- Project, Programme and Portfolio Management
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HOW TO MEASURE THE HEALTH OF A PROJECT USING EARNED VALUE MEASUREMENT.
A recognised technique for tracking both cost and schedule performance in monetary terms is Earned Value Management (EVM). It is generally considered to be a very advanced technique, adopted only by organisations mature in project management. In my view, however, a simple version of it can easily be applied and it is very beneficial to do so as it provides extremely useful measures of the health of a project (or the health of all projects in a portfolio) at a glance.
When a project is in progress, the actual cumulative costs incurred will generally differ from the expected (budgeted) cumulative cost profile. If the actual cumulative cost figure is lower than expected, it may be incorrect to conclude that this is a good status. Similarly, if the actual cumulative cost figure is higher than expected, it may be incorrect to conclude that this is a bad status. This is because the project may have achieved either more or less than expected at any given point in time.
If, for example, the project has incurred more cost than expected but has also achieved more than expected, it may be ‘within budget’ and ‘ahead of schedule’. Conversely, if the project has incurred less cost than expected but has also achieved less than expected, it may be ‘within budget’ and ‘behind schedule’. By establishing the ‘Earned Value’ of projects in progress, it is then possible to calculate project health indicators for both cost and schedule.
The project budget can be considered to be the total ‘planned value’ of the project that the project is attempting to achieve. Before the projects starts it has achieved no value and when it is completed it will have achieved a value equal to the project budget. During the life of the project it will have achieved an ‘earned value’ which is calculated based on what has been achieved.
This is calculated simply by subtracting the latest estimated (remaining) cost-to-complete from the total project budget. If you like maths, then this can be expressed by the following formula:
Earned Value = Total Project Budget – Cost To Complete
Having calculated the Earned Value of a project, two very useful indices can then be calculated to indicate the health of a project in terms of cost and schedule.
At any given point in a project’s lifecycle, the project will have incurred a total actual cost to-date figure that should be known. The difference between this and the Earned Value is the Cost Variance, which can be expressed as:
Cost Variance = Earned Value – Actual Cost
Any project that has a negative Cost Variance value is over-spending.
At the same point in the project’s lifecycle, it should be possible to identify a total planned cost to-date figure from the agreed plan. The difference between this and the Earned Value is the Schedule Variance, which can be expressed as:
Schedule Variance = Earned Value – Planned Cost
Any project that has a negative Schedule Variance value is behind schedule.
I’d be happy to discuss your requirement for measuring the health of your projects.
I am conveniently based in Milton Keynes and have a very good track record of implementing simple frameworks (of processes, tools and templates) into small and large businesses throughout the UK, across many industries, which greatly improve value from investments. Get in touch or call me on 07725 950775