PMP Earned Value Management (EVM) Formulas - A Quick Guide

# PMP Earned Value Management (EVM) Formulas – A Quick Guide

Last updated on 16th Jul 2020, Blog, General

Vithun (Sr Project Manager )

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What is Earned Value Analysis?

Earned Value Analysis (EVA) is a method that allows the project manager to measure the amount of work actually performed on a project beyond the basic review of cost and schedule reports. EVA provides a method that permits the project to be measured by progress achieved. The project manager is then able, using the progress measured, to forecast a project’s total cost and date of completion, based on trend analysis or application of the project’s “burn rate”. This method relies on a key measure known as the project’s earned value.

Oftentimes the term “earned value” is defined as the “budgeted cost of worked performed” or BCWP. This budgeted cost of work performed measure enables the project manager to compute performance indices or burn rates for cost and schedule performance, which provides information on how well the project is doing or performing relative to its original plans. These indices, when applied to future work, allow for to project manager to forecast how the project will do in the future, assuming the burn rates will not fluctuate, which oftentimes is a large assumption.

One technique often used by project managers is to plot the plan spend curve and the actual cost expenditures curve as shown in Exhibit 1 below. The curve looks good, but what can you tell about the health of this project based on this graph? Is the project team accomplishing the planned work and doing it for less money? Or is the team behind schedule? The point is: this curve does not provide sufficient information to communicate how the project is going!

Exhibit 1 – What can you tell about the health of this project based on the cost curve?

his paper will explain the terminology, formulas, and key metrics to monitor when using earned value analysis. In addition, the different techniques commonly used to evaluate progress will be described, along with the top ten items needed on projects when implementing earned value.

• Earned Value Analysis (EVA) — a quantitative project management technique for evaluating project performance and predicting final project results, based on comparing the progress and budget of work packages to planned work and actual costs.
• Earned Value Management (EVM) — a project management methodology for objectively measuring project performance using an integrated schedule and budget based on the project WBS.
• Earned Value Management System (EVMS) — the process, procedures, tools, and templates used by an organization to do earned value management.
Cost Variance: CV = EV – ACCost Performance Index: CPI = EV/AC
Schedule Variance: SV = EV – PVSchedule Performance Index: SPI = EV/PV

A CPI value of 0.83 implies that for every project dollar spent, only US\$0.83 in earned value was accomplished. A CPI of less than one and a negative CV indicates project cost performance is below the plan.

A SPI value of 1.05 implies that for every dollar of work the project had planned to accomplish at this point in time, US\$1.05 worth of work was actually done. A SPI greater than one and a positive SV indicates more work has been accomplished than was planned. Note how this is worded, since a SPI > 1.0 does not necessarily mean you are ahead of schedule! You can accomplish more work than planned by working on non-critical path Work Packages. You need to look at the critical path to determine whether you are ahead, on or behind schedule.

Exhibit 4 shows the Planned Value, Actual Cost, and Earned Value for a project. Note that when the planned spend curve is compared to the actual spent, it shows a variance of +US\$15. An uneducated observer is likely to conclude the project team is accomplishing the planned work and doing it for less money.

Earned Value Analysis Requirements

In order for the Earned Value Analysis to be accurate, a good solid project plan must be created. In today’s marketplace it seems as if all clients are from the great state of Missouri. That is to say, Missouri’s nickname is “The Show Me State”. If I had a dollar for ever time I heard a client say “Plan, you don’t need a plan, I need to see work being done!” well, I would be deep in financial riches! What is the old saying? “Without a plan, any route will do”. That temperament or environment is not conducive to project management and reporting project status to stakeholders. The project plan, especially the Scope Statement is the foundation to solid earned value practice.

The Project Management Institute’s (PMI®) A Guide to the Project Management Body of Knowledge (PMBOK® Guide). defines the Scope Statement as follows:

The narrative description of the project scope, including major deliverables, project objectives, project assumptions, project constraints, and a statement of work, that provides a documented basis for making future project decisions and for confirming or developing a common understanding of project scope among the stakeholders. (PMI, 2004, p. 370)

I especially appreciate the phrase, “that provides a documented basis for making future project decisions and for confirming or developing a common understanding of project scope among the stakeholders” as that informs me of the meaning and importance of the Scope Statement.

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In order to develop that common understanding of the project work, another key project deliverable should be created: the Work Breakdown Structure (WBS). The WBS is defined in the PMBOK Guide as a deliverable-oriented hierarchical decomposition of the work to be executed by the project team to accomplish the project objectives and create the required deliverables. It organizes and defines the total scope of the project. Each descending level represents an increasingly detailed definition of the project work.

There is a saying in project management that “if it’s not included in the WBS, it’s not included in the project!” A WBS is a direct representation of the work scope in the project, documenting the hierarchy and description of the tasks to be performed and relationship to the product deliverables. The WBS breaks down all authorized work scope into appropriate elements for planning, budgeting, scheduling, cost accounting, work authorization, measuring progress, and management control. The WBS must be extended to the level necessary for management action and control based on the complexity of the work.

As one can plainly see, project planning is a necessity for project success and the incorporation of earned value analysis on your project. Now that basis for EVA has been established, let’s focus on three primary areas of information needed to compute EVA.

As introduced above, Earned Value Management Systems allow the project manager to answer the following three questions, as they relate to the project:

• Where have we been?
• Where are we now?
• Where are we going?

In Earned Value Management, unlike in traditional management, there are three data sources:

• – the budget (or planned) value of work scheduled
• – the actual value of work completed
• – the “earned value” of the physical work completed

Earned Value takes these three data sources and is able to compare the budgeted value of work scheduled with the “earned value of physical work completed” and the actual value of work completed.

Planned Value describes how far along project work is supposed to be at any given point in the project schedule and cost estimate. Cost and Schedule baseline refers to the physical work scheduled and the approved budget to accomplish the scheduled work. Together, they result in an important value: Planned Value (PV). PV can be looked at in two ways: cumulative and current.

Cumulative PV is the sum of the approved budget for activities scheduled to be performed to date. Current PV is the approved budget for activities scheduled to be performed during a given period. This period could represent days, weeks, months, etc.

PV, also known as Budget Cost of Work Scheduled (BCWS), can be defined as:

• Define Scope: What you are tasked to do (Scope Statement)
• Assign Scope: Breakdown scope into manageable parts (WBS)
• Schedule Scope: Time-phased, logic driven with critical path (Project Schedule)
• Budget Scope: develop cost (budget) for all approved scope (Performance Measurement Baseline)
• Baseline: Snap-shot in time, frozen. What performance measurement will be based upon.

The goal of the earned value analysis is to support and facilitate the control cost process. The results of this analysis are used for Earned Value Management (EVM) which analyses variances, trends and forecasts based on the EVA results. Read more about these uses in the EVM section below.

For projects following the PMI methodology, Earned Value Analysis is a suggested technique of the following processes:

• Monitor and Control Project Work,
• Control Schedule,
• Control Costs, and
• Control Procurements.

Earned Value Management is defined as a methodology for measuring project performance in a comprehensive and holistic way. EVM focuses on the measurement of costs, schedule and scope against the project baseline. The PMBOK specifies this baseline as the performance measurement baseline that consists of the cost, scope and schedule baseline.

The measures and indicators used in EVM include

• the EVA indicators,
• variance analysis,
• trend analysis, and
• forecasting.

Refer to the next section for the indicators of the Earned Value and Variance analyses and forecasting, incl. their formulae.

The Earned Value Analysis comprises the indicators

• Earned Value (EV),
• Planned Value (PV),
• Actual Cost (AC) and
• Budget at Completion (BAC).

The planned value is the share of the budget (excluding management reserve) assigned the activities or periods in the scope of the analysis.

This indicator measures the progress of the project. Its value is the sum of the budget planned and authorized for the work that has already been completed.

The AC refers to the cost incurred for the work performed.