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Illustrative Explanation of Earned Value Introduction. Earned value is a management technique that relates resource
planning to schedules and to technical cost and schedule requirements. All work is
planned, budgeted, and scheduled in time-phased ''planned value'' increments constituting
a cost and schedule measurement baseline. There are two major objectives of an earned
value system: to encourage contractors to use effective internal cost and schedule
management control systems; and to permit the customer to be able to rely on timely data
produced by those systems for determining product-oriented contract status. Baseline. The baseline plan in Table 1 shows that 6 work units (A-F) would be completed
at a cost of $100 for the period covered by this report. Table 1. Baseline Plan Work
Units
Schedule variance. As work is performed, it is ''earned'' on the same basis as it was
planned, in dollars or other quantifiable units such as labor hours. Planned value
compared with earned value measures the dollar volume of work planned vs. the equivalent
dollar volume of work accomplished. Any difference is called a schedule variance. In
contrast to what was planned, Table 2 shows that work unit D was not completed and work
unit F was never started, or $35 of the planned work was not accomplished. As a result,
the schedule variance shows that 35 percent of the work planned for this period was not
done. Table 2. Schedule Variance
Work Units
Cost variance. Earned value compared with the actual cost incurred (from
contractor accounting systems) for the work performed provides an objective measure of
planned and actual cost. Any difference is called a cost variance. A negative variance
means more money was spent for the work accomplished than was planned. Table 3 shows the
calculation of cost variance. The work performed was planned to cost $65 and actually cost
$91. The cost variance is 40 percent. Table 3. Cost Variance Work
Units
Spend comparison. The typical spend comparison approach, whereby contractors report
actual expenditures against planned expenditures is not related to the work that was
accomplished. Table 4 shows a simple comparison of planned and actual spending, which is
unrelated to work performed and therefore not a useful comparison. The fact that
the total amount spent was $9 less than planned for this period is not useful without the
comparisons with work accomplished. Table 4: Spend Comparison
Approach Work Units
Use of Earned Value Data The benefits to project management of the earned value approach come from the disciplined planning conducted and the availability of metrics which show real variances from plan in order to generate necessary corrective actions. |
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