Earned Value Management

As per the PMBOK Guide, Earned Value Management (EVM) in its various forms is a commonly used method of performance measurements. It integrates project scope, cost, and schedule measures to help the project management team assess and measure the project performance and progress.

Simply put, earned value management helps you assess the performance of your project. Once you get the performance data you can take corrective or preventive action as needed. Elements of Earned Value Management Earned value management has three basic elements:

1) Planned Value

2) Actual Cost

3) Earned Value

Planned Value

This is the first element of earned value management. Planned value is the approved value of the work to be completed in a given time, or you can say that it is the money that you should have earned as per the schedule.

In other words, planned value is the authorized value of work that has to be completed in a given time period as per the schedule.

Planned value is denoted by PV.

Actual Cost

This is the second element of earned value management. Actual cost is the cost incurred on work completed to date; or simply put, it is the amount of money you have spent to date. Actual cost is denoted by AC.

Earned Value

This is the last and third element of earned value management. Earned value is the value of the actual completed work to date, or you can say that if the project is terminated today, earned value is the value that the project has produced.

Earned value is denoted by EV.

Variances

In earned value management you have two variances: schedule variance and cost variance. These variances help you analyze the projects progress, i.e. how you are performing in terms of schedule and cost.

Schedule Variance

Schedule variance tells you whether you are behind or ahead of schedule, and it can be calculated by subtracting planned value from earned value.

Schedule variance is denoted by SV.

Schedule Variance = Earned Value

Planned Value SV = EV PV

From the above formula we can conclude that:

- If schedule variance is positive, you are ahead of schedule.

- If schedule variance is negative, you are behind schedule.

- If schedule variance is zero, you are on schedule.

Note that when the project is completed schedule variance becomes zero, because at the end of the project you have earned all planned value.

Cost Variance

Cost variance tells you whether you are under budget or over budget and it can be calculated by subtracting actual cost from earned value.

Cost variance is denoted by CV.

Cost Variance = Earned Value

Actual Cost CV = EV AC

From the above formula we can conclude that:

- If cost variance is positive, you are under budget.

- If cost variance is negative, you are over budget.

- If cost variance is zero, you are on budget.

Indexes

Like variances, indexes also help you analyze the performance of the project.

They help you analyze the efficiency of schedule performance and cost performance of the project.

In earned value management, you have two indexes: schedule performance index and cost performance index.

Schedule Performance Index

The schedule performance index tells you how efficiently you are actually progressing compared to the planned progress.

It can be calculated by dividing earned value by

planned value. The schedule performance index is

denoted by SV.

Schedule Performance Index = (Earned Value)/(Planned Value) SPI = EV/PV

From the above formula you can conclude that:

- If the schedule performance index is greater than one, you are ahead of schedule.

- If the schedule performance index is less than one, you are behind schedule.

- If the schedule performance index is equal to one, all work is completed.

Forecasting Tools

In cost management you have three project forecasting tools:

1) Estimate at Completion

2) Estimate to Complete

3) To Complete Performance Index

Case-I

In this case you assume that the project will continue to perform to the end as it was performing up until now.

In other words, your future cost performance will be the same as the past cost

performance. Here,

Estimate at Completion = (Budget at Completion) / (Cost Performance Index) Or,

EAC = BAC/CPI

Case-II

Here you say that until now you have deviated from your budget estimate; however, from now onwards you can complete the remaining work as planned.

Usually this happens when due to unforeseen conditions, an incident happens and your cost elevates. However in this case you are sure that this will not happen again and you can continue with the planned cost estimate.

That is why in this formula, to calculate the EAC you will simply add the money spent to date (i.e. AC) to the budgeted cost for the remaining work.

Here,

EAC = AC + (BAC EV)

Case-III

In this case, youre over budget, behind schedule, and the client is insisting you complete the project on time.

Here not only the cost but the schedule also has to be taken into

consideration. Here,

EAC = AC + (BAC EV)/(CPI*SPI)

Estimate to Complete

This is the second forecasting tool.

It is the expected amount of money that you will have to spend to complete the remaining work.

It is denoted by ETC.

Estimate to Complete = Estimate at Completion

Actual Cost ETC = EAC AC

To Complete Performance Index

The To Complete Performance Index gives you the future cost performance index that you must follow for the remaining work if you want to complete it within the given budget.

It is denoted by TCPI.

You can calculate the TCPI by dividing the remaining work by the remaining

funds: TCPI = (Remaining Work)/(Remaining Funds)

You can calculate the remaining work by subtracting the earned value from the total budget, i.e. (BAC EV). However, there are two cases to determine the remaining funds on hand. In the first case you determine the remaining funds when you are under budget, and in the second case when you are over budget.

So in these cases, the formula to calculate the To Complete Performance Index formula will be different.

Case-I: Youre Under Budget

In this case, the remaining funds will be calculated by subtracting the actual cost incurred to date from the initial budget, i.e. (BAC AC).

So, the formula will be:

TCPI = (BAC EV)/(BAC AC)

Case-II: Youre Over Budget

In this case, the remaining funds will be calculated by subtracting the actual cost incurred to date from the estimate at completion, i.e. (EAC AC).

Here the TCPI will show you the required cost performance to complete the project with the newly calculated budget. TCPI = (BAC EV)/(EAC AC)

Example:

You have a project which is worth 100,000 USD. Four months have passed, and 60,000 USD has been spent. Upon closer review you find that only 55% of the work is completed.

Determine the Budget at Completion (BAC).

Solution:

The Budget at Completion is the total budget allotted to

the project. In the question, the cost of the project is

100,000 USD.

Hence the BAC is 100,000 USD.

Practice Question:

You have recently joined an ongoing project. The cost of the project is 350,000 USD. However, 150,000 USD has already been spent and 35% of the work is actually completed.

Determine the Budget at Completion (BAC)