All About Earned Value Management (EVM)


Earned Value Method

Earned value management (EVM) is a tool that assesses project performance. This is pretty simple once you get a hang of it. First, spend some time trying to understand the following terms. It is okay if you do not get all of it right here. Just try to get a hang of them. As you go through the lesson, they will start making sense. EVM develops and monitors the first three key dimensions (EV, AC and PV) for each work package and control account:

  • EV – Earned Value. This is the actual value of work performed on any given activity (or WBS component) at any given point in time. This is expressed in terms of approved budget for that activity. Earned value is also referred to as Budgeted Cost of Work Performed (BCWP).
  • AC – Actual Cost. This is the actual amount of budget spent in carrying out the work on any given activity (or WBS component) at any given point in time. This is sometimes referred to as Actual Cost of Work Performed (ACWP).
  • PV – Planned Value. This is the authorized budget allocated for the given activity (or WBS component). This is allocated over the entire duration of phase or project. This is sometimes referred to as Budgeted Cost of Work Scheduled (BCWS).

On a time-cost graph these are typically an S-curve (refer to the image later in this lesson)

  • PMB – Total Planned Value is sometime referred to as Performance Measurement Baseline. PMB is the time-phased budget plan for accomplishing work, against which contract performance is measured. Note that this does NOT contain management reserve.
  • SV – Schedule Variance. It is the difference between how much of schedule for an activity (or WBS component) is actually utilized versus how much of schedule should have been utilized, at any given point in time.
  • CV – Cost Variance. It is the difference between how much of budget for an activity (or WBS component) is actually utilized versus how much of budget should have been utilized, at any given point in time.
  • SPI – Schedule Performance Index. It is a indication of schedule progress achieved on the project as compared to the progress planned, at any given point in time. Ideal value for a project is >= 1.0, which indicates that the project is ahead of schedule or on schedule.
  • CPI – Cost Performance Index. It is a indication of value of work completed as compared to actual cost (or progress) made on the project, at any given point in time. Ideal value for a project is >= 1.0, which indicates that the project’s expenditure is within the budget or just on it.
  • BAC – Budget At Completion. This is the total planned value for ALL activities (or WBS components) over the entire project. In other words, this is the planned amount you will end up spending on project work when the project ends. We say ‘planned’ because BAC is calculated during planning period, which is much ahead of project completion time.

In reference to PMB, at the end of the project PMB terminates at BAC (refer to the image below).

  • EAC – Estimate At Completion. This is calculated at a given point in time based on how much of work on an activity (or WBS component) is complete. This is a measure of expected cost of activity (or WBS component) when it finally completes. EAC can be different from BAC as you will see a bit later.
  • ETC – Estimate To Complete. It is the expected cost required to complete remaining work on an activity (or WBS component).
  • TAB – Total Allocated Budget. Also known as Total project funds. This is the sum of all activity-level budget on the project – performance management baseline (PMB) + management reserve.

Planned value (PV)

This is sometimes also called as Budgeted Cost of Work Scheduled (BCWS). This is the budget allocated for an activity, WBS component, or control account and can be expressed as the amount for a certain period, or cumulative amount to date. The figure of PV represents work authorized and the budget authorized for that work.

Planned value is calculated by multiplying percentage of work planned to have completed and the Budget At Completion.

PV = Planned % Complete x BAC

Earned Value (EV)

This is at times called as Budgeted Cost of Work Performed (BCWP). This is the value of work completed at any given point in time, expressed as value of budget assigned for the work. Again, this is expressed for an activity, WBS component, or control account. Can be expressed as a value for certain time period, or cumulative amount to date.

Earned value is calculated by multiplying percentage of actual work completed and the Budget At Completion.

EV = Actual % Complete x BAC

Actual Cost (AC)

This is sometimes called as Actual Cost of Work Performed (ACWP). Quite simply, this is the actual cost of work done at any point in time. Can be expressed as the value for certain time period, or cumulative amount to date. There is no formula for this. This figure should come from cost accounts maintained for the project, can be derived from control accounts.

The variance is calculated using the above 3 metrics.

Schedule Variance (SV)

Schedule variance indicates the extent to which an activity is ahead (or behind) as compared to its estimated time. SV can be calculated for an activity, WBS component or control account. When done for all activities on a project, this metric tells us whether the project is ahead (or behind), and if so by how much (hours, person-days – based on unit of measure used).

Schedule Variance = Earned Value – Planned Value
SV = EV – PV

If you discover a negative schedule variance, you need to think of possibilities of shortening duration of few other tasks. Schedule compression techniques (discussed as part of Develop Schedule process) will be useful.

Cost Variance (CV)

Cost variance tells you how are you doing on cost front against the budget allocated for project. If you have spent more than authorized budget for an activity, this metric will tell you that. This can be calculated for a period of time, or at the end of project.

Cost Variance = Earned Value – Actual Cost
CV = EV – AC

If you are calculating CV for the end of project, it will be the difference between Budget At Completion and actual amount spent on project till then.

If there is a negative cost variance then that amount is gone; it cannot be recovered. So you can only plan for corrective action by which you can save money on other tasks (if such a plan is possible).

The image below shows cost and schedule variance at any given point in time. All above concepts are summarized here.

EVM graphFigure 3: Earned Value Management

Schedule Performance Index (SPI)

The next step is to convert these into efficiency indicators. There are two – for schedule it is Schedule Performance Index (SPI) and for cost it is Cost Performance Index (CPI).

Schedule Performance Index is an indication of schedule progress achieved against schedule planned for the project.

SPI = EV/PV

As you can see if planned value is less than earned value of the project, SPI will be > 1.
Hence if SPI >= 1, the project is ahead of schedule. This is a good thing!

Here’s an example –

John’s home construction project went into third quarter and his team completed bare bone structure of first two floors and in terms of value this comes to $75,000. He had plans to complete even the exteriors by this time which would have realized a value of $100,000. How is he doing on schedule?

Answer:

SPI = EV/PV;
This would be, 75,000/100,000 = 0.75
This is less than 1.0, which means that John is lagging in his schedule.

His schedule variance is EV – PV;
75,000-100,000=-25,000. He is falling short on producing $25,000 worth of work.

Cost Performance Index (CPI)

Cost Performance Index is an indication of value of the work completed against actual cost spent towards completing this work.

CPI = EV/AC

As you can see if actual cost is less than earned value of the project, CPI will be > 1.
Hence if CPI >= 1, the project is well within the budget (or ‘cost underrun’). Again, this is a good thing!

An example –

From planning time to construction John had to pay 20% more for wood and steel due to price rise. He ends up spending $110,000 in total into his third quarter. What do his cost numbers look like?

CPI = EV/AC;
This would be 75,000/110,000=0.6818
This is below the ideal number 1.0, this means John is falling short of budget too.
Cost Variance = EV – AC;
75,000-110,000=-35,000. John is falling short of $35,000 on budget.
It is time he goes to sponsor with EAC and ETC figures and asks for more budget.

If your project has CPI and SPI both >= 1.0, that project is ahead of schedule and has utilized less than authorized budget, and is in good hands!

Click here to other related techniques of to control project costs, such as Forecasting (calculating Estimates At Completion, Estimate To Complete), To-Complete Performance Index (TCPI) and the rest.

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