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Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures. It is used for planning, variance analysis and forecasting.
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Quick reference
Earned Value Analysis
Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures. It is used for planning, variance analysis and forecasting.
When to use
Earned value management is a very powerful technique that is particularly helpful on large complex projects. To conduct a thorough earned value analysis, the project must be planned and tracked in the financial system at a task level. If the financial system cannot do this, it is virtually impossible to implement earned value. If the financial system is capable, then earned value analysis can be used.
Instructions
Earned value analysis
Earned value management analyses the current and cumulative status on a project using three financial views of the project, the Planned Value (PV) which represents the project plan, the Actual Cost (AC) which is the money spent on the project as recorded in the financial system, and the Earned Value (EV) which is a project management assessment of progress made on the project. Each of these aspects of the Earned Value Management system is tracked with two time dimensions. One dimension is from the beginning of the project through the present time and is known as the “Cumulative” value. The other time dimension is for the month just completed and is known as the “Current” value.
Explanation of Planned Value
Earned value analysis starts with the Planned Value (PV). PV is the budget baseline for the project. It is established when the project is planned. Without a PV in place it is impossible to do earned value analysis. The PV should be allocated at the project task level. The budget estimate for that task is tracked in a separate cost account and the amount is spread over the weeks or months in which the task is scheduled to be accomplished.
The setting of PV is normally done by the individual responsible for that task, often referred to as a Cost Account Manager (CAM). When setting the PV, the CAM should strive to allocate the money for that task in the time periods when he or she believes it will be spent. After the allocation of project estimate has been made for each task, the sum of the PV for each month and for the total project is calculated.
The CAM typically is provided with either a “best case” value for the task or a “most likely” value. If there is an overrun on the task, the Project Manager covers that amount from his or her management reserve.
Explanation of Actual Cost
The Actual Cost (AC) is the amount of money that is spent conduct the work of a task as recorded in the company’s financial system. Depending upon the attributes of the financial system and how the work was planned by the CAM, the actual costs are divided by both project task and by a spending category such as travel, personnel, or material. The AC is the number that is recorded in the financial records of the business and is used for financial reports such as the Earnings Statement.
Explanation of Earned Value
Earned Value (EV) is a judgement call by the project manager and the CAM concerning how much of a task has been completed. The total possible earned value for a task is based upon the original budget estimate for that task, which is the task Planned Value (PV). The percentage of a task that is completed is the percentage of value that has been “earned.” If a task is 50% complete, the task has “earned” 50% of the planned value – regardless of the cost required to get to that point. Likewise, when a task is fully complete, it has “earned” all of the value for that task, so the EV = PV. EV for a task can never exceed the PV for a task, regardless of how much has been spent. Nor can EV ever be negative. The EV for a completed task is always equal to the PV. The method for establishing EV will be discussed in another module.
Login to download- 00:03 Hi, I'm Ray Sheen.
- 00:04 I'd like to talk with you about the Earned Value Management System.
- 00:07 I believe this is the most powerful project management
- 00:11 financial system that is commonly available for use.
- 00:15 In this module,
- 00:16 I'll review the core elements of the Earned Value Management system.
- 00:20 And in other modules, I'll talk about how to use the data.
- 00:23 One of the reasons that earned value is so powerful for
- 00:25 projects is that it combines the triple constraint of project management, scope,
- 00:30 schedule, and resource management into one comprehensive set of measures.
- 00:35 Earned value works by comparing the project status
- 00:38 from three different cost perspectives.
- 00:40 All the earned value calculations start from these three.
- 00:44 The first is the planned value, or PV.
- 00:46 This is the project budget baseline.
- 00:48 However, it is normally expressed as a budget estimate for each task or
- 00:52 deliverable.
- 00:54 Another key aspect of the PV is that it is time-phased.
- 00:57 There is an amount of planned spending for each month and a cumulative total of
- 01:01 spending that would've occurred if the project is on schedule.
- 01:06 The next baseline perspective is the Actual Cost, or AC.
- 01:10 This is just what it says, the actual amount of money spent on the project.
- 01:14 Again, it is time phased so that it is clear how much money was spent each month.
- 01:18 The earned value system works best
- 01:21 when the actual costs can be tracked at the account level.
- 01:25 The third baseline is the crucial element of this management system, and
- 01:28 it is called the Earned Value, or EV.
- 01:32 This baseline is an assessment of the progress made on the project
- 01:36 by taking credit for every task or partial task that has been completed.
- 01:40 I'll talk more about this measure in the next few slides.
- 01:44 Let's look at planned value first.
- 01:47 As I mentioned, this is the approved budget for each task in the project,
- 01:52 because it represents each task, and the analysis can be done at the task level,
- 01:56 the Earned Value System fully captures the effort required to do the project.
- 02:00 Which is the scope aspect of project management.
- 02:04 The value for each element of PV is based upon the approved estimate for
- 02:07 that task, which is the resource aspect of project management.
- 02:12 The schedule of when that spending will occur is based upon the scheduled for
- 02:16 that task which is the schedule aspect of project management.
- 02:20 All of the base line values for earned value would be expressed in two manners.
- 02:25 One of them is the current PV which means PV for the current month, and
- 02:29 the cumulative PV which is the PV since the project start.
- 02:35 Next, I'll talk about the actual cost.
- 02:38 The actual cost is the money spent doing the work of the project.
- 02:41 Like all financial transactions, it has both an amount and
- 02:44 a time associated with it.
- 02:46 This is the number that is allocated in the company's cost accounting system for
- 02:50 the spending on the project.
- 02:52 This is real money, not estimates.
- 02:55 Again, the money should be collected by task, which often means that the financial
- 02:58 system needs to have project sub-accounts by task or cost type.
- 03:03 And just like with PV, the AC is expressed from two different timing perspectives.
- 03:07 There is a current AC which is how much was spent during the month and
- 03:11 the cumulative AC which is how much was spent on the project since it started.
- 03:16 Finally, let's take a look at the third base line the earned value.
- 03:20 Earned Value is a measure of how much has actually been completed on the project
- 03:25 although it is essentially a schedule measurement
- 03:27 It is expressed in terms of value of the work completed.
- 03:30 That means with units of money.
- 03:32 This measure is based upon the original planned value for the work.
- 03:36 So its foundation is the PV.
- 03:39 A key aspect of effective earned value management
- 03:41 is to have accurate assessment of EV.
- 03:43 In another module on this section on earned value,
- 03:47 I'll spend some time talking about how to do this.
- 03:50 And just like PV and AC, the EV is expressed in both terms of current EV,
- 03:54 which is the value of the work completed in the current month.
- 03:57 And cumulative EV, which is the EV completed since the project started.
- 04:02 Earned value is a powerful management system for planning and
- 04:06 tracking project spending.
- 04:08 The next few modules, I'll show you how to use this system for
- 04:11 dealing with variance analysis and project forecasting.
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