PM4DEV Blog

Ideas, suggestions and general thoughts about project management for development.

What is Earned Value Analysis?

Earned Value Analysis (EVA) is a powerful tool to measure the performance of a project against it original plans. It measures the budget and schedule performance based on the current status of the project. Earned value analysis is able to provide accurate forecasts of project performance problems, which is an important contribution for project management.

Here is a simple example that describes how is it used during a project.

A 12-month project is in its 4th month, has accomplished 25% of its activities but has spent 41% of its financial resources according to the latest financial report. The project is at 33% planned progress. How can a project manager know if his project is on track or not? Total cost of the projects is $1,200,000.

First the project manager will need to do a basic analysis,

· The cost of activities planned in the 4th month is $400,000 (33% x 1,200,000), i.e. what we should have spent based on plans. Or Planned Value - PV

· The actual cost of activities completed is $500,000 (from financial reports). The actual expenditures on month 4. Or Actual Cost – AC

· The cost of activities delivered is $300,000 (25% x 1,200,000), the cost of all activities completed to date. Or Earned Value - EV

The above elements are part of the Earned Value analysis; it is a performance measurement that compares the amount of activities (work) that was planned with what was actually performed to determine if cost and schedule are proceeding as planned.

To know if the project is on schedule calculate the following: 

Schedule Variance (SV) = EV – PV, SV = $300,000 - $400,00 = ($100,000). A negative number means the project is behind schedule.

Another way to calculate the variance is by the Schedule Performance Index or SPI = EV/PV, SPI = $300,000/$400,00 = 0.75, a value less than 1 means the project is behind schedule.

To know if the project is on budget calculate the following:

Cost Variance (CV) = EV –AC (or the difference between earned value and the actual costs. For this example. CV = $300,000 - $500,000 = ($200,000). The negative result indicates a budget overrun. Another way is by the Cost Performance Index (CVI) = EV/AC, = $300,000/$500,000 = 0.6. A value less than one means the project has a budget overrun; in other words, the project has spent more money that the value of the activities delivered to date.

The main benefit of using the EVA is to provide early warning signs on the health of the project and take corrective actions when there is still time to do it.

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Cost Accounts to Develop a Project Budget

Many projects have one overall budget that includes all the project labor costs, travel costs, materials costs, etc. This works fine for smaller and medium-sized projects. However, as a project gets larger it helps to have the overall budget broken down into smaller subsets. This is similar to the concept of breaking down a project with a long duration into a set of smaller projects. Having your budget allocated at a lower level allows you to keep better control of the details and it may point out potential budget trouble quicker than having everything rolled up into one consolidated project budget.

Cost accounts are used to allocate the budget at a lower level. Cost accounts are formally established in your organization's General Ledger so that your budget is actually allocated in each detailed cost account and the actual project expenses are reported at that level as well. The cost accounts can be established in a couple of ways. One way is to simply divide the different types of costs in separate cost account budgets. In this approach, the project manager could have a cost account for internal labor charges, external labor charges, travel costs, per diem costs, training costs, material costs, etc. Typical cost accounts are used to track budget expenses in the NGO financial system, also called the chart of accounts (COA).

  • 50XX - Personnel Costs
  • 51XX - Professional Services
  • 52XX - Equipment Purchases (Expensed)
  • 53XX - Materials, Services, and Consumables
  • 54XX - Travel and Transportation
  • 55XX - Occupancy
  • 56XX - Financing/Depreciation/Miscellaneous
  • 57XX - Grants/Sub-grants
  • 58XX – Contributions in Kind

Another way to set up the cost accounts is based on the WBS. After completing the WBS, the project manager can create cost accounts for each group of related activities. Another option is to set up a separate cost account and budget for each phase, stage, or outcome. This method allows tracking the costs to achieve a specific objective or milestone, something that the other method will not be able to do as it tracks costs associated with accounting codes.

If the cost accounts are for related sets of work on the WBS, the project manager has options to track different costs. The various types of costs can be tracked with sub-account numbers within the cost account. The more detailed the cost accounts are, the more work will be required to set them up and allocating and tracking the cost account budgets. However, if the project is large and costly, the project manager will definitely want to utilize some aspects of this technique.

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