Tuesday 15 March 2022

Earned Value Method in Project Management

First, there is undeservedly little attention on the part of Russian heads of enterprises and project managers to such a powerful management tool as the method of mastered volume.

Secondly, the lack of knowledge in this matter among most employees and members of project teams does not allow the full use of this method at the executive level in order to provide management with quality information about the status of the project.

All this leads to the fact that the method of mastered value (LDO) is often perceived as something complex, requiring special training or, worse, as unnecessary refinements in improving the efficiency of project management.

Meanwhile, the LEA is exactly the way that allows at the highest level to very clearly show the state of the project in terms of answering the question "where are we in the project?", i.e. to satisfy the main need of senior management - to understand the situation with the project at a glance, and in monetary terms (!). Moreover, the MOE is able to show this not only in statics, but also in dynamics, i.e. to demonstrate how we (the company, the team) came to such a state and predict what we will come to in the future if we take / do not take some action.

Yes, the application of the earned value method (LMO) requires a certain managerial, technical and methodological maturity from the company and the project team, but it is worth it.

The purpose of this article is to provide employees engaged in the implementation of projects (and especially managers) with more or less detailed instructions on the application of the earned amount in their work, the formation of an understanding of the essence of LEAs and simple skills in interpreting reports compiled using this method.

Part I: Generating a Project Status Report

A bit of theory

A lot of theoretical and rather boring works have been written about the mastered volume, forcing the reader in most cases to become even more convinced of the complexity of the method and finally cool down to the idea of introducing it into his work.

Here we will try to avoid this theoretical boredom as much as possible, but still we cannot do without the theory at all.

So, what is mastered volume?

As you know, money is the universal measure of everything in the world (except love, of course). In money, you can estimate how much a particular thing, company and even reputation are worth. It is possible to assess the state of the project in money, and this is especially true when the project is associated with significant capital investments.

To begin with, let's imagine such a situation that our project, for example, digging a well, consists of only one work. Let this work, for simplicity, last 100 days, cost $ 100 thousand (this is a special, very expensive well J) and expressed in cubic meters. meters (the number of units in which the work is expressed will also be called "physical volume"). And for all the time of the work it is necessary to dig 100 m3.

It is quite obvious that according to the plan, we should dig the well with an intensity of 1 m3 / day spending $ 1000 per cubic meter.

If after 10 days of work everything goes according to plan, then the project team will have to dig up 10m3 of soil, and spend $ 10,000 on it.

Let's imagine, however, such a situation when, having come to the head of the enterprise with a report 10 days later, the project manager reports that at the moment the actual costs of the project amounted to $ 12,000 with the planned $ 10,000. The question that the manager will ask the project manager in this case lies on the surface: what is the reason for such an overpayment? Is the funds not being spent efficiently (i.e. more than planned) or the fact that the project is ahead of schedule?

In the case of one job, as in our example, it is not at all difficult to find out – just look at the physically performed amount of work. If it is the planned 10m3, then there is an overpayment of funds, and if it is 12m3, then it is obvious that at the time of drawing up the report there is ahead of schedule. Worse, if the executed volume is less than the planned 10m3 (for example, 9), then this means not only an overpayment, but also a lag behind the schedule. And vice versa: if the executed volume is more than 12m3, then this means not only ahead of schedule, but also cost savings.

But what if the project has thousands of works expressed in different units (m3, pcs., %) with different durations and costs, and many of which at each time can be performed simultaneously? Some works at a certain moment may be ahead of schedule, and some, on the contrary, lag behind. It is impossible to turn to any one physical volume in this case and it will not be possible to compare the actual costs ($ 12,000) with the planned ones ($ 10,000).

Let's look, however, at these figures more closely:

What is $10,000 in our example? This is how much the physical volume of 10m3 is worth, which the project team had to complete 10 days after the start of the project, spending money on the project in accordance with the cost plan. That is, $10,000 is the planned cost of the work planned for the current time.

What is $12,000? So much money the project team actually spent, having performed some actual amount of work. That is, $ 12,000 is the actual cost of the work actually performed.

It is not surprising that it is impossible to compare them directly with each other.

This is where the concept of mastered volume comes into play. The mastered volume is a kind of "intermediate agent" that allows "through itself" to compare these two quantities with each other.

What is the mastered volume?

The mastered volume is the planned cost of the work actually performed.

In other words, the mastered volume is actually the work performed in the planned rates.

It is no longer difficult to compare the mastered volume with the planned and actual costs:

If the mastered amount (GS) exceeds the planned amount (expressed in the same rates), this means that at the time of reporting, the project team has completed more work than planned, i.e. there is ahead of schedule. If the GS is less than the planned cost of the planned work, then it is obvious that the project is behind schedule.

Similarly with the actual cost:

If the OO exceeds the actually spent funds, i.e. the planned cost of the work actually performed is greater than the actual cost of the same work, then there is a saving of funds, because having performed the same work, the project team, in fact, spent less money than originally planned. And vice versa - if the OO is less than the actual cost, then the project team overpaid, because the same work cost more than planned.

As you can see, the calculation of the earned volume allows you to unambiguously interpret the state of the project, comparing only three values with each other.

Obviously, when using earned value, the presence in the project of any number of works, measured in different units, is no longer a problem. Since all three values are measured in money, they can be calculated for the entire project as a whole, summing up the corresponding values calculated for each of the works.

The mastered volume allows you to understand how effectively (in terms of timing and cost) the project team masters the planned capital investments in the project and if this efficiency leaves much to be desired, then it is timely to make a decision on corrective measures in the project.

The convenience of mastered value also lies in the fact that this indicator allows you to assess not only the state of the entire project as a whole, but also any single part of it, for example, a certain type of work or site. On the other hand, this indicator can be calculated for a more general category - the entire portfolio of projects of the enterprise.

So, now, having calculated the mastered volume, we know "where we are" in the project. But, as we shall see later, this is only the tip of the "iceberg of utility" of the volume earned.

The next questions we should ask ourselves are how far ahead/lag behind or save/overspend?, how did we come to this state?, how can events develop in the future if we continue to carry out the project within the framework of existing trends? and how should we work to complete the project on time and within budget? More on that later.

Indicators calculated on the basis of earned value

By itself, the mastered volume allows you to state the fact that the project is in a certain state. A more detailed analysis of this condition allows you to draw indicators derived from it.

The simplest indicators, calculated on the basis of earned value, include:

  • time deviation rate (SRF),
  • deviation by value (OST),
  • Deadline Completion Index (IMR),
  • Cost Fulfillment Index (IVST).
  • The first two indicators are absolute, the second two are relative.

Let's introduce the designations:

The Timing Variance Indicator (SRF) reflects the deviation from the schedule expressed in money (it will be understood in the future how the deviation in terms of timing in money reflects the deviation in time) and is calculated as follows: GSR = GSO.

In fact, this indicator is a specific amount by which the project team lags behind or is ahead of the planned budget.
Obviously, the SRF will be negative if the team lags behind the project implementation plan. The value of the SRF will show how much the work that the project team did not have time to perform at the time of the report is worth.

Similarly, the cost deviation indicator (OST) will show a deviation from the budget planned for the performance of work: OST = GS-FS.

If the OST is negative, then its value will show the amount of overpayment that the team made, as of the current moment.

Deadline indices (IWRS) and cost indices (IVST) allow you to move from absolute to relative. Such a transition is useful for the purpose of comparing the state of various portfolio projects with each other, building indicator diagrams (traffic lights, etc.) and forecasting the results of the project, because in fact they reflect the accumulated trends in the implementation of the project.

The deadline completion index compares the earned volume with the planned volume. The formula for its calculation: IVSR = OO/PO. An IVSR value of less than one indicates delays in the completion of work.

The cost fulfillment index shows the effectiveness of the financial costs of the project at the moment. Obviously, the IVST < 1 indicates an overrun on the project when performing the work. IVST = GS/FS.

Each row of the above table is essentially a "mini report" of the status of the project for various scenarios.

So, let's sum up a small intermediate result:

In order to assess the situation with the project at a certain point in time, we need three indicators: the cost of work planned for implementation at the moment, the amount of work earned and the funds actually spent by this time.

In order to specify the description of this situation, to show the specific values of lag / advance, overspending / savings, we need two derived indicators, calculated on the basis of the first three - SRF and OST.

Finally, in order to show the status of the project at an indicative level, to raise an alarming flag, and to be able to conduct a comparative analysis with other projects or alternative scenarios, we will have to use these three indicators to calculate two more relative indicators – IVSR and IVST.

As you can see, there is nothing complicated here, and only three indicators allow us to say a lot about the state of the project.

However, despite its clarity, so far these are still static indicators that reflect the situation at one point on the project timeline. Let's see how it looks in dynamics and see how we came to this situation, and most importantly, what can happen to the project next.

Graphical meaning of the borrowed volume

If the planned volume (i.e. the planned cost of work) is represented by period (for example, monthly) in the form of a histogram, then for a well-planned project we will get something close to the "hump" shown in the figure below, and the same planned volume, but the accumulated total, will be displayed on the graph in the form of a curve. This curve is also called the S-curve.

Earned Value Method in Project Management

The S-curve shows how, according to the original plan, the project budget should be spent.

In fact, if the beginning of the project is dominated by inexpensive preparatory and other "initial" work and the S-curve has a slight growth rate, then in the midst of the project the largest and most expensive amount of work is performed, as a result of which at this time the S-curve has the highest growth rate. As the project moves "to the right", the main volumes are gradually completed, and the growth rate of the S-curve falls.

As a result, the S-curve of the planned volume comes to a maximum reflecting the planned total cost of the entire project. In earned value terms, this value is also referred to as a "completion budget" (BPS).
This is how the project should develop according to plan. But, as you know, in real life there are always some deviations. Let's take a look at them.

Suppose that a project is behind schedule in terms of time, and the actual cost of performing the work exceeds the planned ones. Then, by selecting some reporting date on the chart and building a curve of earned value and actual costs (also the accumulated total), we will see the following picture:

Earned Value Method in Project Management

As can be seen from the graph, the curves of planned and used volumes, as well as actual costs, very clearly reflect the state of the project at the reporting date in terms of budget under expenditure and cash overruns. What do we see? That at some point in time the planned cost of the work performed "does not reach" the required level, while the actual costs incurred on the project already significantly exceed the planned ones.

Note that the already familiar indicators of deviation in terms and cost are also visible on this chart especially clearly:

Earned Value Method in Project Management

Moreover, a reflection of the time delay of the project was added to the visibility of the monetary indicators of deviations: the value of Δvr shows how far the project lags behind the plan in time.

This indicator can also be interpreted as follows:

On the reporting date, the project team has mastered the volume that should have been mastered by Δvr time ago.
It is this graphical representation of the development of the planned volume that shows, as promised above, not only the state of the project at some fixed point in time, but also "how the project came to this".

Isn't it enough to take one look at such a schedule to understand how well the project "feels"? Together with the data from the last table given, the management of the enterprise or the customer of the project has before their eyes a short but very visual report reflecting the state of the project.

However, this is still only a state. Therefore, our questions do not end. The following questions, as it is not difficult to guess, sound like this: What will happen to the project next if we continue to carry out the project in the same spirit? and How we should work on the project further to complete its implementation on time and within the agreed budget

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