Earned Value, Simplified

http://mlflanagan.blogspot.com/2007/03/earned-value-simplified.html

Earned Value, Simplified

Here are some simple examples on how to do EV:

Example 1 – ON TIME:

A very simple project, one resource, one task, duration of 80 hours at $85/hour, that completes on time and on budget.

Setup:

1. Set up your 2 week project plan with the WBS as usual.

2. Calculate your Planned Value (PV), based on task completion dates. (IMPORTANT RULE! EV calculations are time-boxed.) For this project, the task will be complete at the end of week 2, so:

  • PV for week 1 = $0
  • PV for week 2 = 80 x $85 = $6,800

Execute:

1. At the end of each week, add up the Actual Cost (AC) for each completed task. (IMPORTANT RULE! Only calculate AC for completed tasks.)

  • AC for week 1 = $0, because the task is not completed
  • AC for week 2 = 80 x $85 = $6,800

2. Calculate Earned Value (EV) by adding each week’s AC for completed tasks to the cumulative cost of the project. The cumulative cost for this simple project is $0 until the end of week 2, so:

  • EV for week 1 = $0
  • EV for week 2 = $6,800

Report:

1. Cost Variance (CV) = EV – AC = $6,800 – $6,800 = $0
So, this project completed right on budget.

2. Schedule Variance (SV) = EV – PV = $6,800 – $6,800 = $0
So, this project completed right on time.

Example 2 – LATE:

Same project (one resource, one task, duration of 80 hours at $85/hour), but this time it completes 20 hours late and over budget.

Same setup:

1. Set up your 2 week project plan with the WBS as usual.

2. Calculate your Planned Value (PV), based on task completion dates. For this project, the task will be complete at the end of week 2, so:

  • PV for week 1 = $0
  • PV for week 2 = 80 x $85 = $6,800

Execute:

1. At the end of each week, add up the Actual Cost (AC) for each completed task.

  • AC for week 1 = $0, because the task is not completed
  • AC for week 2 = $0, because the task is still not completed, and now our project is late
  • AC for week 3 = 100 x $85 = $8,500

2. Calculate Earned Value (EV) by adding each week’s AC to the cumulative cost of the project.

  • EV for week 1 = $0
  • EV for week 2 = $0 (because the task is not complete)
  • EV for week 3 = $6,800 (IMPORTANT RULE! EV can never exceed PV no matter what the AC!)

Report:

1. Cost Variance (CV) = EV – AC = $6,800 – $8,500 = $-1,700 (IMPORTANT RULE! A negative number means that the project is over spent.)

2. Schedule Variance (SV) = EV – PV = $6,800 – $6,800 = $0 (IMPORTANT GOOFINESS! The task was completed late, but the schedule variance goes to zero once the task completes. This is clearly misleading, but there is a technique called earned schedule to address it.)

SUMMARY:

There are only a few simple rules to keep in mind:

  1. EV calculations are time-boxed, in these examples, weekly.
  2. Calculate EV only for completed tasks, not work in progress.
  3. EV can never be greater than PV, no matter what the AC.
  4. Negative SV or CV mean the project is late and over budget

You may have noticed thatwith this technique SV will never be negative. That’s because we have ignored work in progress by focusing only on completed tasks, and it is the subject of the next post.

5 Comments:

Blogger Ray S said…
You should not try to explain EVM if you don’t understand it! EV is NEVER, NEVER computed from AC. AC has NOTHING to do with EV. EV is derived from the quantity of work completed. It is prorated against the Planned Value for the work. AC is an independent parameter that is only useful when compared to the EV, therefore it can be used to derive EV. (Ray S, certified Earned Value Professional {EVP}, PMP, and EVM book author)

12:13 AM
Anonymous Glen B. Allleman said…
Michael,
I’m not sure it’s necessary to have a “simplified” EV approach. Like Ray says, EV (BCWP) is not “computed” from AC (ACWP). In a simplified approach EV (BCWP) can be Physical Percent Complete * PV (BCWS).
This is potentially a problem in software projects where the Physical Percent Complete is an “opinion” of the developers.
A better approach for the simple EV method is to agree at the beginning of the two week iteration what done looks like in terms of physical evidence. The assign a 0% or 100% outcome to this assessment. Either we made the deliverbale at the end of the iteration or we didn’t.
The next step is to assign “Apportioned Milestones” for longer durations. Again agreeing up front what each milestone is worth (25%, 50%, 75% assignments).
The critical success factor in any EV process is to NEVER EVER assume effort equals results – hence the avodiance of using AC (ACWP) to compute any value.
The “simplification” process for EV in software development orgs using agile or iterative should avoid simplifying too much. It leads to misleading indicators of performance.
I’m working on some training materials for Deliverables Based Planning and the related EV process and will post them on the Blog this week and make a trackback.
Keep up the discussion process – this is a criticaly important topic on IT for all the right reasons and very confusing to many who have not worked their way through the concepts.

10:15 AM
Anonymous Glen Alleman said…
Ray,
I read more carfully Michael’s post. By assigning AC (ACWP) to zero (0) for uncompleted tasks, he is using 0/100 EV(BCWP). While this is probably confusing to those in the EV world – and alos confusing to those just learning – the math is the same.
Michael – it would be better to simply use 0/100 for Physical Percent Complete and multiple that times the PV (BCWS) to get the EV (BCWP).
That way you’ve got the right math with the simplified result and everyone is happy. Plus you will have laid the groundwork for more useful indicators for software projects – the To Complete Performance Index (TCPI) is very very useful for any large development project – it’s the “look into the future as to what we have to do to get back on schedule and cost.”

10:25 AM
Blogger michael said…
Glen, thanks for the thoughtful comments. You are exactly right, I am using 0/100 EV, as the next post on this topic will make clear.

However, after reading your and Ray’s comments, and especially your statement to “NEVER EVER assume effort equals results,” I must agree that it is a mistake to use AC in this manner, even though I can get the math to work out by artificially limiting EV to no more than PV. In the end, the technique complicates things more than it simplifies them.

The point of this post was to work through a “thought experiment” by developing a simple example of the actual mechanics of EV. Although I’d have to say that you and Ray have convinced me that the approach is not as successful as I had hoped it would be, I think the post in conjunction with the comments is quite useful. The actual steps to take when performing EV are difficult to find. Instead, it’s all just the same high-level theory repeated everywhere. I hope this discussion proves useful to readers.

Thanks again for the comments.

9:11 PM
Anonymous Glen B Alleman said…
Michael,
The “thought experiment” process is critical here. Almost every commercial client we have has a hard time wrapping their mind around the EV concepts. Even some of our civil and defense clients get confused at times. We have a “badge tag” with the EV and now Earned Schedule formulas on it (with our logo of course) that we hand out. If a client lives in a “badged” community they add it to their lanyard if not they stick it on the bulletin board above their desk.
Even in the experience community we need reminders of what EV is all about.