IT Project Cost - Tools and Techniques

Earned Value Management (EVM)

Earned Value Management (EVM) is a technique that combines scope, time, cost and resources measurements to assess project performance and progress. It is a common method of measuring performance of projects. Earned value as the name suggests, is the value of work done at each stage of the project. Every project has (recall from triple constrains):

• Cost: The amount of money the project is expected to cost
• Time: The amount of time the project should take
• Scope: The amount of work needed to be done in order to complete the project

Formulas

• Planned Value (PV): Budgeted cost of work scheduled
  • The planned amount to be spent on an activity by certain time
  • E.g. The project budget fro the first month is $1000
  • Use: Shows how much we expected to spend by the time
  • Calculation: Planned Completion (%) × Budget at Completion (BAC)
    • E.g. BAC = $100,000; After 2 months, the planned completion is 40%.
    • PV (2 months) = 40% × $100,000=$40,000
• Actual Cost (AC): Actual cost of worked performed
  • The total money spent on an activity up to a certain date
  • E.g. We actually spent $12,000 in the first month
  • Use:Shows how much we really spent
  • Calculation: Actual Completion (%) × Budget at Completion (BAC)
    • E.g. BAC = $100,000; After 2 months, 30% of the work is actually completed.
    • EV (2 months) = 30% × $100,000=$30,000
• Earned Value (EV): Budgeted cost of work performed
  • The value of the work actually completed based on the original budget
  • E.g. A budget for a task is $10,000andtheprojectteamhascompleted50$5,000
  • Use: Shows how much work has actually been done compared to the plan
  • EV does not show much much money was spent - it shows how much work has been completed and assigns a budgeted value to that completed work
  • Calculation: PV of all completed work
• Schedule Variance (SV) = EV-PV
  • Measures if the project is ahead or behind schedule
  • SV > 0 (positive SV): The project is ahead of schedule
  • SV < 0 (negative SV): The project is behind schedule
  • SV = 0: The project is exactly on schedule (Very unlikely in reality)
  • E.g. SV = EV - PV = $45,000-$50,000 = -$5,000.Theprojectisbehindscheduleby$5,000 worth of work
• Cost Variance (CV) = EV - AC
  • Measures if the project is over or under budget. It compares the budgeted value of work completed to the actual amount spent
  • CV > 0 (positive CV): The project is under budget, the value of work exceeds the cost incurred
  • CV < 0 (negative CV): The project is over budget, as the cost incurred exceeds the value of work completed
  • CV = 0: The project is exactly on budget (Very unlikely in reality)
  • E.g. CV = EV - AC = $20,000-$25,000 = -$5,000.Theprojectisoverbudgetby$5,000
• Schedule Performance Index (SPI) = EV/PV
  • Measures schedule efficiency (How fast are we working?)
  • SPI > 1 (positive SPI): The project is ahead of schedule (work is being completed faster than planned)
  • SPI < 1 (negative SPI): The project is behind schedule (work is lagging behind the plan)
  • SPI = 1: The project is exactly on schedule (Very unlikely in reality)
  • E.g. EV / PV = $40,000/$50,000 = 0.8. SPI = 0.8 indicates that the project is behind schedule, as only 80% of the planned work has been completed by this point
• Cost Performance Index (CPI) = EV/AC
  • Measures cost efficiency (Are we spending wisely?)
  • CPI > 1 (positive CPI): The project is cost-efficient (getting more value for less cost)
  • CPI < 1 (negative CPI): The project is over budget (spending more for less value)
  • CPI = 0: The project is exactly on budget (not wasting money)
  • E.g. CPI = EV / AC = $50,000/$40,000 = 1.25. A CPI of 1.25 indicates that for every dollar spent, the project is delivering 1.25 dollars’ worth of work, which is very cost-efficient.
  • CPI VS CV: CV gives a dollar amount for budget performance (easier to visualise for immediate financial adjustments); CPI provides a ratio for cost efficiency (useful for assessing project long-term trends)
• **Budget at Completion (BAC): Total project budget from the beginning
  • The total approved budget for the entire project, as planned at the start
  • E.g. A project has a planned budget of $200,000,theBACis$200,000
• **Estimate at Completion (EAC) = BAC/CPI
  • The forecasted total cost of completing the project, based on the project’s current performance
  • E.g. EAC = BAC/CPI = $100,000/0.8=$125,000. The project is expected to cost $125,000whichis$25,000 over budget

• Estimate to Complete (ETC) = EAC - AC