For project-based firms, measuring current firm performance is the most significant indicator of future firm performance. Furthermore, by using trend data, firms can forecast cost and schedule variances in the early stage of a project. A preferred method by project managers to factor this trend data is the earned value management technique.
Using Earned Value Management
Earned value management allows firms to evaluate cost and schedule variances in both dollars and percentages on projects. These factors are derived by considering planned value, actual cost and earned value over time.
A common way of looking at earned value is by using both the financial percent complete job to date (JTD) and the estimate too complete (ETC) by using the formula, JTD/(JTD + ETC) and the project managers reported physical percent complete. These two factors when equated provide a quick and easy comparison. For example, the financial percent complete on construction documents may be at 75% when the reported percent complete on construction documents is 50%. There are several possible explanations for these variances, such as:
- There were many revisions that were client driven and not in scope
- The complexity of the work was under estimated
- We have just been very inefficient
Keep in mind, there are a number of other scenarios that can also explain these factors as well.
Factoring Earned Value Management
Getting the information above is actually simple. It requires holding project managers to a high level of accountability. Project managers need to evaluate the amount of hours budgeted, hours burned (JTD), and the effort required to finish the scope of work (ETC).
As a result, this will produce the financial percent complete. Project managers then need to record where the project is from a physical percent complete, which should tie to progress on the project schedule.
Much like a crossover episode of two TV shows, this is where EVM crosses over with a previous blog about FASB 606. EVM will ultimately meet the requirements that in turn will keep the accounting team compliant with FASB 606.
Enter Deltek Vision
The Resource Planning module in Deltek Vision addresses EVM by:
- Allowing the financial percent complete to be calculated
- Providing a physical percent complete plan in the form of an EV%
- A default report in the Resource Planning module known as the Earned Value Chart, which represents the S Curve
By maintaining a project plan in the Resource Planning module, firms can be successful in developing a project report that shows cost and schedule variances in both the dollars and percent (CV, SV, CPI and SPI). If your firm has a benchmark or standard range, you can then compare the actual to that standard to identify anomalies in your projects performance.
The title of this blog is, “Why Your Firm Should Use Earned Value Management” and the answers are:
- It’s an industry standard and proven method for project management and project accounting
- It’s a common language among project managers across industries
- It provides quick visibility into a projects performance
- It brings firms closer to compliance with FASB 606
Learn more about Michael Kessler and his more than 30 years of experience of working in and around project-based accounting here.