One of the keys to the successful management of anything is the ability to accurately measure it. For successful project management, measuring project performance is vital.
A common recurring theme when managing projects, especially large-scale ones is cost and schedule overruns. In construction, research shows that up to 69% of projects go over the planned budget by more than 10% and only 31% come within 10% of their original plan. Those are mood-dampening stats.
Staying on course when managing a project requires proper monitoring and control. This is where Earned Value Management (EVM) comes in by providing valuable information about project costs and schedule performances, which helps you to make better-informed decisions about the future direction of your project.
In this article, we’ll take a detailed look at the Earned Value Management formulas used to calculate the performance of a project in terms of cost and schedule and the relation to the actual project plan.
What is Earned Value Management (EVM)?
Earned Value Management (EVM) is a project management technique that measures the performance and progress of a project by combining schedule, cost, and scope measurements to compare a project’s actual progress against what was planned.
With EVM, it’s easier to have a clear view of the project’s performance with respect to the planned cost and schedule and forecasts the future performance at that rate.
This way, deviations from the project plan become evident allowing corrective actions to be taken to get the project back on track.
Earned Value Management Variables
To measure the project’s performance, there are certain variables used by EVM. These include:
1. Budget at Completion (BAC)
Budget at completion (BAC) is the total budgeted cost for the entire project. It represents the total amount of money allocated for the project from initiation to closing.
It’s a crucial factor in project management as it allows the project team to keep track of the total budgeted cost for the project from start to finish.
By comparing the actual cost of the project to the BAC, the team can determine whether the project is progressing according to the planned budget, exceeding it, or falling short.
Planned Value (PV) Formula
Planned Value (PV) represents the planned cost of the work scheduled to be completed at a specific point in time.
PV = Work Planned x Budget at Completion (BAC)
Actual Cost (AC)
Actual cost (AC) refers to the total cost incurred in completing the actual work done on the project at that specific point in time.
Earned Value (EV) Formula
Earned Value (EV) represents the value of the work actually completed at that point in time.
EV = Percentage of Work completed x Budget at completion (BAC)
Earned Value Management Formulas for Cost Performance
The Earned Value Management (EVM) formulas used to calculate a project’s cost performance are the Cost Variance (CV) and the Cost Performance Index (CPI).
Cost Variance (CV) Formula
The Cost Variance (CV) is the difference between the value of the work completed (EV) and the actual cost of that work (AC).
Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
If the CV is positive, the project is under budget. If the CV is negative, the project is over budget.
Cost Performance Index (CPI) Formula
The Cost Performance Index (CPI) is the ratio of the value of the work completed (EV) to the actual cost of that work (AC).
Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)
A CPI greater than one means the project is under budget, while a CPI less than one means the project is over budget.
Earned Value Management Formulas for Schedule Performance
The Earned Value Management (EVM) formulas used to calculate a project’s schedule performance are the Schedule Variance (SV) and the Schedule Performance Index (SPI).
Schedule Variance (SV) Formula
The Schedule Variance (SV) is the difference between the value of the work completed (EV) and the planned value of that work (PV).
Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
If the SV is positive, the project is ahead of schedule. If the SV is negative, the project is behind schedule.
Schedule Performance Index (SPI) Formula
The Schedule Performance Index (SPI) is the ratio of the value of the work completed (EV) to the planned value of that work (PV).
Schedule Performance Index (SPI) = Earned Value (EV) / Planned Value (PV)
An SPI greater than one means that the project is ahead of schedule, while an SPI less than one means that the project is behind schedule.
Earned Value Management Formulas for Forecasting
When you have measured the current performance of your project using the cost and schedule variances and performance indexes, then you can forecast the future performance of the project based on the performance.
Estimate at Completion (EAC) Formula
The Estimate at Completion (EAC) is an estimate of the total cost of the project at completion. It can be calculated in different ways and two common ones are the Budget at Completion (BAC) formula and the EAC Forecast formula.
- Budget at Completion (BAC) Formula: The Budget at Completion (BAC) formula calculates the EAC by dividing the total budget for the project (BAC) by the Cost Performance Index (CPI).
EAC = BAC / CPI
This formula is based on an assumption that the current cost performance of the project will continue for the remainder of the project. - Estimate at Completion (EAC) Forecast Formula: The EAC Forecast formula calculates the EAC by adding the actual cost of the work completed (AC) to the projected cost of the remaining work.
The projected cost of the remaining work is calculated by dividing the difference between the total budget for the project (BAC) and the value of the work completed (EV) by the Cost Performance Index (CPI).
EAC = AC + [(BAC – EV) / CPI]
This formula is used if we believe that future expenditures will occur at the original amount that was planned.
To-Complete Performance Index (TCPI) Formula
The To-Complete Performance Index (TCPI) formula calculates the Cost Performance Index (CPI) or efficiency required to complete the remaining work within the budget.
To-Complete Performance Index (TCPI) = (BAC – EV) / (BAC – AC)
If the calculated TCPI is less than the current CPI, the project must improve its cost performance to complete the remaining work within the budget.
Estimate to Complete (ETC) Formula
The Estimate to Complete (ETC) is an estimate of the total cost required to complete the remaining work in the project. Just like EAC, it can be calculated in 2 ways.
- Estimate at Completion Forecast Formula: The EAC forecast formula calculates the ETC by subtracting the actual cost of the work completed (AC) from the Estimate at Completion (EAC).
ETC = EAC – AC - To-Complete Performance Index (TCPI) Formula: TCPI formula calculates the Estimate to Complete (ETC) by dividing the difference between the total budget for the project (BAC) and the value of the work completed (EV) by the To-Complete Performance Index (TCPI).
ETC = (BAC – EV) / TCPI
Variance at Completion (VAC) Formula
Variance at completion (VAC) is the expected difference between the Budget at Completion (BAC) and the Estimate at Completion (EAC).
VAC = BAC – EAC
Earned Value Management Example
To have a better understanding of the Earned Value Management technique, here’s a project to explain the EVM formulas and their calculations.
Let’s use a software development project to illustrate. The budget is $500,000 and the planned duration is 6 months.
If the planned percentage complete by the end of the 3rd month is 50%, the actual percentage complete by then is 45%, and the total actual cost to date is $250,000.
Using these assumptions, here’s how we can calculate the EVM formulas:
Planned Value (PV) = Planned % Complete x Total Budget
PV = 50% x $500,000 = $250,000
Earned Value (EV) = Actual % Complete x Total Budget
EV = 45% x $500,000 = $225,000
Actual Cost (AC) = Total Actual Cost to Date
AC = $250,000
Schedule Variance (SV) = EV – PV
SV = $225,000 – $250,000 = -$25,000
The negative value for SV indicates that the project is behind schedule at Month 3.
Cost Variance (CV) = EV – AC
CV = $225,000 – $250,000 = -$25,000
The negative value for CV indicates that the project is over budget at Month 3.
Estimate at Completion (EAC) = AC + [(BAC – EV) / (CPI x SPI)]
where:
BAC = Budget at Completion = $500,000
CPI = Cost Performance Index = EV/AC
CPI = $225,000/$250,000
CPI = 0.9
SPI = Schedule Performance Index = EV/PV
SPI = $225,000/$250,000
SPI = 0.9
EAC = $250,000 + [(500,000 – 225,000) / (0.9 x 0.9)]
EAC = $250,000 + (275,000 / 0.81) = $250,000 + 340,740.74 = $590,740.74
The Estimate at Completion (EAC) is $590,740.74, which indicates that the project is likely to be over budget at the end of the project if future expenditures will occur at the original amount that was planned.
Estimate to Complete (ETC) = EAC – AC
ETC = $590,740.74 – $250,000 = $340,740.74
The Estimate to Complete (ETC) is $340,740.74, which indicates that the project will require an additional budget of $340,740.74 to complete the remaining 50% of the work.
Variance at Completion (VAC) = BAC – EAC
VAC = $500,000 – $590,740.74 = -$90,740.74
The negative value for VAC indicates that the project is likely to be over budget at the end of the project.
To calculate the project’s TCPI (To-Complete Performance Index), we need to determine the efficiency required to complete the remaining work within the remaining budget.
There are two types of TCPI:
Cost Performance TCPI (TCPIc) represents the efficiency required to complete the remaining work within the remaining budget based on the current cost performance.
Schedule Performance TCPI (TCPIs) represents the efficiency required to complete the remaining work within the remaining budget based on the current schedule performance.
To calculate the Cost Performance TCPI (TCPIc), we can use the following formula:
TCPIc = (BAC – EV) / (BAC – AC)
where:
BAC = Budget at Completion = $500,000
EV = Earned Value at Month 3 = $225,000
AC = Actual Cost at Month 3 = $250,000
TCPIc = (500,000 – 225,000) / (500,000 – 250,000)
TCPIc = 275,000 / 250,000 = 1.1
The Cost Performance TCPI (TCPIc) is 1.1, which indicates that the project needs to achieve a cost efficiency of 1.1 for the remaining work to complete the project within the remaining budget.
To calculate the Schedule Performance TCPI (TCPIs), we can use the following formula:
TCPIs = (BAC – EV) / (BAC – PV)
where:
BAC = Budget at Completion = $500,000
EV = Earned Value at Month 3 = $225,000
PV = Planned Value at Month 3 = $250,000
TCPIs = (500,000 – 225,000) / (500,000 – 250,000)
TCPIs = 275,000 / 250,000 = 1.1
The Schedule Performance TCPI (TCPIs) is also 1.1, which indicates that the project needs to achieve a schedule efficiency of 1.1 for the remaining work to complete the project within the remaining time.
Overall, the EVM analysis shows that the project is behind schedule, over budget, and is likely to require additional funding to complete.
While the TCPI analysis shows that the project needs to achieve a higher level of cost and schedule efficiency to complete the remaining work within the remaining budget and time.
Benefits of Using Earned Value Management for Project Management
Earned Value Management (EVM) is a powerful project management tool that offers several benefits:
- Performance Measurement: EVM provides quantitative data on project performance, allowing managers to measure and analyze the project’s current state in terms of cost, time, and scope.
- Progress Tracking: With EVM, project managers can track the project’s progress against the planned schedule and budget. It can highlight areas that are ahead or behind schedule or over or under budget.
- Forecasting: EVM can be used to predict future project performance based on current trends. This includes forecasting the likely project completion date and final cost, helping managers make informed decisions.
- Risk Identification: By comparing planned versus actual progress, EVM can help identify potential risks and issues early in the project, allowing for proactive risk management.
- Enhanced Decision Making: The objective metrics provided by EVM support informed decision-making. Managers can use these insights to adjust plans, reallocate resources, or take corrective actions as necessary.
- Improved Communication: EVM provides a common language to communicate project status to stakeholders. The clear and concise metrics can help align everyone’s understanding of project performance.
- Accountability: EVM can promote accountability by providing visibility into how well project tasks are being executed in relation to the plan.
Limitations of Earned Value Management
While EVM can be a useful tool, it does have several limitations:
- Complexity: EVM requires a well-structured breakdown of the project and can be complex to implement and manage. It may not be suitable for small or simple projects because of this.
- Focus on Quantitative Data: EVM primarily uses quantitative data, such as cost and time. As such, it may overlook qualitative aspects of a project, such as team morale, customer satisfaction, or the quality of work being performed.
- Requires Accurate Estimation: For EVM to be effective, accurate estimation of costs and timelines is essential. If the initial estimates are off, the EVM calculations will be skewed, leading to incorrect conclusions about project performance and progress.
- Doesn’t Predict Future Performance: Although EVM can provide a snapshot of the current status of a project, it’s not designed to predict future performance or project completion dates.
- Overemphasis on Cost and Schedule: EVM focuses heavily on cost performance and schedule performance. Other key performance indicators, such as quality, risk, and stakeholder satisfaction, are not directly considered.
- Doesn’t Account for Changes: EVM assumes a project plan is fixed and doesn’t handle changes or deviations well. If there are significant changes to the project scope or deliverables, EVM metrics may become less useful.
Despite these limitations, when used appropriately, EVM can still provide valuable insights into project performance and progress. It’s usually most effective when used in combination with other project management tools and techniques.
Earned Value Management in Project Cost Management
Managing project costs is a critical aspect of ensuring the success of any project. It involves estimating, budgeting, financing, funding, managing, and controlling costs to ensure that the project stays within the approved budget.
Earned Value Management (EVM) is a valuable tool in project cost management that allows project managers to track and manage costs over time.
Earned Value Management formulas are used to determine how much of the budget has been spent, how much work has been completed, and how much work remains.
The Cost Performance Index (CPI) is a crucial EVM formula used in project cost management. It measures the cost efficiency of a project by dividing the Earned Value (EV) by the Actual Cost (AC).
If the CPI is greater than 1, it means the project is under budget, while a CPI less than 1 indicates that the project is over budget.
In simpler terms, the CPI formula helps to keep track of how much money has been spent compared to how much work has been completed, making it easier to identify whether the project is on track or not.
Earned Value Management in Project Schedule Management
Project schedule management is all about making sure that a project is completed on time. This involves creating, updating, and sharing schedules for the project.
To track progress and see if everything is going according to plan, EVM can be used to compare how much work has been completed (Earned Value) to how much work was supposed to be completed at that point (Planned Value).
EVM formulas can also be used to analyze schedule performance. The Schedule Performance Index (SPI) measures how efficiently the project is progressing according to the schedule.
To calculate the SPI, you divide the Earned Value by the Planned Value. If the SPI is greater than 1, it means the project is ahead of schedule, and if it’s less than 1, it means the project is behind schedule.
This information tells you whether you need to make changes to keep things on track.
Conclusion
The bottom line is that as a project manager, Earned Value Management (EVM) is a really useful tool for your arsenal.
It helps you keep an eye on things like project costs, schedules, and performance. Using EVM, you can track the progress of your project and see how well it’s doing compared to what you planned.
This way, you can make smart decisions about what to do next to keep your project on the right track.
FAQs
Does EVM work with Agile?
Earned Value Management (EVM) can be made compatible with Agile methodologies, but it requires some modifications to fit the iterative and flexible nature of Agile.
The traditional EVM formulas and metrics have to be adjusted using Agile-specific metrics, and adopting a more flexible approach to project planning and cost management.
When Should EVM Not be Used?
Earned Value Management (EVM) may not be the most appropriate technique to use when there’s significant uncertainty or change in project requirements.
Additionally, EVM may not be suitable for projects with complex or non-linear work breakdown structures, or for projects where the primary focus is on delivering value to the customer (Agile) rather than tracking costs and schedule performance.
