work scheduled in the project was expected to cost
- The actual value of the work completed and
- The earned value of the physical work completed
An earned value management system uses a variety of techniques to measure the budget, schedule, and technical performance of a predictive project. It typically includes these factors (each of which is dependent on the other over the life of the project):
- Planned value (budgeted/planned)
- Actual cost
- Cost variance
- Earned value
- Schedule variance
- Schedule performance index
- Estimate at completion
- Estimated time to complete
These elements, when combined, allow project managers to numerically describe the work already performed and completed in the project plan, as well as determine if that completed work was under or over budget. This can help estimate whether the project will continue to run under budget or forecast future costs, and help you determine when to make adjustments.
Planned value (budget) is compared to earned value over the project's life and provides a high-level indication of project success.
Across time, progress is measured against the plan, noting planned value (PV), actual cost (AC), and earned value (EV). When AC, PV, and EV carry a significant variance, the project may be significantly ahead or behind in either schedule, cost, or both.
How to calculate earned value for projects
Here’s a standard formula for earned value:
EV = PV to date X RP, where:
- EV = earned value
- PV = planned value of activities
- RP = rate of performance (the rate at which the project progresses).
Usually, the rate of performance is noted as the percentage of the work completed out of the total work planned. For example, if we had designed to have 50% of the project done by now, but we are only 25% there, my performance rate would be 50% because I only got through half of the expected work.
Why do companies use earned value to manage performance?
In a predictive project scenario, organizations use earned value to measure the performance of projects because it:
- Provides an accurate and objective view of how close a project is to completion. Providing a picture of the project status facilitates better communication between stakeholders.
- Allows managers to identify potential problems early, enabling them to adjust their plans and resources accordingly.
- Is a good gauge of productivity because it measures the relationship between money spent and work performed. This helps companies track costs effectively and ensure that projects remain on budget.
As a result, EVM has become an essential tool for successful project management, especially in waterfall projects.
When should you use earned value?
- When you need to make a case for more funding: If you're in charge of an underfunded project, earned value analysis can be a helpful tool in making a case for additional funding. By showing how much work has been completed and how much money has already been spent, you can demonstrate the need for additional financing to complete the project.
- When you need to show progress to stakeholders: If you're working on a project with stakeholders that prefer to measure projects in earned value, earned value analysis can be a helpful way to show progress. By demonstrating how much work has been completed and how much value has been generated, you can show that the project is on track and meeting its goals.
- When you need to identify problem areas: If you need help meeting your project goals, earned value analysis can help you identify problem areas that are further behind than the project baseline. By looking at the difference between planned and actual value, you can pinpoint areas where a work package is not being completed as scheduled. This information can then be used to change the project plan to improve performance.
- When you need to make adjustments to the project plan: If your project is not going as planned, earned value analysis can help you adjust the project plan. By looking at the difference between planned and actual value, you can identify areas where work needs to be accelerated or slowed down to meet your project goals.
- When you need an accurate forecast of project costs: Earned value analysis can be a helpful tool to generate an accurate forecast of project costs. By looking at the relationship between planned value, actual value, and earned value, you can generate a more precise estimate of future expenses. This information can then be used to decide how to allocate resources within the project budget.
When should you avoid using earned value?
There are many situations where earned value management and analysis don't make sense or don't add specific value. Often, a project's size, complexity, or anticipated schedule makes it hard for EVM to add any real value to tracking project performance.
Some scenarios where EVM may not be right include:
- Atypical scope: When the project is small or exceptionally large. Calculating earned value either won't make sense or would not be feasible if the project is exceptionally large.
- Atypical complexity: When the project is very simple or overly complex. Similarly to atypical scope, if the project is super simple, earned value won't be helpful, and if the project is too large, calculating earned value might not be possible.
- Absence of risk: When the project involves little to no risk, earned value and planned value should be very similar, so earned value might not be helpful.
- Absence of clarity: When there are no clear objectives, and the project is adaptive with not all the requirements identified. Earned value management is not designed for projects with conditions that are not all specified at the outset.
- Uncertain timeline: When the project schedule is not well-defined. Earned value management requires the planned value to be known, meaning all tasks are identified, the schedule is created, and value can be measured.
Earned value in agile or adaptive projects
Measuring earned value is critical to project success, but it can be tricky in agile projects. Traditional EV metrics may not always provide accurate insights into progress and performance, as agile values flexibility, collaboration, and continuous improvement over rigid deadlines and budgets.
But don't worry—there are two methods to measure EV in agile that can help your team stay on track and improve performance: velocity tracking and burn-down charts.
- Velocity tracking: The method of tracking agile velocity provides a holistic view of your team's progress by considering all tasks completed each sprint, allowing you to identify areas for improvement and make adjustments quickly. Additionally, by tracking velocity over time, teams can better understand their overall productivity and how to meet deadlines more effectively.
- Burndown charts: Burndown charts can track the estimated effort versus the actual effort put into completing tasks within each sprint, giving you greater visibility into your progress and helping you stay on track. Burndown charts help teams identify where they can improve their performance by showing the amount of project work remaining compared to what has already been completed during that sprint.
Measuring EV for agile projects doesn't have to be complicated. By leveraging these approaches, you can gain greater visibility into your projects' performance and remain flexible enough to adjust plans when needed.
If you want to stay on top of your agile projects and achieve your goals, make sure you're measuring earned value with the proper methods and tools. With the right approach, you can ensure success and stay on track toward your goals.