Earned Value

Earned Value Analysis, also known as Budgeted Cost of Work Performed, is recommended by a number of agencies including the US and Australian departments of defence. It is also recommended in BS 6079.

Earned Value Analysis has gained in popularity in recent years and may be seen as a refinement of the cost monitoring discussed in the previous section. Earned Value Analysis is based on assigning a 'value' to each task or work package (as identified in the WBS) based on the original expenditure forecasts. The assigned value is the original budgeted cost for the item and is known as the baseline budget or budgeted cost of work scheduled (BCWS). A task that has not started is assigned the value zero and when it has been completed, it, and hence the project, is credited with the value of the task. The total value credited to a project at any point is known as the earned value or budgeted cost of work performed (BCWP) and this can be represented as a value or as a percentage of the BCWS.

Revised total cost

Revised estimate

Original total cost i-

Time (weeks)

Original total cost

Time (weeks)

Figure 9.10 The cumulative expenditure chart can also show revised estimates of cost and completion date.

Figure 9.10 The cumulative expenditure chart can also show revised estimates of cost and completion date.

Project costs augmented by project monitoring can be used to generate forecasts of future costs.

Where tasks have been started but are not yet complete, some consistent method of assigning an earned value must be applied. Common methods in software projects are:

• the 0/100 technique Where a task is assigned a value of zero until such time that it is completed when it is given a value of 100% of the budgeted value;

• the 50/50 technique Where a task is assigned a value of 50% of its value as soon as it is started and then given a value of 100% once it is complete;

• the milestone technique Where a task is given a value based on the achievement of milestones that have been assigned values as part of the original budget plan.

Of these, we prefer the 0/100 technique. The 50/50 technique can give a false sense of security by over-valuing the reporting of activity starts. The milestone technique might be appropriate for activities with a long duration estimate but, in such cases, it is better to break that activity into a number of smaller ones.

The baseline budget

The first stage in setting up an earned value analysis is to create the baseline budget. The baseline budget is based on the project plan and shows the forecast growth in earned value through time. Earned value may be measured in monetary values but, in the case of staff-intensive projects such as software development, it is common to measure earned value in person-hours or workdays. Amanda's baseline budget, based on the schedule shown in Figure 8.7, is shown in Table 9.2 and diagrammatically in Figure 9.11. Notice that she has based her baseline budget on workdays and is using the 0/100 technique for crediting earned value to the project.

Table 9.2 Amanda 's baseline budget calculation

Task

Budgeted workdays r

Scheduled completion

Cumulative workdays w

% cumulative earned value

Specify overall system

34

34

34

14.35

Specify module B

15

49 i

[ 64

27.00

Specify module D

15

49 '

Specify module A

20

54

84

35.44

Check specifications

2

56

86

36.28

Design module D

4

60

90

37.97

Design module A

7

63

97

40.93

Design module B

6

66

103

43.46

Check module C spec

1

70

104

43.88

Specify module C

25

74

129

54.43

Design module C

4

79

133

56.12

Code & test module D

25

85

158

66.67

Code & test module A

30

93

188

79.32

Code & test module B

28

94 i

[ 231

97.47

Code & test module C

15

94 1

System integration

6

100

237

100.00

Amanda's project is not expected to be credited with any earned value until day 34, when the activity specify overall system is to be completed. This activity was forecast to consume 34 person-days and it will therefore be credited with 34 person-days earned value when it has been completed. The other steps in the baseline budget chart coincide with the scheduled completion dates of other activities.

Monitoring earned value

Having created the baseline budget, the next task is to monitor earned value as the project progresses. This is done by monitoring the completion of tasks (or activity starts and milestone achievements in the case of the other crediting techniques).

Total estimatedjDrpject budget

I1111!1111!1111!1111!1111!1111!1"1!11"!1111!1"1!11"!1111!1"1!11"!

65 70 75 80 85 90 95 100

Elapsed days

Figure 9.11 Amanda's baseline budget.

Figure 9.12 shows Amanda's earned value analysis at the start of week 12 of the project. The earned value (BCWP) is clearly lagging behind the baseline budget, indicating that the project is behind schedule.

By studying Figure 9.12, can you tell exactly what has gone wrong with her project and what the consequences might be?

Exercise 9.3

Elapsed days

Figure 9.12 Amanda's earned value analysis at week 12.

Elapsed days

Figure 9.12 Amanda's earned value analysis at week 12.

As well as recording BCWP, the actual cost of each task can be collected as actual cost of work performed, ACWP. This is shown in Figure 9.13, which, in this case, records the values as percentages of the total budgeted cost.

Earned Value Basic Components

Month number

Figure 9.13 An earned value tracking chart.

Month number

Figure 9.13 An earned value tracking chart.

Figure 9.13 also illustrates the following performance statistics, which can be shown directly or derived from the earned value chart.

Budget variance This can be calculated as ACWP - BCWS and indicates the degree to which actual costs differ from those planned.

Schedule variance The schedule variance is measured in cost terms as BCWP -BCWS and indicates the degree to which the value of completed work differs from that planned. Figure 9.13 also indicates the schedule variance in time, which indicates the degree to which the project is behind schedule.

Cost variance This is calculated as BCWP - ACWP and indicates the difference between the budgeted cost and the actual cost of completed work. It is also an indicator of the accuracy of the original cost estimates.

Performance ratios Two ratios are commonly tracked: the cost performance index (CPI = BCWP/ACWP) and the schedule performance index (SPI = BCWP/ BCWS). They can be thought of as a 'value-for-money* indices. A value greater than one indicates that work is being completed better than planned whereas a value of less than one means that work is costing more than and/or proceeding more slowly than planned.

In the same way that the expenditure analysis in Figure 9.9 was augmented to show revised expenditure forecasts, we can augment the simple Earned Value tracking chart with forecasts as illustrated in Figure 9.14.

Original Revised completion completion date date

Original Revised completion completion date date

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Month number

Figure 9.14 An Earned Value chart with revised forecasts.

Revised expenditure , x f forecast <" ,

Forecast overspend forecast

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Month number

Figure 9.14 An Earned Value chart with revised forecasts.

Earned value analysis has not yet gained universal acceptance for use with software development projects, perhaps largely because of the attitude that, whereas a half-built house has a value reflected by the labour and materials that have been used, a half-completed software project has virtually no value at all. This is to misunderstand the purpose of earned value analysis, which, as we have seen, is a method for tracking what has been achieved on a project - measured in terms of the budgeted costs of completed tasks or products.

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Responses

  • kevin hunter
    Is based on the project plan and shows the forecast growth in earned value through time?
    5 years ago
  • Valentin
    Why is earned value analysis not gained popularity?
    2 years ago

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