Earned Value Management Formulas Every Project Manager Should Know
A major challenge Project Managers face is how to identify problems on their projects early enough to successfully make corrective actions. Understanding more about the status of your projects through earned value management (EVM) can help your organization achieve timely visibility into problems that can affect your project outcomes.
Successful project managers understand the role of earned value management in establishing visibility and accountability on their projects. However, to fully utilize EVM, Project Managers need to understand how to calculate the values used for analysis and the meanings behind these numbers.
Here are some commonly used Earned value terms and their meanings:
Basic Earned Value Management Terms Defined
Let’s begin by understanding the variables used in EV:
Planned Value (PV) is the budgeted value for work that would have been completed, if the project were proceeding exactly on schedule. Planned Value answers the question: How much work should have been completed. Planned Value is derived directly from a cost loaded schedule.
Earned Value (EV) is the budgeted value of the work which has actually been completed to date. Earned Value answers the question: How much work has been completed. Earned Value is derived directly from a cost loaded schedule that has been updated to reflect actual accomplishment of work.
Actual Cost (AC) is the total costs for the work completed to date. Actual Cost answers the question: How much have I spent for the work that has been completed.
For example, as of today my PV might be $1,000. But, unforeseen weather issues last week prevented me from working and resulting in an additional purchase of $100 worth of lumber. Since I have fallen behind schedule, I was not able to complete $100 worth of work that was planned, thus, the EV is $900. However, replacing damaged lumber required eight hours of labor, billed at $15 per hour, to repair, as well as $100 in materials. That’s another $220. So, after repairs have been completed, the AC is $1,120.
Now we can evaluate our project’s performance by making some simple comparisons.
Simple & Basic Earned Value Management Formulas
Simple EVM formulas only involve the basic terms mentioned previously.
Schedule Variance (SV)
Schedule Variance tells the Project Manager how far, in terms of budget, the work is ahead of or behind schedule.
SV = EV – PV.
Both the EV and PV reflect monetary values. So, the result of the formula shows how much behind the project is in financial terms if the result is less than zero. If the result is more than zero, it shows the financial advancement of the project for its current state. Also, a value of zero indicates the project is on track with the schedule’s expected costs.
Note: When the work for which Schedule Variance is being calculated has been completed, the Schedule Variance will always be zero, regardless of how early or late the work was completed.
Cost Variance (CV)
Cost Variance tells the Project Manager how far, in terms of cost, the work that has been completed is overrunning or underrunning the budget for that same work.
CV = EV – AC.
The result of this formula shows the dollar amount a project is over or under budget for the work that has been completed. A value above zero indicates the project is under budget. A value of less than zero indicates being over budget. Also, a value of zero shows the project is on track with the budget.
Schedule Performance Index (SPI)
The Schedule Performance Index is the ratio of the Earned Value to the Planned Value. It is used to express the efficiency, in terms of schedule, that work is being performed.
SPI = EV / PV.
If the result is a greater than “1”, it indicates the project has achieved more than what was planned, or that the work is ahead of schedule. A number less than “1” indicates less was achieved than what was planned, or that the work is behind schedule. A result of one indicates a project is on schedule.
Note: When the work for which Schedule Performance Index is being calculated has been completed, the Schedule Performance Index will always be “1”, regardless of how early or late the work was completed.
Using the Schedule Performance Index allows us to compare the relative schedule efficiency with which different work scopes are being performed, regardless of their size.
Cost Performance Index (CPI)
The Cost Performance Index is the ratio of the Earned Value to the Actual Cost. It is used to express the efficiency, in terms of cost, that work is being performed.
CPI = EV / AC.
If the result is a greater than “1”, it indicates the project has spent less than was budgeted for that work scope, or that the work is underrunning the budget. A number less than “1” indicates more has been spent than was planned, or that the work is overrunning the budget. A result of one indicates a project is on budget.
Using the Cost Performance Index allows us to compare the relative cost efficiency with which different work scopes are being performed, regardless of their size.
Other Earned Value Management Terms and Formulas
Described below are some additional terms that are utilized in Earned Value Management. These are used to project the overall projected cost performance of projects.
Budget at Completion (BAC)
The BAC is the total cost that was budgeted for the project. At the end of the project Planned Value and Budget at Completion are Equal. Normally this value excludes any budget set aside as a Management Reserve. The BAC is derived directly from a cost loaded schedule.
Estimate at Completion (EAC)
The Estimate at Completion is the total projected cost of the project. It is equal to the sum of the Actual Costs and the Estimate to Completion.
Estimate to Completion (ETC)
The Estimate to Completion is the projected costs to finish the remaining work which has not yet been completed.
Depending on a project’s status, ETC can be calculated several ways:
Bottoms Up Estimate – This method requires an assessment of all work which has not been completed, and an estimate of the costs to complete the remaining work. A Bottoms Up Estimate should be performed at regular intervals during a project.
Formula 1: ETC = (BAC-EV) / CPI.
This formula extrapolates future cost performance based upon past cost performance. It projects that future work will be done with the same degree of cost efficiency as past work was performed. This formula is best if spending patterns are expected to continue through the end of the project.
Formula 2: ETC= (BAC – EV).
If future expenses are likely to reflect the original BAC, this formula is appropriate. It simply says future performance will be in accordance with the plan.
Formula 3: ETC = [(BAC – EV) / (SPI * CPI)].
This formula is used to reflect the frequent reality that deviations in schedule performance will breed future deviations in cost performance. This method assumes that the future performance for a project that is both behind schedule and over cost will continue to deteriorate.
Variance at Completion (VAC)
Since the BAC and EAC represent two different values for the cost to complete a project, project managers can determine the difference between the two by subtracting the Estimate at Completion from the Budget at Completion. This results in the Variance at Completion (VAC).
VAC = BAC – EAC.
If the Variance at Completion is a positive number, the project is projected to underrun the budget. If the Variance at Completion is a negative number, the project is projected to overrun the budget.
To-Complete Performance Index (TCPI)
The To Complete Performance Index (TCPI) may be used to calculate performance needed to meet an original BAC for a total PV for a project with the following formula:
TCPIBAC = (Budget at Completion – EV) / (Estimate at Completion – AC).
This value tells the Project Manager how efficiently work will have to be performed to achieve the budget. It can be compared to the CPI as a reality check.
However, the TCPI can be applied to the EAC to define the performance required to meet a The Estimate at Completion:
TCPIEAC = (Budget at Completion- EV) / (Estimate at Completion – AC).
The resulting value can be compared to the CPI as a check of reasonableness for our Estimate at Completion.
Both TCPI equations give a project manager the ability to calculate the additional number of hours or raw materials needed to complete a project with a calculated BAC or EAC.
Use EVM Formulas to See Where Your Project Stands
Earned value management formulas provide insight into a project’s adherence to budget, and schedule. This gives the project office a chance to mitigate risk and damages. If you are serious about understanding what constitutes a successful EVM implementation, refer to ANSI EIA Standard 748. The key to using EVM formulas correctly lies in knowing how they are calculated and applied. Since Earned Value Management is based upon having a cost loaded schedule, the validity of your EVM data is dependent upon having a high-quality plan.