Values Calculated For An Activity In Earned Value Management Essay

Length: 5 pages Sources: 1+ Subject: Business - Management Type: Essay Paper: #99911039 Related Topics: Warning System, Budget Management, Forecasting, Project Management
Excerpt from Essay :

Earned Value Management

This is the standard method used in the project management industry to measure the progress of a project at any given time. It also allows for forecasting of the project's completion time, its final costs and the project manager can also analyze any variances in the project's budget, and schedule as the project is ongoing. Earned value management through earned value analysis achieves these by allowing the project manager to compare the amount of work that is planned to the amount of work that has actually been completed in order to determine if the costs, milestones, and project schedule are in tandem with the plan. Penman (2010) describes earned value management as the snapshot of a project and is a management tool that can be used as an early warning system to detect problems in the project execution. The earned value management tool ensures that the project manager always has a clear definition of the scope of the project before they begin their work and they are able to measure their accomplishments easily to ensure they keep an up-to-date and accurate picture of the project status. In understanding earned value management, it is important to understand the three values that are calculated for an activity and how these values relate to the earned value of the project.

Work breakdown structure

Earned value management works best when it is segmented. This means that the project is broken down into a work breakdown structure in an organized format. The work breakdown structure (WBS) is a basic tool for planning the project since it divides the different aspects of the project -- tasks, budget, accounts, milestones, etc. More specifically, the work breakdown structure ensures that the project's scope is captured and integrates the technical aspects of the project as well as cost and schedule. It breaks down the scope of the project appropriately to allow for planning, scheduling, budgeting, accounting, authorization, measuring milestones, and management oversight and control of the project.

Calculating earned value

Earned value management involves calculating or measuring the progress of the project against the project's baseline. In calculating the project's earned value, it is important to understand how the project's value is earned. According to Haz-r and Shtub (2011), any milestone or activity in the project that is completed is considered to be 'earned.' There are three key values -- planned value, actual costs, and earned value - that need to be calculated in order to get the earned value of the project.

Planned value

Planned value, sometimes referred to as the budgeted cost of scheduled work, is the portion of the cost estimate that is planned for spending on a particular activity during a particular period. Goh and Hall (2013) describes planned value as the authorized budget assigned to the different activities of the project. The total planned value of the project is referred to as the project's budget at completion. It is simply the total amount of money that is planned for all the project's activities.

Planned value is calculated by multiplying the percentage of the project that is complete by the project's budget at completion. A project that had a total budget at completion of $100,000 and is currently 40% complete has a planned value of 40/100 x $100,000 = $40,000.

Planned value is an important value because it enables the calculation of the schedule variance and the schedule performance index. Schedule variance is calculated by deducting the project's earned value from the planned value so that at project completion, the schedule variance is 0 since all the planned value has now been earned. Cioffi (2006) argues that while schedule variance is important, it is only indicative. It cannot be used to determine whether a project is ahead or behind schedule since the project manager has to perform critical analyses to determine the interdependency of the project's activities against other activities. Schedule...

...

A project with an schedule performance index (SPI) greater than 1 is deemed to be ahead of schedule. Similar to schedule variance, schedule performance index is limited in application because it depends on the project to complete its earned value on the project's critical time path.

Actual cost

Actual cost as defined by Goh and Hall (2013) is the total cost that is incurred in complete the project's activities in a given period of time. It is sometimes referred to as actual cost of work performed. In simpler terms, the actual cost of the project is the amount of money that is spent on the project to date. It is simply calculated by summing up all amounts that have been spent on the project. For example, a project that is 40% complete and has spent $60,000 from a budget of $100,000 has an actual cost of $60,000. The project's actual cost is used to calculate the cost variance of the project and the project's cost performance index.

Cost variance refers to the difference between the actual amount spent on the project and the project's planned or budgeted amount. It is calculated by deducting the actual amount spent from the planned project amount. For example, a project that was budgeted to cost $100 and costs $120 has a cost variance of -$20, which is unfavorable since the project has overspent. Cost variance is important since it helps to explain the difference between the predetermined costs of the project and the actual project costs. It, therefore, sends an early warning to the project manager regarding costs of the project and allows early discussion should there be any need.

The project manager uses cost performance index to show how efficiently money allocated to the project is being spent. It shows how much value the project sponsor or owner is getting for each dollar that they spend on the project. Cost performance index (CPI) is calculated by dividing the earned value of the project by the project's actual cost. When the project has a CPI of less than one, it means that the project is using its funds ineffectively and a CPI greater than one means the project is using its funds efficiently. As described by Goh and Hall (2013), a CPI of one or greater than one means the project spending is on track or under the budget. If a project has a CPI of 1.2, it means that for every dollar spent, the project is getting $1.20 worth of value.

Earned value

Earned value refers to the value of the activities or work that has been completed. It is also commonly referred to as the budget cost of work performed. As described by Haz-r and Shtub (2011), earned value is the value of the work that is performed expressed in terms of the project's approved budget assigned to the completed activities. In simpler terms, the project's earned value is the percentage of work that has actually been completed multiplied by the project's budget at completion. For example, a project that was planned to be completed in 1 year at a total cost of $100,000 and six months on has spent $60,000 but only 40% of the work has been completed has an earned value of $40,000. This earned value is arrived at by getting the actual amount of work done (40%) and multiplying it by the total budget of the project ($100,000). Therefore, the project's earned value is 40/100 x $100,000 = $40,000.

Earned value is important in calculating the project's cost performance index and scheduled performance index as previously described. It is also used to calculate the project's estimate at completion and to complete performance index. A project's estimate at completion is the forecasted value of a project. It is calculated by dividing the project's budget at completion (BAC) by the CPI. For example, for a project with a BAC of $100,000 and a CPI of 1.2, the EAC is $100,000/1.2 = $83,333.33. This means the project will be completed at a cost of $83,333 compared to the budget of $100,000.

A project's to-complete performance index (TCPI) refers to the calculated cost performance index of the remaining work against the funds available. It is calculated by dividing the remaining work by the remaining funds. Remaining work can be calculated by subtracting the earned value from the project's BAC (BAC-EV). Remaining funds can be calculated either by subtracting actual cost from BAC or by deducting the actual cost from the project's estimate at completion. Once again, we use the example of a project that is 40% complete with a BAC of $100,000 but having spent $60,000 already. The TCPI of the project, if it is deemed to be under the budget is calculated as:

TCPI =

In this case, the project's earned value is $40,000 since only 40% of the work has been completed.

= 1.5

If the project is over the budget TCPI is calculated as:

TCPI =

In this case, the project's estimate at…

Sources Used in Documents:

References

Cioffi, D.F. (2006). Completing Projects According to Plans: An Earned-Value Improvement Index. The Journal of the Operational Research Society, 57(3), 290-295. doi: 10.2307/4102425

Goh, J., & Hall, N.G. (2013). Total Cost Control in Project Management via Satisficing. Management Science, 59(6), 1354-1372. doi: 10.2307/23443853

Haz-r, O., & Shtub, A. (2011). Effects of the information presentation format on project control. The Journal of the Operational Research Society, 62(12), 2157-2161. doi: 10.2307/23409291

Penman, S. (2010). Accounting for Value: Columbia University Press.


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