Earned Value
- Date: 11 January, 2016
A lot of project professionals have heard of earned value - most of the time as a method, as in the "earned value method." If fact, many project professionals use the earned value method as a tool to show project status (cost variances, schedule variances, cost efficiency, and schedule accomplishment efficiency) and to forecast the future.
One word of caution about using the earned value method for determining schedule status and forecasting schedule: the earned value method normally ignores critical path considerations. So, the earned value method could show that, in general, you are ahead of schedule; and at the same time, a critical path analysis could show you are behind schedule. The purpose of this article is to discuss how one determines earned value (EV) - one of the three data points needed to use the earned value method.
First off, let's establish what earned value is. Earned value is a measurement of work performed. In other words, earned value, or EV, is the dollar-value of work accomplished in a defined period of time. This should be reasonably easy to determine (calculate), except for the most complex of projects. The first part of the term "earned" refers to how many dollars of work were completed by the project during the evaluation period. In other words, I "earned" the value of project work actually accomplished. For example, if I was going to use the "percent complete" method of calculating earned value, then:
Project Planning Period Being Examined: Period One
| Activity | Planned Value $ | Complete % | Earned Value $ |
|---|---|---|---|
| A | 1,000 | 100 | 1,000 |
| B | 4,000 | 100 | 4,000 |
| C | 3,000 | 100 | 3,000 |
| D | 5,000 | 80 | 4,000 |
| E | 2,000 | 50 | 1,000 |
| F | 5,000 | 20 | 1,000 |
| G | 5,000 | 100 | 5,000 |
| Total, Period One | 25,000 | N/A | 19,000 |
Project Planning Period Two
| Activity | Planned Value $ | Complete % | Earned Value $ |
|---|---|---|---|
| H | 2,000 | 0 | 0 |
| I | 3,000 | 100 | 3,000 |
| J | 4,000 | 10 | 400 |
| K | 5,000 | 0 | 0 |
| L | 2,000 | 0 | 0 |
| M | 1,000 | 60 | 600 |
| Total, Period Two | 17,000 | N/A | 4,000 |
The above two charts show what activities (from the network diagram and or schedule) and their value (from the bottom-up cost estimate) the project planned to accomplish during period one and period two. There would be similar charts for all of the remaining periods of the project.
At the evaluation time, this project would receive credit for all work accomplished during planning period one and any work that was completed outside of planning period one, such as activities I, J, and M from planning period two. So, the dollar value of work "earned" during planning period one is $23,000 ($19,000 + $4,000). The reason $4,000 is included from period two is because the associated activities were actually accomplished in period one (ahead of schedule).
The above example used a percentage of activity completion as the method to determine earned value. There are several other methods for determining earned value. The project cost management plan should have told you which method would be used on which activities, based on the type of project.
Various methods and their advantages and disadvantages are:
| Method | When to Use | Drive People To | Advantages | Disadvantages |
|---|---|---|---|---|
| % Completion (tangible) | Any project | Most accurate | Takes the most time to determine, could be subjective | |
| 0% / 100% (fixed formula) (tangible) | A large number of small value activities | Complete activities | Easy to use, drives people to complete activities | Under-reports true EV and over-reports EAC until late in the project |
| 20% / 80% (fixed formula) (tangible) | Any project | Possibly the second most accurate | Have to keep up with status of EV for each activity | |
| 50% / 50% (fixed formula) (tangible) | Start activities | Easier to keep up with than 20% / 80% | Over-reports true EV and under-reports EAC until late in the project | |
| Level of Effort (intangible) | Completion cannot be accurately determined, such as administrative support of the project | Easy to use on things like project management and a PMO | Completion might not be linear | |
| Apportioned Effort (intangible) | Effort applied to project work that is not readily divisible into discrete efforts for that work, but is in direct proportion to measurable work effort | Easy to use on things like quality assurance and inspection activities | Usually, the estimate is subjective. Produces no schedule variances and might overestimate schedule completion. | |
| Weighted Milestones | On longer term projects or activities having intermediate tangible outcomes | Easy to calculate | Weights might be subjective. Not many data points. |
Other factors that may apply in determining which of the above methods to use may include:
- Ability to measure discrete effort
- Activity size (value)
- Activity duration
- Number of measurement periods an activity spans
- A combination of #2 and #4
Project personnel have many tools and techniques at their disposal to determine earned value. The method or methods picked are usually dictated by the project's characteristics. Once determined, and several methods can be used on a given project, one should use that same method for like-activities throughout the project. In today's world, there are many software packages that will calculate earned value if you feed it:
- The schedule
- Activity cost estimates
- EV method to be used
- Actual completion data