Earned Value Management

There is already a lot of stuff regarding Earned Value Management still people ask for it. Let me also try to put my insight and I hope you will be benefited from. I will not emphasize much on definition or theories but will try to cover with help of some visuals.

Let us see a brief introduction of Earned Value Management;

Earned Value Management is a technique that helps Project stakeholders to measure project performance. Ultimately, this will also help in forecasting the project resources to successfully complete the project.

Before we start, keep in mind the Earned Value is what we are getting against our Planned Cost Baseline. It has nothing to do with what we are getting from sponsor or client.

Let say you plan $100 cost for a task but after completion you will get $150 from the client.

You hire a contractor any pay him $80 or even $120.

Now, when task is completed, your Earned Value is the same as you planned $100 not a single penny less or more.

Earned Value is not a profit/loss term.

Every Project Manager wants a clear performance date of his/her project if it is lagging behind or ahead of schedule so that he/she can manage resources effectively to save time and budget. Time and cost are two variable in EVM.

Through earned value management we produce different comparisons and variances thus helpful for decision making for further actions.

Essentials for EVM Implementation

Below are pre-requisites that we should have before implementing the Earned Value Management on our project;

  • An approved baseline project plan where we can see all the Project Scope
  • Planned Value – PV or Budgeted Cost of Work Scheduled- BCWS. A value of Planned Work
  • Earned Value – EV or Budgeted Cost of Work Performed – BCWP. A value of Work Performed

Why we need EVM?

This is common question that when we can see what is spend and what is earned just by looking at finance then why we need this?

The answer is what is earned and what is spent is not enough to understand the project performance. hence we need EVM.

EVM gives a better approach and visibility with quantitative data analysis. EVM reports are clear to understand and to communicate among stakeholders

Example

Let say you have following scenario;

Project Approved Duration = 2 Years

Project Approved Budget = 10 Millions USD

Now, after 1 year you have spent 5 Millions and you thing you have completed 50% of the project?

The answer is No as it is not showing that how much work you have completed – May be 30% or less

This is where EVM come into action & gives you a clear picture of your project.

Note: May be after 1 year you have completed more than 70% of work but in this case you can save money by removing extra resources or can claim acceleration cost.

Performing EVM Analysis

Following are the steps involved in Earned Value Management. I will try to explain these with simple examples;

Step -1 : Determine the Planned Value – PV

Step -2 :Determine the Earned Value – EV

Step -3 : Determine the Actual Cost – AC

Step -4 : Calculate the Schedule Variance – SV

Step -5 : Calculate the Cost Variance – CV

Step -6 : Calculate Other Status Indicators like CPI, SPI, EAC, ETC, and TCPI

Let see what includes in these 6 steps

Earned value management simplified formulas

Finding the Planned Value – PV

It is also known as BCWS –  Budgeted Cost of Work Scheduled. This is the amount (Monetary value) of the activity or task that we are supposed to have been completed on that particular data date.

For example; we have the below data for any particular task or the activity

  • Budget  = 100 $
  • Start Date = 1 December
  • End Date =10 December
  • Original Duration = 10 days

Now on the end of December 07th (Data Date), the activity/ task is supposed to be 70% complete.

Then, PV or BCWS = $100 * 70% = $70.

For overall project we can use the below formula

PV = BAC * % of planned work

Finding the Earned Value – EV

It is also known as BCWP – Budgeted Cost of Work Performed. This is the amount (Monetary value) of the activity/task that is completed in actual.

For example; we have the below data for any particular task or the activity

  • Budget  = 100 $
  • Start Date = 1 December
  • End Date =10 December
  • Original Duration = 10 days

Now, see if the actual percent completed of the activity/task is 50%.

EV or BCWP = $100 * 50% = $50.

For overall project we can use the below formula

EV = BAC * % of Actual work

Finding the Actual Cost – AC

It is also known as ACWP  –  Actual Cost of Work Performed. It is the actual spending on the work done on your project.

Here we will add up all the cost, direct, indirect that includes Materials, Overhead Cost, Equipment Cost, rents.

This we will get from finance department. Let say they give you a value that is 60$.

With this cost you need not to play, just take the value on that particular data date – Fresh Date

Here, we are done with all the required information . Now let’s play with other elements in Earned Value Management.

Calculating the Variance & Indexes

Calculate the Schedule Variance – SV

As the name presents a  Schedule Variance – SV indicate the schedule status of the project.

The formula is; also you can see in graph for better understanding.
SV = EV – PV

Now from our above data;

SV = $50 – $70 = -$20

Here, we are lagging behind as we know a negative schedule variance means the task is behind schedule & vice versa.

This will help a project manager to understand that he needs to put an effort to recover the lag.

Calculate the Cost Variance – CV

As the name presents a  Cost Variance – CV indicate the cost status of the project.

The formula is; also you can see in graph for better understanding.
CV = EV – AC

Now from our above data;

SV = $50 – $60 = -$10

Here, we are over budget as a negative cost variance means that we are over budget & vice versa.

This will help a project manager to understand that he needs to put an effort to recover the difference and reduce the cost by optimizing the resources.

Calculate Other Status Indicators

As far as, we got cost & schedule variances that are enough for most of the projects to fulfill the status report but as we have done all the hard work so let see how powerful this Earned Value Management technique is;

Here are other variables;

CPI – Cost Performance Index

This is the cost variance in percentage terms.

We can calculate by this formula;

CPI = EV / AC

in above example, CPI = 0.83 means the project is 17% over budget.

Remember  these points if;

  • CPI > 1 means we are over budget.
  • CPI = 1 means we are on budget.
  • CPI<1 means we are under budget.

Let try numeric way for above conditions;

  • CPI = 0.5 means the project has already spent twice the amount it allocated as per cost baseline plan
  • CPI = 1.0 means the project is on budget.
  • CPI = 1.5 means project is under budget
  • CPI = 0 that means the project work has not started.

SPI – Schedule Performance Index

This is the schedule variance in percentage terms.

We can calculate by this formula;

SPI = EV / PV

in above example, SPI is 0.86 means the project is 16% lagging behind.

Remember  these points if;

  • SPI > 1 means we are behind the schedule.
  • SPI = 1 means we are on the schedule.
  • SPI<1 means we are ahead of schedule.

Let try numeric way for above conditions;

  • SPI = 0.5 means project is behind schedule the half way
  • SPI = 1.0 means the project is exactly on schedule.
  • SPI = 1.5 means we have performed 50% more work for what was required at this point.
  • SPI = 0 that means the project work has not started.

Now, let see some forecasting techniques used to find values to complete a project…

Forecasting & Lookahead

Now, time to find and compile the results…

EAC – Estimate at Completion

This helps the Project Manager to understand that how much more budget he/she need to complete the project. You will find this deviation from cost baseline.

There are different scenarios to find this one;

  • Case – 1: EAC = BAC / CPI – If CPI is expected the same trend till end of project.
  • Case 2: EAC = AC + (BAC – EV) – If the future work is done at the planned rate.
  • Case 3: EAC = AC + (BAC – EV) / (CPI * SPI) If both CPI & SPI influence on remaining work
  • Case 4: EAC = AC + Bottom-up Estimate to Complete – If the initial plan is no longer valid

Use any of above formula as per situation on your project.

This graph can help to understand these terms better’

BAC, EAC, VAC & TCPI

ETC – Estimate to Complete

ETC – Estimate to Complete is also the cost of completing the remaining work.

We can calculate  it as;

Estimate to Complete = Estimate at Completion – Actual Cost

ETC = EAC – AC

TCPI – To Complete Performance Index

The To Complete Performance Index is the efficiency level that is required to achieve the project finish on time. This is an indicator of productivity level of project team – you can say.

An estimate to the future cost that you may need to complete the project within the approved budget. This budget may be the BAC or EAC.

  • TCPI = (Remaining Work) / (Remaining Funds)
  • TCPI = (BAC – EV) / (BAC – AC)
  • TCPI = (BAC – EV) / (EAC – AC)

Let say you got a TCPI value that is 1.01 that means to complete the project within the original budget, $1.01 worth of value must be received for every dollar spent for the remainder of the project.

If

  • TCPI is >1 then hard to complete
  • TCPI is <1 then Easy to complete
  • TCPI is = 1 then same to complete

TCPI Formula for PMP exam is a must to prepare as your entire concepts about EVM will clear ultimately.

You can read more on TCPI here To Complete Performance Index

EVM Advantages

Earned Value Management helps us for:

  • Improving communication and visibility with stakeholders
  • Reducing risk as it clearly gives insight to stakeholders on time
  • Preventing scope creep as we are tracking each task and hence the scrutiny of any creep
  • Preventing Gold Plating as everything is already aligned to a system.
  • Profitability analysis
  • Project forecasting as we can easily see the EAC, ETC & TCPI
  • Better accountability
  • Performance tracking this is what EVM is all about

Points to Remember

When applying EVM then you need to consider these points;

  • Earned Value cannot be more than Earned Value at any stage. Yes, at the End both are equal.
  • Earned value is just you have got from the work done against the cost baseline.
  • Earned value is not what you will get from client but is the value you put in cost baseline. For example, you put cost of a task as 100$ on the cost baseline but you are actually getting 150$ from the client. You hire a contractor and he does the job for you for (120$ or 80$) but once the task is completed your earned value is 100$ nothing more nothing less.
  • While writing the variances formulas EV will be at right side e.g. CV = EV- AC & during indexing it will be at upside e.g. SPI = EV/PV

Wrap Up

Earned Value Management is not that hard to implement. This is more clear reporting structure started from USA in 1960’s around. Keep things simple and so step by step. Make a dashboard on whatever scheduling software your are using or take help from MS Excel at least.

FAQ’s About EVM

How is Earned Value Management used?

Earned Value Management – EVM helps the project team to measure project performance. In this technique we use variances and indexes to evaluate the project health and also further forecasting about successful completion.

How is Earned Value calculated?

We need Planned Value & Actual Cost to calculate the Earned Value that is EV = Total budget multiplied by the % of project completion. This is what actually we have earned against what we planned. This is neither a profit or loss matrices.

Why is Earned Value Management important?

It gives us a clearer picture to understand the performance of any project in terms of cost and schedule.

What is the 50/50 rule in project management?

50/50 rule is that we will get credit 50% as soon as we will start the task & other 50% when we will finish. This is good to retain the cash flow on any project. 0/100 is the bad rule for a contractor.

What is Project baselining?

Baseline is just a reference for both parties to measure the performance of any project. Without any approved baseline every effort measure the progress is of no use contractually.

What is the difference between ACWP BCWS and BCWP?

These are the old names of PV, EV, AC respectively.

BCWS is Budgted Cost of Work Scheduled

BCWP is Budgted Cost of Work Performed

ACWP is Actual Cost of Work Performed


One Small Request:

I understand life is busy when you work especially in the Project Management field. We really have no time to play around the internet. I only can request you share this information to other colleagues. It will help me to grow my blog and can reach to more people. Thank you for visiting.


Read More: What is PMP?

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