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Project Management – Earned Value Management (A Simple Example)

Posted by mgocean on June 2, 2009 in Business Plan, Earned Value Analysis, Estimation, Project Management |

Earned Value Management (EVM or EVA) tracks how the project sticks the project plan in the scale of time and budget. To lie and give very optimistic answers like “Very well”, “we’re progressing through the plan”, “perfect” to the top management and sponsor who asks about the project is also a way. But this method may cause serious problems through the end of project. First of all we must admit the progress of to take the preventing actions.

 

We need 3 data to make Earned Value Analysis; “Planned Value”, “Actual Cost”, “Earned Value”. To explain these values i will keep my example very simple. Suppose that you have a square block of land. Your project is to turn fence to the edges of the land. You handshaked with a worker for 100$ per day and 4 days of work.

 

You started the work. The payment is done at the end of each day. In the 3rd day of work you check the work (bad project management) and you see that only one edge is fenced. You get angry to the worker and you pay only 200$ for 3 days of work instead of 300$.

 

 

In this case; Planned Value is 300$ you planned to turn 3 edges with fence and the cost of it is; 100$ X 3 = 300$

Actual Cost is 200$; everything rather than the money goes out your pockect is lie. You paid 200$ because you wewre mad at the worker.

Earned Value is the work done. The contribution of worker to the project. It is actually 1 edge and 100$ of work.
There are two important indices; CPI(Cost Performance Index) and SPI(Schedule Performance Index). The value 1 for CPI shows that the project progresses on budget. Values smaller then 1 indicates that project is going overbudget. Values greater then 1 indicates that project’s cost is lower than the planned cost. The formula of CPI is “Earned Value / Actual Cost”. For our example 100$ / 200$ = 0.5. Project is overbudget. The estimated overall cost of project is “Planned Finish Cost / CPI” which refers to “400$ / 0.5 = 800$” for our example. Even if you paid only 200$ for 3 days of work, if we continue with this worker the project will cost us 2 times of the value we planned.

 

SPI gives information about the progress of project from the time point of view. The value scale and interpretation is the same as CPI. (just replace budget with time). The formula of SPI is; “Earned Value / Planned Value”. For our example; 100$ / 300$ = 0.33 and this value is dramatical value for a project. As this SPI value when we apply “Planned Finish Time / SPI” -> 4 days / 0.33 = 12 days we see that our project will finish in 12 days wide away from our plan (4 days). This worker is really a lazy one.

Earned Value Analysis, based on this simple example, same logic can be applied to larger projects. Within company, you may get the actual cost value from the salary of the project team, paid promotions to team and extra cost like office rent fees, transportation cost etc.

Another very important point about Earned Value Management is; CPI & SPI values are shaped during the initial stages of the project, as you progress through the project, these values are very difficult to change. For example; (since the project plan is not changed radically) if you have the value around 0.8 for CPI and SPI it needs much more harder and extra work to take the value near 1. For this reason preventive actions must be taken as soon as the deviations are identified. In our example if we had checked the progress in the first day of project not the 3rd day we could see how lazy is our worker earlier and we could change our worker (preventive action) earlier and we could reduce the cost and time spent for the project.

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