What is Earned Value Management?
Earned Value Management System is a globally accepted comprehensive system to track the progress of the project with respect to schedule and cost. It also helps to forecast the anticipated schedule and cost.
Acronyms of Earned Value Management System
Planned Value (PV) – Authorized budget assigned to scheduled work. Planned value is also known as Budgeted Cost of Work Scheduled (BCWS)
Earned Value (EV) – The measure of work performed expressed in terms of the budget authorized for that work. Earned value is also known as Budgeted Cost of Work Performed (BCWP)
Actual Cost (AC) – The actual cost incurred for the work performed. Actual cost is also known as Actual Cost of Work Performed (ACWP)
Budget At Completion (BAC) – Total budget of the project from start to finish
Schedule Variance (SV) – The amount by which the project is ahead or behind the planned delivery date).
Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
A SV which is greater than or equal to zero is good where as a negative SV is considered as bad because the project work is not progressing as planned.
Schedule Performance Index (SPI) – Schedule Performance Index = EV / PV.
If the SPI=1, then the project is right on schedule. If SPI<1, then the project is lagging behind. If SPI > 1, then the project is ahead of schedule.
Both the Schedule variance and the Schedule performance index points to schedule performance. Whenever one need to monitor at a micro level, Schedule variance is useful. When it comes to senior management reporting or if the intention is to compare schedule performance across projects or across timelines then Schedule Performance Index (SPI) is the right indicator.
Cost Variance (CV) – The amount of budget deficit or surplus at a given point in time. CV = EV – AC . A cost variance of Zero or above is better.
Cost Performance Index (CPI) – Is the measure of Cost efficiency
Cost Performance Index (CPI) = EV / AC.
If CPI=1, then the work is getting completed as per budget.
If CPI>1, then the work is getting completed without consuming budget.
Estimate To Complete (ETC) – Estimate to complete the balance work. Calculated as EAC – AC or ETC is re-estimated for the remaining work.
Estimate At Completion (EAC) – A forecast of the money required to complete the total work of the project expressed as the sum of the actual cost incurred till date and the estimate to complete the balance work. There are different formulas to calculate the estimate at completion.
- BAC / CPI – Total budget of the project divided by Cost Performance Index). Not very accurate.
- AC + re-estimated ETC – An estimation is done for the remaining part of work and added to the actual cost incurred so far. Not very accurate.
- AC + (BAC – EV) – Earned value is subtracted from the total budget to arrive at the balance budget. The balance budget is added to the actual cost incurred so far. Has a fair amount of accuracy.
- AC + (BAC-EV) / CPI – The balance budget is divided by the cost performance index. The amount thus arrived is added to the Actual Cost. Is accurate.
- (AC + (BAC-EV)) / (wt1*CPI) * (wt2*SPI) – Weightages are provided to SPI and CPI. The sum of the weightages should not exceed 1.
Variance at Completion (VAC) –
Variance at Completion (VAC) = BAC – EAC
S – Curve
The most comprehensive and commonly used tool to report the project progress in terms of Schedule and Cost is the ‘S’ Curve
The Planned Value (PV) also known as Budgeted Cost Of Work Scheduled (BCWS) , The Earned Value (EV) also known as Budgeted Cost Of Work Performed (BCWP), The Actual Cost (AC) also known as Actual Cost of Work Performed (ACWP) are plotted on the Project’s timeline.
In the diagram#2 below, as on June, which is the review date, the Earned Value (EV) shown in red color is lesser than the Planned Value (PV) shown in blue color.
Schedule Variance (SV) = EV – PV
The Actual Cost (AC) which is shown in green color is higher than the Earned Value (EV), which is in red color.
Cost Variance (CV) = EV – AC
To Complete Performance Index (TCPI)
What must be the target CPI to be maintained while performing the remaining work, to achieve the milestone within the original budget (BAC)
Work remaining / Funds remaining
To Complete Performance Index = (BAC – EV) / (BAC – AC)
If the BAC is totally off track then TCPI = (BAC-EV) / (EAC – AC)
The following is a week wise list of tasks to be completed with their percentage completion. Let us assume that the project is reviewed after Week#1.
|Week#||Tasks||Budget||Completion%||Earned Value||Actual cost|
At the end of week#1, we are supposed to complete task#1, task#2, task#3 and task#4
- Planned value (PV) = Budgeted Cost of Work Scheduled during week#1 = 6000
- Earned value (EV) = Budgeted Cost of Work Performed during week#1 = 4950
- Actual cost (AC) = Actual Cost of Work Performed = 4900
- Budget at Completion (BAC) = 12000
- Schedule Variance (SV) = EV – PV = 4950 – 6000 = -1050
- Schedule Performance Index (SPI) = EV/PV = 4950/6000 = 0.825
- Cost variance (CV) = EV-AC = 4950 – 4900 = 50
- Cost Performance Index (CPI) = EV/AC = 4950 / 4900 = 1.01
- Estimate at Completion (EAC) calculated using various formulas
- AC + (BAC – EV) = 4900 + (12000 – 4950) = 11,940
- AC + re-estimated ETC
- BAC / CPI = 12000 / 1.01 = 11,881
- AC + (BAC – EV) / CPI = 4900 + (12000 – 4950)/1.01 = 4900 + 6980 = 11,880
- AC + (BAC – EV) /CPI*SPI)) = 4900 + (12000-4950)/1.01*0.825) = 4900 + (7050 / 0.825 x 1.01) = 4900 + 7050 / .040 = 4900 + 8463 = 13363
- Estimate to Complete (ETC) = EAC – AC = 11880 – 4900 = 6980
- Variance At Completion (VAC) = BAC – EAC = 12000 – 11880 = 120
- ‘S’ Curve
- To Complete Performance Index (TCPI)
- (BAC – EV) / (BAC – AC) = (12000 – 4950) / (12000 – 4900) = 7050/7100 = 0.99
- (BAC-EV) / (EAC – AC) = (12000-4950) / (11,446 – 4900) = 7050/6546 = 1.07
Rules of Credit
Organizations employ different rules to calculate the earned value. The commonly used rules of credit to account for the earned value are;
Rule#1 – ‘0 -100’ policy states that work is actually considered as earned only when it is completed 100 percentage.
Rule#2 – ‘50-50’ policy states that 50% of the work is considered as earned the moment it starts, and the remaining 50% is considered as earned when it is 100% done.
Rule#3 – When no policy is explicitly mentioned, then we arrive at the earned value by multiplying the planned value with the percentage completion.