Friday, December 14, 2007

Earn Your Value (Part I)

As I was thinking about what to write this week, I noticed my only mention of Earned Value Management was both brief and some time ago. Its an important topic, so I'm going to devote my next three entries to it. This week, we're going to look at the basics. Next week, we'll look at how to report Earned Value to clients and stakeholders. In the third and final post in this series, we'll look at how to use Earned Value Management principles to manage projects.

The usual illustrative story of Earned Value goes something like this ... you hire a painter to paint four walls in four days. Each day is budgeted for $1,000 for a total of $4,000. If at the end of 2 days, I tell you the painters spent $1,500, do you know what the status of the project is?

The answer is "No" because you don't know how much work was actually completed. If I were to tell you the painters finished 3.5 walls, would you know? Also "No" because you don't know how much was spent.

Earned Value is a project management technique which can help you look at time, cost, and performance of your project -- you see the relationships between all the dimensions and not just a view of one. There are simple calculations to provide you with the amount of deviation from schedule and costs, plus performance factors which can be used to predict the future performance of your project. Even simple projects or consulting engagements can benefit from application of the key principles.

The 4 basic formulas to remember are quite simple:

CV = EV– AC -- the cost variance is the earned value less the actual cost
SV = EV– PV -- the schedule variance is the earned value less the planned value
CI = EV/AC -- the cost index is earned value divided by actual costs
SI = EV/PV -- the schedule index is earned value divided by planned value

Basically these formulas help you to understand:

- how far from planned costs and schedule am I?

- at what rate am I deviating from planned costs and schedule

The planned value in the illustrative example is $2,000, the cost of the work planned for by the end of the second day. Since I completed 3.5 days of work, the earned value is $3,500. You can see at a glance that I'm ahead of schedule as well as ahead of my budget. This means the cost index and schedule index will both be greater than 1.

At the end of day 2, I now have several good ways to update my project estimate. If I think the savings I accrued in the first two days of the project are typical of what I will experience for the rest of the project, I can multiple my final estimated budget ($4,000) by the inverse of the cost index. This gives me a new estimated final budget of $1,720. On the other hand, I might judge this not to be typical, in which case I might re-plan the remainder of the project, looking closely at the quality of the work completed and any obstacles which could slow down the finishing of the last 1/2 wall.

Of course this is a very simple example and a more complex schedule or budget would require considerably more analysis. As additional resources, there is an extensive bibliography online, an excellent training resource is Roger Mandel, and Quentin Fleming's (pictured above) book which describes earned value project management in its most fundamental form.
Don't forget to check back next week to see how we can share Earned Value information with clients and stakeholders.

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