2 – What is the Origin of Earned Value Management? Planned Value, Earned Value and Actual Costs
Here will describe what is the origin of Earned Value Management.
Planned Value, Earned Value and Actual Costs
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2:56 – The Earned Value Parameters on the S-curve. Planned Value, Earned Value and Actual Costs
3:50 – Defining Earned Value (EV)
4:45 – Defining Actual Cost (AC)
5:05 – Comparing EV with AC
5:25 – Comparing EV with PV
6:13 – The old EVM terminology: BCWS, BCWP, and ACWP
8:45 – Example
Earned Value Management was originally used in the operations to determine the efficiency of the use of money to create products. The goal was to determine how much value was created and how much did it cost.
The main element here is that the created value or earned value (EV) is compared with the actual cost to create that value (AC). When the AC was higher than the EV, this would mean that the process should be improved to have better efficiency.
When this principle was introduced in project management, it was necessary to adjust it. First, we have the S-curve which gives the planned costs to create the products or services over time. The cost baseline is how we assume, we will be creating the deliverables over time but does not tell us anything about the actual created goods or services over time. When we consider the situation at time t1, we assume that we would have created deliverables with a value of PV1. But how much value did we really create?
In order to understand what value was actually created, it is necessary to measure the deliverables that have been completed and how much value they represent at cost. This is expressed as the Earned Value or EV. With this parameter, we can determine the financial efficiency. EV(t) is basically the schedule information and can be compared with the planned value.
Now, we can determine the amount of money that was spent to create the deliverables of the EV. This AC will be used to calculate spending efficiency.
With the three parameters, it is possible to evaluate the project. The relative position of the PV and EV provides us information about the progress of the project and if we are ahead of schedule, on schedule, or behind schedule.
The relative position of EV and AC tells us how efficient we are spending our money to create the deliverables.
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