Earned Value Management : Part 1

Earned Value Management (EVM) is a project management technique to effectively track progress of a project and measure project performance at any given point in time.

Earned Value Management is very much useful for answering questions such as - is the project over budget, is the project behind schedule, what will be the total project cost by the time project is completed, etc. We need to understand the key terms and concepts involved in earned value analysis.

Some of the key terms and concepts explained:

1. Budget at Completion (BAC) — Budget at Completion is the total budget determined for the work to be performed. This is the original project estimate.

2. Budgeted Cost of work Scheduled (BCWS) — Also referred to as Planned Value (PV). BCWS describes the sum of the budgets for all the work scheduled to be accomplished within a given time period. At any given point on a time line, the planned value describes how much of project work was planned to be performed

Example: Suppose you have a 2-month project, and total budget allocated is 100$. The BAC will be 100 dollars. As per your project plan, you plan to complete 50% at the end of 1 month. So, the Planned value or BCWS at the end of 1 month is 100$ x 50% = 50$

3. Budgeted Cost of Work Performed (BCWP). Also referred to as Earned Value (EV). BCWP is the measure of actual work performed at a given point, expressed in terms of approved budget authorized for that work.

In the above example, suppose your team could only complete 40% of total project work.

The Earned Value will be 100$ x 40% = 40$

You can think like this: In place of 50$ of work planned to be completed at the end of 1 month, you could only complete 40$ worth of project work. Definitely not a good result. When we look at the other metrics such as schedule performance index later in this article, we will understand how inferences can be made with the use of Earned Value and Planned Value together.

4. Actual Cost of Work Performed (ACWP). Also referred to as Actual Cost (AC). ACWP is the total cost incurred for the work performed till date.

In the above example, suppose your project has 1 resource who worked 10 hours at the rate of 4.5$ per hour for the 1 month. Assume you don’t have any other project expenses.

Actual cost is 10 x 4.5$ = 45$.

5. Estimate to Complete (ETC). ETC is the estimated cost needed in completing the remaining project.

Formula: BAC-EV

In the above example, it is 100$-40$ = 60$

6. Estimate at Completion (EAC). EAC is the expected total cost of completing all defined project scope of work.

Formula: AC + ETC

In the above example, it is 45$ + 60$ = 105$

By the time your project is done, you would have spent 105$from your pocket.

7. Variance at Completion (VAC)

VAC is the amount of budget deficit or surplus at the end of the project

Formula: BAC-EAC

In the above example, it is 100$-105$ = -5$

By the time your project is completed, you would have spent (an additional) 5$ above what you had planned initially (100$)

8. Scheduled Variance (SV)

Determines whether project is ahead or behind schedule. A positive value indicates ahead of schedule and negative value indicates behind schedule

Formula: EV-PV

In the above example, Schedule Variance is 40$-50$ = -10$

We got a negative value for SV, so the project is behind schedule.

9. Scheduled Performance Index (SPI)

SPI is a measure of schedule efficiency on a project. A positive value indicates we are ahead of schedule and vice versa

Formula: EV/PV

In the above example, SPI is 40$ /50$ = 0.8. Less than 1, project is behind schedule.

10. Cost Variance (CV)

CV denotes if the project is over budgeted or under budgeted. A positive value indicates under budgeted and a negative value indicates over budgeted.

Formula: EV-AC

In the above example, Cost Variance is 40$-45$ = -5$. Negative value, project is over budgeted.

11. Cost Performance Index (CPI)

CPI is a measure of cost efficiency of the budgeted resources. A positive value is favorable.

Formula: EV/AC

In the above example, CPI is 40$ /45$ = .89, Less than 1, project is over budgeted.

References

PMI’s The Practice Standard for Earned Value Management is a great guide to know in depth about Earned Value Management.

The Practice Standard for Earned Value Management-Second Edition (2011).

Link: https://www.pmi.org/pmbok-guide-standards/framework/earned-value-management-2nd

Earned Value Analysis is a simple yet very power technique in project management. I will post a few more articles on EVM.

Hope this article was helpful to you. Thank you.