Earn Value Management (EVM)

EVM:-
EVM emerged as a financial analysis specialty in US Government programs in the 1960s. In the late 1980s and early 1990s, EVM emerged as a project management methodology.
An overview of EVM was included in first PMBOK Guide First Edition in 1987 and expanded in subsequent editions. Efforts to simplify and generalize EVM gained momentum in the early 2000s.

Purpose:- Why EVM?
According to research performed by the Standish Group, an international IT research firm with an expertise in project and value performance, 71 percent of IT projects are either over budget, over time, or under scope. Based on this historical data along with the troubling times of the U.S. economy, it is anticipated that CFOs and Procurement Managers will begin awarding contracts to firms that demonstrate a strong capacity to effectively manage project costs. Earned value management is a project management technique that promotes timely performance measurement and cost management controls.
EVM helps in:
1. Integrates work scope, schedule, cost with risk management and helps in objective progress measurement.
2. Helps in predict future performance from current trends.

EVM Elements:
PV(Planned Value) or BCWS = Hourly Rate * Total Hours Planned or Scheduled
AC (Actual Cost) or ACWP = Hourly Rate * Total Hours Spent
EV(Earned Value) or BCWP = Baselined Cost * % Complete Actual
Cost Variance (CV) = Earned Value (EV) - Actual Cost (AC) OR CV = BCWP - ACWP
CPI(Cost performance index) = Earned Value (EV) /Actual Cost (AC) OR CPI = BCWP / ACWP

Schedule Variance (SV) = Earned Value (EV) - Planned Value (PV) or SV = BCWP - BCWS

SPI (Schedule performance index) = Earned Value (EV) /Planned Value (PV) or SPI = BCWP / BCWS

BAC(Budget at completion) = Baseline Effort-hours * Hourly Rate

Estimate At Completion (EAC):-
Estimate At Completion (EAC) is the estimated cost of the project at the end of the project.
There are three methods to calculate EAC
Variances are Typical - This method is used when the variances at the current stage are typical and are not expected to occur in the future.
AC + ( BAC -EV )
Past Estimating Assumptions are not valid - This method is used when the past estimating assumptions are not valid and fresh estimates are applied to the project.
AC + ETC ( Estimate to complete )
Variances will be present in the future - This method is used when the assumption is that the current variances will be continue to be present in the future.
AC + ( BAC- EV ) / CPI

Variance At Completion (VAC):-
VAC = BAC - EAC

EVM Implementation:-

1.Establish WBS:-WBS is useful for analyse project progress.

2.Identify the activites:-Divide the WBS up to activity levels. Output of this step wiil be list of activities.

3.Schedule Activities:- Once you have activity list, using network diagraming methods perform activity sequencing. You may use CCPM for this.

4.Cost Allocation:- Cost bugdeting and allocation for each activity is very important.

5.Baseline Formation:- These cost and schedule baselines should be saved, against which performace is analized.

All above are planning activities. Once this is compelete and excecution is started, monitoring and controlling is very impotatnt.

6.Progress updation:- This activity should be periodic. Update the task progress, completion. Here take the caution to not to be subjective. Following techniques can be used to progress measurement:
•Fixed Formula :
The Fixed Formula method for determining progress applies to work packages and control
accounts that span a short period of time (within an accounting period, < 3 months). This method applies a percent complete to the start and finish of an activity. Generally, the percentages used in the formula are 0/100, 50/50, or 25/75. 0/100 - Nothing is earned when activity starts but 100% of budget is earned when completed 50/50 - 50% is earned when activity starts and the balance is earned on completion 25/75 - 25% is earned when activity starts and the balance is earned on completion
•Milestone Weights: The next method of calculating EV that we will discuss is Milestone Weights.The Milestone Weighting method assigns budget value to each milestone. Not until
full completion of each milestone is the budget earned. Milestone Weighting is used as a method for work packages withlong term durations and ideally should have milestones each month or accounting period.
•Milestone Weights with % Complete: The Milestone Weighting with Percent Complete method assigns budget value to each milestone, and it is earned based on the percent of work
Completed against each individual milestone
•Units Complete: The Unit Complete method uses a physical count to determine what is
earned. To use Unit Complete you must have units that are identical or similar and they must
have the same budget value
•Percent Complete: The Subjective Percent Complete method applies a percent complete to a budget value to determine what is earned. The percent complete value is determined by the Control Account Manager or other designated individuals. The percent complete is applied to the Budget at Completion (BAC) for a given activity to determine the current and cumulative EV
•Level of Effort:- The Level of Effort (LOE) method is based on the passage of time. A monthly budget value is earned with the passage of time and is always equal to the monthly planned amount. When using LOE, the PV is always equal to the EV This method is usually used for accounts that are more time related than task oriented.

7.Actual cost:- Update actual cost required for each task completion for effective analysis.

Using above inputs, calculate Schedule variance, Cost variance, Cost performance Index, Schedule perforemance index. Estimates to complete depends upoun trends be in exection.