Creating a Budget Plan with Earned Value Management (EVM): A Step-by-Step Guide

Creating a Budget Plan with Earned Value Management (EVM): A Step-by-Step Guide

Whether managing a small start-up or a large department within a multinational corporation, budget planning is a crucial aspect of any project management process. With the advent of sophisticated project management tools such as Earned Value Management (EVM), creating and managing a detailed budget plan is less daunting today than ever before. In this blog, we will explore how to create a budget plan using EVM with a straightforward approach.

The Basics of Budget Planning

Before delving into EVM, let's break down a foundational budget plan for a project expected to be completed within three months. The budget is broken down into the following expense categories: salaries, equipment and software, office space, insurance, travel expenses, event launch expenses, and a contingency reserve for unforeseen costs. The balanced budget totals $500,000.

Understanding Salaries and Office Space Expenses

Arguably, the most critical facet of any project budget is human resources, which leads us to the first item on our budget: salaries. Given the project's three-month timeline, it is important to account for in the budget calculations the required expertise and the urgency of the work.

Another crucial cost factor to consider is office space, which houses the project's personnel and equipment. Typically, office spaces are leased on a monthly basis, in our case, at $17,000 per month.

Budgeting for Equipment, Software, and Insurance

To complete software coding and design projects, having the right equipment and software is essential. Our budget includes $150,000 allocated to four high-specification computers and necessary software, which are fundamental to the project's timely completion.

Insurance is necessary to provide a safety net for the project's employed personnel. An amount of $12,500 monthly is set aside to cover any unexpected scenarios like accidents or health emergencies.

Allocating Funds for Travel and Event Launch Expenses

As projects progress and evolve, mobility becomes a prime factor that can significantly affect the budget. Our example budget allocates $30,000 for travel expenses that may accrue.

Organizing a successful launch event is a critical aspect of the project life cycle and often requires a significant portion of the budget.

Baking In a Contingency Budget

Risk management is a significant component of any project. Hence, creating a contingency fund is important to cover any unplanned expenses that may occur during the project.

Calculating Project Value: EVM in Action

Understanding the key principles of Earned Value Management (EVM) can be a game-changer in managing the project's financial health. In EVM, there are a few critical calculations that help analyze the project's current financial position:

The earned value (EV) measures the project's progress in monetary terms, based upon what tasks have been accomplished. In our case, this stands at $150,000. The actual cost (AC) designates the actual expenditure so far, which is $30,000 in our scenario.

The budget at completion (BAC) portrays the total cost of the project, based on what has been budgeted, which stands at $500,000 for our project.

These calculations can give you insight into cost variance (CV), cost performance index (CPI), the schedule performance index (SPI), and estimates for completing the project (EAC and ETC).

Optimizing Budget Health: Practical Recommendations

To streamline the monetary prospect of the project further, embracing a few strategic tactics can lead to a balanced and functional budget.

Regular cost tracking is a simple yet efficient way to keep the project within the allocated budget. This routine helps identify overrun costs and curbs overspending.

Embracing cost-saving measures like using open-source software can significantly reduce budget expenses without compromising the project's quality or progress.

Prioritizing urgent tasks in your project's timeline can also optimize resource allocation and ensure smooth project evolution.

Wrapping Up

Creating a detailed budget plan might seem like an uphill battle initially, but it can be effectively managed and optimized with a structured approach. Using EVM provides a granular understanding of the project's financial parameters and how to best navigate them. So, gear up and embrace a meticulous budget plan using EVM for your next project.

References

Anantatmula, V. S. (2020). Project Management Concepts. In Operations Management- Emergent Trend in the Digital Era (pp. 1–17).

Chang, S., Yu, L., Kuo, Y., Mal, Y., & Chen, J. (2015). Applying online peer assessment with Total Quality Management to elevate project-based learning performance.

Jalili, Y., & Ford, D. N. (2016). Quantifying the impacts of rework, schedule pressure, and ripple effect loops on project schedule performance.

Mahmoudi, A., Javed, S. A., & Deng, Z. (2018). Cost overrun causes in construction projects, IOP Conference Series: Materials Science and Engineering, 311(1), 012002.