Cost Control of Projects: An Introduction to Earned Value Analysis Abstract Earned value analysis is a method of performance measurement. Many project managers manage their project performance by comparing planned to actual results. With this method, one could easily be on time but overspend according to the plan. A better method is earned value because it integrates cost, schedule and scope and can be used to forecast future performance and project completion dates.
It is an “early warning” program/project management tool that enables managers to identify and control problems before they become insurmountable. It allows projects to be managed better – on time, on budget. Introduction Different traditional approach like performance reviews; project audit reports and key performance indicators have the limitation to relate the true cost performance of the construction project. Usually two data sources are used in traditional approaches, the actual expenditures and budget expenditures.
The physical amount of work performed cannot determine by only compare these two data sources and it does not indicate anything about what has actually been performed for the cost spent, or performed according to the schedule. This paper briefly discusses about the Earned Values Analysis (EVA) as the alternative tools to control and monitor the projects. Earned Value Analysis Earned Value Analysis (EVA) is a management tools to evaluate the performance of a project and also indicate what will happen in the future. EVA is an enhancement for the traditional approaches.
Usually traditional approaches only focus on planned expenditures and actual expenditures and EVA goes one step further to examine the actual accomplishment. EVA will give managers more clear picture for the project. Sometimes, it acts like “early warning” tools that manager able to identify and solve the problems before they become insurmountable. It also provides a quantitative basis for the estimate cost and estimate completion time. Brief Earned Value History In 1963, PERT (Program Evaluation Review Technique) started to introduce the basic concept of Earned Value.
PERT was failed but the basic concept of Earned Value was adopted by Department of Defense (DoD) become one of the key elements for the Cost/Schedule Control Systems Criteria(C/SCSC) which established in 1967 to standardize contractor requirements for cost reporting and schedule performance. C/SCSC was compiled by Air Force and 35 statements were defined for the minimum requirements for an acceptable project management system. Due to excessive checklist and paperwork, specialist acronyms, and overly complicated methods and tools, many companies implement the C/SCSC in word only.
However, many researchers still support C/SCSC as effective management tools by statistical evidence. DoD also started to remove excessive and ineffective components of the C/SCSC in the past few years and earned value is being used for government projects and several commercial projects. Description of Earned Value Analysis Terms There are three basic quantities forms being define in Project Management Institute: A Guide to the Project Management Body of Knowledge (PMBOK) for Earned Value Management.
They are listed below: a) Budgeted Cost of Work Performed (BCWP) or Earned Value (EV) – The sum of budgets for completed work and completed portions of open work packages. b) Actual Cost of Work Performed (ACWP) or Actual Cost (AC) – The actual cost for completed work within a given time period. c) Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV) – The sum of budgets for all scheduled work to be accomplished within a given time period. From these three basic quantities forms, we can determine the total budget and also the performance of projects as well as estimation of costs and completion time.
Additional quantities forms are used to schedule performance, program budget and record the costs: a) Performance Measurement Baseline (PMB) – The sum of all BCWS for each time period. b) Budget At Completion (BAC) – The Sum of all the budgets allocated to a program. c) Schedule Variance (SV) – Difference between BCWP and DCWS. d) Cost Variance (CV) – Difference between DCWP and ACWP. This will shows the project either overrunning or underrunning its estimated cost. e) Cost Performance Index (CPI) – The ratio of BCWP to ACWP.
If CPI greater than 1 means that the actual cost is less than planned budgets where else if CPI less than 1 means the actual cost is more than planned budgets. CPI of 1 means the actual cost is matched to the planned cost. f) Schedule Performance Index (SPI) – The ratio of BCWP to BCWS . If SPI greater than 1 means that the actual performed work is more than planned performed work where else if SPI less than 1 means that the actual performed work is less than planned performed work. ) Estimate At Completion (EAC) – A forecast techniques used to measure the total project costs based on project performance. Initially, BAC and EAC will be equal and only start vary when ACWP vary from BCWP. Some common variations for EAC were listed below: 1. Actuals to date plus the estimation for all remaining work. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed, or they are no longer relevant to a change in conditions. 2. Actuals to date plus remaining budget.
This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. 3. Actuals to date plus the remaining budget modified by a performance factor, often the cumulative CPI. This approach is most often used when current variances are seen as typical of future variances. 4. BAC modified by a performance factor, cumulative CPI. This approach is most often used when there are no variances from BAC. h) Estimate To Complete (ETC) – Difference between EAC and AC.
This is the estimated additional cost to complete the project. i) Variance At Completion (VAC) Difference between BAC and EAC. This will show the project will be over or under budget. Following are the summary for the important EVA terms and formula: Table 1: Earned Value Analysis Terms Table 2: Earned Value Analysis Formula and Interpretation Effectively Implementation of Earned Value Analysis (EVA) Different barriers was occurred when implement the earned value analysis into the project. They are a) Lack of comprehension of how the technique works; b) Anxiety concerning the adequate use of the tool; ) Use of the tool requiring a lot of work and time consumption; d) Tools trimming creativity in the use of other strategies; e) Inconsistency of the tool in managerial procedures/business processes; f) Method of control as threat, concerning the freedom of the team; g) Vague and inaccurate purpose and its benefit; h) High cost of its implementation; i) Unsuccessful prior experience in the use of other techniques; j) Low familiarity with the technique. In order to implement Earned Value Analysis successfully, below are the elements much take count into the consideration: )Nature of the project – With the clear and tangible objectives and detailed scope of project, the Earned Value Analysis can be more successful. A tangible, controllable and detailed scope can provide better specification of the work and hence it can facilitate the process of measurement of the required data. Therefore, it can improve the results in the use of Earned Value Analysis. 2)Informality in management and resistance to changes – If the informality in the control of project is high, the resistance in the implementation of Earned Value Analysis also become very high.
When using the tool, this resistance will cause the planned work and control rise in an unjustifiable way. In the way to minimize the resistance found in the implementation of EVA, it is necessary to create different work of management of changes, like providing the training, workshops for the management of projects, gain an efficient support of the professionals and so on. 3)Training – Since the Earned value Analysis involved in a cultural change for process of projects control, the training provided by the people who have the experience with dealing with the tools is needed.
The training also can reduce the resistance of implementation of the tools that originally comes from a low technical knowledge of the tool. 4)Organizational support – In order successfully to implement the EVA, the supporting from senior management is one of the important elements and probably the most important one. Once top management becomes a true believer of EVA, it embarks upon improving EVA processes patiently but firmly. At the same time, management builds a strong supportive culture in which EVA is perceived as a good way to do work in order to manage organizations’ programs and projects effectively.
Recommended steps for the successful implementation of EVA: 1. Obtain top level organization commitment with EVA 2. Education and training of the people in the project in EVA 3. Scope well defined, detailed and identified, with proper WBS and packages 4. Schedule and budget organized according to the WBS 5. Clear Project Responsibility Tables, with clear responsibility descriptions 6. Clear flowchart of activities and relationship with the main participants 7. Cost/Schedule Control System with database and data collection procedures 8.
Suitable reports related to EVA, well planned, analysed and distributed 9. Procedures to consistency analysis and validation of information 10. Lessons Learned – continuous improvement process Conclusion Earned Value Analysis is a better method of program/project management because it integrates cost, schedule and scope and can be used to forecast future performance and project completion dates. It is an “early warning” program/project management tool that enables managers to identify and control problems before they become insurmountable.
It allows projects to be managed better – on time, on budget. References 1. Frank, T. A. (2003) Earned Value Project Management Method and Extensions, Project Management Journal, 34(4), pp. 12-23 2. Brandon, D. M. (1998) Implementing Earned Value Easily and Effectively, Project Management Journal,29(2), pp. 11-18 3. Kim, E. H. , Wells, W. G. & Duffey, M. R. (2003) A Model for Effective Implementation of Earned Value Management Methodology, International Journal of Project Management, 21, pp. 375-382 4. Cioffi, D. F. 2006) Designing Project Management: A Scientific Notation and an Improved Formalism for Earned Value Calculations, International Journal of Project Management, 24, pp. 136-144 5. Lipke, W. , Zwikael, O. , Henderson, K. & Anbari, F. (2009) Prediction of Project Outcome: The Application of Statistical Methods to Earned Value Management and Earned Schedule Performance Indexes, International Journal of Project Management, 27, pp. 400-407 6. Noori, S. , Bagherpour, M. & Zareei, A. (2008) Applying Fuzzy Control Chart in Earned Value Analysis: A New Application, World Applied Sciences Journal, 3(4), pp. 684-690