This article is part one of a multi part series investigating earned value reporting for projects, tackling the simpler of the concepts first.
Scenario.
You submit your weekly project report to your supervisor and everything looks good, plenty of budgeted time left on each tasks and plenty of time left before the deadlines for each of the milestones. But wait! Something is lurking below the surface much like an iceberg in the sea ready to sink your project. What is missing is how much work is left to complete on each of those tasks and without taking this into account you are not reporting accurately the health of your project.
Wouldn’t it be nice to know if your project is going to go over budget before the budget has been reached? Interested in having a rough idea how much it will go under/over at completion? Step in Earned Value Management (EVM).
Earned Value Management acknowledges that the value of revenue earned on projects with fixed budgets must reflect the percentage completion of all work to be done on the project rather than the hours incurred to date.
Before explaining this in more detail, let’s review some fundamental project accounting principles. These are the foundations upon which EVM is built.
Your project has one task - This task is “Developing an Invoice Report.”
1. The budget is 120 hours over three weeks.
2. At the end of the second week he has spent 80 hours on it.
3. At the end of the second week (Friday night drinks at the pub) your report writer john lost his laptop with all his work on it (no backups), he will have to start again.
Standard Budget to Actual reporting on the scenario
- Planned (Budgeted) Value of the Project = 120 hours
- Actual Costs Incurred = 80 hours
Heath of Project as Reported = 40 hours under budget and everything going well. I might get that bonus this quarter after all.
Earned Value Reporting on this scenario
- Planned (Budgeted) Value of the Project = 120 hours
- Actual Costs Incurred = 80 hours
- Estimated Work Left to Complete = 120 hours
- Estimate at Completion = 200 hours
- Variance at Completion = 120 hours – 200 hours = - 80 hours
Health of Project as Reported = Looks like we are going to go 80 hours over budget. Time to reset expectations with the customer, shift the delivery date (and maybe look at some kind of source repository for our development team)
One method reports we are under budget, one method reports we are over, which one is correct?
There are a number of calculations that can be performed once you have measured the estimate to complete on your tasks, we will stick to those that are the easiest ones to grasp to begin with. We will look at more complex calculations including earned value and schedule variances in future posts.
Pro’s and Cons to using EVM
Positives
1. Gives you a snap shot of how much work is left on a particular project.
2. Useful for project portfolio reporting as it enables you see at a glance with one calculation (VAC or variance at completion) which projects are in trouble.
3. Lets you report on projects that are going to go over before they go over.
Negatives
1. Requires more project management admin time than ‘set and forget’ actual to budget reporting does.
2. Confusing acronyms can sometimes be used (EAC, VAC, Schedule Variance….).
3. May require changes in existing project management processes and/or software.
4. Might be too cumbersome for very small projects.
Summary
Without reporting on how much work is left in your project, you are not reporting on the health of your projects at all.
