There are a few common queries that you’ll deal with as a project manager. Most of the time, it will be about the status and progress made on the given project how much work you have completed, what is remaining, etc.
Clients are not interested in daily reports. They need broader information to help them visualize the money spent on the project and the value of the work completed.
Earned Value Management (EVM) is your aid in this. It helps you find the project’s status, its progress, and its performance.
What is Earned Value Management (EVM)?
In the past, project managers used to have two parameters: planned expenditures and actual expenditures.
These two variables help the project manager compare planned spending with actual spending. However, this is not enough information to get the whole picture; the information was incomplete. It was not possible to understand the relationship between the completed work and the money spent.
Getting the cost performance of the project was not possible.
This is where Earned Value Management (EVM) comes in. It helps project managers overcome the shortcomings of traditional project management methods.
Earned Value Management was developed in the sixties when the US Air Force started using it in their programs. Since 2005, it has become a part of general federal project risk management. These days Earned Value Management is a requirement for US government contracts.
Earned Value Management vs Traditional Project Management
Earned Value Management has several advantages.
The traditional method focuses on planned and actual expenditures, while Earned Value Management focuses on actual accomplishments and gives you an insight of the project.
Earned Value Management helps in analyzing the cost performance, schedule performance, cost variance, and schedule variance.
According to 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.”
Elements of Earned Value Management
Earned Value Management has three essential elements:
- Planned Value (PV)
- Earned Value (EV)
- Actual Cost (AC)
You can call them primary data points as well.
Planned Value is the scheduled cost of work planned in a given time. It is also called Budgeted Cost of Work Scheduled (BCWS). The total Planned Value of the project is the Budget at Completion (BAC).
Earned Value is the amount of money earned from the completed work at a given time.
Simply put, you can say that the Earned Value will show you the value of the completed work if the project was terminated today, which is also called Budgeted Cost of Work Performed (BCWP).
Actual Cost is the money spent to date. It is also called the Actual Cost of Work Performed (ACWP). This is the easiest element of Earned Value Management to identify; it just takes one look at the question.
You can calculate the following variances and performance indexes with the help of these three elements:
- Schedule Variance
- Cost Variance
- Schedule Performance Index
- Cost Performance Index
You have two variances in Earned Value Management: Schedule Variance and Cost Variance. These help you track project performance in dollars.
Schedule Variance is the difference between Earned Value and Planned Value. It lets you know how much you are ahead or behind schedule in terms of dollars.
Schedule Variance = Earned Value – Planned Value
SV = EV – PV
You are behind schedule if the Schedule Variance is negative, you are ahead of schedule if the Schedule Variance is positive and on schedule if it is zero.
Cost Variance is the difference between Earned Value and Actual Cost. It lets you know whether you are under or over budget.
Cost Variance = Earned Value – Actual Cost
CV = EV – AC
You are over budget if the Cost Variance is negative, you are under budget if it is positive Zero means you are on budget.
Like variances, indexes help you compare the planned progress with actual progress. This helps you understand how efficient your progress is. You have two indexes in Earned Value Management: Schedule Performance Index (SPI), and Cost Performance Index (CPI).
Schedule Performance Index
This is the ratio of Earned Value and Planned Value.
Schedule Performance Index = (Earned Value) / (Planned Value)
SPI = EV / PV
If the Schedule Performance Index is greater than one, you have completed more work than planned to at this time or you are ahead of schedule. If the opposite is true, you have completed less work than planned and you are behind schedule. Lastly, if the Schedule Performance Index is equal to one, you have completed the work as planned and are on schedule.
Cost Performance Index
This is the ratio between the Earned Value and Actual Cost.
Cost Performance Index = (Earned Value) / (Actual Cost)
CPI = EV / AC
You are earning less than what you are spending or are over budget if the CPI is less than one. If it is greater than one, you are earning more than you are spending and are under budget. If the CPI is one, the cost spent is equal to the cost earned; you are on budget.
Variance and performance indices are examples of derived data points.
Earned Value Management in Forecasting
Earned Value Management helps you to forecast the following:
- Estimate at Completion
- Estimate to Complete
- Variance at Completion
- To Complete Performance Index
These tools serve as an early warning sign.
Estimate at Completion
Estimate at Completion is the project’s total expected budget.
This is the price tag of the project at the end.
You can calculate the Estimate at Completion in four different scenarios. Please refer to my blog post on Estimate at Completion for further detail.
Estimate to Complete
Estimate to Complete lets you know the expected cost of completing the rest of the work.
You can calculate the Estimate to Complete in three different scenarios. Please refer to my blog post on Estimate to Complete for more details.
Variance at Completion
Variance at Completion tells you how much you will be under or over budget when the project is complete. It is the difference between the Budget at Completion and the Estimate at Completion.
Variance at Completion = Budget at Completion – Estimate at Completion
VAC = BAC – EAC
You have spent more than you planned to if the Variance at Completion is negative. You have completed the project within the planned budget if the difference is positive.
To Complete Performance Index
The To Complete Performance Index (TCPI) is the estimate of the cost performance required by the project to meet the budgeted goal. Please note that Cost Performance Index is the past performance while the To Complete Performance Index is the future cost performance.
You can calculate the TCPI by dividing the remaining work by the remaining funds.
TCPI = (Remaining Work) / (Remaining Funds)
There are two cases in which you can calculate the TCPI.
Case I: under budget
TCPI = (BAC – EV) / (BAC – AC)
Case II: over budget
TCPI = (BAC – EV) / (EAC – AC)
So, you can see how Earned Value Management helps you analyze the project’s performance and forecasting.
Benefits of Earned Value Management
Earned Value Management offers immense benefits to project managers, sponsors, clients, and organizations.
Here are a few benefits of Earned Value Management:
- Greater control of project constraints.
- Improved planning processes and correlates time-phased budgets to the project tasks.
- Shows the project’s status and progress.
- Any deviations from the baseline can be found early.
- Measures the project’s cost and schedule performance.
- Tracks your project’s performance.
- Gives clients a better understanding of the project’s progress.
- Improves communication and project visibility, which helps prevent scope creep.
- Keeps an eye on deviations from any performance measurement baselines.
- Finds the potential risk areas.
- Increases clients’ confidence in your project’s success.
Earned Value Management helps analyze the project’s performance and predict the forecast. It provides you with quantitative data for decision making. Earned Value Management is an excellent communication tool for project stakeholders because it helps them understand the project’s insights.
Many PMP aspirants find EVM concepts difficult because of the mathematical calculations. However, these calculations are easy if you understand the concepts.
I have written seven blog posts on Earned Value Management and project forecasting. In these, I explain EVM concepts in simple language with examples. This blog post is the first blog post in a series of seven on Earned Value Management.
The following are links to the other blog posts:
- Earned Value Management (You are here)
- Elements of Earned Value Management
- Schedule Variance and Cost Variance
- Schedule Performance Index and Cost Performance Index
- Estimate at Completion
- Estimate to Complete
- To Complete Performance Index
These blog posts are in a particular sequence, and I request you to follow this order. Bookmark this blog post and use it as a reference for Earned Value Management concepts.