I have written seven blog posts on earned value management and project forecasting. In these blog posts I have tried to explain the most difficult mathematical concepts for the PMP exam in a simple and easy language with examples.
These blog posts are in a particular sequence and I request you to follow the same sequence.
Don’t jump to the next blog post unless you understand the previous blog post, because each following blog post is dependent on the previous one.
In this blog post, I am going to explain each concept briefly, and give a link to the detailed blog post. Bookmark this blog post and use it as a reference post for all mathematical concepts in the cost management knowledge area.
Okay, let’s get started.
Earned Value Management
Earned value management (EVM) is a technique which helps you to assess and measure the project performance and progress. This technique has three basic elements: earned value (EV), planned value (PV), and actual cost (AC).
With the help of earned value management, you can watch the project’s progress and compare it with the planned progress, and take the corrective action if needed.
Basic Elements of Earned Value Management
Earned value management has three basic elements:
- Earned Value
- Planned Value
- Actual Cost
Earned Value (EV)
Earned value is the value of the work completed to date. In simple terms you can say that if the project is terminated today, the earned value will show you the value of the completed work.
Planned Value (PV)
Planned value is the authorized value of work that has to be completed in a given time period, as per the schedule. The total planned value of the project is known as the budget at completion (BAC).
Actual Cost (AC)
Actual cost is the amount of money that you have spent to date. This is the easiest element of earned value management that you can find by just looking at the question. How much the money has been spent on the project to date is the actual cost.
In earned value management, you have two variances: schedule variance (SV) and cost variance (CV). In variance you can how are you performing in terms of dollars.
Schedule Variance (SV)
Schedule variance lets you know how much you are ahead or behind schedule in terms of dollars. It is the difference between earned value and planned value.
Schedule Variance = Earned Value – Planned Value
SV = EV – PV
If the schedule variance is negative, you are behind schedule. If it is positive, you are ahead of schedule. If it is zero, you are on schedule.
Cost Variance (CV)
Cost variance lets you know whether you are under budget or over budget in terms of dollars. It is the difference between earned value and actual cost.
Cost Variance = Earned Value – Actual Cost
CV = EV – AC
If the cost variance is negative you are over budget, and if the cost variance is positive you are under budget. If it is zero, you are on budget.
Like variance, indexes help you compare the planned progress with the actual progress. It also helps you find how efficiently you are progressing. You have two indexes in earned value management: schedule performance index (SPI), and cost performance index (CPI).
Schedule Performance Index (SPI)
Schedule performance index is the ratio between 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 or you are ahead of schedule. If the schedule performance index in less than one, you have completed less work than planned, or you are behind the schedule. Lastly, if the schedule performance index is equal to one, you have completed the exact amount of planned work or you are on schedule
Cost Performance Index (CPI)
Cost performance index is the ratio between the earned value and actual cost.
Cost Performance Index = (Earned Value)/(Actual Cost)
CPI = EV/AC
If cost performance index is less than one you’re earning less than you’re spending, or you are over budget. If cost performance index is greater than one you’re earning more than you’re spending, or you are under budget. If the cost performance index is one you are on budget, or you are earning equal to the cost spent by you.
In project management you have four forecasting tools: estimate at completion, variance at completion, estimate to complete, and to complete performance index. These tools assist you as an early warning sign.
Estimate at Completion (EAC)
Estimate at completion is the expected amount of money that the project will cost you in the end. Estimate at completion can be calculated in four different scenarios. Visit my blog post on it for more details.
Visit: Estimate at Completion (EAC)
Variance at Completion (VAC)
With the help of variance at completion, you can see how much more or less money will be spent when the project ends. 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
If the variance at completion is negative, you have spent more than planned (the initially planned budget). If it is positive, you have completed the project within the planned budget.
Estimate to Complete (ETC)
Estimate to complete is the expected amount of money that you will have to spend to complete the remaining work. There are two methods to calculate the estimate to complete. In the first method you calculate the cost of the remaining work by using the bottom up cost estimation technique, and in the second method you calculate the estimate at completion and subtract the actual cost from it.
Visit: Estimate to Complete (ETC)
To Complete Performance Index (TCPI)
To complete performance index is the estimated cost performance for the project to meet the project’s budget goal. Please note that cost performance index is the past performance of the project while to complete performance index is the future cost performance of the project.
The TCPI can be calculated by dividing the remaining work by the remaining funds.
TCPI = (Remaining Work)/(Remaining Funds)
Now, there are two scenarios to calculate the TCPI:
- If you are under budget: TCPI = (BAC – EV)/(BAC – AC)
- If you are over budget : TCPI = (BAC – EV)/(EAC – AC)
Earned value management is a very important monitoring and controlling tool for project managers. It makes them aware of how they are progressing and helps them take corrective action if anything goes wrong. Likewise, forecasting helps them predict the future performance of the project. These also work as communication tools which help stakeholders understand the project’s insight.