quantmleap

In the previous post (Earned Value Management for Dummies – Part 1) I outlined the details of a renovation project and your attempts to figure out whether or not the renovation work on your house is progressing well.

After one week of work you are presented with the following facts:

• Actual Cost (AC) = $19,000
• Planned Value (PV) = $20,000
• Earned Value (EV) = $16,000
• Cost Performance Index (CPI) = EV / AC = $0.84
• Schedule Performance Index (SPI) = EV/PV = 0.8

As explained previously, the renovation work on your house is not only over budget (as the cost to deliver the work output is larger than the value of the output) but is also behind schedule (as the value of the work produced is below the value of the work planned).

You are now in an urgent need to understand the impact that these figures have on the project in its entirety. More specifically you would like to obtain a projection of:

1. The total cost at completion, based on project performance to-date.
2. Estimated completion date.

The budget you’ve assigned to this work is $200,000 (based on $20,000 per room x 10 rooms). In Earned Value ‘speak’ this value is called Budgeted At Completion (BAC) and it represents the originally planned cost for the project. From the CPI you know that each $1 invested produces a returned value of $0.84. Since the total value of the final renovation work hasn’t changed and is still $200,000, you figure out that the level of investment required for producing that value is $200,000 / $0.84 = $238,000. In Earned Value ‘speak’ this value is called Estimate at Completion (EAC) and in its simplest form is calculated as BAC/CPI.

Regarding your 2^nd question: The Earned Value set of tools does not adequately address duration issues, as it primarily cost focused. I will deal with this issue, in greater detail, in one of my next posts, but at a simple level you can derive an indicative end date based on the following technique. From the SPI calculation you already know that the project is progressing at a pace that is 80% of that planned. Given that the project was initially planned to be finished in 10 weeks, and given the slower pace to-date, you estimate that the total time taken to complete all work planned will be 10 / 0.8 = 12.5. This means that the renovation will be complete after a total number of 12.5 weeks, or 2.5 weeks after the initial planned completion date. Further elaboration on this question will be available in my next post titled “Earned Schedule (ES) for Dummies”.

Armed with the above information you produce the following chart:

• The blue line represents your projected accumulated costs to the end of the project.
• The Red line represents your budgeted costs. Notice that as your project was planned to complete at the end of the 10^th week, your accumulated planned cost remain static and do not change after that point in time.
• The Green line represented the projected accumulated earned value. Given current performance, ‘planned’ earned value will only be achieved after 12.5 weeks of work, at which time the Earned Value will reach the planned value of $200,000.

To summarize:

At its core, Earned Value Management makes use of five variables:

• Budgeted At Completion (BAC) – how much was the originally planned to cost
• Planned Value (PV) – The value of the work that should have been complete during a period of time.
• Earned Value (EV) – The value of the work that was actually complete during a period of time.
• Actual Cost (AC) – The actual value of the cost incurred during a period of time.

Using these five variables you could derive the following parameters:

• Cost Performance Index (CPI) – A Return on Investment (ROI) indicator, determining the actual value produced against each $1 of cost incurred. Calculated as EV/AC. CPI > 1 is good news, whereas CPI < 1 might require corrective actions.
• Cost Schedule Index (SPI) – the project speedometer, indicating whether the rate of actual project production is faster or slower than the planned progress. Calculated as EV/PV. SPI > 1 is good news, whereas SPI < might require corrective actions.
• Estimate At Completion (EAC) – Projection of the total cost at completion based on performance to-date. Calculated as BAC/CPI.

This concludes today’s post but there’s much more to EVM than outlined here. In the next post I will attempt to explain some issues with EVM and introduce the next item of discussion, which will be “Earned Schedule (ES) for Dummies” .

I value your comments, if you have any thoughts on the above please join in and share with others!

Related posts:

1. Earned Value Management (EVM) for Dummies – Part 1
2. Implementing Earned Value Management in Agile
3. Monte Carlo Simulation for Dummies