INTRODUCTION

The purpose of this document is to provide Project Management Teams with guidance on project performance analysis with particular attention to Earned Value Management (EVM) and decision making.

EVM information provides an early insight into project performance issues.  The regular analysis of schedule and cost variances will facilitate improved management decision making.

 CONVENTIONAL MANAGEMENT & EARNED VALUE MANAGEMENT

The initial step to understanding Earned Value Analysis (EVA) is to recognise that the base measurement reference point is not the budget (planned value (PV)) as it is in conventional project management. In the EVM project performance is measured and compared against the value of work that has been completed or earned.

 
In conventional Project Management, there are two data sources, the budget and the actual cost. The comparison of actual cost against budget simply indicates what was planned to be spent against what was actually spent at that given time. But, the question remains, how much work has the project produced or delivered for the money spent? As the graph in Figure 1.1 illustrates, actual cost is compared against the budget. This method does not provide information as to whether the project is:  

• Ahead or behind schedule
• Getting value for money
• Under or over spent

 

Figure 1.1 – Actual vs. Budget

Earned Value Management (EVM) will provide project performance information that can be used by the project manager as an aid to the decision making process. However, for EVM to be effective it requires a high degree of data integrity in the following areas:

 

• Clear and concise definition of the project requirements and work scope
• Integration of schedule and cost
• Objective progress measurement defined
• A robust Work Breakdown Structure (WBS) to allow for meaningful project summarisation
• Accurate and timely collection of actual costs
• A robust Change Control Process to maintain the integrity of the Baseline plan
• A Business System to support the provision of timely accurate data in a suitable format facilitating analysis of performance

 

With Earned Value Management, unlike conventional project management, there are three sources of data: -

 

• Budget (Planned Value - BCWS) – What the project is planning to do?
• Actual Cost (Actual Cost - ACWP) – What was really spent?
• Earned Value (Earned Value - BCWP) – What was really achieved?

 

The Earned Value (EV) graph shown in Figure 1.2 illustrates the BCWS or PV (Red), ACWP or AC  (Blue) and the BCWP or EV (Green). The EV graph is the similar to the Actual Cost vs. Budget graph used in conventional project management, but has the addition of the Earned Value curve, which is the measure of progress the project has achieved. In addition to tracking Actual Cost and Budget, the Earned Value curve indicates the progress or value of work completed.  The comparison of the AC against EV and PV against EV offers the followings benefits: -

 

• It allows the project to determine if the project is ahead or behind schedule by comparing the EV (BCWP) against the PV (BCWS),  to obtain Schedule Variance (SV)
• It allows the project to determine if the project is under or overspending by comparing the EV (BCWP) against the AC (ACWP), to obtain Cost Variance (CV)
• Provides a forecast of the costs at completion (EAC) based upon current spend, remaining work and progress to date

 

Figure 1.2 – EV Graph

 Through the application of Earned Value Management System (EVMS), the following questions can be answered:

 

• Where have we been?
• Where are we now?
• Where are we going?

SCHEDULE PERFORMANCE ANALYSIS

Schedule Variance (SV)

Schedule Variance (SV) shows if the project is ahead or behind schedule, and is assessed by comparing the Planned Value (BCWS or PV) against the Earned Value (EV or BCWP).

This is calculated as follows:

SV = Earned Value (BCWP) – Planned Value (BCWS - Budget)    Expressed in hours or money

A positive result indicates a favourable variance (ahead of schedule); a negative result indicates an unfavourable condition.  At completion, SV is always zero.

What Does £50,000 Behind Schedule Mean?

It definitely means the project has not completed as much work as it had planned to by now. However, depending on which activities are behind schedule per the plan, the project may or may not be behind schedule. The EV schedule variance is actually an accomplishment variance, but the project won’t know whether it actually has a schedule issue until the physical schedule and the critical path are reviewed. If an activity with float on it is delayed, it does not translate to a delay to the project, as long at the delay in the activities is completed before the float is eroded, then the associated schedule delay will not impact the project end date. However, if an activity on the critical path is delayed then immediate recovery actions should be put in place, as this will delay the project.

Schedule Performance Index (SPI)

The Schedule Performance Index (SPI) is a measure of Schedule Efficiency. The SPI measures the value of work performed against the work scheduled.

This is calculated as:    

SPI = Earned Value (BCWP) / Planned Value (BCWS - Budget)

A result equal to or greater than 1 indicates an on or ahead of schedule condition, a result less than 1, indicates a behind schedule condition.  At completion, SPI is always 1. 

An SPI of 0.87 tells the Project Manager that the project is behind schedule. Which can be defined in two ways: The project is 13% behind schedule or working at 87% efficiency.

It indicates the rate at which work is being accomplished.  It assists greatly in the early identification of areas where the Project schedule may be jeopardised.  This parameter is tracked over time to show a performance trend and a prediction of project outcome.

Potential Causes of Unfavourable (-) Schedule Performance	Potential Causes of Favourable (+) Schedule Performance
Manpower shortage Revised Execution Plan Supporting organizations behind schedule Late Vendor delivery Delayed customer feedback/direction Rework Work more complex than anticipated Design review comments extensive Unclear requirements Scope creep	Efficiencies being realized Work less complex than anticipated Fewer revisions and rework Favourable Market Fluctuations in Cost of Labour or Material Subcontractor ahead of schedule

COST PERFORMANCE – ANALYSIS

The EV cost performance metric measures and compares the Actual Costs (AC or ACWP) against Earned Value (EV or BCWP) in unitary terms (hours or money) rather than Actual Cost to Planned or Budgeted cost. The Cost Variance is a measure of the cost of accomplishment, whereas an actual cost to budget comparison simply indicates the difference between expected and actual expenditure.

Cost Variance (CV)

Cost Variance (CV) shows if the project is under or Over Spending, and is assessed by comparing the Actual Cost (ACWP) against the Earned Value (BCWP).

This is calculated as follows:       CV = Earned Value (BCWP) - Actual Cost (ACWP)

A positive result indicates a favourable variance (cost under-run) or that work is being performed for less than the expected cost, while a negative result indicates an unfavourable (cost over-run) condition, where accomplishment of work is costing more than expected.

Cost Performance Index (CPI)

The Cost Performance Index (CPI) is a measure of Cost Efficiency. The CPI measures the value of work performed against the actual cost, and is critical in the early identification of potential problem areas which may impact the cost performance of the project. 

This is calculated as follows:       CPI = BCWP / ACWP

A result equal or greater than 1 indicates favourable performance, in that the cost of actually completing the work is equal to or less than that expected. A figure less than 1 indicates an unfavourable performance as work is costing more to accomplish than expected.

A Cost Performance Index (CPI) of 1.10 tells the PM that actual costs are less than what was budgeted, which means the project is getting £1.10 worth of work for every £1.00 spent.

The CPI is essential in analysing project performance trends and conducting projections of the project ‘At Completion’ status.

 

Potential Causes of Unfavourable (-)  Cost Performance	Potential Causes of Favourable (+) Cost Performance
Work more complex than anticipated Design review comments extensive Rework Unclear Requirements Scope Creep Unfavourable Market Fluctuations in Cost Labour or Material Overhead Rate Increases	Efficiencies being realized Work less complex than anticipated Fewer revisions and rework Favourable Market Fluctuations in Cost of Labour or Material Overhead Rate Decreases

 ESTIMATE TO COMPLETE (ETC)

The Estimate to Complete (ETC) is the estimated cost of completing the authorised remaining work scope. The calculated ETC is not a reliable forecast of the cost to completion, as it does not take into account past performance. The ETC formula assumes that all remaining work is independent of the Spend-rate incurred to date.

This is calculated as follows:                   ETC = BAC – BCWP (EV)

Independent Estimate at Complete (iEAC)

The iEAC is a forecast of the costs at completion, factored by the current reported levels of performance as expressed by the CPI.  Its aim is to assess the ‘Integrity’ of a bottom up estimate. 

This is calculated as follows:                               iEAC = ACWP + ((BAC- BCWP)/SPIxCPI)

If the SPI and CPI are equal to 1, the formula states that the iEAC is equal to the budget for the remaining work (the ETC) plus the actual costs to date.

 

If the SPI or CPI are less than 1, the formula states that the iEAC will be greater than the budget for the remaining work (the ETC) plus the actual costs to date.

 

Variance at Complete (VAC)

Indicates the predicted (or ultimately the actual) cost over-run or under-run. 

This is calculated as follows:  VAC = BAC – EAC   

Negative VAC is unfavourable or Positive VAC is favourable

 

FORECAST COST TO COMPLETE

In assessing the forecast to complete the PM should not to generate the forecast from formulae alone.  The forecast should be manually developed and supported through appropriate use of independent formulae.  The iEAC formulae can be used to assess the reasonableness of the PM’s bottom up estimate.

When establishing a bottom up Estimate the following should be considered: 

• Past performance (efficiency) and trends;
• Costs incurred to date;
• Commitments placed to date;
• Potential future commitments;
• Required efficiency to recover delays;
• Assessment of remaining activities;
• Anticipated future efficiency  (relate to past);
• Forecast of schedule (time) to complete activity;
• Associated risks and opportunities on remaining activities – include the value of high probability risks in the ETC;
• Previous ETC trend;
• Resource availabilities

 

SPI & CPI SCENARIOS

What do these tell the project team…?  What should the project do…?

1. CPI = 0.85 and SPI = 1.05
   
   Project Status

Over achieving against schedule but overspent for the achievement
Possible money being wasted on unnecessary overtime or increased material / labour cost.

 

2. CPI = 1.05 and SPI = 1.05
   
   Project Status
   Over achieving and under spending
   No action needed.

 

3. CPI = 1.05 and SPI = 0.85
   
   Project Status
   Under achieving against the schedule, and under spending.

Team performing well but may be under resourced.

 

4. CPI = 0.85 and SPI = 0.85
   
   Project Status
   Under achieving and overspent for the achievement.

Team could be under-resourced and are under performing.

 

WORKED EXAMPLE

Six months into a £20M (BAC) project, the project team should have delivered £13.0M of work (PV), £8.5M has been spent (AC), and the project has delivered £9.0M of work (EV). Shown in the graph below - Figure 1.3.

 

 

Figure 1.3

 

The following calculated example illustrates the current and projected future status of the projects cost and schedule performance.

 

Cost Performance Index (CPI)

 EV/AC = 9.0 / 8.5 = 1.06 (Project under spent)

For every £1 spent £1.06 of work is being completed, Actual costs are less than what was budgeted. Why?

 

Schedule Performance Index (SPI)

 EV/PV = 9.0/ 13.0 = 0.69 (Project behind schedule)

31% behind schedule or working at 69% efficiency. What are the reasons for this delay?

 

Cost Variance (CV)

 EV - AC = 9.0 – 8.5 = £0.5M under spent. The project has delivered £9.0M of work for £8.5M. Possible savings are a result of procurement economy, cheaper labour, efficient working etc. Note: Check to ensure all actual costs have been accrued in-line with the execution of the work.

 

Schedule Variance (SV)

 EV - PV = 9.0 – 13.0 = - £4.0M behind schedule, if the value of this work is on the critical path then project in delay. Check to see if any of the work is on the critical path.

Estimate at Complete (EAC)

EAC = AC + (BAC – EV) / (SPIxCPI) = 8.5 + (20.0 – 9.0)/ (0.69x1.06)= £23.5 Estimated project completion cost.

 

Variance at Complete (VAC) = BAC – EAC = 20.0 – 23.5 = -£3.5M

If the project continues to perform at this level of performance, it is forecast to overspend by £3.5M. What corrective actions can be put in place to mitigate the over spend?

 

CONCLUSION
It is well documented by the US Department of Defence, that a projects Schedule (SPI) and Cost (CPI) performance has stabilised at the 15 - 20 % completion point, and the cost and schedule overrun at completion will not be less than the overrun to date. Therefore, if a project has a CPI 0.85 at the 20% point, then at completion it unlikely to improve going forward, this implies a cost overrun at the projects end. Why? If the near term plan has been underestimated, when detailed plans should be in place, there is little hope the far term planning and adherence will be any better.

Finally, EVM is no more than good project management and whilst good project management can be achieved without EVM, you cannot practice EVM effectively without good project management.