WHITE PAPER
The Basics of
Earned Value Management
Contents
Introduction..........................1
What Is Earned Value
Management?.......................2
What Earned Value
Management is Not.............2
Basic Principles of Earned
Value Management.............3
Plans are
time-phased.....................3
The plan is saved as the .
baseline.............................4
Earned Value is calculated
from the baseline...........4
Actual costs are collected
from the financial
system...............................4
Getting information from
the data............................4
Essential Characteristics....5
The Value of Earned Value
Management........................6
Background
introduction
Earned Value Management (EVM), which has
been a mainstay of major government project
management, has now caught the imagination
of government IT professionals as well as those
in the private sector. This has happened
because EVM offers, for the first time, an
apples to apples methodology for
understanding how projects are progressing in
relation to the original funding and scope.
Earned Value Management (EVM) is a valuable
tool in the Project Managers arsenal of tracking
measures. EVM is now a requirement for all
major capital-funded IT programs in the U.S.
Federal Government. Over a decade ago, the
Secretary of Defense decided to cancel the Navy
A-12 Avenger II Program because of
performance problems detected by EVM. This
proved conclusively that EVM mattered to
secretary-level leaders. In an era of enormous
government IT spend (estimated to be around
$65B per year), fluency in EVM concepts and
methods is a prerequisite to progressive project
management.
EVM is now a requirement for all major capitalfunded IT programs in the U.S. Government. In
June 2002, the Office of Management and
Budget mandated the use of EVM systems for
all major IT service and acquisition contracts.
DOD requires EVM on contracts worth more than
$50 million and the application of at least some
EVM principles on contracts worth more than
$20 million. The purpose of this white paper is
to describe the basics of an Earned Value
Management approach to project management,
with a particular emphasis on its use by the U.S.
Federal Government.
How is EVM pertinent in the Federal arena?
Generally, most projects are reviewed and
evaluated based on how much money has been
spent to date compared to the project budget.
However, as most project managers and
analysts know, expenditure is not always an
accurate assessment of the amount of work
completed.
It is therefore a common practice to look at the
percent complete data around a given project.
This presents the challenge of looking at two
different measurements dollars and percent
complete. This leaves questions like If I am
50% complete and have spent $250,000, is
that good or bad? Was the percent complete
subjectively or objectively determined?
Industry-leading EVMS.......7
www.deltek.com
info@deltek.com
800.456.2009
Earned Value (EV) is an evaluation of accomplished work (in
dollars) and is the foundation of EVM. Pre-defined earning
rules are used to measure EV, which is then compared to the
planned value (PV) and actual costs (AC) of a project. What
makes this information more useful than just multiplying the
percent complete by the budget, is that the earned value is
based on a time-phased budget baseline so all values
(planned, actual, and earned) are related to time. This baseline
is used for all performance measurements and is called the
Performance Measurement Baseline (PMB).
Since the PMB represents the planned budget for the approved
scope of work, it only changes with approved scope changes.
EVM therefore enforces planning and change control while
limiting scope creep. With a fixed PMB, performance-to-plan
can be used to indicate trends that allow accurate forecasts of
cost and schedule performance to that baseline. This
forecasting ability is a signficant improvement for both project
managers and customers trying to assess project performance.
Summary of Introduction to
Earned Value Management
Representing a repeatable process
Provides standard and consistent methods for progress
measurement
Facillitates consistent use of performance metrics on all
projects
Enables management to easily assess health of the
enterprise
Provides project past-performance data and lessons
learned, which are useful for improving performance
and preparing future estimates for similar work
Providing an early warning of performance problems while
there is time for corrective action
In addition, EVM improves the definition of project scope,
prevents scope creep, communicates objective progress to
stakeholders, and keeps the project team focused on achieving
progress.
EVM is critical for project management in the
public sector.
Earned Value Management encompasses a great deal of
project management functionality.
EVM is founded on a dollar-based baseline for
evaluating planned vs. earned vs. actual
project work.
What Earned Value Management is Not
EVM provides a reliable and accurate forecasting
ability, which greatly increases the accuracy of
project assessment for project managers and
federal customers.
What Is Earned Value Management?
EVM is a project management technique that objectively tracks
physical accomplishment of work by:
Relating resource planning to schedules and to technical
performance requirements
Integrating project cost, schedule, technical effort, and risk
in a realistic and executable plan called the
Performance Measurement Baseline (PMB)
Tracks performance and progress to the plan
Provides early warning of developing problems and
opportunities
Enables early corrective action when deviating from the
plan
WHITE PAPER: the basics of Earned Value Management
EVM is not a financial system or accounting system.
Although many organizations require detailed financial
budgeting and cost collection and all information must be
reported in dollars, EVM is not a financial system or accounting
system. EVM is a specific project management and reporting
technique that has enjoyed wide acceptance in the U.S.
Government.
EVM is not a reporting requirement. EVM enables detailed
reports, which enhance its project tracking capability. Since
EVM has certain data that is unique, the reports are unique,
but it is not just a reporting requirement.
EVM is not just a government requirement. Although the
federal governments in several countries require the use of
EVM on major projects, EVM is also used by many commercial
companies to manage projects. Use of EVM algorithms and
metrics have a broad application; therefore, companies are
using EVM as a means of managing work more effectively.
Basic Principles of Earned Value Management
Changes to the performance measurement baseline are
controlled.
Earned Value Management originated in industry as a best
practice and was turned into a requirement by the U.S.
Department of Defense. The concept spread throughout the
U.S. Government, industry, and other countries because this
management concept embodies fundamentally sound
principles for managing performance of projects and programs.
These principles are:
Earned Value information is employed in the
organizations management processes.
What follows is more in-depth discussion on additional
principles of Earned Value Management.
All project work is defined and planned.
Plans are time-phased
The work is broken down into finite product-oriented
components and assigned to a single organization.
A time-phased plan schedules both work and budget. A
familiar part of project management, this is commonly done as
a critical path management (CPM) schedule, but time-phased
planning also works.
The scope, schedule, and cost objectives are integrated
into a plan by which progress can be measured.
Time units can vary. For instance, when doing monthly
reporting, one should have at least weekly schedules; however,
most project managers (PMs) plan in days.
Actual costs are recorded at the same level where the
work is planned, but may be collected at a lower level.
Figure 1 shows a plot of the planned value for a project that is
estimated at $18,000 in 10 months. It is planned as a levelloaded project.
Performance is objectively measured on a regular basis.
Variances and deviations are analyzed, impacts are
forecasted, and estimates at completion are based on the
actual performance to date and the remaining effort.
EVM Concepts
$20,000
BAC
$18,000
$16,000
Dollars
$14,000
$12,000
Planned Value (PV)
$10,000
$8,000
$6,000
$4,000
$2,000
$0
Time
Figure 1. The Planned Value of a Level-Loaded Project
WHITE PAPER: the basics of Earned Value Management
10
The plan is saved as the baseline
It is easy to reach two conclusions from this graph. First, the
project is behind schedule; second, at this rate, the project will
finish very late. The last piece of the puzzle is the actual costs
to date.
An approved plan is documented and saved as the baseline.
Changes are only made to the baseline when there is an
approved scope change. The baseline is the foundation for the
earning of value that is based on accomplishment. For
example, when a project is 50% complete, the value earned is
50% of the baseline. This is called the Performance
Measurement Baseline (PMB). Re-estimates of the plan may be
maintained as the current plan, but do not change the
baseline.
Actual costs are collected from the financial
system
Whether you collect costs directly (time and material), allocate
costs, or do any combination of the two, the costs of the
project need to be reviewed against the information already
collected. When the actual cost data is added to the chart, it
looks like Figure 3.
Because the baseline is time-phased, the total Budget At
Completion (BAC) of the work is the sum of the entire budget
in the PMB. This allows a budget to be considered with respect
to time. Therefore, the planned value (PV) is the budget
planned to date as opposed to the BAC, which is the total
budget.
This indicates that at the end of four months, the plan was to
accomplish $7,200 worth of work; $4,800 worth of work was
actually accomplished, and $5,600 was spent to do it.
Getting information from the data
Earned Value is calculated from the baseline
Spending Variance of $1,200 This example shows that
project costs were less than planned costs by $1,200.
There are many ways to calculate Earned Value (EV) based on
physical accomplishment. The following simple example uses
the percent complete without considering how it is measured.
Planned Value (PV) - Actual Costs (AC)
$7,200 - $5,600= $1,200
If at the end of the fourth month, the project is 26.7%
complete with a BAC of $18,000, the EV is $4,806 (.267 x
$18,000). The planned value at the end of the fourth month
was $7,200. Graphically, that data looks like what is depicted
in Figure 2.
Cost Variance of $800 Even though the project is under
spent to the plan, it is overrun by $800 based on the work
accomplished.
Earned Value (EV) - Actual Costs (AC)
$4,800 - $5,600= $800
EVM Concepts
$20,000
$18,000
$16,000
Dollars
$14,000
Today
$12,000
Planned Value (PV)
$10,000
Earned Value (EV)
$8,000
$6,000
$4,000
$2,000
$0
Time
Figure 2. Planned Value at the End of Month Four
WHITE PAPER: the basics of Earned Value Management
10
EVM Concepts
$20,000
$18,000
$16,000
Dollars
$14,000
$12,000
Planned Value (PV)
$10,000
Earned Value (EV)
Actual Cost (AC)
$8,000
$6,000
$4,000
$2,000
$0
10
Time
Figure 3. Actual vs. Planned per EVM
Schedule Variance of $2,400 If $7,200 worth of work was
planned to date and only $4,800 worth of work was
accomplished, then the project is $2,400 behind schedule.
Earned Value (EV) - Planned Value (PV)
$4,800 - $7,200 = - $2,400
This also correlates to approximately 1.3 months behind
schedule (10 months for $18,000 is an average of $1,800 per
month, making $2,400 equal to 1.3 months.)
Variance at Completion By forecasting the remaining costs
to complete the work Estimate To Complete (ETC) and
adding that to the Actual Costs (AC), the sum is the Estimate
At Completion (EAC).
EAC = AC + ETC
Comparing that EAC to the Budget At Completion (BAC)
provides a forecast of the overrun or under run at the
completion of the project, called the Variance at Completion
(VAC).
VAC = BAC - EAC
WHITE PAPER: the basics of Earned Value Management
Figure 4 has all the measurements and their variances on one
page and provides the information that an EVM system is
known for. Here the reviewer can see what the project cost and
schedule information is to date and what it will be at
completion if the project continues to run at the same level of
efficiency to the baseline plan that it has to date.
In addition to the calculations showing current status, there
are a series of calculations that may provide additional insight
into the future performance of the project. These and all the
other calculations are defined in the Glossary of Terms.
Essential Characteristics
The guidelines contained in the ANSI standard do not describe
a system; rather, they state the qualities and operational
considerations of an integrated management system without
mandating detailed system characteristics. The standard and
its guidelines do not address all of an organizations needs for
day-to-day or week-to-week internal control such as status
reports, reviews, and formal and informal communications.
Cost
Est. Schedule
Variance
EAC
Est. Cost
Variance
BAC
PV
SV
CV
AC
EV
Time
To-Date
Figure 4. EVM Measurements and Their Variances A Visual EVM Report
In designing and implementing an Earned Value Management
System, the objective should be effective management and
control. A system that meets the letter of the guidelines but
not their intent does not support management needs. Earned
Value Management Systems that meet the intent of the
guidelines feature:
Thorough planning
Timely baseline establishment and control
Information broken down by deliverable product and by
organization or function
Objective measures of progress and performance against
the plan at levels where the work is being performed
These are also characteristics of good management and should
be used in conjunction with Earned Value Management to
provide the insight and information necessary to make
informed decisions.
The Value of Earned Value Management
All projects need effective management. Projects that are
complex, on the leading edge of technology, or that have other
parameters that make them difficult and risky must have
greater insight, control, and performance indicators to be
successful. These projects can benefit the most from Earned
Value Management.
An Earned Value Management System that implements the
ANSI/EIA 748 standard EVMS guidelines provides control and
insight because it:
Consistent reporting to higher management for use in
decision making
Relates time-phased budgets to specific tasks to
requirements contained in a statement of work
Analysis of significant variance
Provides accurate, reliable, and timely data
The implementation of management actions to mitigate
risk, manage cost, and schedule performance
Measures project progress and performance with related
costs, schedule, and technical accomplishments
WHITE PAPER: the basics of Earned Value Management
Provides Federal managers with information based on
data that originates from the systems used by the
contractor to manage the project
With the ability to evaluate accomplished work in dollars at a
point in time against what was planned, it is no wonder that
project managers and IT professionals in both the private
sector and in the government are deploying Earned Value
Management. These managers get a visual depiction of
discrepancies and can implement immediate course corrections
to stay on budget and on time in meeting the goals of the
organization.
WHITE PAPER: the basics of Earned Value Management
Industry-leading EVMS
Deltek offers the industrys most comprehensive solutions to
help manage earned value. Our leading earned value
management and analysis systems help both Government
Contractors and Government Agencies control costs, schedules
and resources and easily analyze earned value data. For more
information on Delteks Earned Value Management Systems,
visit www.deltek.com/evm.
Contact
Deltek
www.deltek.com
info@deltek.com
800.456.2009
Deltek (NASDAQ: PROJ) is the leading provider of enterprise applications software designed specifically for
project-focused businesses. For more than two decades, our software applications have enabled organizations to
automate mission-critical business processes around the engagement, execution and delivery of projects. More
than 12,000 customers worldwide rely on Deltek to measure business results, optimize performance, streamline
operations and win new business.
Deltek 13880 Dulles Corner Lane, Herndon, VA 20171
US & Canada: 800.456.2009 or 703.734.8606 UK: +44 (0) 20 7518-5010
2008 Deltek, Inc. All rights reserved. All referenced trademarks are the property of their respective owners.
