Earned Value Management (EVM) is a tool that we use to assess a project's performance at any point in the project lifecycle. A lot of contractors that I work with are under the false belief that a project's profit can only be assessed once it is complete. The greatest benefit of EVM is that it makes risks and other issues visible at an early enough stage to act and mitigate the damage they may cause. Have you ever been in a situation on a project where everything feels out of control? You're being as frugal as you can with spending, but the bank account seems to be going down, not up. What can you do about this? Stick your head in the sand and hope for the best, or work hard to figure out exactly where the money's going and how you can slow, or stem the blood loss.
EVM is actually quite complicated, and to do it right is not a skill that you can pick up overnight. However in simple terms there are 4 parts of EVM:
1. PV - Planned Value
2. AC - Actual Cost
3. EV - Earned Value
4. CV - Cost Variance
You can't measure anything without planned value - that means that you need to establish a cashflow plan based on your budget and your programme, so that you have a baseline to compare things against. Once you have a PV established, you can track you actual cost (AC) against this. However in any project there is a significant difference between cost and value.
Let's say that you had planned to spend $20,000 in month 1. But you actually spent $15,000. Is this a good thing? The answer is, it depends - and the thing that it depends upon is your earned value. Your earned value is a subjective measure (ie. an "educated guess") of the value that your project has earnt for the actual cost that it has expended. So to go back to our example, the $20,000 PV was based on having a slab poured and finished. At the end of month 1, you've only spent $15,000, and your slab is poured and finished - Congratulations! That means that you have a cost variance (CV) of $5,000 - ie. a "gain" of $5,000. Now, what if at the end of month 1 you had only finished the excavation and formworking for the slab - no reo, no concrete. In this case you have most likely made a loss. How much of a loss depends on your budget and breaking down the planned value even further.
I think that's enough for today, but if you are in a position where you think you need to conduct an analysis of the Earned Value of one of your projects, let's talk - give me a call on 0468 321 541.