Earned Value Analysis (EVA) For Projects – Part I


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?

Primary Measures:

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.

Derived Measures:

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.

  1. 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).
  2. 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)
  3. 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.
  4. 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.
  5. Budget at Completion (BAC) – The base line budget total value at completion.
  6. 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.
  7. 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.)

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14 thoughts on “Earned Value Analysis (EVA) For Projects – Part I

  1. No Sir , Rachana Mam is out to do executive MBA from IIM Ahmedabad, she will be back in April 2010.

    We have your classmate sanjeev sir handling the role of rachana mam these days. Are u still in bangalore and in same company ???

    1. Sanjeev Khodaskar was my junior 🙂 I am in Chennai with Siemens for the past 3 years. I head a set of projects based on medical imaging here in Chennai.

      Cheers!
      Ram

      1. Sorry sir , Got confused with “Ram Manohar Sir”.

        Medical imaging was good i got a hand on experince of siemens product during my tests of “jaundice” 😀

        Do siemens by any chance work in open source ?

        Regards,
        Anant Singh

  2. Hi Anant,
    Wish you a Very Happy Diwali as well. Your question is a very interesting one and one that research industry is grappling with. In fact, as my team works very closely with the R&D department so I have had first hand experience of this issue.

    There are a few ways of solving this problem though. First is the establishment of a cost center kind of approach where we take the first step of acknowledging it as a cost. Then we give it a lag or sleep time where in the cost is incurred, the returns are not expected. At this stage, if you are a project manager in the cost center, then your key job would be to ensure cost efficient development. This could be done either by lowering costs, by bringing in measures such as virtualization, concurrent development, infrastructure sharing etc. or by changing your R&D structure to give incremental benefits to other divisions which are in project development. For e.g. suppose your bread and butter job is projects based on J2EE and your R&D is based on a super duper framework in J2EE for telecom domain, then R&D can pass some of it’s components as ready made components to the project development teams, and there in a small value is earned by the R&D department. This is one way of applying earned value management for a R&D setup.

    The good thing is this field is fledgling, so you get to use your brains to come up with your own unique strategies for the same.

    Cheers!
    Ram

    PS: BTW, where are you these days?

    1. Hi Sir,

      Nice to see the exact explanation which i wanted for my queries. To Sum up things , we can say that in Product development or R&D the goal is cost effectiveness and for all other its Client centered.

      Love to see some examples on this measurment and tool on your blog and throughly enjoying it.

      I am in Indore , working for Impetus in Open source Technologies. Mainly PHP, Jquery, MySql and other open source tools, basically we are into product development so was asking for the same.

      Thanks Sir

      Anant Singh

  3. Hi Sir,

    Thanks for this article ,There are questions if you can help me out 🙂

    1. Is it good/ beneficial for project manager to indulge employee in this analysis for better understanding and working.
    2. Is there any tool for all this management ?
    3. Is same any be applied to product development also ?

    Thanks,
    Your IIPS Junior “Anant”

    1. Dear Mr.anant,

      1.It is not advisable to involve the all employees in this analysis. Only managers and asst.managers level can be educated about this without involving them in day to day calculation of any EVA. They have to concentrate their work on baseline plan and achievement against it. In order to have discussion with management for performance, they should have some understanding of EVA.

      2.There are different types of tools available in the market including digite for large scale company. But a simple suitable tool can be prepared by the experts in the field based on the requirement.

      3.Yes. This can be applied for product develepment also.

    2. Hi Anant,
      Good to hear from you after a long time. My take on this issue is that it is always better as a PM to involve the teams in as much issues as makes sense to them.

      In the specific case of EVA, maybe the complete details might be slightly too much for them, but then you can work out elements of EVA into their individual Key Resultant Area (KRA) and then explain them how it adds to the big picture. For e.g. suppose as one of the key to EVA, you profit figures for next quarter can increase if there is increased productivity in the team, then you can set a KRA to measure the increase in productivity of the individual and then explain to him/her on how it adds to the overall EVA of the project.

      I think any of the project management tool such as MS Project, Primevera etc. can help you apply this, but none of them will do the complete analysis for you. So you might still need to put in the effort to track the efforts and then comparing with schedules and once you do that there are formulas or options available in most PM tools to help you with this analysis.

      I did not understand the last query of yours. If it is whether EVA can be applied to development projects, the answer is yes. But, if you are asking whether EVA can be applied to assist in SDLC, then the answer is no. But, statistical controls as such can be helpful in SDLC.

      Hope these answers at least some of your queries…

      Cheers!
      Ram

      1. Hi Sir,

        Happy diwali to you . Thanks for the reply it solved most of my query. Well it seems to be conflict between the managment about involving the “Team” in this analysis or not ? My take would be “Yes” and i totally agree with you sir , after all it would provide the sense of responsibility and human touch which today’s firm lacks a lot and thus suffer.
        About my last question , I really aim for companies that work as product development , they don’t have fixed time line no client to answere and most important work culture is totally aimed at the “look and feel of the finished software product”.

        The picture is looking good , I am waiting for some examples to make the picture a “Picasso” one.

        Regards,
        Anant Singh

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