EARNED VALUE MANAGEMENT SYSTEM A Project Performance Tool By Roy T. Uemura, PMP, P.E., MBA Project Management Consultant Project Professionals, LLC

How Is Your Project Doing? Ahead of schedule? Within your approved Budget?

How Is Your Project Doing? What is your cost estimate at completion? Will you be ahead or behind the scheduled completion date?

Agenda Explanation of Earned Value Management (EVM) The traditional “Two Dimensional System” of Evaluation EVM “Three Dimensional System” of Evaluation Critical Variables in EVM EVM Formulas Applying EVM on projects Example

Earned Value Management Method for integrating scope, schedule, and resources, for measuring project performance. Compares what was planned with what was actually spent with what was actually “earned”

Earned Value Management Developed in the 1960’s Popular method for reporting and controlling project in the Department of Defense A common language to report progress and cost against a project Helps answer the questions: Are we on schedule? How much did the work we do cost? Are there variances? Based on these trends, how much will it cost by the end of the project?

Early Warning System “… based on the Project Performance Plan and Project’s Actual Performance against the Plan, the project will likely take this much time to finish, and spend this much money.”

Traditional System (Two Dimensional) Cost: compares what was planned to be expended versus what was actually expended Time: Compares the date you are on a project versus when the project is to be completed Production: Compares how much work was planned to be completed versus how much was actually completed.

Earned Value (Three Dimensional) 1. Actual work that was “earned” versus 2. Work that was accomplished 3. Work that was scheduled to be accomplished

Critical Variables to EV Performance Indices Quality of the project baseline plan Actual performance against baseline plan Management’s determination to control (change) the final results

Project Baseline Basis of performance measurement Represents technical, cost and schedule objectives of the project Cashflows Outside Material Outside Services

Scope of Work The scope of work of entire project must be defined The Work Breakdown Structure (WBS) identifies and groups major deliverables Integrate scope with budget and schedule.

Performance Measurement Methods Fixed formula by task: 0/100 %, 25/75%, 50/50 % Weighted Milestones Percent complete based on specific work (milestone) accomplished. Percent Complete Increment completed / total activity or task Equivalent Completed Units

Cost Account Plan

Project Description Installed approximately 14.5 miles of transmission line of which about 4,000 feet was installed underground. Installed 93 steel poles: 52 poles were direct buried and 41 were mounted on pier foundations. The project was to install about 14.5 miles of line to connect our Waialua and our Kuilima Substations. This involved installing about 4,000 ft. of underground lines which was located within the Haleiwa Special Design District. Just to give you some numbers, we installed 93 steel poles of which 41 of these poles were installed on pier foundations. Steel pole heights ranged from 40 - 111 ft AGL Foundations: about 5 ft diam. x 15 ft deep. (Largest hole: 7 ft. diam. x 23 ft. deep)

Kuilima The new Waialua-Kuilima line will provide a new source of power to Kuilima where the power could go East or West from Kuilima Substation in the event of a fault on the existing 46 kV system Waialua

Visual Progress Report Foundation: Dug Concrete Poured Pole Erection: Lines Strung: Trench: Conduit Installed: Cable Installed: Trench Covered:

Kuilima The new Waialua-Kuilima line will provide a new source of power to Kuilima where the power could go East or West from Kuilima Substation in the event of a fault on the existing 46 kV system Waialua

Controlling Change Essential: Change Management Control System in the Project Plan prevents incorrect, inappropriate, or unauthorized changes to the project. Inform appropriate stakeholders of authorized changes to the Baseline (scope/quality, schedule, cost)

EVM Input Data Required PLANNING PHASE Planned Value (PV) Budget At Completion (BAC) % Complete - Planned EXECUTING & CONTROLLING PHASES Actual Cost (AC) % Complete - Actual

Calculations from Input Data Earned Value - EV Cost Variance - CV Schedule Variance - SV

Calculations for Analysis Cost Performance Index - CPI Schedule Performance Index - SPI Budget at Completion - BAC Estimate to Completion - ETC Estimate at Completion - EAC To Complete Performance Index - TCPI

Primary Data Elements PV (Planned Value) The value of the amount of work that was planned to be accomplished on a task (or a project) as of a certain date in the baseline plan. BAC (Budget at Completion) Total cost of a task (or project) according to the baseline plan.

Primary Data Elements (cont’d) AC (Actual Cost) The actual amount of money spent on a task (or project) as of a certain date.

Performance Analysis EV = % Actual Complete x BAC EV (Earned Value). The value of the amount of work actually completed on a task (or project) as of a certain date, according to the baseline plan. EV = % Actual Complete x BAC

Performance Analysis (cont’d) CV (Cost Variance) The difference between the value of work that was actually completed (EV) on a task (or project) and the cost that was actually spend (AC) on the task (or project) as of a certain date. CV = EV - AC (+$ = spending less than planned)

Performance Analysis (cont’d) SV (Schedule Variance) The difference between the value of work that was actually completed (EV) on a task (or project) and the work that should have been done (PV) as of a certain date. SV = EV - PV (+$ = Ahead of Schedule)

Performance Analysis (cont’d) CPI (Cost Performance Index) The ratio of the value of work actually completed (EV) on a task (or project) and amount actually spent (AC) on a task (or project) as of a certain date. CPI = EV/AC (>1 = Spending less than planned) CPI: For every project dollar spent, $x.xx in physical work was accomplished, CPI is a powerful tool to predict the final costs needed to finish a job.

Performance Analysis (cont’d) SPI (Schedule Performance Index) The ratio between the value of work that was actually completed (EV) on a task (or project) and the work that should have been done (PV) as of a certain date. SPI = EV/PV (>1 = Ahead of Schedule) SPI: For every dollar of physical work planned to accomplished, $x.xx was completed. SPI can be a valuable tool to forecast completion date for the project.

Performance Analysis (cont’d) ETC (Estimate To Completion) The forecasted cost of the remaining task (or project) is calculated by CPI or CPI x SPI ETC = Remaining Work / CPI = (BAC - EV/ CPI or ETC = Remaining Work/ (CPI x SPI) = (BAC - EV/(CPI x SPI)

Performance Analysis (cont’d) EAC (Estimate at Completion) The value expressed in either dollars or hours to represent the projected final cost of work when completed. The EAC equals the actual costs (AC) incurred plus the estimated costs to complete the remaining work (ETC). EAC = AC + ETC

Performance Analysis (cont’d) Ranges of Estimate at Completion High-End Projection (Cumulative CPI x SPI) EAC = AC + (BAC - EV) / (CPI x SPI) In-Between Projection (80% CPI x 20% SPI) EAC = AC + (BAC - EV) / (0.8 CPI x 0.2 SPI) Low-End Projection (Cumulative CPI) EAC = AC + (BAC - EV) / CPI

To Complete Performance Index TCPI: Project performance which must be achieved on all remaining work in order to meet the financial goal by management TCPI = Work Remaining / Funds Remaining = (Total Budget - Earned value) (BAC - Actual Costs) = (BAC - EV) (BAC - AC)

PMP Exam EAC = BAC Estimate At Completion (EAC) CPI Estimate to Complete (ETC) ETC = EAC - AC Rita Mulcahy, PMP Exam Prep 5th Edition (2005)

Example Time: 4th month of 10 month schedule Budget at Completion: BAC = $10,000 Planned Value: PV = $4,000 Actual Cost: AC = $3,800 Actual % Complete: 36% Earned Value: EV = 0.36 x $10,000 = $3,600

Earned Value Analysis Status Date BAC 1 2 3 4 5 6 7 8 9 10 Time $10,000 $5,000 PV = $4,000 AC = $3,800 EV = $3,600 1 2 3 4 5 6 7 8 9 10 Time

Performance Analysis Traditional Analysis Cost Variance:= Planned Expenditure - Actual Cost CV = PV - AC CV = $4,000 - $3,800 = $200 (under spent by $200) Earned Value Analysis CV = EV - AC CV = $3,600 - $3,800 = -$200 (spending more than planned for work performed) SV = EV - PV SV = $3,600 - $4,000 = -$400 (less work was done than planned)

Performance Analysis Cost Performance Index (CPI) CPI = EV / AC CPI = $3,600/$3,800 = 0.95 (<1, for every $1 spent, only $0.95 in physical work was done) Schedule Performance Index (SPI) SPI = EV / PV SPI = $3,600 / $4,000 = 0.9 (<1, for every $1 of physical work planned, only $0.9 was done)

Performance Analysis ETC = (BAC - EV) / CPI Estimate To Complete (ETC) ETC = (BAC - EV) / CPI ETC = (BAC - EV) / (CPI x SPI)

Performance Analysis EAC = AC + [(BAC - EV)/(CPI x SPI)] Estimate At Completion (EAC) EAC = AC + [(BAC - EV)/(CPI x SPI)] = 3,800 + [(10,000 – 3,600) / (0.95 x 0.90)] = $11,285 (high end) EAC = AC + [(BAC - EV) / CPI] = 3,800 + (10,000 – 3,600) / 0.95 = $10,537 (low end)

Performance Analysis To Complete Performance Index (TCPI) TCPI = (BAC - EV) / (BAC - AC) TCPI = ($10,000 - $3,600) / ($10,000 - $3,800) TCPI = $6,400 / $6,200 TCPI = 1.03

Analyzing Data for Trends $10 $5 $0 ($5) Schedule Variance ($10) ($15) Cost Variance ($20

Earned Value Analysis Time EAC $9.5 M CPI EAC ($7.5 M) SPI Baseline Budget CPI & SPI = 1 1.0 Time

Performance Report

Float and Management Reserves The project manager should control contingency reserve and schedule float The work at hand expands to fill the time available Expenditures will rise to meet the budget. The remaining “management reserves” should be added to EAC until such time when the reserve is no longer needed.

Earned Value Management System Performance Management Accurate Baseline Estimate Measure Performance against the Plan Analyze variances to Plan Assess impacts to Overall Plan Identify corrective actions Implement the corrective actions

Questions?