Earned Value Analysis
Last updated: 12-15-2010
Earned Value Analysis (EVA) is an industry standard method of measuring a project's progress at any given point in time, forecasting its completion date and final cost, and analyzing variances in the schedule and budget as the project proceeds. It compares the planned amount of work with what has actually been completed, to determine if the cost, schedule, and work accomplished are progressing in accordance with the plan. As work is completed, it is considered "earned". The Office of Management & Budget prescribed that EVA is required on construction projects in Circular A-11, Part 7:
"Agencies must use a performance-based acquisition management system, based on ANSI/EIA Standard 748, to measure achievement of the cost, schedule and performance goals."
EVA is a snapshot in time, which can be used as a management tool as an early warning system to detect deficient or endangered progress. It ensures a clear definition of work prior to beginning that work. It provides an objective measure of accomplishments, and an early and accurate picture of the contract status. It can be as simple as tracking an elemental cost estimate breakdown as a design progresses from concept through to 100% construction documents, or it can be calculated and tracked using a series of mathematical formulae (see below). In either case, it provides a basis for course correction. It answers two key questions:
- At the end of the project, is it likely that the cost will be less than, equal to or greater than the original estimate?
- Will the project likely be completed on time?
Work Breakdown Structure (WBS)
EVA works most effectively when it is compartmentalized, i.e. when the project is broken down into an organized Work Breakdown Structure, or WBS. The WBS is used as the basic building block for the planning of the project. It is a product-oriented division of project tasks that ensures the entire Scope of Work is captured and allows for the integration of technical, schedule, and cost information. It breaks down all the work scope into appropriate elements for planning, budgeting, scheduling, cost accounting, work authorization, progress measuring, and management control. The two most common WBS systems are the Construction Specifications Institute (CSI) format, and the Uniformat. Often at the preliminary stages of design the Uniformat lends a better understanding of the cost centers, and at final bid level of documents often the CSI format is used. The indirect costs of design, oversight, and management must be included in the WBS to reflect the full budget.
Calculating Earned Value
Earned Value Management measures progress against a baseline. It involves calculating three key values for each activity in the WBS:
- The Planned Value (PV), (formerly known as the budgeted cost of work scheduled or BCWS)—that portion of the approved cost estimate planned to be spent on the given activity during a given period.
- The Actual Cost (AC), (formerly known as the actual cost of work performed or ACWP)—the total of the costs incurred in accomplishing work on the activity in a given period. This Actual Cost must correspond to whatever was budgeted for the Planned Value and the Earned Value (e.g. all labor, material, equipment, and indirect costs).
- The Earned Value (EV), (formerly known as the budget cost of work performed or BCWP)—the value of the work actually completed.
These three values are combined to determine at that point in time whether or not work is being accomplished as planned. The most commonly used measures are the cost variance:
Cost Variance (CV) = EV - AC
and the schedule variance:
Schedule Variance (SV) = EV - PV
These two values can be converted to efficiency indicators to reflect the cost and schedule performance of the project. The most commonly used cost-efficiency indicator is the cost performance index (CPI). It is calculated thus:
CPI = EV / AC
The sum of all individual EV budgets divided by the sum of all individual AC's is known as the cumulative CPI, and is generally used to forecast the cost to complete a project.
The schedule performance index (SPI), calculated thus:
SPI = EV / PV
is often used with the CPI to forecast overall project completion estimates.
A negative schedule variance (SV) calculated at a given point in time means the project is behind schedule, while a negative cost variance (CV) means the project is over budget.
Earned Value Management System (EVMS)
Section A-11, Part 7 of the ANSI Standard 748 requires an EVMS to be used to comply with the Standard. A list of guidelines is provided which covers areas such as planning, scheduling & budgeting; accounting issues; management reports, and so forth, however there are no "approved" systems identified. But the basics of any EVMS are:
- A methodical, organized, thorough, and complete WBS
- A baseline schedule
- A baseline budget, organized into control accounts
- Measurement of the work by control account (e.g. $, units in place, man-hours, etc.)
Scheduling the authorized work is no different than in any large construction project—it is a necessary activity for the success of the project. However in an EVMS the schedule will integrate all of the technical, cost, and schedule aspects of the work, resulting in the expected sequence of work. Interdependencies are established that result in the total work time and reveal the critical path, which is also the shortest project duration.
Within each task it is then necessary to identify objective interim measures to allow for accurate performance assessment each month. A sufficient number of these interim measures will be defined after the detailed schedule is established to ensure the performance is measured as accurately as possible.
A time-phased budget baseline, at the control account level, must also be established and maintained. The assignment of budgets to work activities or tasks results in a plan against which actual performance can be measured. This is referred to as the performance measurement baseline (PMB), and it should be established as early as possible after notice to proceed has been issued. The PMB includes direct hours/dollars, direct material dollars, equipment and any other direct costs, and any indirect costs for the agreed scope. The indirect costs associated with design, oversight, and management must also be included. Essentially the PMB represents the formal plan for the project manager to accomplish all the work required in the time allotted and within the budget provided.
ANSI 748 also requires "On at least a monthly basis, generate schedule variance data that provide visibility into root causes and establish actions to achieve project completion. The first intent if this criterion is to establish the fact that analysis, to remain viable, must be accomplished on a regular, periodic basis. The second intent is to foster analyses and identification of root cause and resulting impacts at the control account level."
The monthly performance report must include:
- Budget, earned value, and actual costs (reconcilable with accounting system)
- Cost Variance (CV)
- Schedule Variance (SV)
- Variance at Completion (VAR)
- A variance analysis narrative (root causes, impacts at completion, and management actions)
Tools and Techniques
There are several software packages available which will prepare an earned value analysis, as follows:
- Planisware OPX2
- Earned Value Management
- International Cost Engineering Council
- Project Management Institute
- Royal Institution of Chartered Surveyors (RICS)
- Society of Cost Estimating and Analysis (SCEA)
- ANSI/EIA-748-A Standard for EVMS Intent Guide National Defense Industrial Association (NDIA) Program Management Systems Committee
- Defense Acquisition University
- DOE Project Management Career Development Program