Earned value management (EVM) is a methodology that integrates scope, schedule, and cost to answer the question, “Has the plan been effective in delivering the desired results?”
Using EVM, cost, schedule, and scope performance is evaluated against baselines. The schedule and scope are converted into monetary terms.
The three performance dimensions that are monitored using EVM are Planned value (PV), Earned value (EV), and Actual cost (AC). Performance is then analyzed against variance, trends, forecasts and reserves.
Earned value management starts by defining and understanding the current, actual, and planned performance at a defined time. In additon to the three performance dimensions previously mentioned, the project's budget at completion (BAC) is also needed to perform EVM calculations.
- Budget at Completion (BAC)
- BAC = The total project budget
- Planned Value (PV)
- PV = The value of work that should be completed
- PV creates the standard by which progress will be measured
- Earned Value (EV)
- EV = The value of the work the is completed
- EV is often used to calculate the project's percent complete
- Actual Cost (AC)
- AC = The actual amount spent to complete the current work
Let's use an example to illustrate these concepts and show you how to get every earned value management question right on the exam. This example will walk you methodically through the process of using all EVM metrics to determine a project’s health. After this article, you can use the same performance measures with our earned value management calculator to easily input the measures and with the click of a button, get all EVM results with their calculations and interpretations. But first, let take a look at this example..
Let's assume a project has been initiated to paint four walls in a room. The work is to be completed in four days, and the planned cost of completing each wall is $100. After three days, 2.5 walls have been completed. Using all EVM metrics, what is the schedule and cost health of the project?
Determine the Project Baseline Statistics
The first task is to define the four basic facts of the project, as they will be used by calculate the cost and schedule metrics.
- BAC = Budget at completion
- PV = Planned value
- EV = Earned value
- AC = Actual cost
Remember that the current status of all baseline statistics must be converted to a monetary value. In the table below you’ll find the definition of each metric, its calculated value, and how it was calculated. This same structure will be followed throughout the example.
Calculate schedule variance (SV) and schedule performance index (SPI):
Schedule analysis determines if the project is ahead or behind the approved schedule baseline and how efficiently work is being completed. The two major schedule related metrics are schedule variance and schedule performance index.
Schedule variance (SV) measures if the project is ahead or behind the schedule baseline.
- SV Equation: SV = EV - PV
- Positive SV = Ahead of Schedule
- Negative SV = Behind Schedule
Schedule performance index (SPI) measures how efficient the team is in completing project work.
- SPI Equation: SPI = EV / PV
- SPI Above 1 = More work has been completed than planned (project is more efficient)
- SPI Below 1 = Less work has been completed than planned (project is less efficient)
Calculating SV and SPI
The EV and PV values determined earlier are used to calculate both SV and SPI. The only difference between the two equations is the mathematical operator between EV and PV. The SV equation uses a minus sign between the EV and PV, and the SPI equation uses a division sign.
Interpreting SV and SPI
The SV was calculated as -$50. This negative value indicates that the project is behind schedule. The SPI was calculated as 0.83. This SPI of less than 1 indicates that the team has been less efficient in completing the work than originally projected.
Calculate cost variance (CV) and cost performance index (CPI)
Cost variance analysis determines if the project is ahead or behind the budget (approved cost baseline) and how efficiently resources are spent. The two major cost related metrics follow the same structure as the schedule metrics.
Cost variance (CV) measures the amount of budget deficit or surplus at a given time.
- CV Equation: CV = EV - AC
- Positive CV = Under Budget
- Negative CV = Over Budget
As the values in the equation highlight, CV determines if the value of the work that is done is more or less than what was spent to complete the work.
Cost performance index (CPI) measures the cost efficiency of the work completed.
- CPI Equation: CPI = EV / AC
- CPI Above 1 = Cost underrun (every dollar spent produced more than one dollar in value)
- CPI Below 1 = Cost overrun (every dollar spent produced less than one dollar in value)
The EV and AC values determined earlier are used here to calculate both CV and CPI. As with calculating schedule metrics, the only difference in the equations is what is in between the EV and AC values.
Interpreting CV and CPI
The CV was calculated as -$75. This negative value indicates that the project is over budget. The CPI was calculated as 0.77. A CPI less than 1 indicates that the costs exceed the budget at the present time.
Forecasting Future Project Performance
Forecasting estimates the results at the completion of the project based on the team’s performance to date and the future risks defined. Estimate at completion (EAC) is the expected total cost of all project work. There are three methods used to calculate EAC, each with different assumptions. The assumption most commonly used on the PMP® exam is that the work will continue to be performed at the current CPI (first assumption).
- Work will continue to be performed at the current CPI:
- EAC = BAC / CPI
- Work will be performed at the budgeted rate:
- EAC = AV + (BAC - EV)
- Work will continue to be performed at both the current CPI and SPI:
- EAC = AC + [(BAC - EV) / (CPI × SPI)]
Forecasting also calculates the expected cost to finish all remaining project work. This is known as the estimate to complete (ETC).
Calculating EAC and ETC
The EV and PV values determined earlier are used to calculate both SV and SPI. The only difference between these equations is the mathematical operator between EV and PV. The SV equation uses a minus sign between EV and PV, and the SPI equation uses a division sign.
Interpreting EAC and ETC
The EAC value calculated indicates that the final cost of the project will be $520, assuming that the same efficiency will be maintained. Notice that this exceeds the BAC. Corrective or preventative action may be needed to prevent cost overrun. The ETC value of $195 defines the amount of money that will be spent to complete the rest of the project.
Calculating the To-Complete Performance Index (TCPI)
To-complete performance index (TCPI) defines the CPI that must be achieved with the remaining resources to meet a specific management goal. The BAC or EAC could be the management goal. The TCPI results define the “level of difficulty” in achieving the desired business goal. TCPI values greater than 1 are harder to complete; those less than 1 are easier to complete. The specific management goal will dictate which equation is used:
- BAC: The efficiency that must be maintained to complete on plan (BAC)
- TCPI = (BAC - EV) / (BAC - AC)
- Current EAC: The efficiency that must be maintained to complete the current EAC
- TCPI = (BAC - EV) / (EAC - AC)
Calculating TCPI - the business goal used to calculate TCPI is BAC
The TCPI value of 2.0 indicates that the team’s cost efficiency must improve from 0.77 to 2.0 to complete on plan. The significant increase in efficiency required is unlikely.
Now, let's take a look at this example using our earned value management calculator and see how these results can be quickly and simply determined by entering four parameters into our calculator and clicking a button.