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<strong>SLQS</strong> JOURNALJanuary 2009Simulated Earned Value Management: AnInnovative Monitoring and Forecasting forProject Control (Part one)Prabath Hemachandra M.Sc.Project Management SpecializationSchulich School of Engineering,University of CanadaCanadaJanaka Ruwanpura Ph.D, PQS (Canada), FIQS (SL)Canada Research Chair in Project Management SystemsDirector and Associate Professor, Project ManagementSpecializationSchulich School of Engineering, University of CanadaCanadaAbstract:Earned value management (EVM) is one of a widely usedcontrol tools in project management. In addition to providingvital information regarding the status of a project in termsof budget and schedule at any given time, it could forecastthe ultimate outcome of the project with a set of limitedassumptions. However, EVM has limitations when it comesto proactive decision making in handling uncertainties. Thispaper presents the development of a tool integrating MonteCarlo simulation with EVM method to assist project managersto reduce adverse impacts on projects due to uncertainsituations. Simulated Earned Value Management Tool (SEVM),can simulate cost and duration outcome for each activity ofa project and has the capacity to incorporate the currentprogress of all the activities. This simulation tool providesinformation on a) probability of completion for a given costand time and b) range estimation on the cost and scheduleperformance variances and indices at any future date until theproject completion, both of which enables the project managerto identify different cost and schedule outcome combinationsand timeframes where adverse impacts are more significant.Keywords: Cost, Schedule, Earned Value, Simulation,Stochastic1. IntroductionSuccess of a project is defined based on the performanceof number of project parameters such as the project cost,duration, scope and performance. Numbers of tools weredeveloped over the years to support the project managers toachieve these project objectives. Earned Value Management(EVM) which integrates the cost, time and scope parametershas proven itself to be one of the most effective performancemeasurement and feedback tools for managing projects. EVMis the most commonly used method of project performancemeasurement (PMBOK Guide, 2004). According to theconclusions of a number of qualitative researchers, EarnedValue Management could be an effective project control andmanagement methodology (Vargas, 2003; Marshall 2006).Since the introduction of EVM in 1960’s, it has beensuccessfully used in different industries with varying level ofcomplexity in project management. Earned Value Managementsystem, which was initially named the Cost/ScheduleControl System Criteria (C/SCSC) by the originators at theUnited States Department of Defence, has evolved in termsof theoretical basis and also in terms of application practices(National Defence Industrial Association, 2004). With theintroduction of government guidelines for the use of EVM inthe United States, the earned value management process hasbecome more streamlined (Marshall, 2006).Success of a project is defined based onthe performance of number of projectparameters such as the project cost,duration, scope and performance.Earned Value Management is a project control methodologythat integrates cost and schedule performance into a single setof parameters. Earned Value Management system measuresthe actual project progress at a given point in time against thebaseline of time and cost estimates prepared at the beginningof the project. Generally the system is used as a monitoringand a forecasting tool for project control. Previous researchershave identified that EVM contributes to 1) project planning,2) project control and 3) the final project success. Theseresearchers have identified the importance of EVM as a projectmonitoring tool, but not as a strong project forecasting tool.For effective project control, it is important not only tomonitor the time and cost variances of the actual projectprogress, but also to properly establish the project outcomeat the completion. A forecast looking into the future of theproject is necessary for the project manager to determineif corrective actions are required to minimize the expectedvariances from the planned performance. Accurate cost andschedule forecasts are difficult to be generated because of theimpact of events such as unforeseen cost changes, materialdelays, scope deviation etc.30
<strong>SLQS</strong> JOURNALJanuary 2009Final project cost and duration can be estimated using twoapproaches: deterministic forecasting and probabilisticforecasting (Barraza et al. 2004). Project forecastinginvolves predicting the outcome of a future event. Risksand uncertainties in future events makes project forecastinga difficult process. Traditionally, project planners predictthe most likely outcomes of future events and generate adeterministic plan based on these outcomes. The majorlimitation of the deterministic plan is that it considers onlyone single outcome and ignores all the other possibilities.Probabilistic or stochastic planning approach was evolved toaddress the limitation of deterministic planning. Probabilisticplanning considers variability in project parameters anddevelops stochastic cost and schedule estimates for theproject. Monte Carlo simulation is a commonly used tool ingenerating probabilistic project estimates and schedules. Thispaper describes a new and innovative tool that integratesEVM and probabilistic project planning and control.2.Earned Value Management SystemThe most attractive feature of Earned Value Management isits unique metrics. This metrics consists of key parameterswhich are the building blocks of the earned value managementsystem, performance measures and forecasting indicators.Through this metrics, Earned Value Management integratesthe project scope, cost and schedule. Earned value performancemeasures and forecasting indicators are calculated from threeparameters of project scope, cost and schedule. Conceptuallythe earned value management system integrates the costand schedule measurement. Figure 1 provides a graphicalrepresentation of the three parameters on a project Time –Cost graph. The three key parameters of EVM are:1. Planned Value (PV) or Budgeted Cost of Work Schedule(BCWS): Planed Value is the cumulative budgeted cost ata given time point on the baseline schedule. The plannedvalue graph provides the budgeted time – cost combinationfrom the project start to the project end. Calculation ofBCWS is based on the baseline schedule and the projectbudget.2. Earned Value (EV) or Budgeted Cost of Work Performed(BCWP): Earned value is equal to the cumulative budgetcost of the work completed. This integrates the budgetinto the actual progress of the project. The actual costand the earned value represent the same amount ofwork completed, but differ in the value as earned valuecost the completed work according to the budget rates.As this uses the original budget rates to value the workcompleted, it represents the value of the work earned bythe project performer.3. Actual Cost (AC) or Actual Cost of Work Performed(ACWP): Actual Cost is the cumulative project cost thatwas incurred at a given time point of the project. Thedetails relating to the actual cost is exclusive from thebaseline budget or the schedule. The actual cost incurredfor each time unit is derived through the cost accountingsystem.ProjectProgressActual cost ofwork performed (ACWP)CVSVBudgeted cost ofwork scheduled (BCWS)Budgeted cost ofwork performed (BCWP)Figure 1: Graphical presentation of key Earned ValueParametersEarned Value Management has originated as a projectmonitoring tool that integrates the cost and the schedule.The EVM metric consists of number of performance measuresdeveloped to monitor the project progress. There are twotypes of performance measures, namely, variance measuresand index measures. The variance calculates the deviation ofthe actual performance from the baseline as an absolute figurewhile the index reports the deviation as a ratio. Though thevariance in an absolute figure, it does not provides- deleteda good indication on the magnitude of the deviation acrossthe whole project time line. Performance measures used inEVM are Cost Variance (CV), Cost Performance Index (CPI),Schedule Variance (SV) and Schedule Performance Index (SPI).A variance with a smaller value at the early stage of the projectmay have a larger relative deviation than a larger variance atthe later stages of the project. Hence, the index provides abetter monitoring indicator compared to the variance. Costvariance (CV) compares the earned value of the project ata certain time point against the actual cost at that point.The following formulas calculate the cost variance and costperformance index.Cost Variance (CV) = Earned Value (BCWP) – Actual Cost(ACWP). (1)Cost Performance Index (CPI) = Earned Value (EV)/ ActualCost (AC) (2)Both the earned value and the actual cost represent the sameamount of work completed up to the calculation point butuse different cost rates. A positive cost variance indicates afavourable situation where actual cost incurred is less thanthe anticipated value according to the budget. CPI comparesearned value against actual cost in the form of a ratio. AnIndex Value greater than 1 indicates a favourable projectsituation. General schedule monitoring tools measure theschedule variation in time units, though, the earned valueTime31
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