BUS606: Operations and Supply Chain Management

EVM is an important management technique used to evaluate the real development of a project or to conduct the comprehensive and integrated management of a project. According to EVM, project cost is an essential issue that should be addressed in project management, and the other issues should be considered in the next step. Today, authorities are mainly concerned with the comprehensive and correct cost management of a project, including resource planning, cost estimation, budgeting, and cost control. A baseline is required to apply EV. Currently, no other technique like EVM has been able to integrate the scope, cost, and scheduling of a project. Perhaps the main reason for applying EVM in different companies and industries is its ability to power manage a project using EVM to predict the final cost (probable) and the results of project scheduling. A project management team using the EVM can determine the cost and scheduling statuses of the project after a 15% development in the work scope agreed upon in the project contract. In clarifying the project status and problems, we cannot wait until we reach a 90% development before adopting a corrective action as we have no more time to perform and the project resources are mostly consumed. The EV sends a message to the project management to adopt an appropriate management action in which the immediate measures affect the results of the project in terms of cost and time. Through the EV, we can predict the required resources until the entire project is completed, and a new value called estimate at complete, which is greater than the budget at complete, is calculated statistically for the project. This concept is illustrated schematically in Figure 2.

Figure 2. Method of calculation of budget at completion (BAC) and estimate at completion (EAC) values.

The abbreviations used in Figure 2 are defined as:

• ACWP: Actual cost of work performance
• BCWP: Budget cost of work performance
• BCWS: Budget cost of work schedule
• BAC: Budget at completion
• CPI: Cost performance index
• CV: Cost variance
• CV%: Cost variance percentage
• EAC: Estimate at completion
• SPI: Schedule performance index
• SV: Schedule variance
• SV%: Schedule variance percentage
• TCPI: To complete performance index
• VAC: Variance at completion.

To estimate the final cost and project scheduling results, we use CPI and SPI, which are derived from the EV. CPI connects the physical work value of the process to the real costs, which are directly paid for performing this work. If the amount of money paid is greater than the physical work performed, CPI will exhibit operational results exceeding the budget. Equation (2) shows how to calculate CV and CPI:

$\begin{aligned} &C V=B C W P-A C W P=E V-A C W P \\ &C P I=\frac{B C W P}{A C W P}=\frac{E V}{A C W P}\end{aligned}$            (2)

The second index is SPI. Along with SV calculation, it is addressed through Equation (3) and serves to predict the results of the project schedule. This index measures the performed work in the basic plan:

$\begin{aligned} &S V=B C W P-B C W S=E V-B C W S \\ &S P I=\frac{B C W P}{B C W S}=\frac{E V}{B C W S} \end{aligned}$                 (3)

These two performance indices can be used separately or simultaneously to predict the results of the objective project exactly and rapidly. The cost management component of EVM is considered effective, but its schedule aspect has been questioned conceptually in the last few years. Only a few years ago, researchers and practitioners brought up issues on the use of EVM for schedule management. Schedule variance and the schedule performance index should be used only as a warning mechanism and not as a real tool to analyze how the project is performing with regard to the schedule. Experts have criticized the behavior of SV and SPI indices over time and their interpretation in different aspects. The first criticism of the SPI index is its use of the financial unit rather than the time unit measures. Doing so makes the understanding of this index difficult and causes misrepresentation. The second criticism is that it cannot properly interpret the status of the project at a time when SV is equal to zero or SPI is equal to one because it can be interpreted in two ways: work has ended or work has gone according to plan. The third criticism is the behavior of SV and SPI at the end of the project. As the end of the project nears, SV, which always tends toward zero, and SPI, which tends toward one, converge. This outcome expresses the satisfactory performance of a project even if the project is delayed. To improve the performance of SPI, the earned schedule method converts the earned value at a given point in time into its equivalent duration (on the planned value graph) required to achieve that planned value. Figure 3 demonstrates this conversion on a conceptual EVM graph.

Figure 3. Method of calculating the earned schedule.

Using this approach, the method provides the earned schedule (ES_t) for the project. Therefore, the earned schedule can be mathematically defined as adapted in Equation (4).

$\begin{aligned} &E S_{t}=t+\frac{E V-P V_{t}}{P V_{t+1}-P V_{t}} \\ &\text { where } \\ &t=\text { the time is that } E V \geq P V_{t} \text { and } E V < P V_{t+1} \\ &E S_{t}=\text { Earned Schedule in } t \\ &E V=\text { Earned Value } \\ &P V_{t}=\text { Planned Value in } t \end{aligned}$             (4)

The corresponding duration from the beginning of the project until the status date is generally defined as actual time (AT) or elapsed time. We use the term actual duration (AD) in place of AT to maintain consistency and accuracy in this paper. The resultant EST is then compared with AD. Equation (5) shows how the earned schedule performance index (SPI_t) is calculated:

$S P I_{t}=\frac{E S_{t}}{A D}$                (5)