What is Earned Value Analysis? | RedSky

What is Earned Value Analysis?

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What is Earned Value Analysis?

Earned Value Analysis (EVA) is a powerful tool in project management. It blends financial and scheduling data to provide a comprehensive view of project progress and performance.

Designed for construction project managers and their teams, this guide is crafted to equip industry professionals with a solid foundation in EVA.

By examining its relevance, key metrics, and real-world applications, we aim to provide the insights to leverage this analytical tool for enhanced decision-making and unparalleled project management.

What is Earned Value Analysis (EVA)?

Earned Value Analysis is a project management technique that measures its performance and progress by integrating scope, schedule, and cost. It compares planned work and budget to actual expenditures and progress, revealing if a project is over or under budget and ahead or behind schedule.

This approach facilitates the early identification of potential issues, allowing for timely corrections to achieve objectives. It offers a thorough perspective on the project’s progress, enabling proactive strategies for successful completion.

When is Earned Value Analysis (EVA) Useful?

Earned Value Analysis proves invaluable in several scenarios within project management, mainly when clear insight into a project’s health and trajectory is essential.

Here are key moments when EVA shines:

  1. Complex Projects: For projects with multiple moving parts and intricate timelines, EVA offers a unified view of cost, schedule, and scope, simplifying complexity into actionable insights.
  2. Budget and Schedule Adherence: It’s crucial for projects where staying on budget and schedule is non-negotiable. EVA provides early warning signs of deviations, allowing for timely interventions.
  3. Performance Review Meetings: During stakeholder or team meetings, EVA metrics are a clear, objective basis for discussing project progress, facilitating informed decision-making and strategic planning.
  4. Continuous Improvement: For organisations looking to refine project management practices, EVA highlights areas needing improvement, guiding more effective future project planning and execution.
  5. Resource Allocation: EVA helps identify underperforming projects, enabling managers to reallocate resources where they are most needed to optimise overall project portfolio performance.

EVA’s ability to integrate multiple project dimensions into clear, actionable insights makes it invaluable when comprehensive visibility, early issue detection, and proactive management are critical for successful project delivery.

What Metrics are Included in Earned Value Analysis?

Earned Value Analysis uses financial and time-based metrics to provide a comprehensive overview of project performance. Understanding these metrics is crucial for effective EVA application:

Budget at Completion (BAC): The total budgeted cost of the project, representing the sum of all budgeted amounts for the work to be performed.

Planned Value (PV): The budget allocated for the planned work by a specific date.

Actual Cost (AC): The actual expenditure on the project work to date.

Earned Value (EV): The value of work completed to date against the budget.

Schedule Variance (SV = EV – PV): Assesses if the project is ahead or behind schedule.

Cost Variance (CV = EV – AC): Evaluates if the project is under or over budget.

Schedule Performance Index (SPI = EV/PV): Measures the efficiency of time usage, with values greater than 1 indicating ahead of schedule and less than 1 indicating a delay.

Cost Performance Index (CPI = EV/AC): Measures the cost efficiency, with values above 1 suggesting the project is under budget, while values below 1 indicate over-budget scenarios.

Estimate at Completion (EAC): Forecasts the project’s total cost based on current performance.

Estimate to Complete (ETC): Calculates the expected cost to finish the remaining work.

Variance at Completion (VAC = BAC – EAC): Forecasts if the project will finish under, over, or on budget.

To Complete Performance Index (TCPI): Estimates the required performance level to meet budget goals.

Planned versus actual figures are critical in EVA as they highlight variances in performance and cost, enabling early detection of potential overruns or delays. This insight allows managers to make informed decisions and apply corrective actions to steer projects towards successful completion.

Calculating Earned Value Analysis

To put EAV into perspective, let’s walk through a straightforward example that illustrates its core principles in action:

You’re managing a construction project with a budget of £100,000 and a planned duration of 5 months. By the end of the third month, the project should have been 60% complete with a planned expenditure of £60,000 (Planned Value or PV). However, you’ve only completed 50% of the project and already spent £70,000 (Actual Cost or AC).

The Earned Value (EV) represents the actual value of the work completed, which in this case is £50,000. Even though you’ve spent £70,000, the work accomplished is only worth £50,000 because you’re only at the halfway point.

Using these values, you can calculate the following EVA metrics:

  • Schedule Variance (SV) = EV – PV = £50,000 – £60,000 = -£10,000. The negative value indicates you’re behind schedule since you’ve completed £10,000 less work than planned.
  • Cost Variance (CV) = EV – AC = £50,000 – £70,000 = -£20,000. The negative value indicates the project is over budget by £20,000 because the actual cost exceeds the value of the work performed.
  • Schedule Performance Index (SPI) = EV / PV = £50,000 / £60,000 = 0.83. This value of less than 1 signals a schedule delay, as for every £1 planned to be spent, only £0.83 of work was completed.
  • Cost Performance Index (CPI) = EV / AC = £50,000 / £70,000 = 0.71. This value of less than 1 highlights cost inefficiency, as for every £1 spent, only £0.71 of value was earned.

Additionally, EVA provides forecasting metrics:

  • Estimate at Completion (EAC) = AC + (BAC – EV) / CPI = £70,000 + (£100,000 – £50,000) / 0.71 ≈ £140,845. This forecasts the total cost at £140,845, which is £40,845 over the original £100,000 budget based on current performance.
  • Estimate to Complete (ETC) = EAC – AC = £140,845 – £70,000 ≈ £70,845. You need £70,845 to complete the remaining work.
  • To Complete Performance Index (TCPI) = (BAC – EV) / (EAC – AC) = (£100,000 – £50,000) / (£140,845 – £70,000) ≈ 1.41. This indicates the efficiency required to complete the remaining work within the original budget, which in this scenario, given the overruns, is a challenging target.

This detailed EVA analysis shows the project is both over budget and behind schedule. Understanding these critical metrics provides insights to make informed decisions and take corrective actions, such as adjusting the plan, re-evaluating the budget, or improving resource efficiency, to potentially steer the project back on track for successful delivery.

How RedSky’s ERP Speeds Up Earned Value Analysis

RedSky’s ERP system serves as a powerful ally in Earned Value Analysis, providing a digital foundation that automates data gathering and enhances reporting accuracy – crucial for determining a project’s success or failure.

The system centralises crucial metrics such as cost, internal valuation, and budget, making the data essential for EVA readily accessible. This approach eliminates the need for manual data collection and enables calculations with just a few clicks.

While not directly supporting EVA, this comprehensive data integration and automation significantly facilitates the process. Digitisation not only improves accuracy and efficiency but also enables project managers to focus on strategic decisions and adjustments.

Armed with immediate access to crucial metrics and performance indicators, teams are equipped with the necessary insights to ensure projects remain aligned with their budget and timeline goals.

Unlock the transformative power of RedSky’s ERP Software and Construction Analytics to streamline your Earned Value Analysis and ensure a smoother path to project success.