The History Of The Earned Value Management Accounting Essay

This paper outlines the theory and utilizations of Earned Value Management ( EVM ) , its function in project direction. Key constructs, prosodies and computations of EVM are described. Wayss for directors to respond to EVM information are given. Then, grounds why EVM can neglect in a company are described, followed by a treatment of EVM challenges and their solutions. Examples of EVM execution in building undertakings are so given.

Key Concepts, Metrics and Calculations of Earned Value Management

EVM was foremost used by American Department of Defense to mensurate undertaking public presentation in a standard mode. It integrates non merely cost direction, but besides scope direction and clip direction. It considers the costs and the clip spent, along with the advancement of a undertaking in footings of money to command its hazard. Using the rule that historical tendencies and forms can foretell the hereafter, the EVM helps reply the inquiries sing the spread between existent and budgeted costs, current position of a undertaking, whether it is behind or in front of agenda, its current public presentation, expected cost and clip of the undertaking staying. ( Vanhouke, 2009 ) . It besides shows how efficiently clip and resources are used. EVM can so be used to place where the jobs are looking, whether they are critical, and what it might take to convey the undertaking back on path. ( PMI, 2005 )

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To utilize EVM, some cardinal patterns should be present. Performance measurement baseline should be established, which includes break uping work range to a manageable degree, delegating direction duty clearly, developing a time-phased budget for every undertaking, choosing earned value measuring methods for all undertakings, keeping the unity of public presentation measuring baseline throughout the undertaking. ( PMI, 2005 ) Another of import pattern is to mensurate and analyse public presentation against the baseline, which includes entering resource use during undertaking executing, objectively mensurating physical work advancement, crediting earned value harmonizing to earned value methods, analysing and forecasting cost/schedule public presentation, describing public presentation jobs and taking action.

The prosodies that are used in Earned Value Systems include planned value ( PV ) , existent cost ( AC ) , every bit good as earned value ( EV ) . Those basic prosodies are used for earned value studies that integrate them in graphs and tabular arraies, discrepancy and index computations.

Planned value ( PV ) shows how much a undertaking squad programs to hold spent at a given day of the month of a undertaking, sing all the activities that are expected to be completed by that day of the month. The PV at the concluding day of the month of a undertaking is the entire undertaking budget. PV is besides known as public presentation measuring baseline.

Actual cost represents existent cumulative costs up to a given point in clip. The concluding value of AC equals the entire undertaking cost.

Earned value is the value of all the work done up to a specified undertaking day of the month. It is based on the initial value that is “ specified for each deliverable or work bundle during the budgeting stage ” . ( Brown, 2010 )

Issues with Measuring Project Progress

Estimating how much work has been completed can be rather complicated. A technique to cipher EV should be chosen on the evidences of the continuance of a undertaking and the tangibleness of its merchandise. For undertakings with touchable merchandise of work, a fixed expression is used for 1-2 period work attempt and either weighted milepost or per centum complete can be used when there are more than 2 periods of work attempt. For undertakings with intangible merchandise of work, dealt out attempt or degree of attempt can be used ( PMI, 2005 ) .

Fixed expression technique includes such methods as 50/50, 25/75, 0/100 techniques. For illustration, when 50/50 method is used, 50 % of work is credited as complete in the period work starts and the remainder 50 % is credited when all work is completed. ( PMI, 2005 )

With leaden milepost method, work is divided into sections stoping with discernible mileposts, a value is so assigned to the accomplishment of mileposts.

Percent complete is a subjective method when an appointed worker estimates how much work has been done in per centum footings.

Apportioned attempt method has a supportive relationship to some other undertaking holding its ain EV. This manner, the value of the supportive undertaking can be estimated on the evidences of this base activity ‘s EV.

When utilizing degree of attempt method, PV is assigned to each degree of attempt and is credited as the EV at the terminal of the measurement period ( PMI, 2005 ) .

There are assorted earned value discrepancy, index and prognosis computations. These calculatioins can assist a director reply assorted inquiries, including how the undertaking is making timewise and costwise. Below are the expressions of these and the information these offer.

Discrepancies and Variance Percentages

Cost discrepancy is the difference between EV and existent value. It shows the spread between the work performed and what has been spent to accomplish it. Poor public presentation is indicated by negative values, showing that the undertaking is over budget. Positive values normally demonstrate good public presentation. At the same clip, big positive cost discrepancy can bespeak either resources misallocation or serious mistakes in resources appraisal. Cost discrepancy per centum ( CV % ) is calculated as cost discrepancy divided by EV and demonstrates the per centum relationship between the cost discrepancy and the value of the work completed to day of the month, with positive values being good and negative being bad.

Agenda discrepancy is the difference between the EV and the PV. It shows what the difference between the advancement really made and the advancement planned to hold been made up to the given point in clip is. When the undertaking is behind agenda, this value is negative and indicates hapless public presentation. Small positive values demonstrate good public presentation. However, when the positive values are important, resources might be wasted or there might hold been some mistakes of skip. Schedule discrepancy per centum ( SV % ) is calculated as agenda discrepancy divided by PV and demonstrates the per centum relationship between agenda discrepancy and the work value intended to hold been completed to day of the month, with positive values bespeaking good public presentation and negative indicating hapless public presentation.

Performance Indexs

Cost public presentation index ( CPI ) is calculated as EV divided by AC. It is “ a ratio index of cost public presentation in relation to EV ” . When it equals 1, the public presentation is to program ; the value greater than 1 shows good public presentation, the value less than 1 demonstrates hapless public presentation.

Schedule public presentation index ( SPI ) is calculated as EV divided by PV. It is “ a ratio index of agenda public presentation in relation to EV ” . When it equals 1, the public presentation is to program ; the value greater than 1 shows good public presentation, the value less than 1 demonstrates hapless public presentation.

The discrepancies and public presentation indices can be graphed over clip to acquire indexs of tendencies in undertaking public presentation and assist see whether disciplinary actions have any impact. ( Anbari, 2003 )

Forecasting Indexs

Budget at completion ( BAC ) equals concluding value of PV and it “ specifies the initial budget for the full undertaking based on planned outgos ” .

Estimate at completion in footings of cost is BAC divided by CPI. It shows what the stoping cost of the undertaking is likely to be if cost public presentation corsets within its current form.

Revised continuance or Time estimation at completion is planned undertaking continuance divided by SPI. It indicates how long it will take to finish the undertaking, if schedule public presentation follows the same form as it has.

To-complete public presentation index is calculated as work staying divided by budget remaining. It shows what degree of public presentation is needed to “ finish the undertaking within the baseline budget ” , from the information day of the month forward. ( Brown, 2010 )

When the undertaking is on agenda and on budget, cost discrepancy and agenda discrepancy equal 0, cost public presentation index and agenda public presentation equal 1. The reading of other state of affairss is given in the tabular array below.

Figure 1. Interpretations of Basic EVM Performance Measures ( beginning: PMI, 2005 )

Performance Coverage

EVM informations can be presented in assorted ways, depending on the demands of the information user. Most common methods include s-curves, tabular arraies and saloon charts. S-curves are used for showing overall public presentation of a undertaking, a control history or a undertaking. Typically, EVM S-curves are displayed on X-Y axis, with Time on X axis and Resources on Y axis, demoing PV, EV and AC. As for tabular arraies, they are a logical follow-on to an S-curve and are utile when demoing consequences by project constituent, for illustration, exposing assorted EVM computations across and single undertaking constituents down the side can give a concise expression of what the state of affairs in every undertaking constituents truly is. Bar charts can so assist supply comparing of informations. ( PMI, 2005 )

Reacting to Project Variances Indicated by the Earned Value System

EVM can assist directors acquire early warning signals or triggers, assisting them take timely actions in response to hapless public presentation indexs, therefore heightening possible undertaking success. ( Anbari, 2003 )

When discrepancies exceed control thresholds and their causes are known, a undertaking squad can acquire a undertaking on path with initial committednesss and programs making one of the followers. The squad can compact or crash the critical activities left. Besides, the squad can negociate a new day of the month to avoid letdown with undertaking holds. The squads with unwanted discrepancies need to hold aid provided to them. Critical stuffs should be delivered on-time or expedited, so the squad can negociate the footings with internal and external providers. The undertaking range might be reduced, the range weirdo should be checked for and the alteration control procedure should be engaged. The undertaking agenda and the budget can be revised if range and specifications have changed. ( Brown et al, 2010 )

Top Mistakes When Using Earned Value Management and Reasons why EVM does non Work

There are many grounds why EVM does non work in some companies. To get down with, companies that are non mature and that do non hold procedure and processs in all undertakings should non try to utilize EVM. The other grounds why EVM can neglect include the undermentioned issues in companies: no documented demands, uncomplete demands, Work Breakdown Structure ( WBS ) non used or non accepted, WBS incomplete, program non incorporate ( WBS -Schedule-Budget ) , schedule and/or budget incorrect, alteration direction non used or uneffective, cost aggregation system unequal, wrong advancement ; and direction influence and/or control ( Lukas, 2008 ) .

Solutions to Gain Value Challenges

There are rather some challenges that EVM can present to a company ( Brown et al, 2010 ) . These challenges and their solutions are described below. The first issue concerns the fact that some companies can alter the PV as the undertaking is in advancement, AC and EV information going available. Making this, they eliminate the differences between those three indexs. This eradicates historical informations and gives the squad an alibi to non name or rectify public presentation spreads. The cause of this behaviour is a belief that a monitoring system can be used as a blame-casting or penalizing tool, while the squads should be persuaded that the system is used to work out jobs. Trust should be gained, utilizing EV monitoring system foremost in smaller pilot undertakings.

Another challenge is that the undertaking squads tend to avoid the examination coming with advancement discrepancy to avoid holding a failure indicated. As a consequence, accomplishments are overreported, 90 per centum complete is reported continuously as the squads hope to catch up with public presentation thresholds. The consequence of this is that directors are non cognizant of the jobs and therefore no support is provided. The squads should see the advantages of accurate advancement studies. This issue can be resolved by giving the squads merely three advancement figures: undertaking non started ( 0 % ) , undertaking in advancement ( 50 % ) and task complete ( 100 % ) .

Some undertaking squad subscribers might non be familiar with EV system linguistic communication. Therefore they should be asked how much more clip they need, instead than be asked for their per centum complete. This manner, the informations will be reported and the director can himself or herself estimate a per centum complete. This manner, the director can besides respond to the jobs and inquire how to assist a squad get back on agenda. At least a simple signifier of EVM can be used in any industry with any capital undertaking, harmonizing to Fleming and Koppelman. ( Fleming et al, 2002 )

AC appraisal can be a large challenge. A batch of costs should be monitored for each undertaking, including pay rates, stuff and travel disbursals, etc. All the factors of a multifactor cost system are of import for overall undertaking public presentation, nevertheless, when making EV coverage, they can be omitted and merely labour costs can be included. It is even less complicated to utilize individual hours as the step unit.

EVM prosodies should non be used in the exclusion of other public presentation indexs. For illustration, EVM has an premise that the balance of work will hold the same comparative cost discrepancy as the work completed, though sometimes past public presentation is non a perfect forecaster of future public presentation when there were some large jobs in the beginning of the undertaking that are non likely to happen once more. Furthermore, costs should be projected integrating cost deductions of a agenda discrepancy. Another common abuse is utilizing merely Schedule Variance for agenda discrepancy as, for case, some undertakings might be done out of sequence, with dearly-won activities done in front of agenda and lower-dollar critical activities being behind agenda, EVM demoing a favourable state of affairs while it is non the instance. ( Russel, 2008 ) True agenda direction tools should be used along with EVM to guarantee that EVM does non supply misdirecting information. The grounds behind EVM indexs calculated should be investigated to do certain that what EVM shows is really true.

A squad should non concentrate on Numberss merely, insouciant factors must besides be considered when doing determinations as EV data merely informs determinations and should non do them for a director. For illustration, a negative cost discrepancy for an activity might non needfully intend hapless public presentation but indicate that the activity has the added disbursal because of being in front of agenda.

Undertaking ‘s strategic ends should ever be a precedence. When a squad focuses on EV supervising excessively much, non adequate attending might be given to what the existent end was. “ Time and cost should non be the lone prosodies on a undertaking ‘s splashboard ” ( Brown et al, 2010 ) .

Example of the Use for Construction Undertakings

In building undertakings, most informations is already available, with lone public presentation efficiency factors and prognosiss to be calculated. There are six recommendations. First, a agenda of values should be provided by executing providers. Then, all the providers should reflect existent costs incurred and update the agenda of values. The public presentation of both cumulative CPI and SPI should be monitored. The likely concluding costs should be continuously forecasted to guarantee remaining within acceptable cost hazards. Fixed-price providers should be required to supply a projection of awaited costs, which should resemble an S-shape. Front-loaded undertaking baselines should be avoided to avoid paying for work non completed. When doing payments to fixed-price providers, it should be certified that their projected costs have non been exceeded and, if they have been, so the sum should be disclosed. Using these recommendations, the fiscal hazards of building undertakings can be mitigated. ( Fleming et al, 2002 )

Decision

EVM can supply important information for decision-making within a undertaking, seting together range, cost and agenda position informations. Its capablenesss are non to the full understood but what can assist distribute the usage of EVM includes simplification of EVM computations and the usage of graphs in tendencies understanding every bit good as successful application of EVM in industry.

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