Monday, March 2, 2009

Using EV Analysis to Monitor and Control Risk

Did you know that you can use earned value analysis to monitor and control risks? Earned value analysis is traditionally used to monitor overall project performance against a baseline plan and to identify any deviations from the plan. In keeping track of these deviations, you will also help your company to monitor and control project risks, which increases your chances of a successful project.

Earned value analysis calculates whether the work for a given period is accomplished as planned. This type of analysis uses three key values: earned value, actual cost, and planned value.
  • earned value (EV) - EV is the budgeted value of work actually completed in a given period of time. It answers the question: "How much work is done and what was the original budget to complete that work?"

  • actual cost (AC) - AC is the total of costs incurred in accomplishing work on an activity during a given period of time. It answers the question: "How much has it cost to complete the work that has been done so far?"

  • planned value (PV) - PV is the portion of the approved cost estimate budgeted for an activity during a given time. It answers the questions: "What should the work planned for this period cost?" and "How much work should be done by now?"
The formula for calculating earned value is:

EV = PV x % Work Complete

EV is the PV of your project multiplied by the percent of work complete. The PV is in the project budget and you can determine the PC by dividing the amount of work completed by the total amount of work that is expected to be completed during this time period.
With a good basic understanding of these key values, you can move on to performing the calculations used in earned value analysis. A careful interpretation of the results will help you determine if additional risk identification and analysis is required.

To determine whether your project requires additional risk identification and analysis, you must calculate four performance measurements.
  1. cost variance (CV)
  2. schedule variance (SV)
  3. cost performance index (CPI)
  4. schedule performance index (SPI).
CV is the difference between the budgeted value of work actually completed and the total of costs incurred to complete that work in a given period of time. The formula is:

CV = [(EV - AC) / EV] x 100

SV is the difference between the budgeted value of work actually completed and the amount the company planned to spend to complete the work during a given period of time. The formula is:

SV = [(EV - PV) / PV] x 100

The last two performance measurements are ratio expressions of CV and SV. CV and SV tell you the percent that your project varies from the baseline, while the CPI and SPI tell you how efficiently the work has been performed.

CPI is the cost efficiency ratio of earned value to actual costs. The formula is:

CPI = EV / AC

SPI is the schedule efficiency ratio of earned value accomplished against planned value. The formula is:

SPI = EV / PV

Once you have calculated the results for CV, SV, CPI, and SPI, they must be interpreted. This is the information the company needs to decide whether additional risk identification and analysis is necessary.

When analyzing the CV and SV for a project, you must look at how close to zero the results are. A result that is equal to zero indicates that the project or activity is performing as estimated. A result that is greater than zero indicates the project or activity is ahead of the estimates. A result of less than zero indicates that the project or activity is behind the estimates. When the result varies significantly above or below zero, additional risk identification and analysis may be necessary.

When analyzing CPI and SPI for a project, you must look at how close to one the result is. A result that is equal to one indicates that the project or activity is performing as estimated. A result that is greater than one indicates that the project is performing ahead of the estimates. A result of less than one indicates that the project is performing behind the estimates. When the result varies above or below one and exceeds the company's predetermined acceptable range, additional risk identification and analysis is necessary.

Earned value analysis can help you determine when additional risk identification and analysis is necessary. Being able to perform the calculations and interpret the results will help you handle and control project risks properly.

1 comment:

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