When the term Earned Value is used and the associated Earned Value Management, what we need to understand is this is a method of measuring progress to plan that no other method can provide.
There is a common myth, even among recognized leaders in the software development and agile management domain that Earned Value has no value for many projects. It's too complex, it doesn't tell us anything about actual progress and the biggest red herring of all, Earned Value isn't Business Value.
Let's look at a simple definition of Earned Value.
- Work is planned to be performed at a defined period in time. With this plan, work is just Level of Effort and anyone can do anything they want. But let's assume you have a plan for performing the work. You also likely have a budget for that work. You know how much it will cost over that period of time to do the work. This is called the Planned Value (PV). The "value" in the Planned Value is your budget for that work.
- Now you start working and you measure your physical percent complete. A measure of how much of the Planned Work you got done on a specific date. Say you planned to produce 10 drawings over two weeks. Your budget - your cost - for these drawings is $100 per drawing (cheap labor).
- At the end of week one, you planned to have 5 drawings done for a Planned Value - your budget - of $500 for the 5 drawings.
- At the Friday meeting it turns out you only produced 4 drawings, each one actually costing, $88 for a total cost of $352 instead of your Planned Budget (Planned Value) of $500.
- So you have 4 drawings instead of your 5, but you spent $12 less per drawing than you had budgeted.
- Now your customer asks - where are you on schedule and where are you on budget?
- The simple answer is "we're 4/5 of the way toward our planned schedule, and we're 88/100 under budget."
- "Nice" is the answer. "When will you be done and how much will it cost when you are done?"
- What is your answer?
- Without Earned Value you'll have to think a bit.
- Let's see I'm only producing 4 drawings a week when I need to produce 5 to stay on schedule.
- But I only spent $88 each for those 4 drawings when I planned to spend $100 each, so I'm saving money on those 4 and have extra money left over. $148 to be exact.
But you still need to answer the question, when will you be done and how much will it cost?
The Earned Value Calculation
The original Budget for all the drawings is $1,000. 10 Drawings @ $100 each, 5 drawings a week for 2 weeks. That is called the Planned Value (PV),
- PV = $1,000
- PV for the Friday is for 5 drawings, or 5 x $100 = $500
So now let's look at what you "earned."
- You planned 5 but only produced 4.
- In Earned Value that is called physical percent complete and a simple calculation for how much you earned is PV x Physical Percent Complete or $500 x (4/5) = $400.
- You only "earned" $400, when if you had produced all 5 drawings At the time you said you would, you would have "earned" $500.
On the Budget side,
- You had planned to spend $500 by that Friday (5 drawings x $100 each).
- But instead you spent less. You spent only $88 per drawing for the 4 drawings for a total of $352.
- For the actual cost, it is called Acutal Cost (AC).
So now let's do some calculations. In Earned Value there are two main formulas. The first is the Cost Variance.
- Cost Variance (CV) = Earned Value - Actual Cost = EV-AC = BCWP - ACWP = $400 - $352 = $48.
- The CV has a positive $48, favorable to plan as we would say.
The second is the Schedule Variance
- Schedule Variance (SV) = Earned Value - Planned Value = EV - PV = BCWP - BCWS = $400 - $500 = ($100)
- The SV has a negative variance of $100, unfavorable to plan as we would say.
So this is nice, now what. How do we answer the question asked - when will you be done and how much will it cost?
Well there are some more formulas in Earned Value. Formula that are indices of the performance to date and with those we can calculate future performance, assuming we don't change the way we are working.
The first is the Cost Performance Index
- Cost Performance Index (CPI) = Earned Value / Actual Cost = BCWP / ACWP = $400 / $352 = 1.13
- This tells us we are utilizing our budget at 1.13 times our planned rate.
Next is the Schedule Performance Index
- Schedule Performance Index (SPI) = Earned Value / Planned Value = BCWP / BCWS = $400 / $500 = 0.8
- This tells us we're only running at 80% of our planned rate, 80% of our Planned "earning of Value."
So now we have some more numbers, let's calculate the answer to the questions
First let's look at the schedule forecast. If we do nothing different, instead of finishing in 10 working days, we'll be done in 10/0.8 = 12.5 days at the current rate. As far as money goes if we keep spending at the current rate it will cost $884 instead of the planned $1,000, but we'll be 2.5 days late.
This is a simple (and simple minded) example. Imagine a project with 100's or 1,000's of current activies, all with their budgets, Planned Value, Physical Percent Complete, and calculate Earned Value. Now these numbers can tell you things you can't know just by looking at the budget spend and the passage of time.
Earned Value can tell you
- The efficiency of your budget spend - what are you getting for your budget against you're planned value?
- The efficiency of your schedule utilization - are you actually making progress to plan by producing the planned outcomes on the planned date?
In this example you didn't produce the planned number of drawings, but you underspent as well, so you might be able to spend more (the remaining unspent funds) and get back on schedule, by hiring an extra set of hands to finish off the 5th drawing on the next Monday and then take corrective action to produce the planned 5 drawings in the second week.
A Final Set of Concepts
Here's a very nice overview at the next level of detail from Les Chambers, but ignore the comment about the software for now.
And no matter how many times the talking heads of famous agilest say it, Earned Value is NOT about business value, they are right, but ignoire them. Stick with what EV does best, managing projects. If you want to measure business value, you need to define and monetize what business capabilities will be needede. EV is about managing the projects that deliver that business value.
In Les's presentation, working software is the tangible evidence that you have earned the Planned Value - the Earned Value for the software products you're building. There is a direct connection between Earned Value and Scrum - at the end of each iteration, you earn the Planned Value for the working software you planned to produce. Look here for the starting point of integrating EV and Scrum.
