Understanding the earned value of a project, will provide a strong predictive forecast of how you will track towards your planned [budgeted] costs and give insight on what the "estimate at completion" will be. Let's take a look at the key elements of what this powerful approach gives you.
The planning stage is particularly important, as you will want to identify your deliverables [what is to be achieved], assign resources against those deliverables and the costs associated with delivery your intended outputs. Packaging effort into Sprints, Deliverables, Work Packages, etc. enables you to scale your costs and forecast more powerfully.
Following are the key attributes of Earned Value Management.
Planned Costs [PC]
As with all costs associated with a project, you will need to estimate your costs to deliver your outcome. This is generally provided through lessons from previous projects, subject matter expertise on effort required to deliver outputs and mapping out the key activities with resource costs assigned. For the purposes of this post, we are tracking a Sprint with a Planned Cost of $10,000.
Actual Costs [AC]
These will be the costs of your project activities; including third party costs and internal resource costs to produce the intended outcomes. For the purposes of this post, we are tracking a Sprint with an Actual Cost of $12,000.
Earned Value [EV]
Is the planned cost, multiplied by status completion rate; e.g. a Sprint was planned to cost $4,000 and your completion rate is 100%, your Earned Value is $4,000. Similarly, if your Sprint was planned to cost $10,000 and your completion rate is 60%, your Earned Value will be $6,000.
Scheduled Variance [SV]
Is your Earned Value, minus the Planned Value. Let's say that your Earned Value is $6,000 and your Planned Value is $10,000, your Schedule Variance will be -$4,000. Hence, you are already $4,000 behind your budget.
Schedule Performance Index [SPI]
To provide you with a ratio of how your schedule is travelling, the Schedule Performance Index gives you a simple guide. If your index is at 100%, you are on target; if it is below you are under target. The Schedule Performance Index is calculated by your Earned Value divided by your Planned Value. Keeping the theme of the example we have used to date the Earned Value of $4,000 divided by your Planned Value of $10,000 gives you a Schedule Performance Index of 60% [always expressed as a percentage].
Cost Variance [CV]
Is the Earned Value minus the Actual Cost. In the example we are using throughout this post we would have the Earned Value of $6,000 minus the Actual Cost of $12,000; meaning, we have a Cost Variance [CV] of -$6,000.
Cost Performance Index [CPI]
Is the Earned Value divided by the Actual Cost; expressed in a dollar format. Hence, an Earned Value of $$6,000 divided by an Actual Cost of $12,000, gives you a Cost Performance Index of $0.50 - for every dollar spent on the project.
Estimate at Completion [EAC]
The final element we will look at today, is the Estimate at Completion. This is calculated by dividing the total planned cost of the project, by the Cost Performance Index. For the purposes of this example, we will say the overall cost of the project that this Sprint was in, is $100,000. Therefore, the Estimate at Completion for this project would be the total planned cost of the project of $100,000, divided by the Cost Performance Index of $0.50; giving us an Estimate at Completion of $200,000. In effect, this example shows us that the project cost will double at the current trajectory.
How does this help us?
Well, there are many factors that you can consider from this example. Things that you need to review are:
- Do we need to request further funding, for our project to be successful?
- Have we got the right capability mix in the team to deliver what we planned?
- Have we delivered too much functionality to date and distracted our resources from delivery what is needed?
- Are there too many non-value adding activities distracting the team [e.g. too many meetings, requests for overly detailed reports, etc.] ?
There are many more questions that you can explore, now that you have data to focus the team's and organisation's efforts onto.
This is a high level presentation of Earned Value Management. There are many more data points that you extrapolate, to give you even greater insights in to your projects defined "success" factors. Areas such as Variance at Completion [VAC] and the To Complete Performance Index [TCPI] - all great reference to guide your teams and organisation.
Laevo provide a platform that gives you an automated view of this approach. Contact us to learn how we can transform your business. Would you be interested in learning more about Earned Value Management? Please leave a comment in the section below and we will be in touch with you.