Earned Value Management (EVM): How to Forecast Project Outcome and When Does EVM Help?

In an ideal world, IT projects are completed with less or no issues than expected and lead immediately to a successful outcome. A company releases its final product to end-users, and it’s done. You can close the case. However, reality is a bit harsh. Unfortunately, there are cases when a project is finished, but it turns out that the ‘overtime’ and ‘over budget’ situations were following you along the way.

Sometimes, problems can be technical (ex. the lack of experience of a service provider), but in most cases, the issues are caused due to poor communication and workflow management. For example, some details weren’t taken into account, some vital notes weren’t mentioned, or maybe one stakeholder didn’t understand another. As a result, the outcome differs from the initial expectations, and the value of a project may be minimized. In such cases, a team introduces amendments into the scope and SRS (Software Requirements Specification) document. This type of amendments is known as Change Requests, and, once in a while, there can be loads of them.

When considering each Change Request, one should think if it should be performed, because it can postpone product release. If there is only one change to make, it is easier to decide. But when there is a need in dealing with a whole list of them, all stakeholders have to understand how to balance the tasks between the amount of features and reasonable release date. Considering that these requests may appear at any time during the entire development period, it is vital to constantly monitor time and budget spent on a project and calculate forecast to completion. For this type of monitoring, EVM is a good choice, so let’s know more about this tool.

What Main Purpose Does EVM Have?

EVM, or Earned Value Management, is a project management technique that is usually a major part of a bulky project management system that may also include task management tools, Gantt charts, and employee reporting system. Often, companies take the components they lack from different service providers, which makes it difficult to connect them properly. It means that monitoring tools are also usually from third-party service providers. However, in simple cases of developing IT projects, it is possible to create your own EVM by using Google Sheets or Microsoft Excel.

As for the main purpose of EVM, it compares actual progress (EV, or Earned Value) of the project execution, scheduled progress (PV, or Planned Value), and the resources that were spent on it (AC, or Actual Cost). After you compare all of them, you can proceed with the forecast to completion and estimate the expected date of completing a project.

To better understand the state of your project, it is important to pay attention to the following indicators:

Indicator	Description	Formula	Interpretations
SV (Schedule Variance)	Actual deviations in time, which is basically the difference between the actual progress and the planned progress to date	SV=EV-PV	If SV>0, it means that you are ahead of schedule. In case SV<0, then you are behind the schedule, which causes overtime
SPI (Schedule Variance Index	Having a variance of 250h can be critical for a small project but may be not so vital for a bigger one. That is why SPI, which measures the ratio of the actual progress to the planned progress, is also used	SPI=EV/PV	If SPI>1, you are ahead of schedule. If SPI<1, then you are behind it
CV (Cost Variance)	Actual budget deviation	CV=EV-AC	In case CV>0, you brought more value in comparison to the resources your team spent. When CV<0, it means that you are spending more than was earned, which will lead you to go over budget
CPI (Cost Performance Index)	Another indicator for estimating costs	CPI=EV/AC	If CPI>1, then there is more value than the amount of resources you spent. If CPI<1, you have to be ready to spend more resources

There are also other useful estimates that are based on Initial Estimate (IE), and they are known as the following:

• ETC (Estimation to Completion) shows how much more you need to spend to complete a project (ETC=IE-EV);
• EAC (Estimate at Completion) tells the total costs of a project once completed (ETC=AC+ETC);
• EED (Estimated End Date) defines the date of the project competition.

It is more than enough to use the indicators and estimates that we mentioned in order to monitor the current state of the development process and its forecasting.

Read Also How to Estimate Cost of Fixed Price Projects

What to Choose: Time or Money?

Now that we know the basics, let’s see how it can be used in practice.

When using EVM, a project manager has to handle the costs and schedule. Considering that one needs to pay the team that is working on a project, it is customary to count EVM in money. But money is hours multiplied by rate, which means that we can basically count in hours as well. Let’s see the pros and cons of each option.

Counting EVM in Money

If talking about the advantages of this approach, you get as precise calculations as possible considering the data you are taking into account.

And, what about disadvantages? You need to bear in mind that financial documents are highly confidential, and only certain employees have access to them, which means that you will have a small circle of people that you can discuss the project with. Besides that, it is quite difficult to analyze how a Change Request can impact project schedule and budget without showing forecasting calculations in EVM. As a result, it can lead to poor decision-making and high project expenses.

Counting EVM in Hours

As for this approach, it has several advantages. First of all, it doesn’t require a high level of confidentiality. Thus, if the questions about the project, deadlines, or estimates arise, the project manager is able to involve more people into the process to find the optimal solution. For example, implementing all Change Requests increases the budget up to 10%. In this case, the project manager has to involve all stakeholders into the process to find out which Change Requests exactly should be chosen to calculate another profitable amount. Second of all, it is simple to calculate, because you just need to handle the hours from the estimate and reports made by the project team.

However, there is a disadvantage to this approach. It is not so clear how to include the hours of the employees that are paid differently.

Read Also How Much Does It Cost to Develop an App and Which Methods Can Reduce Expenses?

Many teams run into a deadend when they find out about this drawback. But let’s try to think out of the box.

It is crystal clear that you won’t be able to get an absolutely accurate estimation with the help of EVM. Besides that, this is not its major purpose. EVM is for showing the overall picture and dynamics. Insignificant miscalculations that don’t influence the overall understanding of the project are acceptable. It means that you can easily go for the approach of counting EVM in hours if you consider the average rate of team members.

Let’s say you have several developers with different rates. When you calculate their average rate based on the tasks they need to perform for the project, this is the average rate of team members. And now, it doesn’t matter how to estimate EVM, in money or in hours. Though, miscalculations might be higher when you choose the approach based on hours, but there will be less harm than from poor decision-making. That is why it is better to calculate in hours or even in story points if your estimate has them.

Is It Really So Bright and Easy as in Theory?

You need to keep in mind that every project has a scope, budget, and deadlines. Otherwise, it’s just a process not a project. Therefore, it is possible to estimate scope (in hours or story points) based on its features. Choosing between hours and story points depends on the accounting management of Actual Cost (AC). For example, if you take the AC of a feature from the reports made by employees, and the data is in hours, then you should choose hours.

To understand EVM better, let’s imagine a situation when you use it. We will consider “hours” in our example.

When you start a project, features are transferred from estimate to EVM template (in case there are many features, you need to aggregate them) and note down the expected date of features release in the Planned(h) column. The EVM of this project is ready. Throughout the project execution, all team members fill out their reports and register those features that were completed. Project manager transfers all the data into the EVM, filling out the following:

• Status. If a feature was completed or not;
• Earned(h). This is the overall completeness of a feature, or in other words, the achieved value expressed in terms of the estimation set in the Planned(h) column. You can use hours, percentages, or any other variable to understand where you stand with each feature. In our example, we use hours.
• Actual(h). This is basically the actual time spent on the feature development.

Depending on the project size, it is possible to implement changes every day or every time a sprint or milestone ends. Considering these changes, the EVM formulas calculate the following indicators:

• SPI – If a team is able to fit tasks in the schedule;
• CPI – If it is possible for a team to follow the budget;
• EED – Estimated date of the project completion.

If you are unsatisfied with these indicators, you need to find out the source of such data by looking for the tasks, which are over the initial estimate.

What About Change Requests?

In an ideal world, a contractor and a company that hires an outsourcing team negotiate with each other to understand what has to be done, and specifically these arrangements would be done no matter what. In this case, a project manager has a simple task – just filling out the EVM document and checking for each row to be “green.”

In real life, the very first Change Request appears right after the first demo is done, then after the results of a first milestone. Each new version of demo brings more Change Requests, and their amount increases, while project budget and deadlines are not ready for such changes. So, if you want to reduce or completely erase miscommunication and false expectations, you must use EVM.

All Change Requests are evaluated, prioritized according to scope, and then included in EVM. Project manager has a meeting with stakeholders to show the changes in schedule and budget depending on the implementation of the Change Requests. The goal of such a meeting is to determine which ones of them are worth shifting deadlines and increasing budget. Considering that any adjustment done in EVM changes all indicators, the discussion turns out to be quite objective allowing each participant to see new dates of the project completion. At the end of the meeting, everyone forms the same expectations about the project and is able to grasp the amount of tasks that should be done, their deadlines, and expenses.

It is a lot harder to achieve the expected goals when the estimate is higher than project deadlines and budget.

What to Do Then?

Albert Einstein once said:

“A new type of thinking is essential if mankind is to survive and move toward higher levels.

So, let’s move up a little bit higher and look at the problem at another angle. Here’s what we can see:

1. Estimate is a forecast. We are expecting to achieve the result at a given time based on certain circumstances included during the effort estimate. However, not everything in this world is about your project, the world would rather dictate its own conditions.
2. In the IT industry, estimates are usually created according to the project scope, which is filled up with the expectations of each party. It means that the Actual Cost of the project development is unknown, but it can be somewhere near the estimate.
3. Some “necessary” features are not so vital and may be needed only on the stage of developing an idea. In practice, most of them will be irrelevant, and no one will use them. Therefore, there is no need to make all features come into reality or some of them should be done in a different way. All these characteristics will be specified during the project execution and demo testing.

That is why in the case of insignificant estimate increments, we recommend prioritizing your features and work according to the BFS model. It is important to fit the budget and deadlines without significant loss of result value. By following this model, you also include all features in the EVM document. All major features are in development, while the integration of all upcoming features (as well as Change Requests) is discussed with stakeholders by showing how they can impact the budget and deadlines. The success of the project that follows this model is highly possible with EVM.

Read Also The Intricate Art of Maximizing Value. How To Make Every Coin Spent Worth its Weight In Gold

Conclusions

Keeping your deadlines and budget under control while you have a scope creep or even follow the BFS model is possible without the EVM tool in case your project manager is a magician. And, how many magicians do you know? Exactly. Therefore, we recommend not risking your money and reputation and just follow the tactics of the regular management.

If you want to know more about the services we provide and the model we work with our clients, please contact us to let us help you to develop the best software solution for your business.