In one simple example, if a three month project is having the following details.
The project total cost is $500 K and period of completion is 12 months. But at the end of three months, the overall % of completion of the project is 80% only. The primary data calculation details are given below in table -1.
( in Dollars ‘000)
|Actual Cost (AC)||18||30||44||92|
|Earned Value (EV)||16||24||40||80|
Table -1: Primary data
As per the traditional accounting, the cost under-run will be 8 when it compares the PV and AC. But when we track this with earned value, the actual cost over run will be 8. The derived data from primary data are given in table 2.
(Fig. in $’000)
|Particular of variances||April08||May08||June08||
|Cost Variance (CV)Cum EV- Cum Actual Cost||-2||-8||-12||-12|
|Schedule Variance (SV)Cum EV – Cum Planned||-4||-10||-20||-20|
|Cost Performance Index (CPI)Cum EV/Cum Actual||0.89||0.83||0.87||0.87|
|Schedule Performance Index (SPI)Cum EV/Cum Planned||0.80||0.80||0.80||0.80|
|Estimate at Completion (EAC)Total Budget (BAC)/CPI||500/0.87=575|
|Estimated time at Completion (ETC)||12/0.80=15 months|
Table 2: Derived Data
Thus derived data helps the managers and top management to take timely decision when projects are analyzed month wise. The following Fig. 1 tells the benefits of EVA at a glance and the requirement in short.
Conclusions from the example:
Since CPI and SPI are less than one, it shows some adverse indications about cost and schedule plan. It shows that there is cost over-run as well as schedule over-run. EAC states that the project may cost $575 K instead of $500 with the same set of progress. If the present trend of progress is continued, the project completion will be extended by 3 months . i.e. 15 months instead of 12 months. So management should analyze the reasons for longer period. The reason may be either plan is wrongly prepared or the client has deviated from plan or the team is inefficient. The management should find the real reason and take necessary corrective action. If the spec of the plan is changed, the client should be impressed to pay more. If the defect lies with the team, either the person responsible may be replaced by efficient one or additional resource is employed to put the rail back on track though it costs more. But delivery period is important in the buyer’s market as in software line. If the plan is not made properly, action is to be taken in future to take care of the short-comings.
This tool is one of the valuable weapons in the hands of management to control costs on projects. This is applicable to all type of projects right from civil to software projects. In software industry, if the Digite tool combined with Microsoft project will help in feeding the basic or primary data for the above tool. Many inbuilt software are also available but they are costly. Any qualified expert can guide the company to evolve suitable plan for EVA so that company can maximize their profit. From the above simple example, complex examples can be built by the experts.
(This article by Mr. C.R. Venkata Ramani was published in “The Chartered Accountant” magazine Oct 2009 edition.)