Why use Earned Value Management?
0:32 – The project S-curve
1:50 – Periodic Budget Allocations
2:34 – Comparing different Cost Positions
4:25 – Interpretation of the different Cost Positions
6:55 – Conclusion
Initially, project control related to schedule and cost were done separately. This lead to circumstances where the project team reported below budget spending during the execution and created a sense of optimism. Unfortunately at the completion of the project, the result was quite opposite: project late and over budget.
Projects that are over budget may result in important losses and the initial financial goals may not have been reached: IRR below goal and NPV negative, hence a loss.
In the first part, we will look at the S-curve and the periodic budget allocations and explain what they mean.
When we add different cost positions, we will interpret them and in the classic approach, a cost below or on the S-curve will be interpreted as good and the team expects the project to be on budget or below when it is completed. On the other hand, when the cost is above the S-curve, we interpret that the project is going bad budget-wise.
It is important to see that as long as the expenditure is below the allocated budget, the project work can continue but when it is above, there is no more money to continue, and the project work will be stopped (it happened to me a few times).
Experience however shows that the so-called optimism when we are spending less than the planned amount in many cases leads to projects completing behind schedule and over budget.
On the other hand, a cost higher than the planned value can mean that the project is advancing faster than planned and money is spent faster, while a cost lower than the S-curve may be because the project is advancing slower than planned.
This can be resolved by introducing Earned Value Management as we will see in the following videos.
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