Earn Value Management Social Cost Benefit Analysis

1. Earned Value Management (EVM)
Social Cost Benefit Analysis (SCBA)
(Module II: Project Management)
MBA(N) 3rd Semester
General Paper
Code: MB 301

2. What is Earned Value Management (EVM)?
EVM is a technique that project managers use to track the performance of
their project against project baselines. Often the progress of a project is
thought of simply as being ahead or behind schedule and over or under
budget. However, what if you’re ahead of schedule, but costs are higher than
your planned budget? Or, what if you’re behind schedule, but costs are lower
than you first calculated?
This is where knowing the earned value helps. It can provide deeper
information on your project. And when learning about earned value, it’s
important to remember that there are three terms associated with it, which
are each slightly different.
• Earned Value Analysis (EVA): This project management technique is
quantitative. It evaluates project performance by figuring out the likely
results of the project. It does this by comparing the progress and budget of
work planned to the actual costs.
• Earned Value Management (EVM): This methodology measures project
performance with an integrated schedule and budget, which is based on
the project work breakdown structure (WBS).
• Earned Valued Management System (EVMS): This is the collection of
tools, templates, processes and procedures that an organization uses to do
EVM.

3. EVM Benefits
EVM contributes to:
• Preventing scope creep
• Improving communication and visibility with stakeholders
• Reducing risk
• Profitability analysis
• Project forecasting
• Better accountability
• Performance tracking
Calculations for Earned Value Management
To do EVM calculations following need to be known:-
1. Planned Value (PV): Planned Value is the approved Budgeted amount
through the current reporting period of the work to be completed in a given
time. It is the value that you should have earned as per the schedule. So,
Planned Value (PV) is the authorized budget assigned to work to be
accomplished for an activity or WBS component.
Formula: Planned Value = (Planned % Complete) X (BAC)
Total Planned Value for the project is known as Budget at Completion (BAC).

4. Example of PV: You have a project to be completed in 12 months. The
budget of the project is Rs 100,000. Six months have passed, and the
schedule says that 50% of the work should be completed. What is the
project’s Planned Value (PV)?
Given in the question.
Project duration: 12 months
Project cost (BAC): Rs 100,000
Time elapsed: 6 months Percent complete: 50% (as per the schedule)
Planned Value is the value of the work that should have been completed so far
(as per the schedule).
We should have completed 50% of the total work in this scenario.
Planned Value = 50% of the value of the total work
= 50% of BAC = 50% of 100,000 = (50/100) X 100,000 = Rs 50,000
Therefore, the project’s Planned Value (PV) is Rs 50,000
Application of Planned Value (PV)
Planned Value is used to calculate
• Schedule Variance and
• Schedule Performance Index.

5. 2. Actual Cost (AC): Actual Cost is the total cost incurred for the actual work
completed to date. In other words, it is the amount of money you have spent
to date. So Actual Cost (AC) is the total cost actually incurred in accomplishing
work performed for an activity or WBS component.
Example of Actual Cost (AC): You have a project to be completed in 12
months. The budget of the project is Rs 100,000. Six months have
passed, and Rs 60,000 has spent already, but on closer review, you find
that only 40% of the work has been completed so far. What is the
project’s Actual Cost (AC)?
Actual Cost is the amount of money that you have spent so far. In the question,
amount have spent Rs 60,000 on the project so far. Hence, the project’s Actual
Cost is Rs 60,000
Application of Actual Cost (AC): Actual Cost is used to calculate Cost Variance
and Cost Performance Index.
3. Earned Value (EV): Earned Value is the value of the work actually
completed to date. Earned Value will show you the value that the project has
produced if the project is terminated today. It is the value of work performed
expressed in terms of the approved budget assigned to that work for an
activity or WBS component.
Planned Value shows you how much value you expected to earn in a given
time, while Earned Value shows how much value you have actually earned on
the project.

6. Formula of Earned Value:
EV = Actual % of completed work X BAC (Budget at Completion).
Example of Earned Value (EV): You have a project to be completed in 12
months. The budget for the project is Rs 100,000. Six months have passed,
and Rs 60,000 has been spent. On closer review, you find that only 40% of
the work has been completed to date. What is the project’s Earned Value
(EV)?
In the above question, you can see that only 40% of the work is completed, and
the definition of Earned Value states that it is the value of the project that has
been earned. Earned Value = 40% of the value of total work
= 40% of BAC = 40% of 100,000
= 0.4 X 100,000 = 40,000
Therefore, the project’s Earned Value (EV) is Rs 40,000.
Application of Earned Value (EV)
• Earned Value is used for calculating
• Schedule Variance,
• Cost Variance,
• Schedule Performance Index,
• Cost Performance Index,
• Estimate at Completion, and To Complete Performance Index.

7. Planned Value referred to as Budgeted Cost of Work Scheduled (BCWS),
Actual Cost as Actual Cost of Work Performed (ACWP), and
Earned Value as Budgeted Cost of Work Performed (BCWP).
To describe any Project’s Schedule and Cost Performance with EVM, use the
following indicators:
• Schedule variance (SV): This is a measure of the difference between the work
that was actually done against the amount of work that was planned to be
done. This clearly shows is the project is on schedule or not.
• Cost variance (CV): This is the measure of the difference between the amount
that was budgeted for the work meant to be done and the amount that was
actually spent for the work performed. Thus this shows if the project is on
budget or not.
• Schedule performance index (SPI): This is a relative measure of the project’s
time efficiency. This calculation involves dividing the EV by the PV to measure
progress achieved against where you expected to progress at a certain point. If
you’ve come up with a value less than 1.0, it means that you’ve done less work
than you projected for this point. While a value greater than 1.0 means you’ve
completed more than was planned.
• Cost performance index (CPI):It is a relative measure of the cost efficiency of
the project and can be used to estimate the cost of the remainder of the task.
For this calculation you divide EV by the AC to measure the value of work
completed against its actual cost. Again, if you reach a figure less than 1.0, your
costs are higher than budgeted. A number higher than 1.0 means the costs are
less than budgeted

8. EVM Measures
EVM consists of the following Primary and Derived Data elements. Each data
point value is based on the time or date an EVM measure is performed on the
project.
Primary Data Points
• Budget At Completion (BAC)
• Total cost of the project
• Budgeted Cost for Work Scheduled (BCWS) / Planned Value (PV)
• The amount expressed in Pounds (or hours) of work to be performed as
per the schedule plan
• PV = BAC % of planned work.
• Budgeted Cost for Work Performed (BCWP) / Earned Value (EV)
• The amount expressed in Pounds (or hours) on the actual worked
performed
• EV = BAC % of Actual work
• Actual Cost of Work Performed (ACWP) / Actual Cost (AC)
• The sum of all costs (in Pounds) actually accrued for a task to date
For example say we should have completed Rs 800 Crores of work by today. We
completed Rs 600 Crores worth of work. The BCWP is Rs 600 Cr. The BCWS is Rs
800 Cr. And if we actually paid Rs 700 Cr then (ACWP) = Rs 700 Cr

9. Derived Data Points
Cost Forecasting:
• Estimate At Completion (EAC)
• The expected TOTAL cost required to finish complete work
• EAC = BAC / CPI
= AC + ETC
= AC + ((BAC - EV) / CPI) (typical case)
= AC + (BAC - EV) (atypical case)
• Here atypical means it is assumed that similar variances will not occur in the
future.
• Estimate to complete (ETC)
• The expected cost required to finish all the REMAINING work
• ETC = EAC - AC
= (BAC / CPI) - (EV/CPI)
= (BAC - EV) / CPI
Variances:
• Cost Variances (CV)
• How much under or over budget
• CV = EV-AC
• NEGATIVE is over budget, POSITIVE is under budget
• Schedule Variances (SV)
• How much ahead or behind schedule
• SV = EV-PV
• NEGATIVE is behind schedule, POSITIVE is ahead of schedule
• Variance At Completion (VAC)
• Variance of TOTAL cost of the work and expected cost
• VAC = BAC - EAC

10. Performance Indices:
• Cost Performance Index
• CPI = EV / AC
• Over (< 1) or under (> 1) budget
• Schedule Performance Index
• SPI = EV / PV
• Ahead (> 1) or behind (< 1) schedule
EVM Example
A project has a budget of Rs 10 M and schedule for 10 months. It is assumed
that the total budget will be spent equally each month until the 10th month
is reached. After 2 months the project manager finds that only 5% of the
work is finished and a total of Rs 1 M spent.
PV = Rs 2M
EV = Rs 10M x 0.05 = Rs 0.5M
AV = Rs 1M
CV = EV-AC = 0.5 -1 = -0.5M
CV% = 100 x (CV/EV) = 100 x (-0.5/0.5) = -100% overrun
SV = EV-PV = 0.5 - 2 = -1.5 months
SV% = 100 x (SV/PV) = 100 x (-1.5/2) = -75% behind
CPI = EV/AC = 0.5/1 = 0.5
SPI = EV/PV = 0.5/2 = 0.25
EAC = BAC/CPI = 10/0.5 = Rs 20M
ETC = (BAC-EV) / CPI = (10-0.5)/0.5 = Rs 19M
Time to compete = (10-0.5)/0.25 = 38 Months
This project will take TOTAL Rs 20 M (19+1) and
TOTAL 40 (38+2) Months to complete.

11. Social Cost-Benefit Analysis (SCBA)
In this analysis, the direct economic benefits and cost of the project on
distribution of income in society, level of savings and investments in society,
the contribution of the project towards fulfillment of certain merit-wants (e.g.
employment, social orders, self-sufficiency etc.) are analysed. Thus SCBA is
also referred to as economic society benefit analysis, is a part of the economic
analysis in project appraisal. It is a methodology developed for evaluating
investment projects from the point of view of the society (or economy) as a
whole. In short, SCBA is
• To reflect the real value of the project to the society, one has to consider
the impact of the project on the society.
• So when we evaluate the project from the view point of the society or the
economy as a whole , it is known as Social Cost Benefit Analysis.
• Social cost-benefit analysis is a systematic and cohesive method to survey
all the impacts caused by an urban development project.
• It comprises not just the financial effects (investment costs, direct benefits
like tax and fees, et cetera), but all the social effects, like: pollution, safety,
indirect (labour) market, legal aspects, et cetera.
Social Cost is the cost to society as a whole from an action, project or policy
change.
Social benefit means the improvements attained in the living conditions of
its beneficiaries that are directly attributable to the project.

12. Objectives of SCBA
• Contribution of project towards the fulfillment of certain social objectives
which in turn is beneficial for the society like- employment, self sufficiency
etc.
• A great impact is created on the level of savings and investments in the
society.
• Provides economic benefits.
• Creates an impact of the project on the income distribution in the society.
Criteria of Social Desirability of a Project
A project is also assessed from the social angle in addition to assessment of its
commercial viability. The following social desirability factors will be
considered in accepting or reject decisions of a project:
Employment Potential should be high for acceptance of project
Foreign Exchange Project having earning potential or save a nation’s FOREX
reserves is highly desirable
Social Cost-Benefit Analysis Project with net benefits to the society over the
costs to the society is preferred.
Capital-Output Ratio If the value of expected output in relation to the capital
employed is high, the project is given priority over the others
Value Added per Unit of Capital The amount invested in the project should
generate the value addition to the capital employed by earning surplus
profits which can be used for further capital investments to contribute
development of the national economy.

13. Criteria for Social Cost-Benefit Analysis
The objective function of CBA is the establishment of Net Social Benefit (NSB)
NSB = Benefits – Costs.
There are four benefit-cost criteria. They are
• (В — С)/I
• ∆В /∆С
• В — С
• B/C
(Where I relate to direct investment and Δ is incremental or marginal change.)
The criteria formula (В – C)/I is for determining the total annual
returns on a particular investment to the economy as a whole irrespective of to
whom these accrue. Here I do not include the private investment that may have to
be incurred by the beneficiaries of the project.
The criterion of ∆В/∆С = 1 is meant to determine the size of a project
that has already been selected and is not for selecting a project.
The adoption of the В – C criterion would always favour a large project,
and make small and medium size projects less beneficial. Thus this criterion can
only help in determining the scale of the project on the basis of the maximisation
of the difference between В and C.
The best and the most reliable criterion for project evaluation is
B/C. If B/C = 1, the project is marginal & just covering its costs. If B/C > 1 the
benefits are more than costs and it is beneficial to undertake the project. If B/C <
1, the benefits is less than costs and the project cannot be undertaken.

14. Social Rate of Discount
The B/C formula usually used for evaluating social costs and benefits does
not take into account the time horizon of the project. As a matter of fact,
future benefits and costs cannot be treated at par with present benefits and
costs. For this purpose, economists use a social rate of discount for
discounting all benefits and costs. It is a rate of discount that reflects
society’s preference for present benefits over future benefits.
The social discount rate is used to calculate the net present
value (NPV) of a time stream of benefits and costs of a project where its
NPV is calculated as
NPV = Σt (Bt - Ct/(1 + i)t)
Bt is the expected gross benefit of the project at time t,
C is the expected gross cost of the project at time, and
i is the social discount rate at time t.
Reducing Project Cost
Project-Level Tools
Find Cheaper Contracts, Find Cheaper Resources, Shorten the Project
Duration, Prevent Overtime Work, Reexamine Effort Estimates
Project-Level Tools
Reduce Product Scope, Reduce Profit Margins