EARNED VALUE MANAGEMENT (EVM) TUTORIALS. Author: Rahul Nanda Vibisys-DWC-LLC

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1 EARNED VALUE MANAGEMENT (EVM) TUTORIALS 1

2 PURPOSE OF THIS TUTORIAL An attempt has been made through these tutorials to make the understanding of various concepts of Earned Value Management easy by using simple examples and diagrams. Various aspects of EVM described in these tutorials have been broken into following topics: Topic 1: EVM-Understanding Basics of Earned Value Management (EVM) & its advantages. Topic 2: Performance Measurement using EVM at Business, Program, Project and Resource Level : Understanding various KPIs : CV, SV, CPI, SPI & Forecasting (ETC, EAC, VAC). Topic 3: Forecasting and Creating Transparency by using EVM: Profit Margins Cash Flow Work In Progress Re forecasting & Transparency for Shareholders Recovery Plan Topic 4 : Implementation of EVM 2 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com

3 TOPIC 1: EVM- UNDERSTANDING BASICS OF EARNED VALUE MANAGEMENT (EVM) 3 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com

4 WHAT IS EVM? EVM is a project control process based on a structured approach to planning, cost collection and performance measurement. It facilitates the integration of project scope, time and cost objectives and the establishment of a baseline plan for performance measurement. - Association of Project Management, TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com

5 UNDERSTANDING EVM EXAMPLE 1: Client wants to construct a house in 3 years period with an estimated cost of AED 3 million. After six months of work it is found that AED 400k has been spent. What does this information indicate in terms of Project s Performance : Will the Project accomplish with in the stipulated budget? 1 st APPROACH Actual spent in 6 months = AED 400K Remaining period to complete the project = 30 months. Assuming linear cost distribution over a period of 36 months Estimate to complete (ETC) the remaining work= (30/6)* 400K = AED 2 million Estimate at completion = AED 2m + 400K= AED 2.4 m AED- MILLIONS M Estimated Variance at completion = AED 3m AED 2.4m= +AED 600K 6 36 MONTHS i. Cost wise Project is performing good. ii. Estimated cost at completion is AED 600 K less than the budgeted cost. 5 THOUGHT: Is available information sufficient to measure project s performance? Q1 What if the project is not on schedule? Answer: A1. Assuming, updated Project schedule forecasts a slippage in overall Project duration by 4 months. NOTE: Now another approach is required to estimate the cost at completion. AED- MILLIONS MONTHS TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com

6 UNDERSTANDING EVM 2 nd APPROACH Forecast remaining duration of project = 36 months Estimated Cost To Complete the remaining project = (36/6)* 400 = AED 2.4 million Estimate at completion = 2.4 m+ 400k = AED 2.8 million Estimated Variance at Completion = AED 3 million-aed 2.8 million = +AED 200 k AED- MILLIONS k i. Cost wise Project is performing Good. ii. Cost at Completion if AED 200K less than the budgeted cost. 6 MONTHS THOUGHT: Has actual work done been considered in performance measurement? Q.2a. How much Physical Work been accomplished to date? Answer: A.2a. 10% (Physical % Completion) Q.2b How much % of duration elapsed to date? A.2b. 6months/36 months= % (Schedule % Completion) Approaches 1 and 2 were based on Schedule % Completion, ignoring the physical work remaining. So another approach is required taking into account the Physical % Completion. 6 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com.

7 UNDERSTANDING EVM 3rd APPROACH Budget At Completion (BAC)= AED 3 million Earned Value = 10% of BAC = AED 300,000 Actual Cost = AED 400,000 Planned Value (PV)= AED 500,000 (Considering linear spread) Cost Variance (CV) = EV-AC = AED 100,000 Schedule Variance(SV) = EV-PV = AED -200,000 CPI= EV/AC= 0.75 SPI = EV/PV = 0.60 AMOUNT EAC BAC AC PV EV CV SV ETC This indicates that for every AED 1 spend only 0.75 fills is earned. Hence Cost wise performance of the project is not good, there is a cost Over run of AED 100,000. Similarly there is a schedule slippage of AED 200,000. If this trend continues then the forecast could be calculated as follows: ETC = (BAC-EV)/CPI = AED 3,600,000 EAC = ETC + AC = AED 4,000,000 VAC = BAC EAC = AED-1,000,000 t1 T T2 FORECAST SLIPPAGE TIME Note how the perception of project s performance changed from good to poor as we moved from 1 st Approach to 3 rd Approach. If 1 st or 2 nd approaches are followed to assess the performance and estimate the forecast figures, then project s stakeholders will be taken by surprise, when the good performing project will end up into a loss making project. However by following 3 rd Approach (Earned Value Management) Early Warnings of poor performance are generated, which provides an opportunity to mitigate the cause of cost over runs and schedule slippages and to minimize the Potential losses. 7 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com.

8 AMOUNT Contract Fee EAC VAC BAC AC PV EV BASICS OF EARNED VALUE MANAGEMENT AC= Actual Spent (EVM) PV=Planned Value EV= Earned Value BUDGETED PROFIT CV=Cost Variance FORECAST PROFIT SV=Schedule Variance VAC= Variance At completion ETC ETC= Estimate To Completion CV EAC= Estimate At Completion SV CPI= Cost Performance Index t1 T T2 TIME SPI= Schedule Performance Index FORECAST SLIPPAGE Budgeted Profit= Contract Fee- BAC Forecast Profit= Contract Fee - EAC EAC= AC+ ETC ETC= (BAC- EV)/CPI CPI= EV/AC 8 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com.

9 ADVANTAGES OF EVM 1. Early warnings in terms of negative cost variance and schedule slippages are generated using EVM. Performance can be monitored at various levels (project, business, discipline, resource etc), as such source & cause for variances could be identified. This provides an opportunity to proactively mitigate the problems. 2. Resource utilization could be optimized using EVM. 3. Reforecasting the ETC results in generating more realistic revenue and profit margins. 4. EVM creates transparency thereby reducing the element of surprise for the stakeholders. 5. EVM could be used as an effective tool for maximizing the profitability of the project. 6. If applied at organizational level EVM provides a consistent Project Management methodology which saves efforts from re inventing the wheel every time. 7. EVM leads to continuous improvement as organization gets more and more accurate in terms of budgeting from the available historical date and in terms of performance by benchmarking the projects and from the lessons learnt from previous projects. 9 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com.

10 TO CONSULT ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT 10