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Earned Value Management – The Beginner’s Guide

Earned Value Management - The Beginner's Guide

No project manager wants to find themselves at the forefront of catastrophic projects that deviate from the approved budget and delivery deadline.

Imagine having a budget of $ 36.75 billion. But when the project ended – it was six years later than planned – and costs rose to $ 105 billion.

Yup, that’s an increase of 186% from the planned value and is essentially a disaster. It actually happened with the International Space Station project.

The good news is, if you turn to a project management discipline like managed value management, you can avoid a similar crisis.

This guide gives you everything you need to understand managed value management and how you can use it to measure project performance and progress to ensure better results.

Why Earned Value Management is so Important

Earned value management or EVM is a project management method that combines schedule, cost and scope to measure project performance – each aspect helps keep things on track by allowing project managers to predict situations and adjust accordingly.

It lets you calculate burn rates for cost and performance, helping you understand exactly how the project works compared to the original plan. Using the value management method, you can calculate the following:

Where has the project been? Where is the project now? When does the project go?

EVM has four main components that give you key insights. They are:

Budget at closing

Budget at completion is the sum of all budgeted activities planned up to a specific date. It can be current or a cumulative amount.

Budgeted labor costs planned

The budgeted labor costs planned, also known as planned value or PV, represent the total budgeted costs of the work to be performed according to the plan. Like the budget at the end, the budgeted costs of planned work can be current or cumulative.

Budgeted labor costs performed

The budgeted cost of work performed, also known as Earned Value or EV, shows you all the tasks performed so far. This depends on your current condition.

Actual labor costs completed

The actual labor cost completed indicates the total amount of the actual expenses for tasks performed to date. Again, this can be either topical or cumulative.

By looking at all of the above different elements, you can decide if a project is planned or above or below budget and see how the performance is for both of these things at the same time.

If you take these numbers and apply them to their remaining project or future work, you can predict how things will go in terms of cost, performance, and planning – provided the combustion rate does not fluctuate.

No doubt the whole thing is a big assumption. That is why you need to be flexible and aware of how changes can affect these elements.

To sum it all up, EVM helps you keep budget and on time.

You can use it to track costs and schedule associated with the project by comparing the current state of the project with original plans and projections. This in turn helps you make crucial adjustments that make your projects more likely to be successful.

The Benefits of Earned Value Management

Below is a list of the seven key benefits you can expect from adopting this project management strategy:

Better planning in advance Maintain objectivity by understanding where your project currently stands versus where you planned it to be at the time, and how much work your team has actually done compared to what you had expected to accomplish Simplified Project Management Increased accountability, where managers and employees honestly and accurately track time and report their progress Identifying problem areas early in the development and implementation phases, which in turn increases progress Better expectation for problem areas Help employee morale and make your team more agile

The key here is to examine the total value added (the value earned) at each step of the project at the work done at a particular time. Project managers can then “micro-plan” projects without micro-management to control budget and schedule at each step.

Using software for project management tools is always a good idea to increase productivity and ensure better results without delays or errors.

For example, let’s talk about the Aston Martin.

The luxury car manufacturing company relies on Microsoft Office Project, an EVM tool, to collaborate and deliver new and innovative vehicles with greater efficiency and resources – from conception to production.

Each person is given their own isolated activity plan on what to do with their respective departments. This is then rolled up in the cloud to let everyone see an overview of all the activities and progress of each car. Everyone involved in the project can see and monitor every step that needs to be done to make the car end.

Mark Stringer, director of program management at Aston Martin Lagonda, points out that Microsoft Project helps them see where a process or person is going wrong, even before it happens, making it easier for them to catch and fix errors early.

As a result, the entire team can be more efficient, make better-informed decisions, and even reduce the cost of taking products through production. Each of them helps them become a more profitable business.

Similarly, you can also use EVM software tools to better predict situations, which can work wonders for your business’ survival.

How to Improve Earned Value Management Today

Earned value management involves measuring and benchmarking project results and progress in relation to a well-defined plan. This is also why you can only use EVM in organizations with certain key elements in place.

Below we have discussed five ways you can improve and value management today. Let’s take a quick look.

Exactly identify the ‘What’ element of the project

You need to carefully analyze and identify the scope of your project along with the requirements and definition of scope. For this, we recommend developing three crucial documents:

Work Breakdown Structure (WBS). You can create a WBS by splitting high-level deliveries into smaller work packages. It is a graphic representation of the work that clarifies the scope of the project.

Organizational division structure (OBS). You can create an audience, e.g. An organization chart, to show people, teams and departments, that hierarchy, rules and responsibilities. This document mostly represents the ‘who’ element of the project.

Distribution of responsibilities Matrix (RAM). You can insert WBS and OBCs to create the RAM document, which defines exactly which task to perform with the phone. You can then use these associations or checking accounts to measure progress in future stages.

Improved planning, scheduling and budgeting

EVM is designed to define the baseline of the project in concrete terms and set parameters that help monitor and control the project throughout its life cycle.

WBS, for example, is a good starting point for the planning phase. You can group multiple activities under a single work package and then group multiple work packages under a single checking account. You can also assign an account manager to each checking account to monitor overall progress.

At this point, you need to be able to define the item ‘when’ for both high and low level milestones and assign due dates for each activity.

Be sure to allocate the total budget to each activity level in a work package, including labor, materials, and subcontracting costs. It is also wise to allocate management reserves to unexpected increases in volume.

Accounting for ‘actual’ costs

Costing under EVM is quite comprehensive and is designed to measure the actual cost of the project. It is important to have systems in place that track costs at the work level to measure progress accurately, but it does not come without a fair share of challenges.

For example, you can incur or pay the actual costs at a later date instead of clearing them right away. However, you must allocate a portion of this amount earlier to calculate the value earned. Therefore, it is better to account for accruals and avoid similar booking delays.

Analyze and report consistent project results

You should consistently report the PV, EV and AC calculations to ensure that each team member, senior manager and customer has full insight into project progress. This also allows you to identify the corrective actions you need to take as a measurement in relation to the baseline and reporting numbers.

Another tip is to define your limits of variance carefully. If you do this, you can easily detect problem areas when the cost reports indicate a border crossing in a checking account.

Only revise project baselines when necessary

Always be flexible when designing the baseline of your project, especially when dealing with problem areas during a project. You can not revise a baseline every time there is a delay in a task or when you overconsume.

It is better to limit basic revisions in case of approved changes in project scope, cost or schedule. Fluctuations in rates are also an acceptable scenario for revising a project’s baseline.

3 best practices for managing earned value

Here are three best practices that can help you get the most value out of using a value management system.

Use of an independent third party to perform EVM analysis

Hire an independent third party who has the necessary qualifications to open the action requirements analysis. It is best to look for practical “doers” who have previously used sophisticated project management software and have experience with integrated baseline (IBR) reviews, EVMS compliance reviews and monitoring reviews. Experience with a wide range of planning, cost management, performance analysis and risk management tools is another plus.

It is better to have experienced GPs with an inherent understanding of what clicks and what does not. This can help you maximize productivity and avert crises more effectively.

Maintain and periodically update the EVM system description

By having an EVM system description, you can understand any activity required to meet the EVMS standard and features. You can also communicate the process more effectively in your organization and the customer and review team.

The system description should define the management processes and include detailed procedures for defining specific steps.

Although there is no specific regulatory requirement for an EVMS description, you must demonstrate compliance. It is common for companies to do this in a form that provides a description of the EVMS system and the contractor’s comprehensive plan to meet the guidelines.

Invest in a good EVM solution for your projects

EVM is one of the most accurate techniques for project forecasting, but it is still complex.

Fortunately, you will find several EVM solutions on the market that offer comprehensive support for all levels of EVM, from basic support to measuring project performance to ensuring EIA-748 standard compliance. They also make accurate calculations faster and keep all relevant data properly organized.

While you’re at it, also provide the software tool for seamless integration with ERP and financial systems, along with additional features to track actual costs and resource costs.

There are all kinds of EVM software tools on the market so you do not face a lack of options. Just make sure your perspective tool fits your budget and integrates seamlessly with other processes and software you use.

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