Why "Actuals vs. Budget" is a liar: The case for SMB Earned Value Management

Budgets Lie, Value Speaks

You’ve probably been there: halfway through a project, your accounting system tells you that you’ve burned through 50% of the budget, and you breathe a sigh of relief thinking you’re on track. But are you really 50% done? What if the easy tasks were front-loaded and the most complex challenges are still ahead? Relying solely on "Actuals vs. Budget" can be a dangerous illusion, especially in the unpredictable world of professional services. That’s where Earned Value Management (EVM) comes in.

EVM isn't just some complicated government contracting requirement. It's a powerful, honest, and surprisingly straightforward way for small-to-mid sized businesses like yours to get a true handle on project performance, predict potential overruns, and take corrective action before disaster strikes. Let's ditch the misleading "Actuals vs. Budget" mirage and see how EVM can bring clarity to your project delivery.

1. The Problem with "Actuals vs. Budget": A Simple Scenario

Imagine this: You're building a custom software solution for a client. The project is budgeted at $100,000. After two months, you've spent $50,000 (your actual cost). Looking at "Actuals vs. Budget," everything seems fine. But what if those first two months were spent on requirements gathering and system design - relatively low-cost activities - and the bulk of the coding and testing is still ahead? What if unforeseen technical challenges popped up during development?

Simply comparing actual spending to the original budget doesn't tell you anything about the value you've earned for that spend. Are you truly 50% complete? Maybe you're only 30% done. Or, on the flip side, maybe your team found efficiencies and you're actually 60% complete! "Actuals vs. Budget" alone can’t tell you, and that’s where the danger lies. This lack of insight can lead to:

• Late Discovery of Problems: You don't realize the project is in trouble until it's too late to make meaningful changes.

• Cost Overruns: Unexpected expenses pop up because you weren't tracking performance accurately.

• Missed Deadlines: The project takes longer than expected, damaging client relationships.

• Reduced Profitability: Overruns eat into your margins, making the project less profitable or even a loss.

2. EVM to the Rescue: Three Key Metrics

Earned Value Management introduces three crucial metrics that give you a much clearer picture of project performance:

• Planned Value (PV): This is the budgeted cost of work scheduled to be completed by a specific point in time. In our example, if your project plan stated that after two months, $60,000 worth of work should have been completed, then your PV is $60,000.

• Earned Value (EV): This is the budgeted cost of the work actually completed by that same point in time. This is the key to EVM. Let's say your team encountered some roadblocks, and after two months, they only completed $40,000 worth of work as per the original plan. Your EV is $40,000.

• Actual Cost (AC): This is the actual amount of money spent to achieve the earned value. In our example, you spent $50,000 (as stated earlier).

Now, instead of just comparing AC to the total budget, you can calculate two critical variances:

• Cost Variance (CV): EV - AC. In our example, $40,000 - $50,000 = -$10,000. This tells you that you're $10,000 over budget for the work you've completed. This is a far more accurate and actionable metric than simply knowing you've spent $50,000.

• Schedule Variance (SV): EV - PV. In our example, $40,000 - $60,000 = -$20,000. This tells you that you're $20,000 behind schedule in terms of the value of work completed.

3. Turning EVM Insights into Action

The power of EVM lies not just in calculating these variances, but in using them to proactively manage your projects. Once you have these numbers, you can:

• Identify Problems Early: A negative CV or SV signals potential issues before they spiral out of control.

• Analyze Root Causes: Why are you over budget or behind schedule? Is it due to unrealistic estimates, resource constraints, scope creep, or unexpected technical challenges?

• Take Corrective Action: Armed with insights, you can adjust resource allocation, renegotiate deadlines, manage client expectations, or even re-baseline the project plan.

Example Actions Based on EVM Analysis:

Let's say your EVM analysis reveals a negative CV, indicating you're over budget. You might:

• Re-negotiate Scope: Work with the client to identify features that can be deferred to a later phase.

• Improve Resource Allocation: Reassign tasks to more efficient team members.

• Address Inefficiencies: Identify and eliminate bottlenecks in your workflow.

If your EVM analysis reveals a negative SV, indicating you're behind schedule, you might:

• Increase Resource Allocation: Add more team members to critical tasks.

• Streamline Processes: Identify ways to speed up development cycles.

• Renegotiate Deadlines: Communicate proactively with the client and adjust the project timeline if necessary.

The beauty of EVM is that it provides a framework for data-driven decision-making. It moves you away from gut feelings and vague anxieties and towards concrete, actionable insights. It forces you to confront the reality of your project's performance and make adjustments before it's too late.

Don't let "Actuals vs. Budget" fool you into a false sense of security. Embrace Earned Value Management, and you'll gain the visibility and control you need to deliver projects on time and within budget.

About Continuum

Continuum PSA, developed by CrossConcept, understands the challenges that professional services organizations face when it comes to project overruns. Our Project Accounting features provide real-time visibility into project costs, revenue, and profitability, helping you track key EVM metrics like Planned Value, Earned Value, and Actual Cost. By integrating project management, resource management, and financial tracking into a single platform, Continuum empowers you to proactively manage your projects, identify potential issues early, and take corrective action to ensure projects stay on track and within budget. Ready to stop project overruns before they start?