PROJECT MANAGEMENT FOR TELECOMMUNICATIONS MANAGERS CHAPTER 12 ppsx

Chapter 12
EARNED VALUE
Earned Value is a tool which enables project managers to determine
where the project stands in relation to the budget and the schedule, even on
projects with hundreds or thousands of activities, some of which are on track
at any given time, while others are either ahead of schedule or behind. Since
Earned Value refers to cost, this concept could have been introduced in
Chapter 7 with the other financial concepts. Or, since Earned Value shows
the status of the Schedule, the concept could have been introduced in
Chapter 8. But, given that the main value is as a tool for project
management, this project management chapter seems to be the best place to
cover this very important concept.
In order to describe this concept, we use the terms already mentioned in
Chapter 7:
BCWS-
budgeted cost of work scheduled or
PV
– planned value
BAC-
budget at completion
ACWP
- actual cost of work performed or
AC
– actual cost
EAC
- estimate at completion
The PMBOK
®
Guide uses the terms PV and AC. Both terms are
included here because some people use one version, while others use the
second version. Then we add some additional concepts, related to the

amount of work completed, and the overall schedule and budget status:
BCWP-
Budgeted cost of worked performed = Earned Value
CV-
Cost variance - which is BCWP - ACWP
SV-
Schedule variance - which is BCWP - BCWS
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Earned Value
BCWP is also called Earned Value (EV). Using this tool at any point in
time we can evaluate the amount of work actually completed. Then we
calculate the dollars that were budgeted for completing that work. The
cumulative graph of these budgeted costs is the budgeted cost of work
performed. Let’s walk through this.
First, we have a list of project activities. For each of these activities, we
have a planned cost, or the amount that we budgeted to complete that
activity. And, for each, we have a start date and a finish date in the schedule.
At any given point in time some activities will have started, some will not,
and others will be finished. If we can get a solid estimate of how far along
each of the activities is at the point in time – and this is a big if in itself –
then we can determine the overall status of the project using Earned Value.
Let’s look at this graphically.
The Earned Value is the Budgeted cost of Work Performed. What does
this mean. For any item there is a budget. If we have completed that item, we
have obtained a value. What value? According to our plan, the value of that
item is the amount that was budgeted. So we have obtained the value that
was in the budget. Note that this does not reflect in any way the actual cost
to obtain this value. The cost of this item might have been higher then, the
same as, or lower than the budgeted value. If the actual cost was higher, then
for this item we are under budget; if lower we are obviously over budget. If

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221
we can calculate this amount for each of the action items, then we can
determine for the project as a whole whether we are over budget, under
budget, or on track financially.
For items that have not yet started, the value obtained is zero. But for
items that are partially completed, things become more complicated.
Someone has to determine the value obtained for each of these. Probably the
best way to determine this value is to ask the people working on the activity
how much work has been completed to date. This needs to be done carefully.
Most people feel that they have worked hard, and accomplished quite a lot
when they are working on activities. It is quite common for people to
estimate that an activity is 80% finished, then find that the last 20% of the
work takes 80% of the time. So, in order to balance this, the PM should ask
how much work is remaining on the item. An estimate of the remaining
work, subtracted from 100%, should give a more accurate reading of the
percentage complete. Once this percentage completion is known, we know
what percentage of the value has been obtained. We can then multiply the
budgeted amount for the activity by this percentage to calculate the value
obtained to date, or the earned value. Again, when we have all of the earned
values, we can add these to get the overall EV for the project. This can then
be compared to the actual cost to determine the budget status, called the cost
variance, (CV) and to the planned value to get the schedule status, called the
schedule variance (SV). See figure 1.
CV = BCWP-ACWP
SV = BCWP-BCWS
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Earned Value
This
technique can be used to identify trends early. In fact, problems will

show up even if these are masked by the usual calculations of actual cost
versus budget. Because it takes all related factors into account, even on a
complex project, this technique can unearth problems that are undetectable
using other methods of analysis. Because this tool identifies potential
problems early, the PM should start using this technique early in the project.
Additional information can also be calculated, if required, as shown in
the following formulae.
SPI: Schedule performance index is BCWP/BCWS or EV/PV
CPI: Cost performance index is BCWP/ACWP or EV/AC
EAC = BAC/CPI
ETC = EAC/ACWP
VAC: Variance at completion BAC- EAC
TCPI: To complete performance index (BAC-BCWP)/ (BAC-
ACWP) or (BAC – EV)/(BAC-AC)
Percent complete BCWP/BAC or ACWP/EAC
However, be careful in using such calculations. You must know more
than the numbers to apply these formulae properly. If people have been
working hard, but facing some difficulties in the work, and these are
expected to continue, so that the project is expected to progress at more or
less the same rate as it has been progressing in the past, then the formula for
EAC can be used. However, if the current variances are negative due to
some significant one time problems that occurred in the early stages of the
project, then the formula does not apply, because the performance indices
are valid for the conditions experienced to date, not for those expected in the
remainder of the project. In that case, to calculate the EAC, the PM would
have to get estimates for cost to complete each of the remaining activities,
add these, and then add on the cost to get to the current point. That would
give the actual estimate to completion. Another technique which should
give a reasonable estimate in these circumstances would be to calculate the
amount budgeted for the work remaining, and add this to the actual cost to

date. Since the remaining work is expected to proceed according to the
original plans, this should give an accurate completion estimate.
To look at another parameter, consider CPI. CPI is a productivity
measure. It is measuring how well the project is doing against the planned
budget. If it is less than 1, then the project is in trouble. The same is true for
SPI. If it is greater than 1 then the team has completed more work than
planned by this time (SPI). But be careful in making this assessment. Maybe
the team put a large amount of contingency into the early portion of the
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schedule to help cover for a risk, but it did not happen. So that contingency
may not have been needed yet. The project will appear to be doing better
than budget. However, if the contingency is needed later instead, this would
bring the index down at that time.
In summary, earned value is a valuable tool. Some of the benefits of
using it are that it shows trends early, so that these can be dealt with. It
allows calculation of completion time even when the order of tasks is
shuffled. The calculations can be done by milestone or by discipline if
desired. These calculations can be combined with critical path analysis to
give an even more comprehensive picture of the project status.
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