Introduction to Earned Value Management
Any project needs control for the project’s success. Hence, Project Forecasting and Scheduling is a very useful measure in project management. Earned value management (EVM) is such an approach providing that extra information for successful project completion.
Earned Value Management is used to measure the performance of the project in terms of cost and time. It effectively measures the time, cost required, and spent on a project by generating a warning signal. The key metrics are taken into consideration and are calculated for forecasting. This helps the manager define the project more accurately and complete successfully having the budget calculations as per work is done.
Baseline Schedules of Earned Value Management
The three baseline schedules of Earned Value Management are:
- Planned Value
- Actual Cost
- Earned Value
1. Planned Value
Planned value is the periodic approach of the budget assigned at the initial stage of the project. Before any activity, the Planned Value is calculated.
The formula of Planned value is the percentage of completion of planned activity multiplied by the project budget.
Let’s understand from an example.
Consider a project to be completed by 6 months, having a budget of 1 Million USD. Currently, 2 months have passed.
Hence 33% of project work should be completed. We will now apply a planned value formula to calculate.
- Planned Value = 33% of 1 Million USD
- Planned Value= (33/100) * 1,000,000 USD
- Planned Value= 3, 30, 000 USD
Hence Budgeted cost of work scheduled (BCWS) is 3 30, 000 USD for 2 months out of 6 months of project work.
2. Actual Cost
The actual cost is nothing but the total amount of cost incurred during the completion of certain work. It is the actual money spent on work completion.
Let’s consider an example where 50% of work has been completed, and the cost for completion is 1,00,000 USD for 50% of work completed.
There is no formula involved in calculating the Actual Cost. Hence, the Actual Cost is the actual amount spent, which is 1,00,000 USD.
3. Earned Value
Earned value is the actual amount of work completed to date. It shows the total budget of the project incurred. Thus giving us the complete visibility of the project.
Now the work planned is compared with the project’s earned value. Each task will be assigned in bits to make it a hundred percent. The performance of the project depends on labor, time, and dollar. Using this accountable measure, the manager can compare the planned work with the progress of current work.
The formula to calculate Earned value is:
Lets us consider the same example and try to solve the earned value. If the manager finds that only 5% of work is finished.
- Earned value = 5% of 1 Million USD
- Earned value= (5/100) * 1,000,000 USD
- Earned value= 50, 000 USD
The calculated Earned value for 5% of work completion is 50, 000 USD.
Project Variance of Earned Value Management
According to PMI’s PMBOK® Guide, variance is defined as “a quantifiable deviation, departure, or divergence away from a known baseline or expected value”.
Now, based on the Planned value and Earned value, and the total budget of the project, the project manager will analyze the Variance.
There are two types of variances:
- Schedule Variance
- Cost Variance
1. Schedule Variance
Schedule Variance is the difference between Planned value and Earned value. Using this parameter, the manager can analyze how much ahead or behind is the work. This gives the information to know if the work is going as per schedule. If not, how much are we lagging or ahead of the planned work?
We can calculate this by using a simple subtraction formula.
If the Schedule Variance is 0, the project is considered as per planned. If the value is negative, the work is behind. If the value is positive, the work is considered to be ahead.
2. Cost Variance
The Cost Variance is based on the earned value and the actual cost. This gives us whether the project is on a budget as per plan, under Budget or over Budget.
Cost Variance is the difference between Earned Value and Actual Cost. Hence there is again a simple formula to calculate the Cost Variance.
If the resultant difference is found to be 0, then the project is considered to be as per budget. If the difference is negative, the project is over budget, and if the result is positive, the project is under budget.
There are two types of performance Indices to establish the project’s burn rate.
- Schedule performance index (SPI)
- Cost performance index (CPI)
1. Schedule Performance Index
SPI is the resultant value of Earned Value divided by Planned Value. This metric gives the information regarding the project schedule, is the project as per schedule, ahead or behind as per plan.
The formula used to calculate SPI is:
2. Cost Performance Index
CPI is defined as the difference between Earned value and Actual cost. This metric gives information on the budget. To check if the project is under budget or over budget.
The formula used to calculate CPI is:
Estimate at Completion (EAC)
This is the last stage of the Earned project management. EAC is nothing but the total budget of the project for completion. The evaluation of EAC should be done on a periodic basis, such as monthly or as per requirements.
The formula for calculating the EAC is:
Estimate to Completion (ETC)
Estimate to completion is the cost required to complete the remaining work.
The formula for calculating the ETC is:
Earned value management has many benefits in Project Management. It helps in coordinating the schedule, cost, and plans in a team. Managers can make better decisions using the Earned Value Management trends. It also gives a clear vision of how much work is in progress along with the budget constraints for financial goals.
This has been a guide to Earned Value Management. Here we have discussed the concept, baseline schedule, variance, performance index of earned value management. You can also go through our other suggested article to learn more –