What is Earned Value Management and How Does it Relate to Cost Management in Project Management?
Earned value management (EVM) is a project management technique used to measure the performance of a project by comparing actual results with planned results. It is a systematic method for evaluating the work completed, the work remaining, and the work under budget. The main objective of earned value management is to provide accurate and timely information about the cost and schedule performance of a project that can be used by project managers to make informed decisions about their projects.
EVM integrates cost and schedule data into a single metric that is easy to understand and communicate to stakeholders. This integration helps project managers to better assess the project’s cost and schedule performance, identify potential issues early on, and adjust their approach as needed to ensure that the project meets its goals. In addition, EVM provides project managers with a quantitative basis for determining how much work has been accomplished, how much work remains, and how much money has been spent.
Understanding Earned Value Management
Earned value management is based on the principles of cost accounting. It uses a combination of budget, schedule, and actual results to determine the current status of a project. The method requires that project managers establish a baseline plan, which is a detailed description of the project’s scope, schedule, and budget. The baseline plan serves as a reference point for measuring performance throughout the project.
The key elements of earned value management are:
- Budget: The total amount of money allocated for the project
- Schedule: The timeline for completing the project
- Actual Results: The actual cost and completion date of the work
- Baseline Plan: The detailed description of the project’s scope, schedule, and budget
By comparing the actual results with the baseline plan, project managers can determine the earned value of the project. The earned value is a measure of the work that has been completed, expressed in terms of the budget that was planned for that work. For example, if a project manager plans to spend $100 on a task and actually spends $80, the earned value would be $80.
An important aspect of earned value management is that it allows project managers to track the performance of their projects in real-time. This means that they can quickly identify any deviations from the baseline plan and take appropriate action to bring the project back on track.
Calculating Earned Value
Calculating earned value involves three key metrics: budgeted cost of work performed (BCWP), actual cost of work performed (ACWP), and budgeted cost of work scheduled (BCWS).
Budgeted cost of work performed (BCWP) is the value of the work that has been completed, expressed in terms of the budget that was planned for that work. BCWP is calculated by multiplying the percentage of work completed by the budgeted cost of the entire project.
Actual cost of work performed (ACWP) is the actual cost of the work that has been completed. ACWP is calculated by adding up all of the expenses incurred to complete the work.
Budgeted cost of work scheduled (BCWS) is the budgeted cost for the work that was planned to be completed during a specific period. BCWS is calculated by multiplying the budgeted cost for the entire project by the percentage of the project that was planned to be completed during the specified period.
To calculate earned value, project managers subtract the actual cost of work performed from the budgeted cost of work performed. The result is a measure of the project’s performance in terms of cost. This information can be used to determine whether the project is over or under budget and to make adjustments as necessary.
Benefits of Earned Value Management
Earned value management provides many benefits to project managers and their organizations. Some of the key benefits include:
Improved project visibility: EVM provides project managers with real-time information about the cost and schedule performance of their projects, allowing them to identify potential problems early on and take corrective action.
Better decision making: By integrating cost and schedule data into a single metric, EVM provides project managers with a quantitative basis for making informed decisions about their projects.
Increased accountability: EVM makes it easier to track the performance of individual project team members and hold them accountable for their work.
Better risk management: By providing accurate information about the cost and schedule performance of a project, EVM helps project managers to identify potential risks early on and take appropriate action to mitigate those risks.
Improved communication: EVM makes it easier to communicate project results to stakeholders, including senior management, stakeholders, and project team members.
G## Gantt Chart and Earned Value Management
Gantt charts are commonly used in project management to visualize the timeline of a project. They show the start and end dates of tasks, as well as the dependencies between tasks. Gantt charts can be a useful tool for project managers who are using earned value management because they provide a visual representation of the project’s schedule.
For example, if a project manager is using earned value management to track the cost performance of a project, they can use a Gantt chart to show the status of each task in terms of its budget and schedule. If a task is behind schedule or over budget, the Gantt chart will clearly show this, allowing the project manager to take appropriate action.
There are a variety of Gantt chart software options available, including Microsoft Project, Wrike, ClickUp, Monday.com, Smartsheet, and others. Many of these tools offer features specifically designed for project management, such as task management, resource allocation, and risk management.
When using Gantt charts in conjunction with earned value management, project managers can get a comprehensive view of their projects, including their cost and schedule performance. This information can be used to make informed decisions about their projects and ensure that they meet their goals.
Conclusion
Earned value management is a valuable tool for project managers who want to track the performance of their projects in real-time. By integrating cost and schedule data into a single metric, EVM provides project managers with a quantitative basis for making informed decisions about their projects. Additionally, EVM makes it easier to communicate project results to stakeholders, including senior management, stakeholders, and project team members.
When used in conjunction with Gantt charts, earned value management provides project managers with a comprehensive view of their projects, including their cost and schedule performance. This information can be used to make informed decisions about their projects and ensure that they meet their goals.
Benjamin Dawes
Benjamin Dawes is a project manager from the United States who has worked for several organizations throughout his career. He grew up in the suburbs of Boston, Massachusetts and attended Northeastern University, where he earned his bachelor's degree in business administration. After graduation, Benjamin started his career in project management at a large financial services company in Boston. He quickly proved himself to be an effective leader and was promoted to project manager within a few years. Benjamin's strong organizational skills and ability to work with diverse teams made him a valuable asset to the company. From there, Benjamin went on to work for several other financial services companies, including Fidelity Investments and State Street Bank. He also worked as a project manager for a healthcare technology company, where he managed the development and launch of a new software product aimed at improving patient outcomes. Benjamin is known for his expertise in project management methodologies such as Waterfall and Agile, which he has successfully implemented on several projects. He is also a skilled communicator and is able to effectively manage stakeholders across multiple teams and departments.