Finance – Earned value management example

Earned value management example

Earned value management examples

About earned value management examples

These earned value management examples are applicable to almost any project-based company, but the examples are going to focus more heavily on industrial-style companies like construction, oil and gas and mining.

While any project-based company can use and benefit from earned value management, it's these companies who can benefit massively from good earned value management and analysis.

They plan for long and expensive projects which feature many different parties and thousands of moving pieces, and then they go through a very obvious phase of project delivery which can get really messy really quickly - with many of them struggling to deliver on time and on budget.

The beauty of earned value management is that it enables these companies to maintain almost-constant oversight of their performance on a cost and schedule basis so that they can course-correct and stay on time and on budget.

So let's dive into some earned value management examples to help you see what earned value often looks like - as well as how it can be applied to different situations and scenarios which you will probably run into.

Our specific earned value management example

The best way to lay out an earned value management example is to start with an example of our current project status, with all of the detail we will require to make our earned value judgements and calculations.

From there, we will step through the different phases of earned value management, starting with understanding our current status and then using this information to get insights about multiple dimensions of performance.

So let's start with the example of our project and project status.

Project manager Dave Hodgson has been charged with determining the current earned value, cost variance, schedule variance and new estimate at completion on this construction project.

This particular construction project is building a new 10 apartment complex. The budget for constructing all 10 apartments is $5,000,000.

The project is scheduled to be completed in 2 years.

Dave Hodgson is looking at calculating earned value when the construction project has been running for 1 year. At the time of calculation, the company has completed 4 of the apartments, which is 40% of the overall project work.

Our actual costs to date have been tracked, reconciled and calculated to be $2,500,000.

We now have all of the detail we need from this earned value management example to start determining our project performance so far.

Earned value management example: Getting everything together for our current earned value

The first phase of this project management example and the first phase of any earned value management effort is gathering your current project information.

One (1) of the three (3) inputs we care about when gathering our initial data will always stay the same when calculating earned value, while the other two (2) vary depending on the current stage and status of the project:

Budget at Completion (BAC) - Our budget at completion is one of the earned value 'numbers' which stays the same through the life of the project, and has a lasting impact on how we assess our performance.

Budget at completion is defined as the total budgeted spend for a specific project or phase of works. Obviously the more accurate our budget is, the more likely our earned value calculations will be. If we pad or inflate the budget, then we are giving ourselves more room to breathe while if we underestimate project costs, our earned value results may look pretty undesirable.

This is actually pretty intuitive. Our planned value is simply how much value we had planned to generate by this stage of the project, which is of course the amount of work we had planned to complete multiplied by the whole budget.

From the above example, we know our initial budget for the project is $5,000,000.

Earned value (EV) - Earned value is a really easy earned value metric to figure out. What we will learn from looking at this earned value management example is that earned value alone doesn't give us great performance information, but it is the basis for all of our other earned value calculations.

To find our current earned value, we simply take our initial budget at completion (total budget) and multiply it by the % of the project (of phase of work) we have completed to date.

For example, we may be charged with determining our earned value metrics at the half way mark of our project (50% through), so we are going to be using that 50% complete in our earned value formula:

EV = % of project completed (actual) x Budget at completion (BAC)

From our specific earned value management example data above, we know that we are currently 40% of the way through our project (we have finished 4 of 10 apartments). We can quite easily multiply this % by our BAC to give us our current earned value - which is the amount of value we have generated on the project thus far.

Current earned value = 40% x $5,000,000 = $2,000,000

Planned Value (PV) - As mentioned, the earned value example above is the basis for all of our performance measures. To understand our performance properly, we also need to gather a couple of other details - with one being planned value.

Planned value (PV) is a rolling measure which takes our budget at completion, and multiplies it by % of the project we had scheduled to complete by this stage. For example, if we are 6 months through our project and it was scheduled to run for 12 months (assuming linear progress), then our planned value will be this amount of work complete (50%) multiplied by the initial budget at completion.

PV = % of project completed (planned) x Budget at completion (BAC)

Using the information from our specific earned value management example, we know that we are 1 year through a scheduled 2 year project. This means (assuming linear progress) that we had planned to have 50% of the schedule work complete.

We can use this planned % complete and multiply it by our budget at completion again to give us our current planned value.

PV = 50% x $5,000,000 = $2,500,000

At this stage of the project, we had planned to had generated $2,500,000 in value.

Actual cost (AC) -  Foreshadowing the earned value management examples below, the above planned value we need to determine at our time of calculating is required for understanding schedule performance, while actual cost is used to determine performance on a cost basis.

Actual cost is the easiest component of earned calue to understand, but it can be tricky to get right.

Actual cost is simply the actual costs we have incurred on the project to date (across the same timeframe as we have used to determine planned value and actual progress).

As we saw from our above construction apartment example, we have incurred total costs $2,200,000 to date.

The crux and main issue associated with this measure is that companies and project managers sometimes struggle to keep track of costs in real-time. Poor cost and expense reporting can skew this number and skew all of your calculations.

Using great financial management tools and project delivery softwares can really help in reporting on timesheets, supplies and other purchases.

Project timesheet software

Earned value management example: Determining cost performance

Construction companies, like all companies managing projects are businesses. Businesses need to generate positive cash flows by charging more for their goods and services than the costs they incur to deliver those goods or services.

Project-based companies need to be very aware of their costs throughout the course of a project. On medium-sized and large projects, costs can quickly escalate out of control. Delays, variations, poor purchase controls and other unexpected influences can have a major impact on our initial budget and jeopardise the project and the company.

One of the major benefits of earned value management is that we can get a really good read on our cost performance to date.

To do this, we use an earned value metric called cost variance. This, as the name implies, enables us to find out the variance in the costs we had planned vs. what we have actually incurred.

Cost variance = Earned value - Actual cost

Because we have gathered and calculated our earned value and actual costs earlier, it's very easy for us to determine our cost variance:

Cost variance = $2,000,000 - $2,200,000 = -$200,000

In this particular earned value management example, our cost variance is negative (meaning we are over budget), and equal to -$200,000. This means that the project is $200,000 over budget at the moment.

This example shows you the power of earned value. Because earned value shows us how much value we have actually generated, we get a real and accurate indication of how much we have spent to generate some amount of value.

In this case, we have spent much more than the value we have generated, which puts us in the red.

Earned value management example: Determining schedule performance

The other dimension of performance we always care about when managing projects is time. We want to deliver on budget of course - but we also want to deliver on time. If we promise to deliver a project in 2 years, then we want to be able to deliver on that promise.

Other people and companies base their work and decisions on our promises, so it's really important to stay on schedule.

Determining our schedule performance on this earned value management example looks very similar to determining cost performance, but instead of cost variance, we are looking for our schedule variance.

Schedule variance = Earned value - Planned value

Once again, we can pull from the paragraph at the beginning of this earned value management example to quickly understand our schedule variance. We worked out both our planned value and earned value when gathering all of our details, which means we can simply plug them in:

Schedule variance = $2,000,000 - 2,500,000 = $-500,000

Similar to cost variance, a negative schedule variance is also a bad sign, and means we are also behind on schedule as well.

In this particular earned value management example, we are even further behind schedule ($500,000) than we are over budget ($200,000).

So we are not only spending more money than we are generating in value, but we are also behind schedule as well.

 

Earned value management example: Forecasting and reporting

The real strength of earned value management is based on being able to judge performance during the course of a project and course-correct before the end of a project when it's too late.

Most companies can judge performance once the project is finished and once it's delivered late and over budget, but we want to be able to make more informed decisions during a project so we can prevent these end of project headaches.

While understanding performance to date is incredibly important, we want to be able to apply these learnings and new information to our initial forecasts so that we can make more accurate predictions about where we are going to end up, can inform other parties and stakeholders of these details, and make decisions about how to stay or get back on track.

We can do this using our standard set of earned value management formulas.

To begin using our earned value management example data for projections, we need to create a new index which we can apply moving forward. Once again, we have a cost index and a schedule index.

Cost performance index = Earned value / Actual cost

Schedule performance index = Earned value / Planned value

Taking what we know from this earned value management example, we can easily calculate our cost performanve index too.

Cost performance index = $2,000,000 / $2,200,000 = 0.909

Similarly, we can also calculate our schedule performance index:

Schedule performance index = $2,000,000 / $2,500,000 = 0.8

Now that we have these indices, we can take what we have learned from our earned value management examples and apply it to the rest of the project.

First, let's work out our estimate at completion (EAC). There are a few ways to calculate estimate at completion, and one of the best is to divide our BAC by our EAC:

Estimate at completion = $5,000,000 / 0.8 = $6,250,000

This new estimate at completion takes our cost performance so far on the project and projects that onto the rest of the project. In this case, our new estimate at completion is $6,250,000, which is $1,250,000 over our initial budget.

This makes sense given we were over budget during the first part of the project. If things continue in the same vein and with the same level of efficiency, then we will continue to fall further behind budget.

We can easily use this number to find our estimate to complete as well, which can be really helpful in understanding our funding and cash flow needs. To work that out, we simply subtract our actual costs from our estimate at completion:

Estimate to complete = $6,250,000 - $2,200,000 = $4,050,000

If we don't find a way to improve this earned value management example in the second half of the project, then we will likely need another $4,050,000.

We can get even more detail about our earned value using these formulas.

This earned value management example was designed to give a good idea of how to gather the correct information and use it to understand how your project is tracking - as well as what you may need to do to get it back on track.

There are many different kinds of earned value management examples out there for different types of work and different industries. The process and theories remain largely the same as this earned value management example.

People in 70+ countries use this software to track earned value more easily and more accurately.

Sitemate users

Sitemate is flexible project managament software which enables companies in the industries to streamline their projects, teams and processes - their way.

About Lance Hodgson

Lance is the Head of Marketing & Growth at Sitemate. His aim is to bring awareness to a brighter future for the heavy industries where people and companies work smarter.

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