EARNED VALUE MANAGEMENT SYSTEMS EXPLAINED
WHO INVENTED EARNED VALUE MANAGEMENT SYSTEMS?
The genesis of EVMS occurred in industrial manufacturing at the turn of the 20th century, mainly based on the principle of "earned time" popularised by Frank and Lillian Gilbreth. Still, the concept took root in the United States Department of Defense in the 1960s.
Earned Value Management System is one of the essential techniques prevalent today in Project & Performance Management which enables industries of all descriptions to meet their objectives by having adequate control over the Project's Schedule and budget.
In addition, it acts as an early warning system for projects that are behind cost & or schedule and helps to correct course, thereby reducing/mitigating losses and delays.
CRITICAL COMPONENTS OF EARNED VALUE MANAGEMENT SYSTEMS
The three main components of Earned Value Management System are
- Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV).
- Budgeted Cost of Work Performed (BCWP) or Earned Value (EV).
- Actual Cost of Work Performed (ACWP) or Actual Cost (AC).
Budgeted Cost of Work Scheduled (BCWS)
Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV) is the approved cost of works planned until a particular cut-off date.
Budgeted Cost of Work Performed (BCWP)
Budgeted Cost of Work Performed (BCWP) or Earned Value (EV) is the amount of work done relative to the budgeted cost of works until a particular cut-off date.
Actual Cost of Work Performed (ACWP)
Actual Cost of Work Performed (ACWP) or Actual Cost (AC) calculates the performance of the works until a specific cut-off date.
From the above essential components, two crucial requirements arise for successful implementation of Earned Value Management System, and they are,
- Project Baseline Programme.
- Project Budget.
Project Baseline: A set of dates and costs frozen at the start of the project and used as a basis for performance evaluation as the project progresses.
Project Budget: This tool used by Project & Performance Management enables organisations/industries of all descriptions to meet their objectives to estimate the total cost.
A project budget is a schedule of rates that lists the professional staff, nursing and miscellaneous staff, asset and capital requirements.
To successfully implement Earned Value Management Systems, the project scope has to be divided into various Work Breakdown Structure (WBS) and decomposed to the lowest level called activity, each of which has its duration, procurement of materials, resources sequence and cost parameters.
EARNED VALUE MANAGEMENT SYSTEM TERMS & CALCULATIONS
The essential terms used in Earned Value Management System are as below.
- Budget At Completion (BAC) or Project Budget.
- Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV).
- Budgeted Cost of Work Performed (BCWP) or Earned Value (EV).
- Actual Cost of Work Performed (ACWP) or Actual Cost (AC).
- Cost Variance (CV).
- Schedule Variance (SV).
- Cost Performance Index (CPI).
- Schedule Performance Index (SPI).
- Estimate At Completion (EAC).
- Estimate To Complete (ETC).
- Variance At Completion (VAC).
The formulae used in Earned Value Management System calculations of the above terms are as below.
- Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
- Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
- Cost Performance Index (CPI) = Earned Value (EV)/Actual Cost (AC)
- Schedule Performance Index (SPI) = Earned Value (EV)/Planned Value (PV)
- Estimate At Completion (EAC) = Budget At Completion (BAC)/Cost Performance Index (CPI)
- Estimate To Complete (ETC) = Estimate At Completion (EAC) – Actual Cost (AC)
- Variance At Completion (VAC) = Budget At Completion (BAC) - Estimate At Completion (EAC)
ADVANTAGES OF EARNED VALUE MANAGEMENT SYSTEM IN PROJECTS/ ESTABLISHMENTS
- EVMS provides a realistic picture of the project at any given time.
- EVMS is easy to understand with a graphical representation of the values.
- EVMS delivers a way to predict a future estimate of the projects.
- EVMS enables course correction in advance before the point of no return.
- EVMS conclusions can steer the management to provide for inevitable contingencies much earlier.
CONCLUSION
The Earned Value Management System is an essential armour in any Establishment which is keen to monitor and control the performance of its finances in the interests of its shareholders.
Moreover, it gives the Organisation/ Stakeholders visibility into the future, thereby leveraging time, thus enabling informed decisions to be activated.
HPC Ltd and Associates expertise are in the field of Project & Performance Management.
Earned Value Management System is a strategic enabler by having adequate control over the Project's Schedule and budget.
In addition, it acts as an early warning system for projects that are behind cost & or schedule and helps to correct course, thereby reducing/mitigating losses and delays.
He who has a why to live for can bear almost any how."
Friedrich Nietzsche