Do you like Agile but wish it included more math, acronyms, and formulas? If so, Agile Earned Value Management is the project performance technique for you!
What is Earned Value Management?
Earned Value Management or EVM is a technique that analyzes actual time, cost, and scope data against a baseline estimate to measure project performance in a concrete and quantifiable way. It uses an estimation of the total time, cost, and scope the project will require and compares it to the actual state of the time, cost, and scope of a project at different points in development.
This information can help you as a project manager evaluate how well you and your team are performing and provide concrete estimates that can be presented to product owners on how long a project will take and what it will cost [1].
The concept of AgileEVM was first introduced in a paper written in 2006 exploring the efficacy of incorporating EVM into Scrum projects. The authors of that paper found the usefulness and value of the metrics produced by AgileEVM equal to the established Agile burndown methods in all respects except for cost.
When it came to that they found it was "extremely valuable", particularly in risk estimations, identifying budget issues early, and determining the cost effects of scope changes on a project [5].
AgileEVM is still, like all other techniques, only as accurate as the baseline estimations it uses. However, due to the iterative nature of Agile, those estimations do get more and more accurate as the project progresses [2].
Cost Related Earned Value Management Formulas
I want to note here that this is not a complete list of all the metrics EVM can be used to calculate. EVM can be used to measure not just cost performance but also scope and time performance, but for the purposes of this post I am mainly going to focus on the calculations directly related to managing product costs.
There are three basic values on which all other AgileEVM cost-related calculations are based. These are earned value (EV), actual cost (AC), and budget at completion (BAC).
Planned Value or PV, is included in the above table and although it is not directly involved in cost-related calculations it does provide a baseline for the cost and scope of the sprint or iteration as can be seen in the graph further up in this post. It can be calculated by multiplying what percentage of the project is planned to be completed by the end of the given iteration times the Budget at Completion [2].
PV = (current iteration number / total number of iterations) * BAC
Earned value or EV, is essentially a way of quantifying the value of work completed on a project. It's calculated by multiplying what percentage of the project has been completed by the end of the given iteration times the Budget at Completion [2].
EV = (Completed story points / total number of story points) * BAC
Actual Cost or AC, is exactly what it sounds like, it’s the actual cost for completing a portion of the project [2].
Budget at completion or BAC within AgileEVM refers to the planned budget for the completion of a release rather than for the entire project meaning if a project has multiple releases, each will have a different BAC. In Agile the BAC is typically calculated by summing up the story points for each user story included in the release [2].
What Does AgileEVM Measure?
Cost Variance
Cost Variance is the difference between how much you planned to spend to complete a portion of the project and the actual amount you ended up spending. It is the difference between the earned value and the actual cost.
A positive CV number is how much you're under budget, a CV of zero means you're exactly on budget, and a negative CV indicates how much you're over budget by [2].
CV = EV – AC
Cost Performance Index
The cost performance index is calculated by dividing the earned value by the actual cost. Although it can also be used to tell a project's current budget status it won't be a specific dollar amount the way CV is.
The true purpose of the CPI is to provide a measurement of how much value each dollar spent on the project is generating.
For example, a CPI of .98 would indicate the project is slightly over budget and getting around 98 cents worth of earned value for each dollar spent [2].
CPI = EV / AC
Cost Estimate At Completion & Cost Estimate To Completion
CPI also has another use; it can be used to estimate how much your project will cost to complete based on the current state of the project. The estimate at completion (EAC) is calculated by dividing the BAC by your project's current CPI [4].
EAC = BAC / CPI
The estimate to completion (ETC) is another cost estimation that predicts what the additional cost to complete the project will be based on its current state. It can either be calculated by subtracting the EV from the project's BAC and then dividing that by the project's current CPI [3].
(BAC – EV) / CPI
Is Trying To Remember All Those Acronyms Really Worth It?
AgileEVM metrics can be used to run what-if scenarios and quantify the effect changes to project scope could have on your project's budget.
It can help you evaluate whether you're spending money on a project effectively, evaluate how you and your team are performing, and forecast future project costs.
It can also be a valuable tool for product owners who are naturally hesitant to sign on to a project without an answer as to how much it's likely to cost or how long it's likely to take
AgileEVM does however have its limitations; its accuracy is still dependent on estimations and how well you and your team's past performance reflects your future performance.
It is also limited by the flexible nature of Agile and so it has to be acknowledged that any predictions or evaluations made may have a limited window of accuracy as the project continues to evolve.
With that being said, it's entirely up to you whether the metrics generated from AgileEVM are worthwhile for you and whether AgileEVM is something that can be integrated into your project management methodology.
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