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 41.66% of its financial resources according to the latest financial report. The project planned to achieve a 33% progress on month four. 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 the project should have spent based on plans. Or Planned Value (PV).
· The actual cost of activities completed is $500,000 (from financial reports = 41.66 x 1,200,000). 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 - $400,000 = ($100,000). A negative number means the project is behind the planned schedule.
Another way to calculate the variance is by the Schedule Performance Index or SPI = EV/PV, SPI = $300,000/$400,000 = 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, CVI = $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 than the value of the activities delivered to date, at this rate it will need more finds to complete the project.
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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