Guide to Earned Value Management
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Are you looking to be a better and more successful project manager and architect? The Earned Value Management System can seem really complicated at first look but it’s worth it to figure it out.
Maybe you have heard of the Earned Value Management System and maybe the term alone gives you unexplained shivers. It can sound complicated and unnecessary – it’s neither.
The Earned Value Management System, or Earned Value Analysis, is a technique to keep control over your budget and schedule. It helps you know at any time where those two things stand and can help you make quick adjustments to save the budget or schedule in the end. It can take a bit to understand, but once you’ve got it, you’re good.
The way we have presented it isn’t the only way to use this system. Look through the additional resources we included below if you feel like it’s just not clicking and you need a different way to look at it – although, we do think this way is the best and most straightforward.
Table of Contents
- How to Prepare
- Definition of Some Useful Terms
- Calculating the Cost and Schedule Status
- Forecasting Performance
- Actionable Takeaways
- Additional Resources
How to Prepare
In order to be able to use this system, you have to set up a few things during the project planning phase. These are known as your cost baseline. Let’s go into more details about what that set up looks like.
- Create tasks
- The entire project should be split up into different tasks. You will do an analysis for each task and the results are summed to get a project total.
- Create start and end dates
- Each task should be given a start and end date. This is so you know where you should be when comparing the results from the analysis. Use past projects to develop these dates.
- Plan your budget
- Most likely you have a total budget, but you also should give each task a portion of the budget.
- Choose how often you will do an earned value analysis
- How often you do the analysis is up to you, but the most common is a weekly analysis. There isn’t any reason not to do extra analysis when needed during the project, so a week interval should be plenty to cover most needs.
Definition of Some Useful Terms
Before we dive in, there are some terms that will help further your understanding of the concepts later. All these terms are considered inputs to the system and understanding them fully will ensure you are getting correct results.
Budget at Completion
The Budget at Completion (BAC) is what you set up in step three of the section above. It is just the budget for each task, and this should be done during project planning.
The Planned Value (PV), also known as the Budgeted Cost of Work Scheduled (BCWS), answers the question: how much of the project should be complete, based on cost?
This is how much should have been spent by a specific time. Say at a certain time the task should be 60% completed. The PV would be equal to 60% of the BAC.
The Earned Value (EV), or the Budgeted Cost of Work Performed (BCWP) is how much the project is actually completed, based on cost.
This differs from the PV by being based on the percentage of the project actually completed. Say at a certain point the project should be 60% completed, but we determine that it’s actually 65% completed. The EV would be calculated by multiplying that 65% by the BAC.
Also known as the Actual Cost of Work Performed (ACWP), the Actual Cost (AC) is simply how much has been spent so far. This is found by reviewing time and expense logs and calculating a total. This is different from the EV because the EV is a percentage of the BAC and not it’s own total.
Calculating the Cost and Schedule Status
Now that the cost baseline has been determined and the inputs have been defined, it’s time to move on to the calculations that actually tell you the status of your cost and schedule. All of these will tell you how well the project is progressing and gives you something quantitative to use as a gage.
This section only tells you how you are doing at that moment and won’t tell you what you can expect in the future. That is forecasting, which we will cover next.
Cost Variance (CV) measures how far below or above the budget you are on each task. It’s calculated by subtracting the AC from the EV and is given in a dollar amount.
If the cost variance is at zero, you know that you are right on track. A negative value indicates you have spent more than you should have, while a positive value indicates you are below your budget.
This can also be compared to the total budget to give it some perspective. If the cost variance is $5,000 it will have different implications for a project with a total budget of $10,000 vs. $100,000.
Cost Performance Index
The Cost Performance Index (CPI) tells you how efficient you are being. The CPI answers the question of how much work was done per dollar spent? It is a way to give your CV some perspective and is a relative metric vs. an absolute one.
Calculate the CPI by dividing the EV by the AC of the work.
A CPI over one indicates that the project is doing very well and is under budget, equal to one means it’s right on track, and less that one means the project is over budget.
The Schedule Variance (SV) is like the CV – it tells you how far ahead or behind schedule you are on any given day. The SV is expressed in cost and not days. Just like with the other metrics, calculate the SV for each task individually and then add them together to get the total project SV.
Calculate the SV for a task by subtracting the PV from the EV. An SV of zero means you are right on track, a positive value means you are ahead of schedule, while a negative value means you are behind schedule.
Schedule performance index
The Schedule Performance Index (SPI) gives you a relative measurement of how well you are doing schedule-wise. It is calculated by dividing the budgeted cost of work (earned value) by the planned value.
An SPI greater than one indicates that the project is ahead of schedule, equal to one means it’s right on track, and less that one means the project is over budget.
The SPI also tells you how many hours of planned work a team is completing in one hour of actual work. For example, if your SPI is 1.2, that tells you that for every actual hour your team works, they are getting done 1.2 hours of scheduled work done.
All of the calculations so far have given you a way to tell how on track you are at the moment, but what if you want to see how things should go in the future based on where you are now? That is called forecasting and there are four main metrics used to forecast the performance of the project.
Estimate to Complete
The Estimate to Complete (ETC) tells you how much more budget is needed to finish the project. It allows the project manager a way to compare how much budget is left vs. how much is needed and make adjustments.
There are two main methods for calculating the ETC – the bottom-up estimation or formulas. What you use largely depends on your needs and preferences, but the bottom-up estimation is most common.
The bottom-up estimation method requires you to just add up the costs for the tasks left to complete. If tasks are added to or changed, the ETC can be changed just by adding or subtracting the cost of that change.
The other method uses formulas to reach the same result and there are two main formulas used. The first uses the metrics calculated in the previous section.
ETC = (Budget at Completion – Earned Value)/ Cost Performance Index
The other formula used is based on the value for the Estimate at Completion and you will, obviously, need to calculate that before it can be used here.
ETC = Estimate at Completion – Actual Cost
For either formula, the ETC can be recalculated based on changes to the project. This is often called the Management ETC. It’s okay and expected to redo the ETC to reflect changes to the budget or schedule.
Estimate at Completion
The Estimate at Completion (EAC) tells you how much the total project will cost, and this number can change as the project nears completion or as the budget and schedule are changed. In other words, it’s the new BAC.
There are many ways to calculate this and the one you chose should be based on how you see the project going in the future. If you aren’t planning on adjusting the costs or schedules, you would use the following four formulas using the ETC already calculated.
- If you think the original budget will be met with no variance you can use the following equation. Using this equation means that things are going well, the CPI and SPI are around or greater than one, and you should just keep doing what you are doing.
- EAC = Budget at Completion/Cost Performance Index
- If you think the rest of the project will go as planned and that the situation that caused the project to go over or under budget was just a one-time thing, the project budget still available can be added to the actual cost of the project so far. With this method you will not expect to finish on budget, the whole thing is just adjusted up or down. It recognizes that the original estimates for cost and schedules were not accurate to begin with.
- EAC = Actual costs + (Budget at Completion – Earned Value)
- If you think the level of effort demonstrated by the team is what you can expect in the future, you should use a more complicated formula that takes into account the cost performance index. Remember that the CPI is a measure of how efficient your team is working.
- EAC = Actual costs + ((Budget at Completion – Earned Value)/Cost Performance Index)
- If you think the future cost performance will be impacted by the past schedule performance, you could use a formula that considers both the cost performance index and schedule performance index. The schedule and costs are so interconnected, its reasonable to expect this.
- EAC = Actual costs + ((Budget at Completion – Earned Value)/(Cost Performance Index X Schedule Performance Index))
If, however, the costs or schedules are adjusted to create a new estimate of the cost of future tasks (called the Management ETC) you can simply add that new, adjusted ETC to the actual costs to get the final EAC.
Variance at Completion
The Variance at Completion (VAC) is an estimate of what the CV will be at the end of the project. This is calculated by subtracting the EAC from the BAC, essentially subtracting the new budget from the old budget.
This is one of the main metrics for project management, as it is the expected amount over or under the project budget the project manager expects to be by the end of the project. VAC gives you a number you can report to request for additional funding, or just to make others aware of the situation, and that number can be relied on to be fairly accurate.
To Complete Performance Index
The To Complete Performance Index (TCPI) tells you how hard you need to work and how productive you need to be to make the project finish on time. This, like the VAC, is another huge metric for project management. It helps you decide if adjustments to the schedule or budget need to be made.
Calculate the TCPI by using the following formula: TCPI = (Budget at Completion – Earned Value) / (Budget at Completion – Actual Costs)
If you end up needing to make changes to the budget to achieve the EAC and those changes to the schedule and budget have been approved, you can recalculate the TCPI using the following formula: TCPI = (Budget at Completion – Earned Value) / (Estimate at Completion – Actual Costs)
If the project has already gone over its budget the TCPI will be negative. If for example, you get a TCPI of 1.3, you know your team will have to be 30% more efficient to finish on budget. It’s up to you and your team to determine if that is possible. If it isn’t, then changes should be requested as soon as possible.
- Start using Earned Value Analysis on your projects now – thank us later.
- First steps: for every project, set up a list of individual tasks, set each task a start and end date, divvy out a portion of the budget to each task, and decide how often you want to run the analysis.
- Download or Copy this spreadsheet to use on every project.
- Feel free to make your spreadsheet look nice and include graphs and charts, so you can easily include it in reports.
- As you use this system, review how it’s working and ask yourself how you can make the system work better for you.
- The Earned Value Management System
- Estimate to Complete (ETC) – Another Project Forecasting Tool
- Estimate at Completion vs Estimate to Complete
- Estimate at Completion (EAC) vs. Estimate to Complete (ETC)
- Different Ways to Calculate the Estimate at Completion (EAC)
- Schedule performance index (SPI)
- Cost performance index (CPI)