Earned Value Simplified

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Need to understand what Earned Value is? This tutorial will help you understand those crucial concepts.

Evaluating a project’s performance can seem like an overwhelming task, but with the right tools in hand the process can become a lot more manageable. One very popular method used by many project managers is a concept called Earned Value. EV is used to look at how well or not so well a project is performing from the perspective of a single unit of measurement (money). It takes the two dimensions associated with project performance measurement, cost and time, and combines them so that even the project’s schedule performance (time) can be expressed in dollars.

Earned Value

Step # 1 to Evaluating Earned Value – The Basic Variables:

Earned value takes the original budget baseline into consideration, the point in time actual cost and a calculation to determine how much was “earned”. To further define and elaborate on the 3 variables:

  • PV – planned value: this is the budgeted dollar amount, the benchmark. This amount reflects how much should be spent for a specific project task. It’s set in stone during the project planning process (budget baseline) and cannot be changed once there is a sign-off from the relevant project stakeholders.
  • EV – earned value: at any given time during the course of a project, this amount reflects the value of work that was actually completed up to that point. This number changes as progress is made with the project. And upon successful completion of a task, the earned value amount at most will equal the planned value amount.
  • AC – actual cost: this reflects actual spending for a given amount of work and will change as project progress is made. At any given time the actual cost can be lower, equal to or higher than the planned and earned values.

Step # 2 to Evaluating Earned Value – The Initial Inquiry:

With these three variables and the dollar amount associated with them in hand at any given point in a project, variances and ratios can be calculated that help answer some very critical performance related questions. Those questions are:

  • Is the project on schedule or behind schedule? (Schedule Variance)
  • How efficiently is the project progressing? (Schedule Performance Index)
  • Is the project over or under budget?  (Cost Variance)
  • How much value is earned dollar-for-dollar for each dollar spent on the project? (Cost Performance Index)

In order to answer these questions, the following Earned Value Analysis Formulas are used:

  • Schedule Variance:                                       SV = EV – PV
  • Schedule Performance Index:                 SPI = EV/PV
  • Cost Variance:                                                CV = EV – AC
  • Cost Performance Index:                           CPI = EV/AC

Step # 3 to Evaluating Earned Value – Interpretation of Data:

When PV, EV and AC are equal, there are no variances. Meaning the project is progressing as it was budgeted in terms of cost and time. Another way of saying this would be, the project is earning a 100% of its value to us and work is being performed as efficiently as one could have expected. [SPI and CPI are equal to 1]

When the schedule variance (SV) is a negative number, the project is behind schedule. Similarly when the cost variance (CV) is a negative number, the project is over budget. The other way of looking at this would be to say, the project is not progressing as efficiently as it should be and not earning its value dollar-for-dollar for the money spent. [SPI and CPI are less than 1]

When the schedule and cost variance numbers are both positive numbers, the project is ahead of schedule and under budget. In other words, efficiency is better than expected and the project is earning more value for each dollar spent. [SPI and CPI are greater than 1]

Earned Value – An Illustrative Example:

Assume that you are managing a project that has 5 unique tasks scheduled for 5 months and the project has been underway for 3 months now. At the end of the third month you are interested in evaluating the project’s performance and you are looking at the following set of information.

Project Task # Total Planned Value Point in Time Planned Value* % Complete Actual Cost To Date
1.1 $3,000 $1,800 50% $1,200
1.2 $7,000 $4,200 65% $5,200
1.3 $2,000 $1,200 40% $1,00
1.4 $3,000 $1,800 30% $900
1.5 $5,000 $3,000 70% $3,150

*Point in Time Planned Value is calculated here at 60% of the task’s Total Planned Value (3 months complete out of 5 month project, 3/5 = 60%). But note that it need not be done this way. You should evaluate based on the merits and uniqueness of your project.

Calculating EV at this juncture can be just a matter of multiplying Point in Time PV x % Complete, but you should do this ONLY if you are confident that your % complete estimates are reasonably accurate for projects tasks that are underway but are not yet finished. In many cases, it is very difficult to estimate how far along you really are so there are general guidelines as discussed below that you may find useful.

EV gives you the flexibility to set rules that conform to your organizational experience with similar projects. Some commonly used rules for calculating EV are as follows:

  • 20/80 rule: adapting this rule would mean that your EV will be 20% of the PV until the task is 100% complete. It does not matter if you are 5% done with the task or 95% done with the task, your EV is 20% the second you start and will remain at this mark until the task is fully complete
  • 50/50 rule: similar to the 20/80 rule whereby your EV will stay at 50% of PV until the entire task is complete regardless of where you are in the task.
  • 0/100 rule: by adapting this rule you will not have earned value until the entire task is complete.

Of course, there are other variations you can adapt based on your organizational experience. Some other splits may be 30/70, 10/90, 40/60, 25/75, and so forth.

Let’s assume for all intensive purposes that you are very comfortable with your % complete estimates. So your EV will be based on the % complete estimate provided above. Taking the provided information, EV, SVI and CPI can be calculated along with the cost and schedule variances. The table below shows this calculation along with comments on how the project is performing.

 

Earned Value

Earned Value

 

Based on completing the exercise above, you know that you are relatively close to your budgeted amount at this point in time and you are efficiency is not too terrible. The next question to pop up may be one related what the total cost expectation is in two months time when the project is scheduled to end. This is where the EV forecasting techniques come in handy.

Earned Value – Forecasting:

Forecasting with earned value ushers in a new set of variables but they are not complicated. There are 3 forecasting variables that are of concern, and they are:

  • BAC (Budget At Complete) – refers to the cumulative planned values for the project. For instance, the 5 task project discussed above has 5 total planned values and BAC is simply the sum of all the total PVs. In this project’s case the BAC amount is $20,000.
  • EAC (Estimate At Complete) – this will be the forecast. EAC has to be figured out based on the most recent data available for the project. This refers to the total predicted cost for the project.
  • ETC (Estimate To Complete) – this variable refers to the dollar amount that needs to be spent in addition to what has already been spent in order to arrive at the total predicted cost.

The major variable that has to be solved for is EAC. Calculating EAC and the formulas to be used depend on the nature of your project’s situation. You can either have a situation that calls for:

  • A new estimate because of a fundamental flaw with your original plan
  • An estimate for a situation with Atypical Variances (meaning there were cost variances that you can very specifically identify as “anomalies” and you don’t expect those variances to continue). In this case you would just ignore the variance when deriving your forecast. But, whatever that excess amount was will need to be added back to the total after the forecast has been derived if you are looking for a true total cost.
  • An estimate for a situation with Typical Variances (meaning the variances for your project cannot be pinpointed for a specific reason). To factor in that uncertainty, the forecast is modulated by the cost performance index that was calculated. Typical Variances happen to be the most common type of variance experienced in most projects.

Earned Value Forecasting Formulas you would use based on the aforementioned situations are:

  • A New estimate:        EAC = ACcum  + ETC
  • Atypical Variance:      EAC = ACcum  + (BAC – EVcum )  >>>>> (*BAC – EVcum is the ETC in this case)
  • Typical Variances:     EAC = ACcum  + (BAC – EVcum )/CPI   >>>>> (*BAC – EVcum /CPI is the ETC in this case)

Knowing what formulas to use and in what instances definitely makes the forecasting exercise easier. To continue with the previous example, let’s assume that the 5 task project spanning 5 months has not had any “anomalies” and that the original plan was not fundamentally flawed in any way. This means that the forecasting formula appropriate for the situation is the one for Typical Variances. Let’s go ahead and figure out the forecasted total cost for the project and how much more will need to be spent in addition to the actual cost to date. (See the table above for figures used in the formula)

EAC = $11,450 + ($20,000 – $11,250)/0.98
EAC = $11,450 + $8,929     >>>>> (*$8,929 is the ETC)
EAC = $20,379

At this point (60% of the way through the project time wise), your estimate at project completion [EAC] is $20,379. To put it another way, the estimate to complete the project is $379 more than what was budgeted (not to be confused with the ETC, which is $8,929).

To Complete Performance Index:

After seeing your EAC you might be inclined to ask yet another question. “What will the ending CPI have to be in order for the project to finish within the budgeted amount given the actual cost to date?” To answer this question, you simply use the formula that calculates TCPI (To Complete Performance Index). If your EAC is over budget, TCPI will tell you how much additional value your efforts have to generate for each dollar spent in order to conform to the initial budget from the time the forecast is derived through the end of the project. On the other hand, if you are lucky enough to have a EAC that is better than budget, TCPI will give you an indication of how much “slack” you have.

Now here is the formula:
TCPI = (BAC – EV) / (BAC – AC)

Given the project we’ve been working through, the TCPI needed to finish within the budgeted cost of $20,000 can be calculated thusly.

TCPI = ($20,000 – $11,250) / ($20,000 – $11,450)
TCPI = ($8,750) / ($8,550)
TCPI = 1.02

To put the 1.02 into words: For the remaining two months, for every dollar spent from this point on you need to generate $1.02 in value for the project. (The variance from current CPI is about 4% and to put things in perspective, this is definitely a manageable* feat).

Note: *After a quarter of the way through any project, it is rare for CPI variances to fluctuate higher than 10%. Therefore, if you have a TCPI of say 1.7 at the time you forecast and your point in time CPI is around a .3, you won’t have much luck in trying to find ways to finish within the budget.

Plan early, prudently and collaboratively to ensure your project is successful with analysis and management of Earned Value as a tool.

If you found this tutorial on Earned Value helpful, you may also like to read:

Cash Flow Analysis

Key Financial Ratios – Profitability

Key Financial Ratios – Asset Productivity

2 Responses to Earned Value Simplified

  1. benny says:

    a little difficult to understand but still helpful with the example. thanks.

    • SSB says:

      Good! I’m glad you found it helpful. It takes practice to become very comfortable with this topic because there are so many variables.

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