Project Performance Evaluation by Earned Value Analysis

Project Performance Evaluation by Earned Value Analysis Project Performance Evaluation by Earned Value Analysis – A Case Study Abstract- Earned Value management (EVM) is a well-known project management tool that uses information on cost, schedule and work performance to track the current status of the project. It uses information on cost, schedule and work performance to establish the current status of the project. The calculation of earned value is a very effective tool in measuring the progress of contractors in external projects. Computation of earned value can be part of an audit activity, or it can be integrated into the progress monitoring system. The concept of earned value is generally used in the context of fixed price contracts where the objective is to calculate the amount of payment that is due to the contractor. Keywords- Project Performance Evaluation, Earned Value, Cost Control, Forecasting INTRODUCTION Earned value analysis is a project control technique which provides cost and schedule performance measurements of the project. It is a frequently used method of performance measurement for projects. It integrates the project scope baseline and the cost baseline, along with the schedule baseline, to form the performance baseline, which helps the project management team assess and measure project performance and progress. EVM provides project managers and the organization with triggers or early warning signals that allow them to take timely actions in response to indicators of poor performance and enhance the opportunities for project success. Better planning and resource allocation associated with the early periods of a project might be the cause of this reliability. EVM IN CONSTRUCTION PROJECTS EVM can be used for progress payments to contractors based on the earned value (EV) of contracted or outsourced work. Since such contractual arrangements create legal and financial obligations, it is important to consider the method specified for evaluating progress. These methods and tools for the determination of progress should be carefully considered and negotiated to achieve a fair and equitable environment that encourages successful accomplishment of contracted or outsourced project items. Once a project has advanced to a stage of performance, the consistent and constant flow of information on the true status of the project is essential. EVM is a methodology that associates project scope, schedule, and resource measurements to analyse project performance and progress. The fundamental principle of EVM is that the patterns and trends of performance, when compared against a soundly developed baseline, can be excellent predictors of the future project performance. Feedback is critical to the success of any project. Getting the relevant feedback in time enables project managers to identify problems early and make adjustments that keeps a project on time and on budget. EVM is considered by many to be one of the most effective performance measurement and feedback tools for managing construction projects. In EVM system, the three parameters that influence the project performance control are: Planned Value (PV) Planned value (PV) is the sanctioned budget assigned to a scheduled work. It may also be known as the Budgeted Cost for Work Scheduled (BCWS). This budget is allocated by phases over the life of the project, but at a given moment, planned value outlines the physical work that should have been accomplished. The overall PV is sometimes referred to as the performance measurement baseline (PMB). The total planned value for the project is also known as budget at completion (BAC) [1]. Earned Value (EV) Earned value (EV) is the measure of work performed at a specific point in time, expressed in terms of the authorized budget for that work. The EV being measured needs to be related to the PMB, and it cannot be greater than the authorized PV budget for a component. The EV is often used to calculate the percentage completion of a project. Progress evaluation criteria should be established for each work breakdown structure (WBS) component to measure work in progress. The earned value methodology used to plan the baseline should be used consistently to determine the earned value. Project managers monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends [2], [1]. Actual Cost (AC) Actual cost (AC) is the realized cost incurred for the work performed during a specific time period. It is the total cost incurred in achieving the work that the EV measured. In order for EVM analysis to be reliable, AC must be recorded in the same time period as EV and for the same activity or work breakdown structure component as EV. Fig. 1 shows the actual cost at time now, and indicates that the organization has spent more than it planned to spend in order to achieve the work performed to date. Fig. 1 Earned Value curve for a project over budget and behind schedule LITERATURE REVIEW Previous researches done on the EVM indicate that it is definitely one of the better practice to monitor a project. Therefore in this project we will be considering Earned Value Analysis for research purpose. Pramod M et al. (2014), recognise that the absence of an effective system for monitoring and controlling project cost is the main reason for cost escalation and delays in the project. Their study considers Earned Value analysis and Earned Schedule concept as the two monitoring systems which can be used to monitor a construction project. The study was done on a residential apartment in Bangalore. They concluded their research by saying, Earned Value Analysis is a great monitoring system for project cost control when the required information are cost oriented [3]. Jose Angelo Valle and Carlos Alberto Pereira Soares (2012), did a critical review of the application of EVA for the Amusement Park named Monica Park in Brazil, which was is documented with reports, graphs, analyses and comments. EVA had a relevant role in the integrated management of the project scope, time, progress, cost and risks and the procurement. Because of the implementation of EVA, the project finished on time and on budget. The findings of the case study are analysed and concluded with 10 recommended steps for future implementation of the EVA process [4]. Antony Prasanth M A and K Thirumalai Raja (2014), selected Integrated housing and slum development program (IHSDP) located in Mattampuram, Thrissur, Kerala, for case study. Budgeted cost of work performed was compared against actual cost of work performed and budgeted cost of work scheduled to assess cost and schedule variances, respectively. Based on the collected data, schedule of the project and cost for individual activities had prepared. It gave an idea of cost and time required for individual activities and for the entire construction. S-Curve was drawn showing the relationship between duration and cost of the project. From the calculation of various project performance indicators, they arrived at conclusion that the project has an unfavourable schedule variance of 9.5 which meant the project was behind schedule. A SPI of .62 and a CPI of 0.82 was obtained. EAC of 411.20 lakhs was obtained which is 74.02 lakhs more than the BAC at 337.18 lakhs [5]. EVM PERFORMANCE ANALYSIS AND FORECASTING PARAMETER Calculating Project Performance EVA analyses project performance by calculating performance variances and performance indices. Common variances include: Schedule Variance (SV):Schedule variance (SV) is the amount by which the project is ahead or behind the planned delivery date, at a given point in time. It is a measure of schedule performance on a project. It is equal to the earned value (EV) minus the planned value (PV). The EVM schedule variance is a useful metric which can indicate when a project is falling behind or is ahead of its baseline schedule. The EVM schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Cost variance (CV):Cost variance (CV) is the amount of budget deficit or surplus at a given point in time. It is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual cost (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Schedule performance index (SPI):The schedule performance index (SPI) is a measure of schedule efficiency expressed as the ratio of earned value to planned value. SPI indicates the rate at which the project is progressing. It is sometimes used in conjunction with the cost performance index (CPI) to forecast the final project completion estimates. An SPI value less than 1.0 indicates less work was completed than was planned. An SPI greater than 1.0 indicates that more work was completed than was planned. Cost performance index (CPI):The cost performance index (CPI) is a measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost. It is considered the most critical EVM metric and measures the cost efficiency for the work completed. A CPI value of less than 1.0 indicates a cost overrun for work completed and greater than 1.0 indicates a cost underrun of performance to date. Performance Forecasting As the project progresses, forecasts can be developed for cost and schedule performance. Common forecasting data includes: Estimate to Complete (ETC):The estimate to complete (ETC) is the expected cost needed to complete all of the remaining work for a control account, work package, or the project. The most accurate method is to develop a new, detailed, bottom-up estimate based on an analysis of the remaining work. Estimate at Completion (EAC):Estimate at completion (EAC), is the expected total cost of a control account, work package, or the project when the defined scope of work will be completed. The EAC is typically based on the actual cost incurred for work completed (AC), plus an estimate to complete (ETC) for the remaining work. Variance at Completion (VAC):The cost variance at completion (VAC), derived by subtracting the EAC from the BAC, forecasts the amount of budget deficit or surplus at the end of the project. The VAC shows the team whether the project is forecasted to finish under or over budget. This can be expressed as a percentage by dividing VAC by BAC. To complete performance index (TCPI):The TCPI is a comparative measure. It compares work completed to date with budget required to complete the remaining work. The TCPI data can be used as the basis for a discussion which explores whether the performance required is realistically achievable. It is the ratio of remaining work to the remaining budget. TABLE I EVM AS IT RELATES TO PROJECT MANAGEMENT SITUATIONS Project Management Questions EVM Performance Measures Formula Schedule Analysis Forecasting: To know the status of project Time-Wise. Are we ahead or behind schedule? Schedule Variance (SV) SV = EV/PV How efficiency are we using time? Schedule Performance Index (SPI) SPI = EV/PV Cost Analysis Forecasting: To know the status of project Cost-Wise. Are we under or over our budget? Cost Variance (CV) CV = EV-AC How efficiently are we using our resources? Cost Performance Index (CPI) CPI = EV/AC How efficiently must we use our remaining resources? To-Complete Performance Index (TCPI) TCPI = (BAC – EV)/(BAC – AC ) What is the project likely to cost? Estimate at Completion (EAC) EAC = BAC/CPI Will we be under or over budget? Variance at Completion (VAC) VAC = BAC-EAC What will the remaining work cost? Estimate to Complete (EAC) ETC = (BAC-EV)/CPI CONCLUSIONS The study of various research works and case studies give an idea that Earned Value Analysis is a great monitoring system for project cost control. Therefore, in this paper I will be making an attempt to apply and analyse the use of EVM on a live project based on the findings and guidelines of the references. REFERENCES [1] PMI, A Guide to the Project Management Body of Knowledge (PMBOK), 4th Edition, Project Management Institute, USA, 2008. [2] PMI, Practice Standard for Earned Value Management, 2nd Edition, Project Management Institute, USA, 2005. [3] Pramod M, K. Phaniraj and V. Srinivasan, â€Å"Monitoring System for Project Cost Control in Construction Industry†, in International Journal of Engineering Research Technology (IJERT), Vol. 3, Issue 7, pp. 1487-1491, July 2014. [4] Jose Angelo Valle and Carlos Alberto Pereira Soares, â€Å"The Use of Earned Value Analysis (EVA) in the Cost Management of Construction Projects†, International Journal of Engineering and Innovative Technology, pp1-11, Mar 2011. [5] Antony Prasanth M A and K Thirumalai Raja, â€Å"Project Performance Evaluation by Earned Value Method†, International Conference on Engineering Technology and Science, Volume 3, Special Issue 1, Feb. 2014.