Earned Value Management for Project Managers: EVM explained by an APM PMQ trainer

[Music] hi my name's callum i work for training bite size and today i'm going to talk to you about earned value management now this is a topic that always seems to appear quite complicated on paper but when you drill down into its key parts it's not that tricky so let's go through some stuff now i'll begin today by looking at a fairly straightforward example that hopefully you can relate to so own value management is a way of tracking progress on our project in terms of cost and in terms of schedule it doesn't consider quality though that's something we need to consider but i like to think of earned value management as a sat nav for the project if you think about how a sat nav works i imagine you'll all have some familiarity with them either you have them on your phone or maybe in your cars you type in a destination into your sat nav and it tells you what you what time it expects you to arrive if you're behind time so if you get stuck in traffic for example uh your sat nav will update to reflect this you're not where expected you to be at that point in time therefore going to turn up at a different time it originally predicted conversely if you're ahead of schedule and you're ahead of where the saturn have thought you're going to be it will change the time to reflect you're going to be earlier than it is expected hopefully one of those people who races the sat nav but this is what earned value management is helping us to do with our project it's checking progress and seeing are we where we expected to be again compared to our plans if not well how much longer or how much more money is it going to cost us to get what we're after or how much shorter is it going to take us and how much less money is it going to cost us so a sat nav for your project effectively earn value management when you see it in textbooks it's always using a simple example and i'm going to use a simple example today to explain it it was actually invented to monitor very complicated projects and therefore all the maths and the graphs and everything i'm going to talk about in a bit can be used on complicated projects so don't let this simplicity fool you it's a very very useful tool on multi-million pound projects as well as simple ones so the example i'm going to use is a wall i'm going to construct a wall the wall is going to cost me for 1 000 bricks which is what i need 250 pounds for those thousand bricks i also need to consider labor and labor costs so i contact a builder and they say it's going to take 10 days to build this wall they will charge 750 pounds for labor including any additional materials that's not per day that's overall so 1000 bricks at 250 pounds 750 pounds for labor means i'm planning to spend a total of 1 000 pounds on this wall and i'm expecting it to take 10 days to construct earned value management information can be displayed in a couple of different ways i'm going to use a graph initially then i'll start using some numbers and some maths to explain it differently but for now let's look at the graph i'm planning to spend after 10 days a total of 1000 pounds on this wall this value once i plotted onto the graph is known as my budget at completion how much money do i plan to spend by the end of my project hence budget at completion this is the first question earned value management can help us to answer what did we plan to do budget completion is the first step of answering that question what do we plan to spend overall by the end of the project now in projects it's very unusual to be spending all your money at the end or all your money up front you tend to find these incremental payments throughout the project and that's what's going to happen with this wall that we speak to the builder and they say they'd like a payment of 500 pounds at five days into the project i can plot that onto my graph as well this is known as planned cost or planned value those two terms terms are interchangeable planned cost is the same as planned value so on my graph here i've got a planned value of 500 pounds because i'm planning to spend 500 pounds at that point in time notice how i've drawn a line between the two points this line now shows me the rate at which i'm planning to spend money throughout my project so the second question that earned value management can help us answer is where are we now so we are now at five days into this project the builder sends an invoice through to me 375 pounds i can plot this onto my graph this is known as actual cost because if i pay this i've actually spent this money if i draw a line this now shows me the rate at which i'm actually spending money on my project what would this imply to you then we planned to spend 500 pounds of five days into the project that was our original planned cost yet we've actually spent 375 pounds does this mean we're under budget are we behind schedule we don't know why we've only spent 375 pounds earned value management is helping us to understand or at least prompt us to ask the question why have we perhaps not spent as much money as we planned to spend because it could mean any number of things earned value management isn't really tracking percentage complete and using that as progress it's really interested in that cost and time in order to do this then we need to establish how much 25 of the wall is worth to me and this is where the word value comes back into play and why you have the terms plan cost and plan value i have with me here one of my guitars and i bought this for 1 500 pounds what's the value of this guitar to me then so sentimentally it's very important to me it's one of my favorite guitars actually um i've used it a lot i've used many gigs i'd say it's priceless however sentimental value and um how much value i've got out of it using it playing at shows and things like that earned value management isn't really helping me with that it's not tracking sentimental value what it's looking at here is value in terms of money so the value of this guitar to me in terms of money is one thousand five hundred pounds because i paid one thousand five hundred pounds for it therefore its value is one thousand five hundred pounds to me if i go online and see the same guitar for one thousand two hundred pounds the value it doesn't change it's still 1 500 pounds to me equally if i paid more if it was advertised for more than 1 500 pounds its value would still be the same to me that is what the value is talking about so if i had the completed wall in front of me that would be worth one thousand pounds if i'm planning to spend a thousand pounds on it i expect to get one thousand pounds worth of value at this point in time i plan to have 500 pounds worth of value hence the term plan cost or plan value i've received 25 therefore i've received 250 pounds worth of value of my wall which is known as the earned value i have earned 250 pounds worth of value i can now plot that onto my graph because it's now a cost figure it's a numerical figure i can now plot onto this graph now i've plotted my own value onto my graph i can now compare it to the planned value and the actual cost i planned to receive 500 pounds worth of value at this point in time aka 500 pounds worth of wall i've received 250 pounds when i expect it to have 500 pounds worth of wall this means i'm not receiving wall or value of wall at the rate i expected to get it this is telling me i'm behind schedule if i compare my own value to my actual cost i've actually spent 375 pounds but i've only got 250 pounds worth of wool for it which now tells me this looks like it's going over budget if everything was going okay the graph would be one straight line however because the lines are all separated it means something isn't going quite as expected graphs are great but some people prefer values especially in spreadsheets and things like that so let's look at some formula then to look at the next steps of earned value management to help us understand where are we going before we know where we're going though we need to understand how we're doing and i've reflected on that a little bit with talking about the graph but there's some mathematical formula we can use to show us the same information the first of which is called cost variance so the formula for this is cost variance equals earned value subtract actual cost if i do that with my project i have an earned value of 250 pounds an actual cost of 375 pounds therefore 250 subtract 375 equals minus 125. now if everything was going as expected it would be zero we'd do this formula and it would give us zero that'll tell us we're meeting our estimates we're meeting our baseline expectations however a minus number tells us going badly a positive number going better than expected we can do something similar for our schedule with what's called schedule variance which is earned value subtract plan value so with our project then 250 is the earned value the planned value is 500 so therefore the formula is going to be 250 subtract 500 equals minus 250. it's a minus number therefore this would tell me things aren't going as expected before we can look at where we're going in terms of cost and in terms of schedule and what this delay in this over budget currently means to us what it will mean for us if we continue like this we need to work out how efficient we're being this leads to performance indexes or performance indices depending on who you speak to so the first of these performance indexes is called cost performance index formula is very similar we just change it slightly to add a division instead of subtract so we have cost performance index equals earned value divided by actual cost if we look at my project to build this wall 250 is earned value actual cost is 375 250 divided by 375 equals 0.67 which i've rounded up to make it a bit simpler with the performance index this formula should give us a result of one if everything is going to plan anything below one isn't going very well anything above one means it's going better than expected if we look at scheduled performance index then again a very similar formula to before scheduled performance index equals earned value divided by plan value looking at my wall project then 250 divided by 500 equals 0.5 if it was going okay this would show me one less than one 0.5 means things aren't going as expected we may be asked what our percentage efficiency is going to be now it's just fairly easy to calculate we've got a 0.67 number here so cost performance index is 0.67 all you need to do is times that by 100 to establish how efficient we're being so 67 efficient 0.67 times 100 67. we can look at that scheduled performance index of 0.5 as well if we times that by 100 it tells us we're being 50 efficient in terms of schedule we want to be 100 efficient less than 100 things aren't going quite to plan this now allows us now we've established efficiencies and performance indexes and things like that we can now think about okay so if things continue like this what will this look like so the formula to help us calculate where we're going so estimate at completion which is our new predicted cost we take our original planned cost of budget at completion and we divide that by our cost performance index so looking at this project then our budget at completion was 1 000 pounds our cost performance index was 0.67 3000 divided by 0.67 equals just shy of 1 500 pounds so that tells me i'm going to need another 500 pounds to deliver this project if things continue like this let's do the same thing for scheduling then so we have an estimated completion date which will equal our duration so our planned duration of 10 days on this particular project and we divide that by our scheduled performance index so 10 days divided by 0.5 equals 20 days so this now tells me if things continue like this it won't take 10 days it's going to take 20. earned value management isn't a magic wand making problems go away it's really just a tool that helps us make decisions earlier than perhaps if we were reacting to them it's a proactive way of managing your project so what does earned value management allow us to do well first off think about where we are in this project we're halfway through and we know now that things aren't going very well because we're tracking it so we've got this early warning that earned value management helped give us allows us to then make decisions preemptively and proactively rather than reactively in projects as you've been exploring this stuff you may have encountered these things called constraints we often talk about triple constraints in project management and these are often portrayed on a triangle these three things are quality time and cost so we now can make decisions in terms of what's most important to us here for example our project may be a quality driven project it might have very specific very set specifications it has to meet otherwise it won't be a success in which case then in order to achieve this specification we're gonna have to probably spend another 10 days over what we plan to have and another 500 pounds more than we expected to spend if that quality is paramount to us equally though if the deadline if we haven't got any more time in the calendar than those 10 days we originally planned for then how much we gonna get for ten days or how much more money we're gonna have to throw at it to get it done in 10 days or if the thousand pound budget was all we have in the kitty as it were then how much we gonna get for one thousand pounds or how much longer is it going to take us or what specifications or scope do we sacrifice in order to get it in budget again we are making these decisions proactively rather than reactively that is what earned value management helps us to do it's not a magic wand it just helps us make decisions

Channel: Training Byte Size Ltd

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Keywords: Earned value management, EVM, project manager, project management, APM PMQ, Project Management Qualification, Planned value, Earned value, Actual cost, Cost variance, apm, www.trainingbytesize.com

Id: 1-N0St1A2kU

Length: 13min 11sec (791 seconds)

Published: Tue Jan 26 2021