Earned value management cork board

What Is Earned Value Management?

Project management is an essential part of any business. Large projects are often significantly over budget, delayed for months — even years on end, and can be very messy to deal with.

Even the largest projects with the heftiest budgets can be delayed, with their budgets spiraling out of control. Take the 2012 London Olympics, which went nearly $12 billion over budget. As a result, effective project management is crucial to ensure that your projects are on track, and that you’re getting the most out of your investment.

Using the correct project management technique is of paramount importance — and earned value management (EVM) is one method to do this.

A basic overview

Earned value management is a project management technique that uses the concepts of earned value, planned value, and actual cost to track project progress.

It is a systematic approach to measuring whether a project is on track and on budget.

  • The earned value of a project is the sum of all the work that has been completed. EV = Total project cost * % of actual work
  • The planned value is the budgeted cost of all the work that was planned to be completed. PV = Total project cost * % of planned work
  • The actual cost is the sum of all the money that has been spent on the project.

EVM can be used to track progress, identify problems, and make decisions about how to best course correct. It is a valuable tool for project managers and can help ensure that projects are completed on time and within budget.

An example of earned value management

There are lots of words here, so let’s illustrate EVM through an example:

Say you’re managing the construction of a new office building.

The total value of the project is $1,000,000. After one month, you’ve spent $100,000 and the planned value of work completed is also $100,000.

In this case:

  • Your earned value is $100,000.
  • Your planned value is $100,000.
  • Your actual cost is $100,000.

Your earned value management system would show that you are on schedule and on budget. Things are going well!

But let’s say that after two months, you’ve spent $200,000 but the planned value of work completed is only $150,000.

In this case:

  • Your earned value would be $150,000. This is the total cost of the project multiplied by % of actual work.
  • Your planned value would be $200,000. This is the total cost of the project multiplied by % of planned work.
  • Your actual cost would be $200,000. This is the amount of money you’ve spent so far.

But how can we interpret this information, and figure out what actionable steps to take in response?

By conducting variance analysis.

Earned value management report on a laptop

EVM and variance analysis

Your earned value management system for the above example would now show that you are behind schedule and over budget.

This is because you have spent more money than planned, and also have not completed as much work as was originally scheduled.

We can conduct variance analysis to find out the issue, and think up potential solutions to solve the problem.

There are two main variances we can use:

Schedule variances

  • This tells you how far away you are from your original schedule.
  • A negative variance indicates you are behind schedule, a positive variance indicates you are ahead of schedule, and a variance of 0 indicates you are right on schedule.
  • Schedule variance = earned value — planned value.

Regarding this particular example:

  • Earned value = $150,000 as this is the value of the work already completed in 2 months.
  • Planned value = $200,000 as this was the value of work due to be completed by 2 months.
  • We are finding the difference between how much work was due to be completed in two months, versus how much was actually completed in two months.
  • Hence SV = 150,000–200,000 = -50,000.
  • We have a negative schedule variance indicating we are behind schedule.

Cost variances

  • This tells you how far away you are from your original budget.
  • A negative variance indicates you are over your budget, a positive variance indicates you are under your budget, and a variance of 0 indicates you are right on budget.
  • Cost variance = earned value — actual cost.

Regarding this particular example:

  • Earned value = $150,000 as this is the value of the work already completed in 2 months.
  • Actual cost = $200,000 as this was the total cost spent on work done in 2 months.
  • Hence CV = 150,000–200,000 = -50,000.
  • We have a negative cost variance as we have spent 50,000 more than originally budgeted.

There are a few ways to interpret this information.

One way would be to say that you need to speed up the project in order to catch up to the original schedule. This would bring the schedule variance back to par.

Another would be to reevaluate the project scope and cut some features in order to stay on budget. This would bring the cost variance back to par.

Hence conducting variance analysis is a crucial part of earned value management, allowing us to interpret and solve problems associated with the project.

The origins of earned value management

Earned value management arose out of the need for a more accurate and efficient method of project management.

In the early days of project management, the waterfall method was used. This approach is linear and sequential, with each phase being completed before moving on to the next. However, this method has several disadvantages.

One is that it does not take into account the fact that some tasks can be started before others are completed. For example, if you are building a house, you can start construction on the foundation while the architect is still working on the plans.

Another disadvantage of the waterfall method is that it does not allow for changes to be made once a project has started. This can be a problem if the client changes their mind about something or if unforeseen circumstances arise.

The earned value management approach was developed to address these issues.

With this method, each task is assigned a certain value based on its importance to the project. The project manager then tracks the progress of each task and compares it to the value that was assigned. This allows for a more accurate picture of the project’s progress. It also makes it easier to make changes, as the manager can simply adjust the values assigned to each task.

How earned value management works

There are three main aspects to earned value management:

1. Planning — You need to establish a baseline plan, which will include what work needs to be done, how long it will take, and how much it will cost. This is important as it provides a benchmark against which you can measure progress.

2. Tracking — As work is completed, you need to track progress against the baseline plan, so that you can see whether you are on track, ahead of schedule, or behind schedule. This gives you the opportunity to take corrective action at the first sign of falling behind, if necessary.

3. Reporting — You’ll need to generate reports that show how the project is progressing and whether it is on track, behind, or ahead of schedule. These reports can be generated by software platforms that specialize in earned value management, or they can be created manually.

Earned value management paperwork

Why use earned value management?

There are many reasons why you might want to use earned value management on a project. Here are some of the most common benefits:

Helps you to better understand project progress — Earned value management can give you a clear picture of whether a project is on track, behind, or ahead of schedule.

Allows you to take corrective action early — If you can see that a project is behind schedule, you can take steps to get it back on track. A greater focus can be placed on productivity and cost cutting.

Helps you to better manage costs — By understanding where money has been spent and how much work has been completed, you can better control project costs.

Facilitates communication — Earned value management can help to improve communication between project managers and stakeholders by providing clear and concise reports.

Constraints of earned value management

Although earned value management is a useful project management technique, it does have some inherent constraints.

One such constraint is that it only works when there is a measurable deliverable associated with the project. If the project doesn’t have a tangible outcome, it’s impossible to track progress using earned value management.

Additionally, earned value management requires detailed planning at the outset of the project. This can be difficult to do if the project is complex or if the team isn’t experienced in using this technique.

Finally, earned value management relies on accurate data in order to produce accurate results. If the data is inaccurate, the entire analysis will be flawed.

It’s important to note that EVM won’t be a suitable project management technique for every single project, and alternative methods of project management also have to be considered.

Earned value management alternatives

One popular alternative is the agile approach. Agile project management focuses on delivering small increments of functionality throughout the project lifecycle. This approach is well-suited to projects that are complex or where the requirements are likely to change over time.

Another alternative is the waterfall approach. This traditional approach involves completing all phases of the project before moving on to the next one. Waterfall can be a good choice for projects that are well-defined and where the team has a lot of experience.

Various other project management techniques are also available, such as the critical path method, Kanban and Lean methods.

If you feel like these project management techniques would be better suited to a particular project, then it is absolutely fine to veer away from earned value management. There is more than one way to skin a cat, and this certainly applies when discussing project management.

The bottom line

Earned value management can be a very useful project management tool, if used correctly. It can help you to better understand where your project is at, in terms of both cost and schedule, and can give you early warning signs if things are starting to go off track.

Have a look at the benefits of EVM laid out in this article, where it can be used most effectively — and remember to consider other alternatives that may suit your project better.

Happy planning!