Came across (through Google agent) a nice short description of what is Earned Value. It's from a British construction firm. The phrasing is a bit off for our domain, so I'd like to clean it up. Let's start with a simple and s imple minded project.
- We have a construction project and our efforts are in the design shop, making drawings for construction, from requirements.
- We have 4 weeks to produce 20 drawings for the project.
- Each drawing is the same level difficulty and therefore should take to same effort and duration (Cost and Schedule).
- We have a plan to produce these drawings at an equal pace, over the 4 weeks, 20 drawings total, 5 drawings per week for 4 weeks.
- We have a budget of $1,000 for all 20 drawings, with a budget per drawing of $50 each drawing.
- 'We assume that one person is doing this work, and that person is available 100% over the 4 week period of performance.
Earned Value has three components for our project:
- Planned Value - the budgeted cost for the planned outcomes for the work efforts at the time of assessment. This budget profile is linear, $250 per week for the 4 weeks, to produce 5 drawings each week, costing $50 each.
- Earned Value - the assessed value of the work accomplished at the time of assessment.
- Actual Cost - the actual cost of the work performed to at the time of assessment.
Notice the at the time of assessment statement. This is critical. If we plan to spend $1,000 as the total budget for the work over a 4 week period, this is the Planned Value, the Budgeted Cost for Work Scheduled or BCWS. This is the budget to produce our outcome. When we assess the performance of our efforts, we do that at a point in time. This point has a cummualtive budget and we need to assess our cummulative performance, and our cummulative actual costs all at the same time.
At the half way point (week 2), our plan says we should have spent 50% of our budgeted cost (BCWS = $500 at this point in time). This is naive of course, but makes our calculations simple. This means that after 2 weeks of work, we planned to have spent $500.
We assume - again naively - that over the course of the 4 week, the ACTUAL value of the product - the drawings - we are producing is growing linearly. So at the 2 week point, our product should be worth 50% of the Planned Cost or $500. This is the Earned Value. We essentially earn our budget in this simple minded example.
So now the 2 weeks has come, it's Friday of the second week of our 4 week deliverable. We planned to spend $500 and to earn $500 of value. At our status meeting, here's where we are:
- BCWS = $500. This is the planned budget to date at this point in the project - 2 weeks in.
- BCWP = let's assess our progress toward earning value for that invested budget.
- To earn our $500 we had to produce 10 drawings at the end of 2 weeks
- We only produced 8 drawings, not the planned 10.
- Our BCWP = BCWS x "percent complete" = $500 x (8/10) = $500 x 0.8 = $400
- So we only earned $400 instead of the planned $500
- Our BCWP = $400
During those two weeks, we spent $50 per drawing on the first 7 drawings, just like we planned. But on the 8th drawing we spent $70 because it was harder. Which is also the reason we didn't get to finish the 9th and 10th drawings. So for the first 7 drawings that were produced we spent (7 x $50) and for the 8th drawing we spent $70 for a total of $420 for 8 drawings.
Now we can compute some indicies
- The actual for the cost for the 8 drawings was $420
- ACWP = $420
- The planned cost for the 10 drawings was $500
- So at the end of the week, we are under budget by $80
- But we didn't produce the planned 10 drawings,but only 8 drawings for that $420
So let's do some claculations using Earned Value formula.
- We can calculate our Cost Variance (CV) - the difference what we planned to spend and what we spent.
- CV = BCWP - ACWP = $400 - $420 = ($20)
- So for the work we did do, we had an unfavorable cost of $20
- No only did we not do the planned work, we had an unfavorable cost to do it
- Let's calculate the Schedule Variance (SV) - the difference between when we planned to produce the first batch of drawings - the 10 at the end of the 2nd week and when we will actually produce the 10 drawings
- SV = BCWP - BCWS = $400 - $500 = ($100)
- So for the planned work we are unfavorable to schedule by $100
- Not only are we unfavorable to cost, we are also behind schedule
That's all interesting, but the real value in Earned Value is the ability to forecast the future. The first forecast calcualtion is our Estimate At Completion. This our estaimate of how much this project is going to cost when we are do, if we don't change anything
- First let's calculate the Cost Performance Index
- CPI = BCWP / ACWP = $400/$420 = 0.95
- EAC = [ACWP + (Budget at Completion - BCWP)]/CPI = [$420 +($1000-$400)]/0.95 = $1073
- If we keep going at the planned rate, we're going to over run by $73
But that's not the real problem, let's see how late we are going to be.
- The Schedule Performance Index (SPI) = BCWP / BCWS = $420 / $500 = 0.84
- We had planned 4 weeks, 20 working days, so the forecast completion can be calculated with the SPI
- Estimated completion duration = Planned Duration / SPI = 20 days / 0.84 = 23 days
- We're going to be days late and $73 over budget if we don't make any changes.
Here's the quick summary:
- At the end of 2 week - half way through - we're missing 2 planned drawings.
- We spent more than planned for the 8 we did deliver.
- For the 8 drawings we should have spent $400. $50 each x 8
- But we spent $420, because the last drawing cost $70, instead of the planned $50
- We produced fewer drawings than we planned
- We were suppose to produce 10 drawings in the first 2 weeks
- But we only produced 8 drawings in that same period of performance
- We prodced less than planned and spent more for those we did produce than we planned
- We are now late - 8 drawings instead of 10 - and we're over budget - $420 instead of $400
- If we don't do anything, we'll be over budget by $73 and late by 3 days
So what can we do?
- We can catch up by producing more drawing for less cost
- We can keep on schedule and spend more money
- We can keep on budget but be late
- There is no way to get back on budget and get back on schedule, unless we produce the remaining drawings for less than we had planned and at the same time produce more drawing than we planned in the remaining weeks.
This is what Earned Value can tell us. No other method can do this.
This is the Value of Earned Value