Earned Value Management chapter 8 pm2.pptx

lecture slides for pm2

1. EARNED VALUE MANAGEMENT

2. Lesson Outcomes Understand the earned value terminology Draw the earned value curve Compile the earner value table

3. E arned Value Management Earned Value Management technique is a special project planning and control technique within both the Project Schedule Management and Project Cost Management, knowledge areas which is used to plan and control the project in comparable units. It is the project manager’s challenge to use the earned value technique to plan and control the project in comparable units to ensure that the project can be accurately tracked and controlled.

4. E arned Value Management This is achieved by setting up an earned value management system to track earned cost and time or earned man-hours and time. We define earned value as the integration of cost and time ( or man hours and time) to determine the project’s progress. The need for Earned Value-: It helps in distinguishing between planned man-hours, actual man-hours and earned man-hours.

5. E arned Value Management Planned man-hours or budgeted man-hours are an estimate of the man hours to complete the work. The earned man-hours are a measure of the work done The actual man-hours are the hours booked against the job

6. Body of Knowledge Mapping PMBOK 6ed Mapping Earned Value Analysis (EVA) EVA uses Earned Value Management methodology to compare the performance measurement baseline to the actual schedule and cost performance. EVM integrates the scope baseline with the cost baseline and schedule baseline to form the performance measurement baseline. Variance Analysis Variance analysis reviews the difference ( or variance) between planned and actual performance. EVM reviews the schedule variance (SV) and cost variance (CV) Trend Analysis Trend analysis is used to forecast the future performance based on the past results.

7. E arned Value Terminology and Abbreviations 1. Abbreviations 2. Terms Example Given Calculated BAC Budget at Completion $2,000 PV Planned Value PC Percentage Complete 40% EV Earned Value ( EV = PC *BAC) $800 AV Actual Value $1,200 EAC Estimate at Completion (EAC = AV/EV *BAC) $3,000 ETC Estimate to Complete ( ETC = EAC – AV) $1,800 SV Schedule Variance (SV = EV – PV) ($200) SV% Schedule Variance Percentage ( SV% = SV/PV) (20%) CV Cost Variance ( CV = EV – AV) ($400) CV% Cost Variance Percentage ( CV% = CV/EV) 50% SPI Schedule Performance Index ( SPI = EV/PV) 0,8 CPI Cost Performance Index ( CPI = EV/AV) 0,66

8. S tep 1: Draw the earned value axis, cost and time ( BAC and PV) The first step is to draw the earned value axis, the x axis is the time (1) and the y axis is the cost (2) or the value to be measured. The BAC line (3) is drawn horizontally at $2,000 ( given) The PV is drawn as an ‘S’ curve (4) from the zero to the BAC line. Where two line intersect (5) a vertical line is drawn to the time axis (6) which is the duration of the project.

9. S tep 1: Draw the earned value axis, cost and time ( BAC and PV) Budget At Completion ( BAC) -: This is the original cost estimate or quotation, indicating the funds required to complete the work. However the BAC does not include the profit, it is a generic term for man-hours or another parameter used.

10. S tep 1: Draw the earned value axis, cost and time ( BAC and PV) Planned Value (PV) -: Is the authorized budget ( man-hours)assigned to the work. When the planned work is integrated with the schedule, the accumulated value will get the characteristic ‘S’ curve which forms the project’s baseline plan.

11. S tep 1: Draw the earned value axis, cost and time ( BAC and PV) Earned V alue graph (1) BAC $2,000 PV Cost Time 1 2 3 4 5 6

12. S tep 2: Draw the earned value curve, EV Once the project starts the progress is captured as PC ( Percentage Complete) at timenow and the EV is calculated. PV at timenow is $1,000 (given), the timenow line is drawn vertically to intersect with the PV line at $1,000 (7). The equation below shows how a PC of 40% at timenow equates to $800 The earned value is drawn from zero to timenow at $800 (8) and then extrapolated to the end of the project (9).

13. S tep 2: Draw the earned value curve, EV The extrapolated line follows the curve of the PV line from ( 8) until it meets the BAC line at (9) At the intersection a vertical line is dropped down to the time axis (10) this is the revised forecast completion date. The difference between 5 and 9 gives the Slippage

14. S tep 2: Draw the earned value curve, EV Percentage Complete (PC) The PC is the measure of the activities performance and progress up to timenow and is required for the earned value calculation. For example the PC is 40% at timenow. Earned Value (EV) The earned value is the measure of achievement or value of the work done to timenow. The EV is calculated by the equation EV = PC (earned progress at timenow) X BAC = 40% X $2,000 = $800

15. S tep 1: Draw the earned value curve, EV Earned V alue graph (2) BAC Slippage $2,000 PV PV EV Cost PV $1,000 $800 EV PV = $1,000 EV = $800 Timenow Time 1 2 3 7 5 6 9 1 0

16. S tep 3: Draw the actual value curve, AV and EAC The actual costs( actual value) are calculated to give the costs incurred to produce the earned work. In this case the AV is given at timenow as $1,200 (11) The AV is drawn from zero to intersect with time now at $1,200 Once the AV is known the EAC can be calculated ($3,000) The EAC line (12) now can be drawn and the AV line extrapolated from the intersection (13)

17. S tep 3: Draw the actual value curve, AV and EAC Actual Value-: This is the amount payable for the work done to timenow. It is the real cost incurred after executing the work to achieve the reported progress Both PC and AV should be based on the same data.

18. S tep 3: Draw the actual value curve, AV and EAC Estimate at Completion-: The EAC is the revised budget for the activity, work package or project and is based on current productivity. The EAC is calculated by extrapolating the performance trend from timenow to the end of the project This value assumes that the productivity to date will continue at the same rate to the end of the project

19. S tep 3: Draw the actual value curve, AV and EAC This value assumes that the productivity to date will continue at the same rate to the end of the project. The productivity is defined by the ratio of costs (AV) to earned value (EV). If the costs (AV) are less than the earned value (EV), then the EAC will be less than the BAC and vice versa.

20. S tep 3: Draw the actual value curve, AV and EAC EAC = AV x BAC EV But EV = PC x BAC Therefore EAC = AV x BAC PC x BAC EAC = AV PC For this example at timenow EAC = $ 1,200 x 100 40% = $ 3, 000

21. S tep 1: Draw the earned value curve, EV Earned V alue graph (2) BAC AC Slippage $2,000 Cost Overrun PV PV ETC $1,200 EV Cost PV $1,000 $800 EV PV = $1,000 EV = $800 AC = $1,200 Timenow Time 1 2 3 11 5 6 9 1 0 1 13

22. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI The next step is to calculate a number of earned value variances. The V at timenow is the difference between EV (8) and PV (7) and the CV at timenow is the difference between the EV (8) and EV ( 11) The variances give a numerical value to a range of parameters that will help gauge the project’s performance.

23. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI Schedule Variance (SV) The schedule variance calculation is a measure of the time deviation between the planned progress (PV) and the earned progress of earned value (EV) SV = EV – PV = $800 - $1,000 = -$200

24. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI Negative variance – the project is behind the planned progress Positive variance – the project is ahead of planned progress. Schedule Variance Percentage ( SV%) Converting the schedule variance to a percentage will address any distortion caused by the size of the activity. For example an SV of $1,000 is 10% of a $10,000, but only 1% of a $100,000 activity

25. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI SV% = SV/PV = -$200/$1,000 = -20% Cost Variance (CV) The cost variance is a measure of deviation between the earned value (EV) and the actual cost of doing the work (AV) CV = EV – AV = $800 - $1,200 = -$400

26. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI Negative Variance – the cost is higher than the original estimate (BAC) Positive Variance – the cost is lower than the original estimate (BAC) Cost Variance Percentage (CV%) Converting the CV to a CV% will reduce the distortion caused by the size of the activity. CV% = CV/EV = -$400/$800 = -50%

27. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI Performance Indices Performance Indices are ratios used to determine the status of the project. Schedule Performance Index : This is defined as SPI = EV/PV = $800/$1,000 = 0.8 The SPI compares the work earned with the work schedule If the SPI < 1 then the project is behind the schedule and if corrective action is not taken it will finish late.

28. S tep 4: Calculate the earned value variances, SV, SV%, CV, CV%, SPI,CPI Cost Performance Index CPI : this is defined as CPI = EV/AV = $800/$1,200 = 0.66 The CPI compares the work earned with the actual cost. If the CPI<1 then the project is spending more than it is earning and will lake a loss if corrective action is mot taken

29. Project Control It is difficult to quantify the status of the overall project visually and it might be argued a subjective assessment of a complete project is bound to be inaccurate. Therefore to solve this problem, you can make use of the value model to roll up all the activity data and report a bottom line for the project giving an overall position. Consider the following example

30. Project Control Activity BAC PV PC EV Status 100 $100 $100 100% $100 On Time 200 $400 $400 75% $300 Behind 300 $1,200 $800 90% $1,080 Ahead Totals $1,300 $1,480

31. Project Control The status report indicates that overall earned value EV $1,480 is ahead of the planned progress PV $1,300 and if this continues, the project should finish early.

32. Project Control Determining Percentage Complete If the activity has not started it is zero and if it is complete it is 100%, but all points in between are somewhat of a guess even if more structured approach is used. A quick way to estimate PC is to use the 50/50 rule. If the job has started it is given 50% and when it is finished it is given 100%. This will work well if the work duration is less than 50 hours

33. Project Control Earned Value Table The status report can be expanded into the earned value table. The earned value data can be presented in both a tabular format and a graph. The graph is an excellent summary presentation based on an earned value database, therefore the database needs to be compiled first. The following steps should be considered-:

34. Step1: Set up an earned value table using the following abbreviated field headings. WBS BAC PV PC EV AV SV CV EAC 1.1 $2,000 $1,000 40% $800 $1,200 ($200) ($400) $3,000 1.2 Total ∑ ∑ ∑ ∑ ∑

35. Project Control Step 2: list the full scope of work Step 3: input BAC values for all work packages Step 4: calculate PV to timenow for all work packages Step 5: from the data capture sheet transfer the values for PC and AV Step 6: calculate EV = BAC x PC Step 7: calculate SV, CV and EAC Step 8: sum of the following columns BAC, PV, EV, AV and EAC Step 9: calculate the total PC, SV and CV

36. Project Control- Earned Value Reporting Overall status The overall status of the project can be seen at a glance on the earned value graph and also on the bottom line of the earned value tabular report. If more information if required the earned value report can be expanded to reveal the progress at the work package level. Responsibility When reporting to functional managers the progress report can be tailored to clearly indicate the activities that fall under their responsibility. This information can be separately reported if a responsibility field is added to the earned value report and then sorted for different functional managers. Management –by-Exception (MBE) The progress report can use the MBE technique to identify problem areas. The MBE thresholds can be set by the project manager using-: a) Activity variance SV and CV, b) activity float = 0 days, identifies the critical path, or sets activity float<5 days, to identify activities which could go critical in the next week before the next reporting date. Threshold Variance The threshold variances for SV, SV%, CV and CV% can be used to flag problem areas to attract the project manager’s attention. The threshold limits must be set as an amount of %. Tight variance thresholds allow true MBE as negative threshold will trigger an immediate response helping the supervisors to assign priorities and additional resources. Extrapolate Trends The earned value technique enables the performance to date to be extrapolated to the end of the project. This gives a performance trend which is more informative than a single project status snapshot

37. Project Control- Client’s view of Earned Value Fixed Price Contract If the contractors are working to a fixed price contract then EV and AV will always be the same Progress The client can effectively use earned value to track the project’s progress in terms of man-hours or costs by comparing EV and PV. Over Claim The client must check that contractors do not over claim. If a contractor has claimed 80% of the contract by value but not completed 50% of the work, there is little financial pressure that can be exerted to complete the project on time