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.

Project Cost Performance Measurement Techniques

One of the most important aspects of project cost control is cost performance measurement. You can use a number of performance measurement techniques to measure cost performance, including cost variance, earned value management (EVM), and the cost performance index. Details about these three cost performance measurement techniques are provided below.

1. Cost variance
Cost variance (CV) is the most basic performance measure. Simply stated, cost variance is the difference between the earned value and actual costs. A positive variance indicates that the project is running under budget, while a negative variance means that costs are overrunning. For the purpose of tracking over- or underrun percentages, you may want to use tables, Gantt charts, or bar charts.

Cost variance is typically expressed as a ratio or percent. You can calculate CV by comparing the actual cost of the work (AC) to the earned value (EV). Follow the steps below to calculate cost variance.

• Calculate the difference between the earned value of the project and the actual costs.
• Divide this amount by the earned value.
• Multiply this figure by 100 to obtain a percentage.
• Keep the negative sign for cost overruns.

The project manager's goal in calculating variances is to provide the basis for earned value management. You must understand the problems behind variances and take action that will correct any problems.

2. Earned value management
Earned value management is perhaps the most useful activity in cost control because it combines costs and the schedule into one indicator. It tells you how much the project is physically accomplishing in terms of both cost and time, giving management a more accurate and timely report on project progress.

The concept of earned value management multiplies the project budget (planned value, or PV) and percent-complete figures to arrive at a budgeted dollar value of the work that has actually been completed so far. The main difficulty in using earned value data to measure cost performance is in determining work completion. How does one accurately measure how much of a task is complete, while avoiding subjectivity in measuring performance as much as possible?

There are five methods you can use to assess work completion. They are described below, from the most conservative and least accurate to the most accurate.

• The zero/100 rule. Many companies do not assess percent complete incrementally. This removes any subjectivity. A task is assessed as either not done (zero percent complete) or finished (100 percent complete). This method works well for activities with a short duration—less than a month, for example.
• The 20/80 rule. This method is almost as conservative as the zero/100 rule. When it is started, a task is considered to be 20 percent complete, and 20 percent of the PV is charged against its account. When the task is complete, the remaining 80 percent of the budget is applied to the task.
• The 50/50 rule. This is probably the most popular method. You assume that once a task has begun, 50 percent of its budget is used. When a task is complete, it has used the other half. For a project with a large number of tasks, this method provides a fairly accurate way to calculate earned value.
• The milestone method. This is used for long work packages that are broken down into distinct milestones. A budget is assigned to each milestone instead of to the task as a whole. Value is earned when each milestone is completed.
• The percent complete. This method is usually used for long-duration work packages (for example, ones that last three months or more). Your project may not have identifiable milestones, but you are still able to estimate the percentage of the task that has been completed.

3. The cost performance index
You can use the earned value figure to establish another important performance indicator. Calculate the ratio of earned value to the actual costs to find out how efficiently your team is accomplishing the work. This ratio is called the cost performance index (CPI). The formula for calculating CPI is as follows:

CPI = EV ÷ AC.

When the CPI is measured periodically, you can plot CPI figures in a line graph to see the trend over the life of the project. This is called a trend analysis.

You will usually see the cost performance index reported along with its "companion" indicator—the schedule performance index (SPI). The SPI is the ratio of earned value (EV) to the planned costs (PV).

Project managers use the CPI and SPI to rate the cost and schedule performance of their projects. A poor rating provides a warning signal, allowing for corrective action to be taken before it's too late. These indexes fall into three categories:

• If equal to 1.0, performance is exactly as planned.
• If greater than 1.0, performance is better than planned.
• If less than 1.0, performance is poor.

Evidence shows that without corrective action, most projects will continue to perform at their cumulative CPI rate. Once the project is about one-third complete, you will have difficulty recovering from a CPI of less than 1.0 without aggressively managing the remaining tasks.

Remember, it's important to measure the cost performance of your projects. By using the three techniques described above, you can control project costs and ensure the project comes in on-budget.

Methods for Evaluating Project Performance

Author Thomas S. Monson said: "When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates."

In the area of project management, performance measurement techniques are used to assess the magnitude of deviations from the original project plan. As such, they are an important aspect of project schedule control, allowing the project team to determine whether a schedule variance requires corrective action.

There are four basic performance measurement techniques: performance reviews, trend analysis, earned value analysis, and information distribution.

1. Performance reviews
   Performance reviews are meetings held to assess project status. Most project managers schedule weekly, bi-weekly, or monthly reviews to keep the management team abreast of the project's status. By conducting frequent performance reviews, variances are more readily detected and can be addressed sooner which prevents further deviation from the plan.
   
   
2. Trend analysis
   Trend analysis involves examining project results over several reporting periods to determine if performance is improving or deteriorating. By plotting report results on a graph, management can determine whether schedule performance is progressing or regressing.
   
   Companies use trend analysis for long-term projects, to compare status over several periods. Either a three-month, four-month, or six-month moving average is used to predict project trends. Trending provides management with advance warning of adverse trends, and allows for corrective action to be taken to rectify the situation. Companies also use trend analysis data to plan future projects that are similar in nature.
   
   
3. Earned value analysis
   Earned value analysis is the most commonly used method of performance measurement. It integrates scope, cost, and schedule measures to assist the management team in assessing project performance.
   
   Earned value analysis compares the amount of planned work to what was actually accomplished. This involves calculating three key values for each activity that is performed.
   

- The planned value in a project is the approved estimate of cost planned to be spent on an activity during a given time period. - The actual cost in a project is the total costs involved in completing the work for an activity in a given time period. - The earned value for a project is the value of the work actually completed during a period of time. These calculations allow project managers to see whether cost and schedule performance is proceeding as planned.

4. Information distribution tools and techniques
   Information distribution tools and techniques make necessary information available to project stakeholders in a timely manner.
   
   Information regarding a project's performance is essential to bring about project success. Too little or incorrect information could lead to misunderstandings and changes that are not really necessary.
   
   Clear communication and shared information retrieval and distribution methods are the basic tools and techniques for ensuring that important information is distributed.
   
   Communication skills are used to exchange information. Whether communication is written, oral, internal, external, formal, informal, vertical, or horizontal—the sender must ensure that the information is clear and complete while the receiver confirms that it is properly understood.
   
   Information retrieval systems allow information to be shared by project team members and stakeholders. Such systems may include project management software, electronic databases, and manual filing systems.
   
   Information distribution methods ensure that important project information is distributed to the stakeholders. Project meetings, voice mail, electronic mail, fax, videoconferencing, project intranet, hard-copy documentation, and shared databases are all effective distribution methods.
   

Performance reviews, trend analysis, earned value analysis, and information distribution tools and techniques are important in assessing the magnitude of any project variations. Using these techniques to determine whether a project is performing as planned will help you maintain a concise and controlled project schedule.