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How to Accurately Predict Technology Project Budgets Using Earned Value Management

By Guest Writer on March 19, 2018

earned value management

We’ve all been there. A technology project is half-way through its lifetime, yet used 60% of its funding.

Is it overspent? Is it on track? Or almost as bad, underspent, and about to skew administrative costs and raise audit issues.  Wouldn’t it be nice to be able to understand at a deeper level what is happening in projects?

In reality, there usually isn’t enough information to tell how the project is doing just by looking at time/budget ratios.  If it has large startup costs, it could actually be under-spent.  If it hasn’t done anything yet except pay consultants, it could be overspent.

What if I told you:

  • We can calculate how much money a project was actually going to need in order to reach completion.
  • This calculation can be done at regular intervals, not just in a project’s later stages.
  • You can use this calculation to compare different projects’ performance across different project types.

The Power of Earned Value Management

Earned Value Management (EVM) is a project management tool which can help with all of these issues.  EVM is a mathematical technique widely used to measure performance and progress of projects in an objective manner.  It is included in the Project Management Institute’s PMBOK standard.

Four reasons to use EVM are:

  1. We can determine whether a project needs extra attention early in its life-cycle.
  2. We can predict how much money is actually going to be required to complete the project.
  3. We can compare dissimilar projects in meaningful ways.
  4. We can gain deeper insight into the “why” behind project progress and finances.

EVM is academically rigorous and is commonly used in large projects.  It is standardized as ANSI EIA 748-B.  It has been shown to predict projects’ success or failure as early as a quarter of the way into the project.

EVM gets its name from its core concept of Earned Value.  It moves from “How much money did you spend?” to “How much value have you delivered?”  This is a subtle but important distinction.

It does that by asking four basic questions:

  • What did you say you were going to spend?
  • What did you actually spend?
  • What did you say you were going to do?
  • What did you actually do?

With these questions and a bit of math, Earned Value Management is able to produce a variety of metrics which may prove useful in analysis. The index numbers may be compared or ranked even when the projects are quite different.

The comparison of Planned Value (PV) to Earned Value (EV) is central to EVM. These lead to the Cost Performance Index (CPI) and Schedule Performance Index (SPI), which measure how efficiently the project is spending money and how quickly the work is being accomplished.

Each project is judged only by its own planned budget (“How much did we spend/get done?” vs “How much did we say we were going to spend/get done?”). In a project that is on time & on budget, both CPI and SPI are exactly 1.0 (one). Less than one is bad, while greater than one is generally good.

Another useful metric for development projects is Estimate To Complete (ETC). If present performance trends continue, how much money is it actually going to take to finish this project? This may be vastly different than the budgeted amount.

A Practical EVM Example

We had a significant underspend issue we were trying to understand across 60 projects in the Sahel.  Many of our projects were under budget…  Since they didn’t need the money, the first response was to cut the budgets across the board.  That didn’t go over well.  😉

In an article in December’s PM World Journal, I analyzed those 60 projects in the Sahel using EVM.  What I discovered painted a different picture:

  • Some of the projects were under budget because they were simply being thrifty.  Others were under budget because they hadn’t actually done much.
  • Other projects needed different amounts of funding to reach completion – usually a vastly different number than the nominal budget.  In some cases, it was less.  In others, it was clear that half-way through, the project would need more money than their entire original budget just to finish their current scope of work.
  • Overall, most of our Sahel projects would complete reasonably close to budget, but behind schedule.

Earned Value Management provided the insights to help us understand we had a progress problem, not a spending problem.

What will EVM tell you?

By Stephen Fierbaugh, a PMI-certified Project Management Professional.

Filed Under: Management
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