baselines, project forecasting, and the role of the cost Account Manager. Or get everything together in the ebook found at the end of this post.
Earned Value Management
Earned value management is an analytical approach for determining the current cost and schedule status of a project and for forecasting the final cost of a project. It combines scope, schedule and resource management into one set of measurements. When used properly it will simplify and reduce the effort needed to provide effective project management control.
Earned Value Management is based upon the comparison of three different perspectives on a project. The first perspective is the project planned value (PV) which is the estimated cost of each activity time phased according to the project schedule. The next baseline is the earned value (EV) which is the estimated cost of the project activities that have been completed. The final baseline is the actual cost (AC) which is the amount of money spent completing the work that has been done on the project. These baselines are discussed in more detail in the blog post, “Demystifying Earned Value – the Baselines.”
Projects hardly ever go exactly according to plan (at least I have never had one that went exactly to plan). Some things go better than expected, some go worse. Some tasks start early, some late, and some are just different. Variance occurs when the actual situation is different from the planned or expected situation. In projects, variance analysis applies to schedule variance and cost variance. Variance analysis helps the project team understand why things are different than expected, and more importantly, what they should do about it, if anything.
Variance is always backward looking. It analyses what has happened. (We will cover forecasting in another blog.) We typically are concerned with two different time horizons when determining project variance. One is the variance since the start of the project, known as cumulative variance. This variance will be focused on trends. The second is the variance in the current month or week. This is focused on recent occurrences. Most earned value reports will show both variances.
Cost variance is the under-run or over-run of actual costs (AC) as compared to the estimated project costs of the work that has been completed (EV). When evaluating project cost variance, it is important to exclude the effect of tasks that are ahead or behind schedule, which is why EV is used instead of PV. The PV has embedded schedule assumptions for which tasks will occur in which months. If a task is not worked on during a month because of a schedule delay, that could appear to be an under-run to the project for that month if we use PV. However, if the task is accomplished the following month, it would appear to be an over-run for that month since the cost occurred in that month without any planned cost for that task occurring in that month. The Earned Value Management approach allows us to eliminate the schedule impact on cost variance by using EV for the baseline cost instead of PV. The EV represents the planned or budgeted cost for the work that has actually been performed. The AC is the total costs associated with doing that work.
Cost variance that is calculated using EV and AC from the beginning of the project is the cumulative variance. It is an excellent indication of trends and helps to predict what will likely continue on the project unless changes are made. However, the amount of the cumulative cost variance – either under-run or over-run – is typically unchangeable. Most of those tasks are completed and the variance cannot be impacted. The current period cost variance analysis will provide insight as to whether the tasks that are currently underway are over-running or under-running. These are indications of immediate risks and opportunities that the project manager should investigate.
The cost variance is calculated as the difference between EV and AC. A positive cost variance is an under-run and a negative cost variance is an over-run.
Cost Variance = EV – AC
Current period cost variance uses the EV and AC for the current month. Cumulative cost variance uses the EV and AC since the project has started.
Schedule variance is the ahead of schedule or behind schedule position of the project as compared to the schedule found in the project plan (PV). Normally project managers present schedule variance in terms of time (days or weeks) ahead of or behind schedule. However, since all earned value analysis baselines are expressed using money; the schedule variance in earned value analysis is also denominated in money. (Hey – time is money, right?)
The earned value analysis schedule variance is the estimated cost of the work that has not been done according to the project schedule plan. For work that is accomplished earlier than scheduled, this would be a positive value representing the estimate of the work accomplished early. For work that was late this is a negative value representing the estimated cost of the work that was not done when scheduled. The schedule variance is then the difference between the EV, which is the estimated or budgeted cost of the work that has been performed and the PV which is estimated or budgeted cost of the work that should have been performed according to the project plan.
The primary concern for a project manager is negative schedule variance. This is cost that will need to occur at some time on the project when those project activities finally occur. This becomes important near the end of a fiscal year when the business is trying to plan the costs that will occur in both the current year and the following year. Keep your finance people informed if you have large earned value schedule variances.
Schedule Variance = EV – PV
Just as with cost variance, this can be calculated both for the current month and for the entire project since its start.