Let’s consider a real-world example of using EVM to measure against a baseline to determine variance in an agile software development project. The cost variance and schedule variance tells you whether your project is on-budget and on-time, which is a common question from most clients. I will explain below how Earned Value Management is helpful in calculating the project cost variance and schedule variance and the parameters needed to calculate the variances.
Cost Variance and Schedule Variance
Cost Variance (CV): This is the completed work cost when compared to the planned cost.
Schedule Variance (SV): This is the completed work when compared to the planned schedule.
Earned Value Management Variance is calculated using the following parameters:
- Budget at Completion (BAC): the original planned cost of the project.
- Actual Cost (AC): the amount of money actually spent during a period of time.
- Planned Value (PV): the planned value of the projects throughput.
- Earned Value (EV): the value of the projects throughput.
Earned Value Management Fundamental Formulae (BAC, AC, PV, and EV) to determine the variances pertaining to project cost and schedule. Earned Value Management Variance formulae consist of:
Cost Variance is computed by calculating the difference between the earned value and the actual cost, i.e. EV – AC. As you can deduce from the formula, Cost Variance will be negative for projects that are over-budget. Monitoring project cost variance is critical to ensuring the project is delivered on budget. Using realistic project is a good start to ensuring there isn’t significant cost variance.
Schedule Variance is computed by calculating the difference between the earned value and the planned value, i.e. EV – PV. A positive Schedule Variance tells you that the project is ahead of schedule, while a negative Schedule Variance tells you the project is behind schedule. Monitoring Schedule Variance is critical to delivering the project on-time.
Example of Calculating Earned Value Management Variance
In this example I will show how you how to calculate variance in a software development project. For the example let us assume that the project is expected to be completed in 8 months at a cost of $10,000 per month. After 2 months, the project is 30 percent complete at a cost of $40,000. We need to determine whether the project is on-time and on-budget after 2 months. By calculating the cost and schedule variances we can determine the health of our project.
Step 1: Calculate the Planned Value and Earned Value
From the scenario:
- Budget at Completion (BAC) = $10,000 * 8 = $80,000
- Actual Cost (AC) = $40,000
- Planned Completion = 2/8 = 25%
- Actual Completion = 30%
- Planned Value = Planned Completion (%) * BAC = 25% * $80,000 = $20,000
- Earned Value = Actual Completion (%) * BAC = 30% * $80,000 = $24,000
Step 2: Compute the earned value management cost and schedule variances:
- Cost Variance = EV – AC = $24,000 – $40,000 = -$16,000
- Schedule Variance = EV – PV = $24,000 – $20,000 = $4,000
Analysis of results: Since Cost Variance is negative, this means the project is over-budget. Since Schedule Variance is positive, the project is ahead of schedule. However, this has come at a cost of going over-budget. If work is continued at this rate, the project will be delivered ahead of schedule and over-budget. Therefore, corrective action should be taken in terms of cost. To control the project cost variance, you will need to monitor resource utilization more carefully.
EVM can be applied to agile projects with some risk of losing agility. Stakeholders must understand that the plan on which the EVM calculations are based is not fixed. The plan to be adopted to the discoveries and knowledge gained during the project. If the product backlog changes, the EVM calculation has to be changed.
It is very important to make sure that people responsible for budgets understand the agile approach. They must understand that agile projects do not have a fixed plan that must not change.