Earned Value Analysis (EVA) is an essential tool in the field of business analysis. It is a quantitative technique used to assess the performance and progress of a project in terms of its budget and schedule. This method provides a systematic approach to the integration of scope, time, and cost objectives of a project during the planning and control phases. The fundamental principle of EVA is to compare the actual cost of work performed with the budgeted cost and the actual work performed with the planned work.
The concept of EVA is based on the principle that value is earned as work is performed. This means that the value of a project is directly proportional to the amount of work completed. Therefore, by comparing the earned value (EV) with the actual cost (AC) and the planned value (PV), a business analyst can determine whether a project is on track, ahead of schedule, or over budget.
Components of Earned Value Analysis
EVA consists of three main components: Planned Value (PV), Actual Cost (AC), and Earned Value (EV). These components form the basis for the calculation of performance indices and variance analyses, which are crucial for project control and management.
Planned Value (PV) is the authorized budget assigned to the scheduled work to be accomplished. It represents the value of the work planned to be done at any given point in time. Actual Cost (AC) is the realized cost incurred for the work performed during a specific time period. Earned Value (EV) is the value of work actually performed during a specific time period, measured in terms of the budget assigned to that work.
Planned Value (PV)
Planned Value, also known as Budgeted Cost of Work Scheduled (BCWS), is the cost allocated for the work which was supposed to be completed by a certain date. It is the baseline against which the actual performance of the project is measured. PV allows project managers to assess whether the project is ahead of or behind its schedule.
For example, if a project has a total budget of $100,000 and is planned to be completed in 10 months, the PV for each month would be $10,000. If by the end of the third month, the project should have completed 30% of the work, the PV would be $30,000.
Actual Cost (AC)
Actual Cost, also known as Actual Cost of Work Performed (ACWP), is the total cost incurred for the work completed during a specific period. This includes all the direct and indirect costs associated with the work performed. AC provides an indication of the efficiency of resource utilization on the project.
For instance, if by the end of the third month, the project has spent $35,000 on the work performed, the AC would be $35,000. This indicates that the project has spent more than planned for the work performed during this period.
Earned Value (EV)
Earned Value, also known as Budgeted Cost of Work Performed (BCWP), is the value of the work actually completed during a specific period, measured in terms of the budget assigned to that work. EV provides a measure of the actual progress of the project in terms of cost.
For example, if by the end of the third month, the project has completed work worth $28,000 as per the initial budget, the EV would be $28,000. This indicates that the project has earned less value than planned for the work performed during this period.
Performance Indices and Variance Analysis
Performance indices and variance analysis are the two key aspects of EVA that provide a comprehensive view of the project’s performance. They provide quantitative measures of the efficiency and effectiveness of project execution.
Performance indices include Cost Performance Index (CPI) and Schedule Performance Index (SPI). Variance analysis includes Cost Variance (CV) and Schedule Variance (SV).
Cost Performance Index (CPI)
The Cost Performance Index (CPI) is a measure of the cost efficiency of the project. It is calculated as the ratio of the earned value to the actual cost. A CPI less than 1 indicates that the project is over budget, while a CPI greater than 1 indicates that the project is under budget.
For instance, if the EV is $28,000 and the AC is $35,000, the CPI would be 0.8. This indicates that the project is over budget as it is getting 80 cents out of each dollar spent.
Schedule Performance Index (SPI)
The Schedule Performance Index (SPI) is a measure of the schedule efficiency of the project. It is calculated as the ratio of the earned value to the planned value. An SPI less than 1 indicates that the project is behind schedule, while an SPI greater than 1 indicates that the project is ahead of schedule.
For example, if the EV is $28,000 and the PV is $30,000, the SPI would be 0.93. This indicates that the project is behind schedule as it is only achieving 93% of the work planned for this period.
Cost Variance (CV)
Cost Variance (CV) is the difference between the earned value and the actual cost. A positive CV indicates that the project is under budget, while a negative CV indicates that the project is over budget.
For instance, if the EV is $28,000 and the AC is $35,000, the CV would be -$7,000. This indicates that the project is over budget by $7,000.
Schedule Variance (SV)
Schedule Variance (SV) is the difference between the earned value and the planned value. A positive SV indicates that the project is ahead of schedule, while a negative SV indicates that the project is behind schedule.
For example, if the EV is $28,000 and the PV is $30,000, the SV would be -$2,000. This indicates that the project is behind schedule by $2,000 worth of work.
Advantages of Earned Value Analysis
Earned Value Analysis provides several advantages in project management and control. It allows for early detection of performance problems, facilitates better decision-making, and enhances communication among stakeholders.
EVA provides a factual and quantitative basis for performance measurement and control. It integrates cost, schedule, and scope measurement into a single system, thereby providing a comprehensive view of project performance. By comparing the planned, actual, and earned values, project managers can identify potential problems early and take corrective actions to keep the project on track.
Furthermore, EVA facilitates better decision-making by providing objective and reliable data on project performance. It helps project managers to make informed decisions regarding resource allocation, schedule adjustments, and cost control. It also enhances communication among stakeholders by providing a common language for discussing project progress and performance.
Moreover, EVA promotes accountability and transparency in project management. It provides a clear and objective measure of project performance, which can be used to hold project teams accountable for their performance. It also enhances transparency by providing a clear and visible measure of project progress, which can be used to communicate with stakeholders and manage their expectations.
Limitations of Earned Value Analysis
Despite its advantages, Earned Value Analysis also has certain limitations. It requires a well-defined project plan and a stable project scope. It also assumes a linear relationship between cost and progress, which may not always be the case.
EVA requires a well-defined project plan with clear definitions of work packages, their sequence, and their interdependencies. Without a well-defined project plan, it would be difficult to establish the planned value and measure the earned value accurately. Moreover, EVA requires a stable project scope. Frequent changes in project scope can distort the planned value and earned value, making it difficult to measure project performance accurately.
Furthermore, EVA assumes a linear relationship between cost and progress. It assumes that the cost of a work package is directly proportional to its progress. However, this may not always be the case. Some work packages may require a high initial investment but progress rapidly once the initial setup is complete. Conversely, some work packages may require a low initial investment but progress slowly due to technical complexities or other issues.
Moreover, EVA does not consider the quality of work performed. It measures the value of work in terms of its budgeted cost, not its quality. Therefore, a project may appear to be on track in terms of cost and schedule, but may be delivering poor quality outputs.
Conclusion
Earned Value Analysis is a powerful tool for project management and control. It provides a systematic and objective method for measuring project performance and progress. By integrating cost, schedule, and scope measurement into a single system, EVA provides a comprehensive view of project performance.
However, like any tool, EVA is not without its limitations. It requires a well-defined project plan and a stable project scope. It also assumes a linear relationship between cost and progress, which may not always be the case. Therefore, while EVA can provide valuable insights into project performance, it should be used in conjunction with other project management tools and techniques to ensure a comprehensive and accurate assessment of project performance.
Despite these limitations, EVA remains a widely used and highly regarded tool in the field of business analysis. Its ability to provide a clear and objective measure of project performance, facilitate better decision-making, and enhance communication among stakeholders makes it an invaluable tool for any business analyst.
