Hi, you’re listening to ByteSize Project Management, a podcast about all things project, program and IT service management. As always, I’m George and I work for Training ByteSize, a family-run training provider with a passion for project management. Our podcasts will bring you top tips such as how to pass your next accredited exam through to unique industry insights and conversations with industry experts.
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Hi, you’re listening to ByteSize Project Management, a podcast about all things project, program and IT service management. As always, I’m George and I work for Training ByteSize, a family-run training provider with a passion for project management. Our podcasts will bring you top tips such as how to pass your next accredited exam through to unique industry insights and conversations with industry experts.
Enjoy! Hi, my name is Callum, I work for Training ByteSize and today I’m going to talk to you about earned value management. This is a topic that always seems to appear quite complicated on paper, but when you drill down into its key parts, it’s not that tricky.
So let’s go through some stuff. I’ll begin today by looking at a fairly straightforward example that hopefully you can relate to. Earned value management is a way of tracking progress on our project in terms of cost and in terms of schedule.
It doesn’t consider quality though. That’s something we need to consider. But I like to think of earned value management as a sat nav for the project.
If you think about how a sat nav works, I imagine you’ll all have some familiarity with them, either you have them on your phone or maybe in your cars. You type in a destination into your sat nav and it tells you what time it expects you to arrive. If you’re behind time, so if you get stuck in traffic for example, your sat nav will update to reflect that you’re not where expected you to be at that point in time and therefore going to turn up at a different time it originally predicted.
Conversely, if you’re ahead of schedule and you’re ahead of where the sat nav thought you were going to be, it will change the time to reflect you’re going to be earlier than it expected. Hopefully not one of those people who races the sat nav. But this is what earned value management is helping us to do with our project.
It’s checking progress and seeing are we where we expected to be compared to our plans? If not, well how much longer or how much more money is it going to cost us to get what we’re after or how much shorter is it going to take us and how much less money is it going to cost us? So a sat nav for your project effectively.
As earned value management, when you see it in textbooks, it’s always using a simple example and I’m going to use a simple example today to explain it. But it was actually invented to monitor very complicated projects and therefore all the maths and the graphs and everything I’m going to talk about in a bit can be used on complicated projects. So don’t let this simplicity fool you.
It’s a very, very useful tool on multi-million pound projects as well as simple ones. So the example I’m going to use is a wall. I’m going to construct a wall.
The wall is going to cost me for 1000 bricks, which is what I need, 250 pounds for those 1000 bricks. I also need to consider labour and labour costs. So I contact a builder and they say it’s going to take 10 days to build this wall.
They will charge 750 pounds for labour including any additional materials. That’s not per day, that’s overall. So when 1000 bricks at 250 pounds, 750 pounds for labour means I’m planning to spend a total of 1000 pounds on this wall and I’m expecting it to take 10 days to construct.
Earned value management information can be displayed in a couple of different ways. I’m going to use a graph initially and then I’ll start using some numbers and some maths to explain it differently. But for now, let’s look at a graph.
I’m planning to spend after 10 days a total of 1000 pounds on this wall. This value, once I plot it onto the graph, is known as my budget at completion. How much money do I plan to spend by the end of my project?
Hence budget at completion. This is the first question earned value management can help us to answer. What did we plan to do?
Budget at completion is the first step of answering that question. What do we plan to spend overall by the end of the project? Now in project it’s very unusual to be spending all your money at the end or all your money up front.
You tend to find it’s incremental payments throughout the project. And that’s what’s going to happen with this wall that we speak to the builder and they say they’d like a payment of 500 pounds at five days into the project. I can plot that onto my graph as well.
This is known as planned cost or planned value. Those two terms are interchangeable. Planned cost is the same as planned value.
So on my graph here I’ve got a planned value of 500 pounds because I’m planning to spend 500 pounds at that point in time. Notice how I’ve drawn a line between the two points. This line now shows me the rate at which I’m planning to spend money throughout my project.
So the second question that earned value management can help us answer is where are we now? So we are now at five days into this project. The builder sends an invoice through to me for 375 pounds.
I can plot this onto my graph. This is known as actual cost because if I pay this I’ve actually spent this money. If I draw a line this now shows me the rate at which I’m actually spending money on my project.
What would this imply to you then? We planned to spend 500 pounds at five days into the project. That was our original planned cost.
Yet we’ve actually spent 375 pounds. Does this mean we’re under budget? Are we behind schedule?
We don’t know why we’ve only spent 375 pounds. Earned value management is helping us to understand or at least prompt us to ask the question why have we perhaps not spent as much money as we planned to spend because it could mean any number of things. Earned value management isn’t really tracking percentage complete and using that as progress.
It’s really interested in that cost and time. In order to do this then we need to establish how much 25% of the wall is worth to me. This is where the word value comes back into play and why you have the terms planned cost and planned value.
I have with me here one of my guitars and I bought this for 1,500 pounds. What’s the value of this guitar to me then? So sentimentally it’s very important to me.
It’s one of my favorite guitars actually. I’ve used it a lot. I’ve used it many gigs and say it’s priceless.
However sentimental value and how much value I’ve got out of it, using it, playing it at shows and things like that, earned value management isn’t really helping me with that. It’s not tracking sentimental value. What is looking at here is value in terms of money.
So the value of this guitar to me in terms of money is 1,500 pounds because I paid 1,500 pounds for it therefore its value is 1,500 pounds to me. If I go online and see the same guitar for 1,200 pounds the value doesn’t change. It’s still 1,500 pounds to me.
Equally if I paid more, it was advertised for more than 1,500 pounds. Its value would still be the same to me. That is what the value is talking about.
So if I had the completed wall in front of me that would be worth 1,000 pounds. If I’m planning to spend 1,000 pounds on it I expect to get 1,000 pounds worth of value. At this point in time I plan to have 500 pounds worth of value hence the term planned cost or planned value.
I’ve received 25% therefore I’ve received 250 pounds worth of value of my wall which is known as the earned value. I have earned 250 pounds worth of value. I can now plot that onto my graph because it’s now a cost figure.
So a numerical figure I can now plot onto this graph. Now I’ve plotted my earned value onto my graph. I can now compare it to the planned value and the actual cost.
I planned to receive 500 pounds worth of value at this point in time aka 500 pounds worth of wall. I’ve received 250 pounds when I expected to have 500 pounds worth of wall. This means I’m not receiving wall or value of wall at the rate I expected to get it.
This is telling me I’m behind schedule. If I compare my earned value to my actual cost I’ve actually spent 375 pounds but I’ve only got 250 pounds worth of wall for it which now tells me this looks like it’s going over budget. If everything was going okay the graph would all be one straight line.
However, because the lines are all separated it means something isn’t going quite as expected. Graphs are great but some people prefer values especially in spreadsheets and things like that. So let’s look at some formula then to look at the next steps of earned value management to help us understand where are we going.
Before we know where we’re going though we need to understand how we’re doing and I’ve reflected on that a little bit with talking about the graph. But there’s some mathematical formula we can use to show us the same information. The first of which is called cost variance.
So the formula for this is cost variance equals earned value subtract actual cost. If I do that with my project I have an earned value of 250 pounds and actual cost of 375 pounds therefore 250 subtract 375 equals minus 125. Now if everything was going as expected it would be zero.
We do this formula and it would give us zero. That would tell us we’re meeting our estimates or we’re meeting our baseline expectations. However, a minus number tells us it’s going badly.
A positive number going better than expected. We can do something similar for our schedule with what’s called schedule variance which is earned value subtract planned value. So with our project then 250 is the earned value, the planned value is 500 so therefore the formula is going to be 250 subtract 500 equals minus 250.
It’s a minus number therefore this would tell me things aren’t going as expected. Before we can look at where we’re going in terms of cost and in terms of schedule and what this delay in this over budget currently means to us and what it will mean for us if we continue like this we need to work out how efficient we’re being. This leads to performance indexes or performance indices depending on who you speak to.
So the first of these performance indexes is called cost performance index. Formula is very similar we just change it slightly to add a division instead of subtract. So we have cost performance index equals earned value divided by actual cost.
If we look at my project to build this wall 250 is the earned value actual cost is 375 250 divided by 375 equals 0.67 which I’ve rounded up to make it a bit simpler. With the performance index this formula should give us a result of 1 if everything is going to plan. Anything below 1 isn’t going very well anything above 1 means it’s going better than expected.
If we look at schedule performance index then again a very similar formula to before. Schedule performance index equals earned value divided by planned value. Looking at my wall project then 250 divided by 500 equals 0.5.
If it was going okay this would show me 1. Less than 1 0.5 means things aren’t going as expected. We may be asked what our percentage efficiency is going to be.
Now this is fairly easy to calculate. We’ve got a 0.67 number here so cost performance index is 0.67 all you need to do is times that by 100 to establish how efficient we’re being. So 67% efficient 0.67 times 167.
We can look at that schedule performance index as 0.5 as well. If we times that by 100 it tells us we’re being 50% efficient in terms of schedule. We want to be 100% efficient.
Less than 100 things aren’t going quite to plan. This now allows us to establish efficiencies and performance indexes and things like that. We can now think about if things continue like this what will this look like.
The formula to help us calculate where we’re going. So estimate at completion which is our new predicted cost. We take our original planned cost of budget at completion and we divide that by a cost performance index.
Looking at this project then our budget at completion was 1000 pounds. Our cost performance index was 0.67. If we 1000 divided by 0.67 equals just shy of 1500 pounds.
So that tells me I’m going to need another 500 pounds to deliver this project if things continue like this. Let’s do the same thing for scheduling then. So we have an estimated completion date which will equal our duration so our planned duration of 10 days on this particular project and we divide that by our schedule performance index.
So 10 days divided by 0.5 equals 20 days. So this now tells me if things continue like this it won’t take 10 days it’s going to take 20. Earned value management isn’t a magic wand making problems go away.
It’s really just a tool that helps us make decisions earlier than perhaps if we were reacting to them. It’s a proactive way of managing your project. So what does earned value management allow us to do?
Well first off think about where we are in this project. We’re halfway through and we know now things aren’t going very well because we’re tracking it. So we’ve got this early warning that earned value management has helped give us.
It allows us to then make decisions preemptively and proactively rather than reactively. In projects as you’ve been exploring this stuff you may have encountered these things called constraints. We often talk about triple constraints in project management and these are often portrayed on a triangle.
These three things are quality, time and cost. So we now can make decisions in terms of what’s most important to us here. For example our project may be a quality driven project.
It might have very specific, very set specifications it has to meet otherwise it won’t be a success. In which case then in order to achieve this specification we’re going to have to probably spend another 10 days over what we plan to have and another £500 more than we expected to spend if that quality is paramount to us. Equally though if the deadline if we have got any more time in the calendar than those 10 days we originally planned for then how much will we get for 10 days or how much more money we’re going to have to throw at it to get it done in 10 days.
Or if the £1000 budget was all we have in the kitty as it were then how much will we get for £1000 or how much longer is it going to take us or what specifications or scope do we sacrifice in order to get it in budget. Again we’re making these decisions proactively rather than reactively. That is what earned value management helps us to do.
It’s not a magic wand, it just helps us make decisions. So that’s it for this episode of ByteSize Project Management. We hope you’ll tune in again soon for another edition.
Until then you can find out more about the certifications and training packages we offer on our website trainingbitesize.com. Thanks very much for listening and we’ll see you again soon.
