We are going to discover earned value and how it works. And to help us to do that, I am going to tell a joke! This is a well-known story, about two guys; and it is entirely ‘politically correct’. I hope it will explain ‘earned value’ for you and in a friendly way.
The story starts outside on a hot day with two guys digging by the side of the road. Well in fact, one guy is digging holes, and the other guy is filling them in! This is what it looks like:
One guy digs, quite deep, with a spade, lifting out the sand, and the gravel, and the stones, and the dust, and the bits of rock. Then the other guy, with his shovel, puts back into the hole, all of the sand, and gravel, and stones, and dust, and bits of rock; and then he pats it all down neatly and makes it all nice and smooth. Now the first guy is in the second hole.
And later on, the first guy is in the third hole, and the second guy is in the second hole. We look at them and you are thinking: “Strange project!” “One guy digs, the other guy fills in the holes. What’s this project all about?”
And the two guys lean on their spade, and on their shovel. They need to rest a moment. It’s hard work on a hot day. By this time they’re tired; they’re perspiring, and wiping their brow and breathing deeply.
They say; “Well there are supposed to be three of us. But, the guy who plants the trees is sick today” J !
In this story there are three types of progress: time is going by, effort is being spent, but value is not being created. The question to be asked is “How would you measure the physical progress of a tree being planted?” The answer is to think about all of the tests: that the tree has been planted in the right place, that it is stable, the soil has been nourished with the right tree care products to give the tree a good start, that the right tree has been planted according to the agreed specifications, that it has not been damaged or harmed in any way, that it is the right size, that the hole was dug deep enough, and if there are many trees that all of the trees are aligned with the avenue.
And who does these tests? Is it your customer? Is it a tree expert? Is it a member of the local community or the park authority? Defining physical progress is a job for the project manager with the team and the stakeholders.
So now if you had ten trees to plant, when you had planted the first tree and you had verified, validated, checked, inspected and tested it, what would be your physical progress? Yes, we could say 10% to keep things simple. But, more likely we might say more. Why is that?
Yes, because the first tree takes us on a learning curve, and there may be risks. We might dig down and hit rock, or uncover damp. So let’s give ourselves 15% for the first tree, because of the risks and learning, 9% for all of the others and 13% for the last tree (you’re never as effective as at the last minute when you suddenly realize you are almost finished.)
Let’s say that we intended our progress to be linear and that when 35% of the time has gone by and we’ve planted 3 trees and done the tests and they’ve been approved; that’s 33%. And we’ve spent 40% of the overall planned effort; missing most of our lunch in the process, because we had to work extra hard and somebody will have to pay for that.
So if we carry on like this, on exactly the same trajectory, by the time we have achieved 100% of the work, we will have used 105% of the time, an extra 5%, and we will have spent an extra 20% of effort, perhaps in the form of overtime.
What we need to do is to spend our effort more effectively and in less time, or otherwise we will have to predict and forecast a project overrun.
Later on when 70% of the time has gone by, let’s say that we have spent 75% of the overall effort and that we have planted 8 trees. We decided that these eight trees were worth 15% + (7 x 9%) of the overall project, which is 78%.
Hey! Now we are expecting to finish early and to make a saving. If the project was supposed to take 20 hours and you continue on the current trajectory, you will save about 10% of the time which is two hours. And it looks as if you will save about 4% of the overall effort, which means you can take a well-deserved rest and perhaps give yourself a little of what you fancy under the shade of trees!
Let’s say that in this project each contractual hour of a guy’s work is worth 25 Euros. Over the course of the 20 hour project, therefore, 40 x 250 = 1 000