The concept of Earned Value Management (EVM) is developed from the principle of “earned time.” This principle was popularized by innovators of time and motion studies who were two American engineers, Lillian Gilbreth and Frank.
During the 1960s, Earned Value Management was dominant in the US Department of Defense. Today, the technique of Earned value management is essential for project managers.
This technique enables projects to fulfill their objectives by adequately controlling the budget and schedule. In addition, EVM act as an early warning system for various projects behind their schedule and cost.
It also helps the project manager correct course, mitigating delays and losses. We all heard that the current performance of any project determines future performance as it acts as an indicator.
Moreover, it is also possible to predict schedule and cost overruns early in the project life cycle by using the trend data. So, you can save your project from severe problems. The most comprehensive technique available today is EV Management for trend analysis.
What is Earned Value Management?
It is a project management technique that integrates costs, schedule, and scope to determine project performance. With the help of actual and planned values, EVM calculates the future and permits project managers to change accordingly.
On the other hand, Earned Value Management Systems (EVMS) describes the processes, software, tools, templates, and tools used for EVM. Another important term relevant to project management is EV analysis (EVA).
It is a quantitative technique to evaluate the project’s performance by computing cost and schedule variances. Earned value management uses earned value analysis as a tool for projects that are larger in scope. EVM is a project management function as it deals with both the actions taken and data.
Benefits of EVM
Fleming and Koppelman have conducted a detailed study on agile EVM in project management. According to them, once you are done 20% with your project, you can predict the future performance of your project by using the current performance as an indicator.
However, there could be a variation of plus or minus 10%. Nevertheless, this is one of the best powerful predictive capabilities that are available today. Thus, earned value management is a powerful tool that provides many benefits such as:
- Identify critical paths.
- It maps costs with work, reducing unknowns into calculable factors.
- Benchmark and compare the current status with the project baseline.
- Create a framework of data-based to take actions and also make decisions for the future.
- Intervene ahead of time and fast (for example, you can tweak budgets and project scope, procure more resources, roll back functionalities, set customer expectations, invest in better technologies, etc.).
- Provide insight into the big picture of projects at both portfolio and project levels.
- Create accountability and provide visibility to stakeholders through clear metrics.
5 Fundamentals of Earned Value Management
EVM is all about benchmarking and measuring against a well-defined and organized plan. Therefore, you can only perform Agile EVM in organizations with certain key features in place.
There are five fundamental principles of earned value management. Let’s discuss these principles in detail.
Organization and Scope of Project
Earned value management principles stat with the elements of the project such as a scope. Then it includes a collection of requirements and scope definitions. According to this principle, the project managers have to develop three essential definitions that are:
Work breakdown structure (WBS): From the earned value principle, create a work breakdown structure so that you can divide the larger deliverables into smaller ones. The WBS gives information about the scope clarity.
Organization breakdown structure (OBS): Make an OBS, an organization chart that shows the teams, people, and departments that are intricate in a project. It also includes their roles, hierarchy, and responsibilities. The breakdown structure of an organization addresses the ‘who’ component.
Responsibility assignment matrix (RAM): Interference of the OBS and WBS to create a RAM. It defines exactly who will perform a specific task. You can measure each of these control accounts or mappings in future stages.
Scheduling, Planning, and Budgeting
This principle of earned value management focuses on defining the baseline in solid terms. Against these parameters, the manager will monitor the project. In addition, the managers will control the project throughout the project lifecycle.
The best starting point for any project planning is the work breakdown structure. In WBS, the manager group numerous activities under a single package. Also, they group the numerous work packages under one control account.
For the management of each account, there would be an account manager who would monitor the project’s progress. However, in reality, a single person manages various accounts. After planning, the scheduling stage comes where the managers decide when the work will be complete.
After that, the stage of budget allocation comes. Here, the manager appoints the specific budget required to perform the activities within a work package. Budgeting managers include the cost of material, labor, and subcontracting.
The managers also define the progress measurement methods at each work package. In addition, the managers also allocate the reserves to manage sudden scope increases.
Accounting for Actual Costs
This fundamental principle focuses on the calculation of the actual cost. Bur for the measurement of the actual cost, it is essential to have a system to track the cost of the project’s various activities. If you do not have any system, it would be difficult to track the accurate progress of the project.
Furthermore, it is also possible that you are paying the cost a few months later; however, it has already been allocated early to determine the earned value.
Examining and Reporting on Performance
According to this principle, the manager has to report the numbers of senior leaders, team members, and clients that have clear visibility into the project. But the managers have to focus on the identification of corrective actions.
These actions are the measurements against the reporting numbers and baseline. In addition, the fundamental guidelines also suggest defining thresholds of variance is necessary when there is a breach of threshold in a control account. From the variance analysis, one can easily determine the problematic tasks.
Data Maintenance and Revisions
There are some instances when there is a need to revise the baseline. It is essential when there is a project scope, schedule, or cost change. In addition, revisions are also essential when there are fluctuations in the rates.
Not only the revisions but also the data maintenance requirements are essential. Also, creating plans of risk management, change management, seeking essential approvals, and evaluating the necessity to dip in management reserves falls under this principle of EV project management.
Agile Earned Value Management (EVM)
It is a technique to determine the performance of an agile project by considering three primary variables: time, cost, and scope. Data is often represented as a burndown chart or a spreadsheet.
When a project manager wants to provide key information to the clients, he uses this chart.
It is true that agile projects always demand change, so the customer or investor wants to get a rough estimate of the cost and time for the completion of an agile project.
Key metrics for Agile EVM
Performance measurement baseline or PMB is essential in agile EVM. The baseline generates a reference point to measure the progress of the project. For measuring the performance of an agile project, the managers should know the answers to three questions which are:
- How many story points are in a project?
- How many agile iterations are prepared?
- What is the released budget?
The project manager can collect data at the end of every sprint or iteration. In data, the following metrics are included:
Earned value: It is the budget to complete work in an iteration.
Planned value: It is the budget to plan work in an iteration.
Actual cost: It is the actual cost required to complete a sprint deliverable.
Agile EVM helps you to match your release plan with the actual work you have done. The comparison is important because it enables agile teams to find any problematic areas and ensure they do not cross the budget.
Five Frequently Asked Questions
Is earned value used in agile?
Earned value (EV) refers to technical work completed or earned against the work planned or baseline. In terms of agile, the number of users’ story points is completed.
What is the key concept behind Agile?
Agile is an iterative approach to software development and project management. When the managers focus on iterative development, they can easily respond to change. Conventionally, the managers plan a project or product fully on paper before starting.
What is the formula for Earned Value Management?
The formula to calculate the earned value is:
Earned Value (EV) = total budget of the project x % of project completion
What is the top three EV management?
Earned value (EV) is a technique that contains three variables, including schedule, scope, and cost. These are the three top EVS that helps in the project management with the EV tool.
Where is Earned Value Management used?
Earned value management is a tool that measures any project’s performance. It helps the manager spot the variance by comparing the work done and the work planned. The managers can use it on three primary variables to forecast project status.