Earned Value Analysis

It is one thing to meet a project deadline at any cost. It is another to do it for a reasonable cost. Project cost control is concerned with ensuring that projects stay within their budgets, while getting the work done on time and at the correct quality.

Work quality is most likely to be sacrificed when deadlines are tight. Constant attention is required to avoid this tendency.

One system for doing this, called earned value analysis, was developed in the 1960s to allow the government to decide whether a contractor should receive a progress payment for work done. The method is finally coming into its own outside government projects, and it is considered the correct way to monitor and control almost any project. The method is also called simply variance analysis.

Variance analysis allows the project manager to determine trouble spots in the project and to take corrective action. The following definitions are useful in understanding the analysis:

• Cost variance: Compares deviations and performed work.

• Schedule variance: Compares planned and actual work completed.

• BCWS: (Budgeted cost of work scheduled): The budgeted cost of work scheduled to be done in a given time period, or the level of effort that is supposed to be performed in that period.

• BCWP: (Budgeted cost of work performed): The budgeted cost of work actually performed in a given period, or the budgeted level of effort actually expended. BCWP is also called earned value and is a measure of the dollar value of the work actually accomplished in the period being monitored.

• ACWP: (Actual cost of work performed): The amount of money (or effort) actually spent in completing work in a given period.

Variance thresholds can be established that define the level at which reports must be sent to various levels of management within an organization.

Cost Variance = BCWP – ACWP

Schedule Variance = BCWP – BCWS

Variance: Any deviation from plan

By combining cost and schedule variances, an integrated cost/schedule reporting system can be developed.

Variance Analysis Using Spending Curves

Variances are often plotted using spending curves. A BCWS curve for a project is presented in Figure 9-1. It shows the cumulative spending planned for a project and is sometimes called a baseline plan.

In the event that software is not available to provide the necessary data, Figure 9-2 shows how data for the curve are generated. Consider a simple bar chart schedule. Only three tasks are involved. Task A involves forty labor-hours per week at an average loaded labor rate of $20 per hour, so that task costs $800 per week. Task B involves 100 hours per week of labor at $30 per hour, so it costs $3,000 per week. Finally, task C spends $2,400 per week, assuming sixty hours per week of labor at $40 per hour.

At the bottom of the chart we see that during the first week $800 is spent for project labor; in the second week both tasks A and B are running, so the labor expenditure is $3,800. In the third week, all three tasks are running, so labor expenditure is the sum of the three, or $6,200. These are the weekly expenditures.

The cumulative expenditures are calculated by adding the cost for each subsequent week to the previous cumulative total. These cumulative amounts are plotted in Figure 9-3. This is the spending curve for the project and is called a BCWS curve. Since it is derived directly from the schedule, it represents planned performance and therefore is called a baseline plan. Furthermore, since control is exercised by comparing progress to plan, this curve can be used as the basis for such comparisons so that the project manager can tell the status of the program. The next section presents examples of how such assessments are made.

Examples of Progress Tracking Using Spending Curves

Consider the curves shown in Figure 9-4. On a given date, the project is supposed to have involved $40,000 (40K) in labor (BCWS). The actual cost of the work performed (ACWP) is 60K. These figures are usually obtained from Accounting and are derived from all the time cards that have reported labor applied to the project. Finally, the budgeted cost of work performed (BCWP) is 40K. Under these conditions, the project would be behind schedule and overspent.

Figure 9-5 illustrates another scenario. The BCWP and the ACWP curves both fall at the same point, 60K. This means that the project is ahead of schedule but spending correctly for the amount of work done.

The next set of curves illustrates another status. In Figure 9-6, the BCWP and the ACWP curves are both at 40K. This means the project is behind schedule and under budget. However, because the manager spent 40K and got 40K of value for it, spending is correct for what has been done. There is a schedule variance, but not a spending variance.

Figure 9-7 looks like Figure 9-4, except that the ACWP and the BCWP curves have been reversed. Now the project is ahead of schedule and underspent.

Variance Analysis Using Hours Only

In some organizations, project managers are held accountable not for costs but only for the hours actually worked on the project and for the work actually accomplished. In this case, the same analysis can be conducted by stripping the dollars off the figures. This results in the following:

• BCWS becomes Total Planned (or Scheduled) Hours

• BCWP becomes Earned Hours (Scheduled hours × % work accomplished)

• ACWP becomes Actual Hours Worked

Using hours only, the formulas become:

Schedule Variance = BCWP – BCWS = Earned Hours – Planned Hours

Labor Variance = BCWP – ACWP = Earned Hours – Actual Hours Worked

Tracking hours-only does lead to one loss of sensitivity. ACWP is actually the composite of a labor rate variance times a labor-hours variance. When only labor-hours are tracked, you have no warning that labor rates might cause a project budget problem. Nevertheless, this method does simplify the analysis and presumably tracks the project manager only on what she can control.