Project management is both art and science. A large part of project management involves skills that are not analytical, such as leadership, conflict resolution, and communication. Quite often we focus on these aspects of project management because they are perhaps the most difficult to master. Plus, they are much more interesting to discuss than cold hard numbers. However, speaking as a person who has spent the bulk of his career in the Business Intelligence (BI) and Enterprise Performance Management (EPM) space, these cold hard numbers can be pretty darn interesting. Earned Value (EV) is one of those numbers. Not only is it interesting, it is also a critical project management metric. Let me explain…
EV gives us a way to monitor the status of a project that is relatively objective. I use the word relatively here since some of the inputs to the process are estimates. They are not the type of thing that we can measure with a caliper or yard stick. Strictly defined EV is the value of the work performed expressed in term of the approved budget assigned to the work for a scheduled activity or work breakdown structure component. In other words, it compares what we have achieved to what we had planned to achieve. It provides us insight into how well we are performing against our plan. Let’s review how EV gives us a better understanding of our project’s status.
Every good project manager should have a budget and Work Breakdown Structure (WBS). These are outputs of the planning stage. This will enable us to assign a value to project activities. For example, we can assign a cost to system design, the creation of test plans, and user acceptance testing. This, in conjunction with our project schedule, can tell us how much we plan to spend and when we plan to spend it. This scheduled budget is our Planned Value (PV).
If we simply compare our actual costs to our plan, as I have done in the graph below, we may draw the wrong conclusions about our project’s status. In looking at the graph, we see that in the first four weeks of our project actual costs are above our plan. In the sixth week, however, actuals fall below plan putting us in a position where we are under budget. We might conclude that while we started out a little rough, the project is back on track.
The second graph, however, tells us quite a different story. To calculate EV we sum the planned costs of the tasks completed, that is the value created. We base the value of these tasks NOT on the actual costs, but on what we had planned. By using the planned costs, we are able to compare what we have actually done to what we planned to do, this is the Scheduled Variance (SV). We see that in the first five weeks things are actually going well. The value of the work completed is greater than what we have planned. Things actually turn for the worse in the sixth week, not for the better as might have surmised by simply looking at actual costs. The value of the work completed starts to be less than what we have planned. Continuing to examine the second graph, we compare the final EV value to the PV line to determine that we have schedule variance of a week. Basically, according to the value we have created, we are a week behind.
So far, we have only looked at what we planned, let’s now compare our EV to our Actual Costs (AC) to determine our Cost Variance (CV). Here we actually have a bit of good news. Although our costs were higher than planned in the first four weeks, the value we created in that time was higher than our cost. Week six still seems to be our problem week. The value of the work created starts to fall behind our costs. While our SV (Scheduled Variance) in week seven is a week behind, our CV is only $5,000.
The uninitiated might think that you can get this same information by simply looking at our project schedule. After all, won’t that tell me if I am behind on my project. Think about the reality of projects for a moment. You have a variety of tasks occurring simultaneously. Your Business Analysts may be working on requirements while the infrastructure team is setting up environments and your architect is laying out your schemas. Some of them may be ahead of schedule while others are behind. Earned Value provides a way of aggregating the status of all these activities into one concise metric.
The core job of a project manager is to keep the project moving in the right direction. A project is like a shark if it stops moving it drowns. Earned Value is a project management tool to assess how well the project is moving. The greater insight the project manager has into this movement, the greater will be his or her ability to manage it.
 Project Management Institute, The PMBOK Guide