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Earned Value Management
14/03/2024
Earned Value Management (EVM) is a project management technique used to assess a project's progress in terms of cost and schedule. It integrates data on scope, schedule, and cost to give project managers a comprehensive view of project performance. Here's how it works:
Planned Value (PV): This is the authorized budget assigned to scheduled work. It represents the estimated value of the work scheduled to be completed by a specific time.
Earned Value (EV): This is the value of the work actually performed. It represents the budgeted cost of the work that has actually been completed at a specific point in time.
Actual Cost (AC): This is the total cost actually incurred (Money spent) and recorded in accomplishing the work performed for a specific time period.
With these three values, several performance metrics can be calculated:
Cost Performance Index (CPI): This is the ratio of earned value to actual cost. It indicates how efficiently the project is using its budget. A CPI greater than 1 indicates under budget, while less than 1 indicates over budget.
Schedule Performance Index (SPI): This is the ratio of earned value to planned value. It indicates how efficiently the project is progressing in terms of schedule. An SPI greater than 1 indicates ahead of schedule, while less than 1 indicates behind schedule.
Variance Analysis: By comparing the planned, earned, and actual values, variances can be calculated. Positive variances indicate that the project is performing better than planned, while negative variances indicate the opposite.
Estimate at Completion (EAC): This is a forecasted total cost of the project based on performance to date. It can be calculated using various methods, such as dividing the budget at completion by the cost performance index.
To Complete Performance Index (TCPI): This is the projected efficiency needed to complete the remaining work within the original budget. It can be calculated using various methods, such as dividing the remaining work by the remaining budget.
EVM provides project managers with valuable insights into project performance, allowing them to identify issues early, make informed decisions, and take corrective actions to keep the project on track. It is widely used in industries such as construction, engineering, and software development where projects are complex and involve significant costs and timelines.
Schedule and Cost Variance
Schedule variance (SV) is another metric used in earned value management (EVM) to measure the difference between the earned value (EV) and the planned value (PV) of work performed up to a certain point in time. A positive SV indicates that the project is ahead of schedule, while a negative SV indicates that the project is behind schedule.
Let's take construction project example:
Suppose the same construction project has progressed further, and you gather the following additional data:
- Planned Value (PV): $500,000
- Earned Value (EV): $480,000
To calculate the schedule variance (SV), you would use the formula:
SV=EV−PV
Substitute the values into the formula:
EV=480,000−500,000SV=480,000−500,000
EV=−20,000SV=−20,000
So, the schedule variance for the project at this point is -$20,000. This means that the project has completed $20,000 less work than planned according to the project schedule. It indicates that the project is behind schedule, requiring attention from the project manager to analyze the causes of the delay and take necessary corrective actions to get the project back on track in terms of schedule.
Cost variance (CV) is a measure in earned value management (EVM) that indicates the difference between the earned value (EV) and the actual cost (AC) of work performed up to a certain point in time. A positive CV indicates that the project is under budget, while a negative CV indicates that the project is over budget.
Let's consider an example:
Suppose you are managing a construction project to build a new office building. The total budget for the project is $1,000,000. After completing the first phase of the project, you gather the following data:
- Planned Value (PV): $200,000
- Earned Value (EV): $180,000
- Actual Cost (AC): $190,000
To calculate the cost variance (CV), you would use the formula:
CV=EV−AC
Substitute the values into the formula:
CV=180,000−190,000CV=180,000−190,000
CV=−10,000
So, the cost variance for the project at this point is -$10,000. This means that the project has spent $10,000 more than the value of the work completed according to the project plan. It indicates a cost overrun, which would require attention from the project manager to analyze the reasons for the variance and take appropriate corrective actions to bring the project back on track financially.
CPI and SPI
Let's continue with the construction project example to demonstrate how to calculate the Schedule Performance Index (SPI) and the Cost Performance Index (CPI).
Suppose the project progresses further, and you gather the following additional data:
- Planned Value (PV): $600,000
- Earned Value (EV): $550,000
- Actual Cost (AC): $600,000
To calculate the Schedule Performance Index (SPI), you would use the formula:
SPI= EV/PV
Substitute the values into the formula:
SPI = 550,000/600,000,
SPI≈0.917
So, the Schedule Performance Index (SPI) for the project at this point is approximately 0.917. This indicates that for every dollar planned to be spent, the project has earned approximately $0.917 worth of work. Since SPI < 1, it means the project is behind schedule.
Now, let's calculate the Cost Performance Index (CPI).
To calculate the Cost Performance Index (CPI), you would use the formula:
CPI= EV/AC
Substitute the values into the formula:
CPI=550,000/600,000
CPI≈0.917
So, the Cost Performance Index (CPI) for the project at this point is approximately 0.917. This means that for every dollar spent, the project has earned approximately $0.917 worth of work. Since CPI < 1, it indicates that the project is over budget.
In summary:
- SPI < 1 indicates the project is behind schedule.
- CPI < 1 indicates the project is over budget.
Both SPI and CPI provide crucial insights into project performance, helping project managers identify areas that require attention and take necessary corrective actions to keep the project on track.
EAC , ETC And VAC
Let's continue with the construction project example to demonstrate how to calculate Estimate at Completion (EAC), Estimate to Complete (ETC), and Variance at Completion (VAC).
Suppose the project progresses further, and you gather the following additional data:
- Planned Value (PV): $600,000
- Earned Value (EV): $550,000
- Actual Cost (AC): $700,000
- BAC = $ 1000000
We've already calculated CPI as $550,000 / $700,000 ≈ 0.786. Now, we can use this CPI to calculate EAC and ETC.
Estimate at Completion (EAC)
There are various methods to calculate EAC. One common method is using the cost performance index (CPI) to forecast the final project cost. The formula used here is:
EAC= BAC/CPI
Where:
- BAC is the Budget at Completion, which is the total budget for the project.
- CPI is the Cost Performance Index.
Substitute the values into the formula: EAC =1,000,0000/.786
EAC≈1,272,727
So, the Estimate at Completion (EAC) for the project using CPI is approximately $1,272,727.
Estimate to Complete (ETC)
The Estimate to Complete (ETC) is the forecasted cost needed to complete the remaining work. It can be calculated using the formula:
ETC=EAC−AC
Substitute the values into the formula: ETC=1,272,727−700,000
ETC≈572,727
So, the Estimate to Complete (ETC) for the project is approximately $572,727.
Variance at Completion (VAC)
Variance at Completion (VAC) represents the difference between the budget at completion (BAC) and the Estimate at Completion (EAC). The formula is:
VAC=BAC−EAC
Substitute the values into the formula: VAC=1,000,000−1,272,727
VAC≈−272,727
So, the Variance at Completion (VAC) for the project is approximately -$272,727. A negative VAC indicates that the project is expected to overrun its budget by that amount based on the current performance.
The forecasting formula used above are to assess the baseline performance with the current CPI and SPI. We can use the following formulas if the work remaining is done at a different CPI or SPI.
EAC = AC + (BAC-EV)/CPI If the work remaining is done at a different value of CPI
EAC = AC + (BAC-EV) If the work remaining is done at a budgeted rate
EAC = AC + (BAC-EV)/CPI X SPI If the work remaining is done at a different CPI and SPI
EAC = AC + ETC (Bottom up) Re-estimate the remaining work using bottom up estimation
To Complete Performance Index (TCPI)
To illustrate the To Complete Performance Index (TCPI) concept, let's consider an example scenario:
Suppose you're managing a software development project with the following data:
- Budget at Completion (BAC): $100,000
- Earned Value (EV): $50,000
- Actual Cost (AC): $60,000
- Estimate at Completion (EAC): $120,000
Example 1: TCPI to Achieve Original Budget (BAC)
We want to calculate the TCPI needed to achieve the original budget (BAC) of $100,000.
TCPI=To illustrate the To Complete Performance Index (TCPI) concept, let's consider an example scenario:
Suppose you're managing a software development project with the following data:
- Budget at Completion (BAC): $100,000
- Earned Value (EV): $50,000
- Actual Cost (AC): $60,000
- Estimate at Completion (EAC): $120,000
Example 1: TCPI to Achieve Original Budget (BAC)
We want to calculate the TCPI needed to achieve the original budget (BAC) of $100,000.
TCPI=(BAC−EV)/(BAC−AC)
Substitute the given values into the formula:
TCPI=(100,000−60,000)/(100,000−50,000)
TCPI=40,000/50,000
TCPI=1.25
So, the TCPI needed to achieve the original budget (BAC) is 1.25. This means that to complete the project within the original budget, the project team must be 125% more efficient than they have been so far.
Example 2: TCPI with EAC
We want to calculate the TCPI needed to achieve the Estimate at Completion (EAC) of $120,000.
TCPI=(EAC−AC)/(BAC−EV)
Substitute the given values into the formula:
TCPI =(100,000−50,000)/(120,000−60,000),
TCPI≈0.83
So, the TCPI needed to achieve the Estimate at Completion (EAC) of $120,000 is approximately 0.83. This means that to complete the project within the revised budget, the project team must be 83% more efficient than they have been so far.
These examples demonstrate how TCPI can be used to assess the performance efficiency required to achieve specific project goals, whether it's staying within the original budget or meeting a revised budget estimate.