Earned Value Analysis
What is earned value analysis and how can it help you control and monitor projects as well as serve as an early warning system for cost and schedule variances?
Earned Value Analysis (EVA) is a tool to measure the progress and success of a project for controlling, as well as to map the current schedule and cost situation. The terms performance value analysis, completed value method or labour value analysis are also used synonymously.
Definition
Earned Value Analysis (EVA) is a controlling method that provides clear key figures on the progress of a project, regardless of the size and complexity of the project, with the help of planned and actual data on costs, time and scope of activities. The results of the calculations provide valid statements on the project status and form a basis for forecasts of the further course of the project in terms of costs and duration.
Goals
Project managers use earned value analysis to check costs and deadlines by comparing planned values with actual values in a given time frame. This allows them to check whether time and money are being used wisely and, on this basis, to make informed decisions on how to proceed with the project.
EVA is used to:
- Monitor adherence to deadlines and costs
- Forecast the expected total costs and the final deadline of a project
- Provide early warning for project controlling
Basic terms
Planned value (PV): The planned value comprises the estimated project results as well as the effort planned for them. It is determined from the project planning and forms the basis for further calculations.
PV = planned quantity x planned costs
Actual costs (AC): The actual costs incurred for the work performed up to a key date. This value usually comes from cost overviews or controlling.
AC = actual quantity x actual costs
Percentage of completion (PC): This value is given as a percentage and indicates the proportion of a project that has already been completed by the key date.
Earned value(EV): The aarned value of the work performed states how much value the work on a project has created by the key date.
EV = PV * PC
Cost variance (CV): This value tells whether the project produced more costs than it should have on the key date, i.e. whether the project is within the planned cost framework.
CV = EV – AC
Cost Performance Index (CPI): This is a metric to evaluate the relative costs incurred in relation to the project scope (cost effictiveness).
CPI = EV / AC
Schedule variance (SV): With the schedule variance you can see whether the project is ahead or behind schedule.
SV = EV – PV
Schedule Performance Index (SPI): Time efficiency assesses the progress of the project in relation to the schedule.
SPI = EV / PV
How do you perform an earned value analysis?
1. Determine input variables
These are the planned total costs of a project and the project duration. They result from the work breakdown structure and the cost calculation. During the project, you can calculate and evaluate the key figures on this basis at the desired time, for example, once a month on a fixed key date.
2. Determine planned expenditure, actual costs and earned value at the current key date
In order to determine the earned value, you first need the percentage of completion. This can be calculated in different ways. Use your experience to decide which form is appropriate for your particular project or activity.
- Percentage of completion: With this option, your employees estimate their progress and express it as a percentage. However, take these figures with a grain of salt, as people tend to overestimate their completed work.
- 0/100 rule: Here, only completed activities are included in the calculation at 100 per cent. All other activities are valued at 0 per cent. This variant is particularly suitable for short activities and projects with short reporting cycles as well as for activities with uncertain results. Since the degree of completion is constantly underestimated in this way, this is a safe method.
- 25/75 rule: Here, each activity started is valued at 25 per cent and only when it is completed is the remaining 75 per cent added. This mitigates the 0/100 rule.
- 50/50 rule: A started activity is always valued at 50 per cent. This means that the first half of the activity is overrated and the second half is underrated. This rule is particularly suitable for short activities that are started and finished within two consecutive reporting periods.
3. Calculate cost and schedule variance
Negative values indicate that you are exceeding the planned costs or that the project is behind schedule If the values are positive, then the project has so far incurred fewer costs than planned or the project has progressed faster.
4. Calculate CPI and SPI performance indices
These put the cost and schedule variance in relation to the project scope to date.
For the CPI (cost efficiency), a value less than 1 means that the previous activities were carried out at a higher cost than planned. If the value is exactly 1, your project is right on target. On the other hand, if the value is above 1, you were able to save costs.
The same applies to the SPI (time efficiency): If the value is less than 1, your project is behind schedule. At a value of 1, the project is exactly according to plan, and at a value above 1, the project progress is faster than planned.
5. Calculate the forecast values for the project costs
Usually two values are calculated for this under different assumptions.
- Assumption that measures taken in the future will have an effect: If you assume that no further deviations from the plan will occur, then the forecast total costs (Estimate at Completion = EAC) are the sum of your costs to date and the remaining planned costs.
EAC = AC + (PV – EV) - Assumption that the CPI remains constant: If you assume that the cost planning error will remain, then calculate the EAC by applying the CPI to date to the entire project calculation.
EAC = PV / CPI
6. Calculate forecast values for the project duration
The simplest way to forecast the project duration is to divide the originally planned duration by the calculated SPI. However, this calculation only gives a rough estimate and is not very reliable because it does not take into account interdependencies between activities and, for example, resource availability. You will get more reliable forecasts, if you carry out a forecast in combination with the network planning technique or the critical path method.
7. Interpret the key figures
Visual presentations are usually easier to understand and provide a better overview than tables. For this reason, you can also show the development of the values over time in line diagrams. By following the course of the lines, you and everyone to whom you present the analysis can see at a glance whether the planned and actual values correspond and how the costs and schedules behave. You can also see the effectiveness of control measures you have taken in the past in such a diagram.
8. Take measures
If the determined values deviate strongly from the planned values, you should try to find out the cause and take measures against it.
Overview of terms
AC (Actual Cost)
CPI (Cost Performance Index)
CV (Cost Variance)
EAC (Estimate at Completion)
EC (Estimated Completion)
EV (Earned Value)
PC (Percent Complete)
PV (Planned Value)
SPI (Schedule Performance Index)
SV (Schedule Variance)
Overview of formulas
EV = PV * PC
CPI = EV / AC
CPI > 1: on budget
CPI < 1: over budget
CV = EV – AC
SPI = EV / PV
SPI > 1: on plan
SPI < 1: behind plan
SV = EV – PV
EAC:
No further variances: AC + (PV – EV)
Variances remain constant: PV / CPI
EC = planned duration / SPI
Advantages
- the completed work is evaluated on the basis of the originally planned and actual costs
- provides a snapshot of the project status in terms of time and cost at the selected point in time
- the future development of the project can be forecast with the EVA
- the method is objective and fully comprehensible
- projects can be compared with each other
Disadvantages
- EVA does not provide any information on the quality of the work done.
- the calculations are time-consuming unless they are calculated automatically in project management software
- ensuring that the data is up-to-date and of high quality requires more effort
- the estimation of the degree of completion can be erroneous, as it is partly based on personal assessments
- the interpretation of the key figures requires experience
- it can only be used for projects with a clearly defined scope of work and requires a high degree of project maturity.
Conclusion
Earned Value Analysis is a very valuable tool to monitor and control projects as well as an early warning system for schedule and cost variances. However, many project managers are put off by the many key figures and formulas. Good project management software determines all key figures automatically and thus provides you with a valuable overview of your project status at any time as well as with meaningful forecasts for the further development of your projects.
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