Earned Value Analysis for Justification of Continuous Value

May 20, 2018
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Business justification demonstrates the reasons for undertaking a project. It answers the question “Why is this project needed?” Business justification drives all decision making related to a project. So, it is important to assess the viability and achievability of a project not only before committing to significant expenditures or investment at initial stages of the project but also to verify the business justification for continuance throughout the project’s lifecycle. A project should be terminated if it is found to be unviable; the decision should be escalated to the relevant stakeholders and to senior management. The business justification for a project must be assessed at the beginning of the project, at pre-defined intervals throughout the project, and at any time when major issues or risks that threaten the project viability arise.

Monitoring the rate of delivering value is an important requirement for Scrum projects and earned value analysis is an excellent tool that can be applied to Scrum projects to understand how projects are performing. EVA analyzes actual project performance against planned performance at a given point in time using graphs and other visuals (e.g. S-curve) as a way to represent project status information.

Earned Value Analysis measures current variances in the schedule and cost of a project against planned objectives, and forecasts the final cost based on the determined current performance. EVA is typically done at the end of each Sprint after the User Stories in Sprint Backlog are completed. The result obtained is a simple set of metrics that indicate performance issues and allow timely adjustments.

Earned Value Analysis also improves the definition of project scope and offers meaningful metrics that can be communicated to stakeholders. EVA is based on the core concept that with the advancement of a project, value is generated. The value obtained (called the Earned Value) is measured and compared to the Actual Cost of the project and its Planned Value. This analysis or comparison helps in estimating future performance of the project.

For implementing EVA, some basic metrics such as valuation of planned work (called planned value or PV) need to be measured. Key parameters used in the Earned Value Analysis of a project include:

  • Planned value (PV) or the planned value of the project’s throughput
  • Earned Value (EV) or the value of the project’s throughput
  • Actual Cost (AC) or the amount of money actually spent during a period of time
  • Budget at Completion (BAC) or the original planned cost of the project

Metrics calculated from the above data –

  • Schedule Variance (SV) = EV – PV
  • Cost Variance (CV) = EV – AC
  • Schedule Performance Index (SPI) = EV/PV
  • Cost Performance Index (CPI) = EV/AC
  • Percent Complete (%) = (EV/BAC) x 100
  • Estimate at Completion* (EAC) = BAC/CPI
  • Estimate to Completion (ETC) = EAC – AC
  • Variance at Completion = BAC – EAC

Effective utilization of Earned Value Analysis depends on early estimations and accuracy of project baselines (such as PV and BAC). It is also dependent on the capacity of the organization to track actual progress made against the project and report on actual costs of making that progress.

 (*Note – The formula is valid if current variances are typical)

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