Project Management

Establishing the Budget in Earned Value Management

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A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts. Written by Elizabeth Harrin from GirlsGuideToPM.com.

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I’ve been working my way through The Practice Standard for Earned Value in an attempt to really get to grips with the nuances of EVM. It’s one thing understanding the high level principles, but another to understand the individual processes and how everything fits together to give you a rounded process.

The Establish Budget process is a way of converting what you need to do the project (equipment, resource availability and so on) to an actual budget that you can track against and use during project execution. Note that at this time we haven’t actually started the project yet, we’re still planning out how it’s all going to happen. Now is the time to plan out how much our activities are going to cost in a way that aligns with the EV principles.

The Practice Standard doesn’t go into a lot of detail about how to document your budget, so you can choose a technique and a software tool that works for you. Typically, EV management systems need a ‘proper’ financial management and accounting tool that links into the resource management software, so a spreadsheet isn’t really going to be enough.

See what provision is made within your EV set up at work and make sure you are creating your budget in the right tool so it can provide information to the software used for reporting and analysis.

Inputs

There are three inputs to this process:

  • The project charter
  • The responsibility assignment matrix (RAM)
  • The schedule baseline.

The RAM takes the WBS and organisational breakdown structure (OBS) and converts that into a matrix that covers who is managing what control account and who is doing what WBS element. You need these control points so individuals are clear about the estimates and resources for everything on the schedule, so it’s really important to get that right.

If your schedule baseline is rubbish, then your EV data will also be rubbish. It’s so important that the inputs to this process are good quality, otherwise all your numbers will be wrong. Your budget baseline and schedule baseline can be iterated together, but they need to be robust and based on decent information so that you end up with sensible reports at the end.

What to do

There are four steps to creating your budget:

1. Establish the budget structure

This means listing out and understanding the different elements that make up your budget, including:

  • The base budget
  • The management and contingency reserves
  • Distributed and undistributed budget
  • Summary level planning budget
  • Control accounts
  • Work packages and planning packages.

Once you’ve got your structure sorted, you can move on to the next part.

2. Develop the cost estimate

Next, for each relevant component (the work packages, planning packages and the summary level planning budget) develop estimates.

Estimate at the correct level for the element and as accurately as you can. Control account budgets need to be linked to the time frames for the work, so that’s how the progressive elaboration of the budget and schedule come together.

3. Authorise the work

Next, there’s a formal approval step. This gives the control account owner permission to begin the work.

4. Update the budget log

Finally, update your project management budgeting tool to show that the budget is moving from undistributed i.e. not authorised for work to proceed yet to distributed i.e. linked to a control account that is underway.

That might be a very simple exercise because you’ve allocated everything out at the beginning, or you might be approving chunks of work as you go so some budget is held back until it’s approved.

The budget log is just a way to track what’s been approved for spending so far.

Outputs

The outputs from this process are:

  • Project budget – obviously, because you’ve spent this process creating it
  • Project funding requirements – because you use the cost estimates to come up with the overall amount you need to request (you’ll use the budget info for this)
  • Project budget log – if you didn’t have a template set up before, you’ll have one now
  • Control account plans (CAPs) – basically, a plan for each control account.

It’s important to note that EVM uses ‘budget’ and ‘funding’ to mean two very different things. The budget is defined in the Practice Standard as ‘a work planning element that is earned’ when the work is completed. It’s not really the same definition as we would use in a non-EVM setting, such as when someone asks you what your budget is for your next holiday, or what you budget for your food bill each week.

Funding is used to mean the amount of money ‘available to accomplish the work’. This is what I would normally consider to be a budget in a non-EVM project where control accounts aren’t part of project performance management. In the EVM world, funding relates to what you are actually authorised to spend on any given chunk of work.

It’s a useful definition because it keeps the earned value part of performance management separate from the money leaving the bank account, and allows you to manage any conflicts that arise, when, for example, you don’t get approval to spend all the money that has been requested for any given control account.

I learned something new on this dive into the Practice Standard today. What about you?

Next time, I’ll be looking at the next process in the earned value management standard, which is determining measurement methods.

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Posted on: May 24, 2021 07:00 AM | Permalink

Comments (1)

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I absolutely needed this article as I am keen to learn how to use EVM in real-life scenarios. I look forward to reading the others articles on this. Thank you Elizabeth!

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