Earned value management
Earned value management is a project management technique for estimating how a project is doing in terms of its budget and schedule.
Earned value compares the work the project team has finished so far with the estimates they made in the beginning of the project. This gives a measure of how far the project is from completion. By extrapolating from the amount of work already put into the project, the project manager can get an estimate on how much resources the project will have used at completion.
This technique is based on the critical path concept. An alternative project performance measurement and management technique is critical chain, which utilizes buffer management instead. The reason is that the earned value management method does not distinguish between the progress on the project constraint (i.e. its critical chain) from progress on the non-constraints (i.e. other paths in the project network). This can sometimes lead the project manager to expetite non-critical work at the expense of critical work in pursuit of better earned value measures, resulting in delayed project completion. This is a case of local optimalization, resulting from a lack of subordination of local measures to global measures.
To apply earned value to a project, the project manager needs the following primary data:
- a work breakdown structure (WBS): a list of all tasks broken down in a hierarchical structure
- project master schedule (PMS): a Gantt chart of what task will be done when and by who
- budgeted cost of work scheduled (BCWS) or planned value: for every period the budgets of the tasks that were planned to be finished in this time unit
- budgeted cost of work produced (BCWP) or earned value: for every period the budgets of the tasks that actually finished in this time unit
- actual cost of work produced (ACWP) or effort spent: for every period the actual costs of the work
- budget at completion (BAC): sum(BCWS), the total budget we estimate to spend to complete the project
- total funding available (TFA): the budget the client has committed to
- negotiated period of performance (NPOP): the time period the client has agreed upon with the project manager
- planned period of performance (PPOP): the time period we think we can finish the project
- cost accrual ratio (CAR): the total average cost per person per time unit
- forecast of remaining work (FCST) or current schedule: the work that still needs to be done after this time unit
From this data, the project manager can calculate
- the cost variance (CV): BCWS - ACWP, greater than 0 is good
- the schedule variance (SV): BCWP - BCWS, greater than 0 is good
- the cost performance index (CPI): BCWP/ACWP, greater than 1 is good
- the schedule performance index (SPI): BCPW/BCWS, greater than 1 is good
- the estimate at completion (EAC): sum(ACWP) + (BAC - sum(BCWP)) / CPI, an estimate of the budget spent at the end of the project