Earned Value Management
Managing the progress of your project is key to success. One of the key PMi methods is calculating Earned Value to show the progress of your project – good or bad. The earned value concept was developed in the 1960’s by the Department of Defense to track and report on the project health. The private sector began to make use of this methodology and it later became part of the PMI methodology for managing and controlling projects.
Earned value management works to leverage project scope, cost and time to produce metrics that allow you to know the health of your project at a given a point of time from the perspective of the project budget. It indicates how much of the budget should have been spent, in view of the amount of work done. To begin to understand earned value management you will need to understand the three following terms:
- PV – Planned Value; Budgeted cost of work scheduled (BCWS)
- What did I expect to spend for the work (Budget)?
- AC – Actual Cost of work performed (ACWP)
- How much did the work really costs after it was performed?
- EV – Earned Value – Budgeted cost of work performed (BCWP)
- The approved budget for the work completed by the specified date or EARNED VALUE
Here is an example:
You’re working on a painting project for 10 homes and you expect to get the entire project of 10 homes done in 10 months. You need to complete painting one home each month. Here are the details:
- $10,000 is your total budget for all 10 homes.
- $1,000 is budgeted cost to spend for each home for each month. This includes money spent on paint and painting materials.
- You ask your accountant for a report after 2 months have passed. The accountant tells you $1,500 has been spent on the project so far. You think, “Great, I’m saving money.”
- Then you realize after 2 months’ time, 20 percent of the project should have been done, because 2 months is 20 percent of the 10 months that you had originally planned to spend on the project – $1000.00 per home; 1 home per month for 10 months – total budget $10,000. But only one and half of a home were painted, not 2 homes in two months (what you budgeted for by month 2).
- So, after two months, you should have spent 20 percent X $10,000 (or $2,000) on the project to get it done on time, and two homes should have been painted by now—not $1,500 for one and half homes painted. Now you realize you’re behind schedule. – The big difference here is that the status of the budget is providing a status for project – whether you are on time or behind schedule. Using the Earned value method allows us to determine the project status outside of the project schedule were the tasks are the focus not the budget.
Calculating Earned Value
Earned Value (EV) = % complete x budget
For example, if a Work Package is the installation of 500 new computers in an office, and 350 computers are installed, the Work Package progress is 70% complete (350/500). If the budget for this Work Package is US$200,000, the earned value is US$140,000 (0.70 x $200,000).
Earned Value Calculations
With the terms PV, EV, and AC defined, calculations can be done to let you know if you are on-schedule, behind or ahead of schedule. The formulas for earned value calculations are:
|• Cost Variance: CV = EV – AC||• Cost Performance Index: CPI = EV/AC|
|• Schedule Variance: SV = EV – PV||• Schedule Performance Index: SPI = EV/PV|
Variance – Helpful Tip:
Variance is a comparison. It is the difference between two values that will provide you with information about your project status. For example, let’s look at Cost Variance. What is the difference between the actual amount spent and how much I was supposed to spend during a period of time? This is Cost Variance. When your variance is negative based on your budget you are behind schedule. When your variance is equal or more than what you budgeted for a specific time, you are on or ahead of schedule.
Performance Indexes – Helpful Tip:
Performance Indexes works to provide the same data about your status like a variance calculation would only using percentages.
A CPI value of 0.83 implies that for every project dollar spent, only US$0.83 in earned value was accomplished. A CPI of less than one and a negative CV indicates project cost performance is below the plan.
A SPI value of 1.05 implies that for every dollar of work the project had planned to accomplish at this point in time, US$1.05 worth of work was actually done. A SPI greater than one and a positive SV indicates more work has been accomplished than was planned.
The final performance measures are Estimate at Completion (EAC) and Estimate to Complete (ETC)
The estimate at completion (EAC) is the estimated final cost of the project. The estimate to complete (ETC) is the estimated money required to finish the project considering where you currently are in the project schedule.
Estimate at Completion
EAC = Budget at completion (BAC)/Cost Performance Index (CPI)
The BAC for your project is $100,000. You’re current CPI is 1.05. Your budget estimate at the completion of your project is now $96,238.09 – We are on track to spend around $4,700 less than what we budgeted for!
Note – as your CPI changes as you periodically check your status, your estimate at completion will also change.
Now that you know what your current estimate to complete the project, you can now calculate how much more of your budget will you need to get to $96,238.09 based on where you are now in your schedule/budget.
Estimate to Complete
EAC = Estimate at Completion (budget) (ETC) – Actual Cost of Work Performed to date (ACWP – assume 2,400)
EAC = $96,238.09 – $2,400 = $93,838.09
At this point in time, you need to have $93,838.09 to complete your project as scheduled.
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