May 22, 2011

What is Earned Value?

What is Earned Value?

    At the highest level, earned value is simply a means to measure the progress and overall health of a project.  Earned value is an objective and unbiased means to measure progress taking into consideration scope, cost, and schedule.  While most engineers are very familiar with scope and schedule, as we've been trained to understand completing tasks by a specific time since elementary school, very few have had to deal directly with the third variable - cost.  This is unfortunate because the most common reason a project gets canceled is because it became "too expensive".  This article will attempt to introduce you to some of the basics of Earned Value without overwhelming you with many of the more advanced aspects.

Why Use EV?

    As projects increase in size and complexity, so do the risks and the likelihood for failure.  Earned value provides useful information that project leaders can use to identify problems they wouldn't see if they were only tracking schedule.  As you'll see in the examples below, being ahead of schedule isn't always cause for celebration, and being behind schedule isn't always reason to panic.  By factoring in cost to the equation, we can see a new dimension that will often change the way a project lead would handle a problem than if they were looking at schedule alone.  Lastly it provides a common language between management and engineering as both sides can use the same unit of measurement - the dollar.  This common language is critical when problems arise and you have to help management understand the situation and come to the right resolution.

EV Explained

   EV is simply a matter of converting planned and actual progress to a common denominator, the dollar, such that the project leader can compare and evaluate planned versus actual.  Once you have these simple values it is possible to see the status in terms of cost and schedule, but also the interplay between the two.  The basic formulas are listed below:
        Planned Value of Task (PV) = Planned % Complete of Task * Planned Cost of Task
        Actual Cost (AC) = Amount of money spent so far
        EV of Task (EV) = Actual % Complete * Planned Value of Task

    Because all three measurements use the same common base (the dollar), it is possible to compare and graph these values together.  This means it is possible to communicate a great deal of information in a very simple chart.  Things will become a little clearer as we go through the examples, but the chart below shows a project that has the following status:

  • Is getting work done cheaper than originally planned (EV > AC through the entire schedule)
  • Has become behind schedule and has completed less work than they planned (EV < PV in the later weeks).


Example

    Consider a simple 12 week, $22,000 plan to create "Feature X" (Plan assumes mid-level engineers that cost $1000 a week).

Task Planned Time Planned Resources Planned Cost = Planned Value of Task
Design Feature X 2 weeks 2 developers $4000 (2 weeks * 2 developers * $1000 per week)
Implement Feature X 8 weeks 2 developers $16000 (8 weeks * 2 developers * $1000 per week)
Test Feature X 2 weeks 1 tester $2000 (2 weeks * 1 tester * $1000 per week)

Now lets consider a couple scenarios to illustrate how EV can be useful.

Scenario 1:  Suppose that instead of $1000 per week mid-level engineers, the only available engineers for the project are very senior and cost $1,500 per week.  Since senior engineers generally complete work faster than the mid-level engineers, we should finish early and the cost will remain the same.  Checking schedule status at week 3 (see table below), we are in fact progressing faster than originally planned.

Project Schedule Status at 3 weeks
Task Planned % Complete Actual % Complete
Design Feature X 100% 100%
Implement Feature X 12.5% 25%

    At the end of 3 weeks, we planned to be finished with design and be 12.5% done with the implementation.  Instead we have finished the design and are already 25% complete with the implementation.  If we were only tracking schedule right now we'd probably be patting ourselves on the back because we are 12.5% ahead of where we thought we would be on the schedule.  It looks like the senior engineers are going finish the project early.  But what is the health of this project really?
If we track the status using EV using the formula:  EV = Actual % Complete * Task Planned Value we arrive at the table below.

Project Status at 3 weeks using EV
Task Planned % Complete Actual % Complete Planned Value Earned Value Actual Cost
Design Feature X 100% 100% $4,000 (100% * $4,000) $4,000 (100% * $4,000) $4,500 (1.5 weeks * 2 developers * $1500)
Implement Feature X 12.5% 25% $2,000 (12.5% * $16,000)) $4,000 (25% * $16,000) $4,500 (1.5 weeks * 2 developers * $1500)

    At the end of 3 weeks, we originally planned to complete $6,000 ($4,000 + $2,000) worth of work, we have actually completed $8,000 ($4,000 + $4,000) worth of work, but it cost $9,000 ($4,500 + $4,500).  The status of this project is ahead of schedule, but over cost.  So, although the more expensive senior engineers are completing the work faster than the planned mid-level engineer would have, they aren't completing it fast enough and the project is looking like it will exceed the original $22,000 budget.  Knowing this information, we can tell that now is not the time to pat ourselves on the back and relax for the rest of the project.

Scenario 2:  Consider the same example, but suppose you could only get 2 rock star junior developers that cost a mere $500 a week.

Project Status at 3 weeks
Task Planned % Complete Actual % Complete
Design Feature X 100% 100%
Implement Feature X 12.5% 0%

    At the end of week 3 we see that the design task took a little longer than expected, but looking only at the schedule doesn't tell you the whole story.  What options does the project lead have that he can present to management?

Project Status at 3 weeks using EV
Task Planned % Complete Actual % Complete Planned Value Earned Value Actual Cost
Design Feature X 100% 100% $4,000 (100% * $4,000) $4,000 (100% * $4,000) $3,000 (3 weeks * 2 junior developers * $500)
Implement Feature X 12.5% 0% $2,000 (12.5 * $16,000) $0 (0% * $16,000) $0

    At the end of 3 weeks, we originally planned to complete $6,000 ($4,000 + $2,000) worth of work, we have actually completed $4,000 ($4,000 + $0) worth of work, but it only cost $3,000 ($3,000 + $0).  By factoring in cost we can see that the 2 junior developers are definitely completing the work slower than desired, but they are also completing it much cheaper than expected.  Given this information the project lead might opt to bring on another engineer to help catch up the schedule.  This is very feasible because you are currently spending half of what your originally planned to spend every week.  Or he might choose to go to management stating he can deliver the feature under budget if he is given more time, which could be an attractive option depending on the situation.

Summary  

    By tracking a project's progress using earned value, and factoring in cost to your status calculations, project leaders can gain a much more complete understanding of the overall health of the project than they could by tracking schedule alone.  As we saw in the scenarios it is possible to be ahead of schedule but still be in danger of failing, or be behind schedule but actually discover a better definition for success.  In any case, seeing the interrelation between schedule and budget greatly improves what we can know about the current situation, and make apparent other options for achieving success.


Questions?  Post a comment, or contact me at plummeronsoftware at gmail dot com

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