Due to depressed conditions of market, all industries including software industry started looking at cost reduction techniques. One such technique is ‘Earned Value Analysis’. For any project, there will be planned resources and actual used resources. The time limit within which the project has to be completed is also mentioned by the buyer of the software. Any delay and cost overrun will affect the client of the Software Company as well as Software Company. If it is a fixed bid, then the company is only affected. If it is time and material contract, both are affected. Time overrun is also called as schedule overrun.
Earned Value Management which is used to track earned value, is an integrated system of project management and control. It enables the software company or any project contractor and their client to monitor the progress of the project in terms of cost, schedule etc. Traditional project management method tends to compare the actual costs with planned expenditure with little respect to % of completion of projects phase wise.
The successful implementation of Earned Value Analysis under Earned Value Management can result in
- Better control on Cost over-run
- Better control on schedule over-run
- Better visibility of program performance.
- It gives the likely expenditure of the project with the present pace of progress.
- It gives the likely completion date based on present pace of progress.
- Reduced risk as timely correction can be made either allowing more resources to complete the project in time
- Identifying either program manager’s in-efficiency or defectiveness in plan.
- Demanding more bid amount when the cost overrun is due to technical change demanded by client.
In short, under Earned Value Management (EVM), Earned value analysis helps in finding the schedule performance and cost performance to answer the question “What we got for the money we spent so far?”
1. Budget Cost of Work Scheduled (BCWS) – the spending plan. This is also known as Planned Value or simply PV.
Each project is planned to have certain number of resources (employees) per month and time limit for completion. The resources (employees) are loaded with other costs like material and other overheads. These overheads include R&D also. So there will be planned cost for each project month wise till targeted month.
2. Budgeted Cost of Work Performed (BCWP). This is also known as Earned value or simply EV.
Each project collects ‘Earned value’ as work completed in pro-rata basis. Suppose, for any milestone or phase, the amount ear-marked is $ X as per plan and the said phase on any particular point of time is completed 80%, then the earned value will be $0.80 X. If it is completed 100%, then the earned value will be $ X.
3. Actual Cost of Work Performed (ACWP) – actual spending. This is also known as Actual cost. (AC)
Actual costs for resources (employees) are collected month wise or as on any particular date as per requirement.
From the above three primary measures it is possible to derive measures that can be used to accurately assess the status of the project and predict its future state. The earned value is compared with actual costs and planned costs up to that particular point of time. This comparison will give Cost overrun and schedule overrun. This will also predict future likely cost at which the project likely to be completed.
- Cost Variance (CV) – The difference between the earned value (BCWP) and the actual cost (ACWP) i.e. CV = BCWP – ACWP. (Another way of thinking of this is the difference between the planned and actual costs of work completed.) . It can also be taken as CV= (EV—AC).
- Schedule Variance (SV) – An indicator of how much a program is ahead of or behind schedule. SV = BCWP – BCWS. In simple terms, it can be shown as SV= (EV-PV)
- Cost Performance Index (CPI) – The cost efficiency factor representing the relationship between the actual cost expended and the earned value. CPI = BCWP/ACWP or EV/AC. A CPI ≥ 1 suggests a relatively efficient cost factor, while a CPI <1 may be cause for concern for the project manager or management.
- Schedule Performance Index (SPI) – The planned schedule efficiency factor representing the relationship between the earned value and the initial planned schedule. SPI = BCWP/BCWS or EV/PV. A SPI ≥ 1 is good. SPI < 1 suggests actual work is falling behind the planned schedule.
- Budget at Completion (BAC) – The base line budget total value at completion.
- Estimate at Completion (EAC) – Tells the likely expenditure when the project completed when it goes in the same pace of progress. It is obtained by BAC(value)/CPI.
- Estimated Time at Completion (ETC) Tells the likely time when the project to be completed with the present pace of progress. It is obtained by BAC (period)/SPI.
The performance status of the project is to be discussed in monthly meetings of the project managers by the top management and corrective action is taken.
Benefits of communication to all stake holders including client:
- Estimation of delivery date :Client will know when he is likely to get the finished project and he can plan accordingly.
- Promote Accountability in managers: When developers understand how their individual work (or lack thereof) influences the project, they tend to be more focused on their specific work goals. They also better understand the significance of estimating the amount of work needed to complete specific tasks. There exists a mindset among some project managers that they should “protect” their developers from the distraction of project metrics. In reality, communicating project status to the development staff tends to establish a sense of accountability for their assigned pieces of the project and often results in more realistic estimates for completion of future tasks
- Timely intervention of management: Reporting real project status, including earned value, at regular intervals provides an opportunity to address potential problems early in the project when it is still possible to resolve problems and avoid cost overruns and schedule slippage. The project team takes a proactive approach to prevent problems from occurring. The team also think whether the plan given by them earlier is realistic or not. Management uses the information to resolve issues that are beyond the control of the project team.
In the second part, some examples are shown which will be of interest to the readers.
(This article by Mr. C.R. Venkata Ramani was published in “The Chartered Accountant” magazine Oct 2009 edition.)