Earned value management is the technique for measuring and monitoring the progress and performance of any project. The main purpose of EVM is to determine whether the value of a piece of work done is equal to the budget allocated to complete that piece of work. The progress of a project cannot be determined only comparing the expenditure incurred with the budget allocated. It is also important to determine how much value the client is getting from the work done as compared to planned work, for which the EVM comes into picture. EVM is very helpful technique for a successful project management. To determine this, we need to have the following information:
Index
Planned Value (PV)
The approved budget for the work to be completed up to a specific date is called the planned value. It is also called the Budgeted Cost of Work Scheduled (BCWS). The total PV of a project is equal to the total budget approved for the project to complete it and is referred to as Budget at Completion (BAC).
Earned Value (EV)
It is the approved budget for the work already completed up to a specific dated and also termed as Budgeted Cost of Work Completed (BCWC).
Actual Cost (AC)
It is the actual cost incurred for the work completed up to a certain date. It is also termed as Actual Cost of Work Performed (ACWP).
To determine the cost and schedule performance of the project the following indicators are needed.
Schedule Variance (SV)
It is the difference between the amount budgeted for the work actually done and for the work planned up to a specific date. The SV demonstrates whether or by how much the project is ahead or behind the approved schedule. A negative schedule variance indicates that the project is behind the schedule and therefore the remaining activities will have to be done on fast track mode to accomplish the project within originally stipulated timeframe.
Schedule variance (SV) = Earned value (EV) – Planned value (PV)
Cost Variance (CV)
The difference between the amount budgeted and the expenditure already incurred in the work performed is termed as Cost Variance (CV). It is the measure of by how much amount we are over or under budget allocated. A negative cost variance indicates that the project is spending more than budget allocated, therefore alerts the project manager to cut down the cost in remaining activities.
Cost variance (CV) = Earned value (EV) – Actual cost (AC)
Schedule Performance Index (SPI)
It is the ratio of the approved budget for the work done to the approved budget for the work planned. The SPI indicates the relative amount the project in above or behind the schedule and it is sometime also referred as the schedule efficiency. It is used to determine the schedule performance of a project at a certain date.
Schedule performance index (SPI) = Earned value (EV) / Planned value (PV)
An SPI value <1.0 indicates less work was completed than was planned. SPI >1.0 indicates more work was completed than was planned.
Cost Performance Index (CPI)
The ratio of budget allocated for the work performed to the expenditure already incurred in performing that piece of work is termed as Cost Performance Index (CPI). CPI indicates the relative value of the work done as compared to the amount paid for it and it sometimes referred to as cost efficiency. It is used to project the cost performance of a project up to a specific date.
Cost performance index (CPI) = Earned value (EV) / Actual cost (AC)
A CPI value <1.0 indicates costs were higher than budgeted. CPI >1.0 indicates costs were less than budgeted.
Earned Value Management Indicators
Finally, the following values are also calculated using EVM.
- Estimate at completion (EAC): Present day estimated value of total cost of the project
- Estimate to complete (ETC): Amount of funds required to the remaining part of the project
EAC can be calculated using two methods:
Method 1: Assume that the cost performance for the remainder of the task will revert to what was originally budgeted.
EAC = Approved budget for the entire task – Cost variance for the work done to date on the task
= Budget at completion (BAC) + Actual cost (AC) – Earned value (EV)
Method 2: Assume that the cost performance for the remainder of the task will be the same as what it has been for the work done to date.
EAC = Budget at completion (BAC) / Cumulative cost performance index (CPI)
ETC is determined as using the following formula, irrespective of any method used to calculate EAC.
ETC = Budget at completion (BAC) – Actual costs to date (AC)
Let us understand the significance of EVM indicators through an example:
Assume we’re halfway through a year-long project that has a total budget of Rs. 100,000. The amount budgeted through this six-month mark is Rs. 55,000. The actual cost through this six-month mark is Rs. 45,000.
So,
Planned value(PV)= Rs. 55000/-
Actual Cost (AC)= Rs. 45000/-
Earned value (EV)= Rs. 100000*0.5= Rs. 50000/-
Schedule variance (SV)= EV-PV= Rs. 50000- Rs. 55000= Rs. -5000/- (Bad because <0)
Schedule performance index (SPI)= EV/PV= 50000/55000= 0.91 (Bad because<1)
Cost variance (CV)= EV- AC= Rs. 50000- Rs. 45000= Rs. 5000/- (good because>0)
Cost performance index (CPI)= EV/AC= 50000/45000= 1.11 (good because>1)
Estimate at completion (EAC)= Budget at completion(BAC)/ CPI
= Rs. 100000/ 1.11= Rs. 90090/-
Because SV is negative and SPI is <1, the project is considered behind schedule. We’re 50% of the way through the project but have planned for 55% of the costs to be used. There will have to be some catch-up in the second half of the project.
Because CV is positive and CPI is >1, the project is considered to be under budget. We’re 50% of the way through the project, but our costs so far are only 45% of our budget. If the project continues at this pace, then the total cost of the project (EAC) will be only Rs. 90,000, as opposed to our original budget of Rs. 100,000.
