You’ve Spent Half the Budget. Are You Halfway Done?
The simple but profound insight behind earned value.
Let’s say you’re renovating your kitchen. It’s been a long year and half staring at the same walls. It’s time for a change. You get some quotes, choose a contractor, and brace yourself for washing dishes in the bathtub. It’s going to be $10,000 and it will take ten weeks.
You’re at week five. The contractor’s billed you $5,000. Are you going to be finished on time? Are you going to be on budget?
The answer is… maybe. This is where the concept of earned value comes in. It is a very simple idea, part of the 1960s revolution in project management that also produced critical path schedules, but just because it’s simple doesn’t mean it’s not brilliant.
Put Your Costs in Context
The concept is this: it is the relationship between progress, cost, and schedule that is important. A project “earns value” through completion of tasks over time, but incurs costs through work on those tasks. This means that progress, time, and cost have to be measured separately. It’s not enough to say that you’re $5,000 along so you’re basically half complete. You need to know whether the project is actually 50% done. If it’s 40% done, you have at least one problem. If it’s 60% done, you’re doing great — on cost. But if you’re also two months past the finish date, you need to have some discussions with your contractor.
This kind of high level assessment is enough on its own to provide some useful information, and if you’re doing a simple project that might be where you stop. However, Earned Value Analysis (EVA) starts to really show its worth once we introduce two things: (1) a plan for measuring and valuing progress, and (2) a schedule which integrates progress and cost.
Planning is Essential
The first challenge is how you tell when you have accumulated 50% of the value of the project. Value is different for every project and even for every task, but progress measured should be related to value earned. Depending on the task and type of work, it might make sense to think about measuring progress in pages written, or about installed units, or about parts arriving on site.
This is one of the many reasons why it’s important to have a good schedule. Your schedule should allow you to estimate progress (and therefore value) reasonably well for each activity. Take our kitchen example — it’s a lot easier to say you’re halfway through the floor work, 95% through appliance procurement, and 100% complete with the cabinet painting than it is to estimate an overall progress. It might be even easier to say you’re 100% done with the floor preparation and 0% done with the installation of new flooring. The level of granularity is a judgment call.
Once you have your breakdown, you also want to be able to roll things up. Obviously you can’t just average the percent complete across tasks; some tasks are larger than others. With EVA, you roll up progress via the cost of each activity. The floor (50% done) is estimated at $1,200, the appliances (95% done) are $4,000, and the cabinet painting (50% done) is $2,000. Multiply each percent progress by the estimate and then sum, to find you’ve “earned” $5,400 ($600 + $3,800 + $1,000).
$5,400/$10,000 is 0.54. The project is 54% done. You’re actually coming in a little under budget.
But as we saw above, you still might be in trouble.
Am I Ahead or Behind?
Progress (and value) isn’t usually evenly distributed over time. Sometimes, like with a kitchen renovation, there are expensive purchases to be made which don’t take much time but which use a lot of the budget. Or sometimes you’ve got a big part of the job, like tiling, that won’t take place until towards the end. Right now your contractor has spent $3,800 on appliances, which is 38% of the total. It only took a day. The remaining 62% of the work will take a lot longer, because that’s all the time-consuming floorwork, painting, plumbing, installation, and so on. So if the project is in week five, and you’re only 54% complete, you’re probably behind schedule.
This is one of the other reasons you need a good schedule. The schedule lets you spread out the progress of each activity over its duration, so you can plan for the expected intensity of the work. When you add in the total cost of each task, this lets you create a cash flow projection. This is how you can relate earned value to the schedule and tell where a project should be at a given point in time. With our kitchen project, the total progress rollup should be at about 70% at week five of ten.
Next Steps
As a PM, you now know that on this project, $5,000 spent by week five of ten means you’re a bit under budget, but well behind schedule. There are many other uses for these numbers, including forecasting both the end date of the job and the final total, determining an expected spend per month, and calculating some indicators to help you target which task is in the most trouble, but those are topics for another day.
All of this information will help you keep your contractor accountable and give you confidence in your targets. And if you sense something’s not quite right on a project, and you’re not already doing EVA, it’s one of your best diagnostic tools.
Finally, while you might not do the full process on every project, keep in mind the value of planning out the project before beginning, and developing some rules of thumb for how you are measuring progress and keeping track of costs. It’s like drawing a map for yourself. If the map is wrong, you won’t know where you are. Some very simple planning and calculations up front can help you establish much more confidence in your project performance.
