EARNED VALUE MANAGEMENT (EVM) TUTORIALS © PM Strategic Insight Of ViBiSys

OBJECTIVES OF EVM TUTORIALS An attempt has been made through these tutorials to make the understanding of various concepts of Earned Value Management easy by using examples and diagrams. Various aspects of EVM described in these tutorials are as follows : Topic 1: EVM-Understanding Basics of Earned Value Management (EVM) & its advantages. Topic 2: Performance Measurement using EVM at Business, Program, Project and Resource Level : Understanding various KPIs : CV, SV, CPI, SPI & Forecasting (ETC, EAV, VAC). Topic 3: Forecasting and Creating Transparency by using EVM: Profit Margins Cash Flow Work In Progress Re forecasting & Transparency for Shareholders Recovery Plan Topic 4 : Implementation of EVM

EARNED VALUE MANAGEMENT (EVM) TUTORIALS TOPIC 1: EVM- UNDERSTANDING BASICS OF EARNED VALUE MANAGEMENT (EVM) © PM Strategic Insight Of ViBiSys

WHAT IS EVM? EVM is a project control process based on a structured approach to planning, cost collection and performance measurement. It facilitates the integration of project scope, time and cost objectives and the establishment of a baseline plan for performance measurement. - Association of Project Management, 2006

Now another approach is required to estimate the cost at completion. UNDERSTANDING EVM EXAMPLE 1: Client wants to construct a house in 3 years period with an estimated cost of AED 3 million. After six months of work it is found that AED 400k has been spent. What does this information indicate in terms of Project’s Performance : Will the Project accomplish with in the stipulated budget ? 1st APPROACH Actual spent in 6 months = AED 400K Remaining period to complete the project = 30 months. 3 +0.6M Assuming linear cost distribution over a period of 36 months AED- MILLIONS 2.4 Estimate to complete (ETC) the remaining work= (30/6)* 400K = AED 2 million 0.5 Estimate at completion = AED 2m + 400K= AED 2.4 m 0.4 Estimated Variance at completion = AED 3m – AED 2.4m= +AED 600K 6 36 MONTHS i. Cost wise Project is performing good. ii. Estimated cost at completion is AED 600 K less than the budgeted cost. THINK: Is available information sufficient to measure project’s performance ? Q1 What if the project is not on schedule ? 3 AED- MILLIONS 2.4 Answer: A1. Assuming, updated Project schedule forecasts a slippage in overall Project duration by 4 months. 0.5 0.4 NOTE: Now another approach is required to estimate the cost at completion. 6 36 40 MONTHS

UNDERSTANDING EVM 2nd APPROACH Forecast remaining duration of project = 36 months Estimated Cost To Complete the remaining project = (36/6)* 400 = AED 2.4 million 3 +200k 2.8 AED- MILLIONS 2.4 Estimate at completion = 2.4 m+ 400k = AED 2.8 million Estimated Variance at Completion = AED 3 million- AED 2.8 million = +AED 200 k 0.5 0.4 i. Cost wise Project is performing Good. 6 36 40 MONTHS ii. Cost at Completion if AED 200K less than the budgeted cost. THINK: Has actual work done been considered in performance measurement ? Q.2a. How much Physical Work been accomplished to date ? Answer: A.2a. 10% (Physical % Completion) Q.2b How much % of duration elapsed to date ? A.2b. 6months/36 months= 16.67 % (Schedule % Completion) Approaches 1 and 2 were based on Schedule % Completion, ignoring the physical work remaining. So another approach is required taking into account the Physical % Completion.

UNDERSTANDING EVM AMOUNT 3rd APPROACH Budget At Completion (BAC)= AED 3 million EAC BAC ETC Earned Value = 10% of BAC = AED 300,000 Actual Cost = AED 400,000 AC PV CV Planned Value (PV)= AED 500,000 (Considering linear spread) EV SV Cost Variance (CV) = EV-AC = AED – 100,000 Schedule Variance(SV) = EV-PV = AED -200,000 t1 T T2 TIME CPI= EV/AC= 0.75 SPI = EV/PV = 0.60 FORECAST SLIPPAGE This indicates that for every AED 1 spend only 0.75 fills is earned. Hence Cost wise performance of the project is not good, there is a cost Over run of AED 100,000. Similarly there is a schedule slippage of AED 200,000. If this trend continues then the forecast could be calculated as follows: ETC = (BAC-EV)/CPI = AED 3,600,000 EAC = ETC + AC = AED 4,000,000 VAC = BAC – EAC = AED- 1,000,000 Note how the perception of project’s performance changed from good to poor as we moved from 1st Approach to 3rd Approach. If 1st or 2nd approaches are followed to assess the performance and estimate the forecast figures, then project’s stakeholders will be taken by surprise, when the good performing project will end up into a loss making project. However by following 3rd Approach (Earned Value Management) Early Warnings of poor performance are generated, which provides an opportunityto mitigate the cause of cost over runs and schedule slippages and to minimize the Potential losses. TO KNOW MORE ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com.

BASICS OF EARNED VALUE MANAGEMENT(EVM) AC= Actual Spent PV=Planned Value EV= Earned Value CV=Cost Variance SV=Schedule Variance VAC= Variance At completion ETC= Estimate To Completion EAC= Estimate At Completion CPI= Cost Performance Index SPI= Schedule Performance Index AMOUNT BUDGETED PROFIT Contract Fee FORECAST PROFIT EAC BAC VAC ETC AC PV CV EV SV t1 T T2 TIME FORECAST SLIPPAGE Budgeted Profit= Contract Fee- BAC Forecast Profit= Contract Fee - EAC EAC= AC+ ETC ETC= (BAC- EV)/CPI CPI= EV/AC INTRODUCTION

ADVANTAGES OF EVM BENEFITS OF EVM Early warnings in terms of –ve cost variance and schedule slippages are generated using EVM. Performance can be monitored at various levels (project, business, discipline, resource etc), as such source & cause for variances could be identified. This provides an opportunity to proactively mitigate the problems. Resource utilization could be optimized using EVM. Reforecasting the ETC results in generating more realistic revenue and profit margins. EVM creates transparency thereby reducing the element of surprise for the stakeholders. EVM could be used as an effective tool for maximizing the profitability of the project. If applied at organizational level EVM provides a consistent Project Management methodology which saves efforts from re inventing the wheel every time. EVM leads to continuous improvement as organization gets more and more accurate in terms of budgeting from the available historical date and in terms of performance by benchmarking the projects and from the lessons learnt from previous projects. TO KNOW MORE ABOUT EVM IN RELATION TO YOUR INDUSTRY PLEASE CONTACT US AT info@vibisys.com. BENEFITS OF EVM

EARNED VALUE MANAGEMENT (EVM) TUTORIALS TOPIC 2: Performance Measurement using EVM at Business, Program, Project and Resource Level : Understanding various KPIs : CV, SV, CPI, SPI & Forecasting (ETC, EAV, VAC). COMING SOON © PM Strategic Insight Of ViBiSys