Earned value management (EVM) is a standardized method used by project managers to track and predict progress and performance. It came into being in the 1960s within the U.S. Department of Defense as a way to manage defense programs and has since become an integral part of project management across a wide range of industries.
Why Earned Value Management Matters
The three areas in which project management problems seem to occur most frequently are cost, schedule, and scope. This means that project managers often find themselves over budget, behind schedule, or outside the intended scope of a project. An issue in any of these areas can result in poor project performance.
No one wants to be in this position. It can result in a lot of wasted time and money, not to mention stress and unhappy clients. EVM involves a variety of formulas and variables, allowing project forecasting. You can identify issues before they arise, and it’s invaluable for monitoring project status.
As you might imagine, this makes EVM an incredibly useful tool no matter what type of project you’re working on.
Basic Variables of Earned Value Management
Your project management software may already have a feature for performing an earned value analysis, which are the calculations that support EVM. To take full advantage of your project management software’s functionality, however, you will need to have a deeper understanding of the variables involved. These include:
- Planned value (PV)
- Earned value (EV)
- Actual cost (AC)
- Schedule variance (SV)
- Cost variance (CV)
Not all of these variables are straightforward, so let’s cover each of them in more detail.
PV is simple. It’s the total cost budgeted for a project. Let’s say, for example, that we’re working on a software development project together. The project has a budgeted cost of $100,000, so that’s our PV for the project as a whole.
We can also calculate the PV for a specific time within our project as. Let’s say we want to be 25% of the way to completion after three months. That calculation would look like this:
100,000 × 0.25 = 25,000
That means our budgeted cost or planned value after three months is $25,000. With variables rather than real numbers:
Total PV × % planned completion = PV at specific time
Things get a bit more complicated when we look at EV. This number represents the value of the work performed. To get this number, you’re going to multiply the total expected cost of your project, the PV, by the progress you’ve made, measured as the percentage of work that’s been done.
PV × % of project work completed = EV
Using our example, let’s say we haven’t made as much progress as we would like. We’re 15% of the way toward our goal after three months. To calculate our EV:
100,000 × 0.15 = 15,000
So far, we have an EV of $15,000 for our project.
AC is another self-explanatory variable. It’s the amount of money our project costs in reality. We can look at the AC of our project after completion, or we can take a snapshot for a specific amount of time.
Let’s say we’ve spent $30,000 so far, so the AC of our project at this point is $30,000.
CV is how far you’ve varied from your planned budget. To calculate it, you’re going to subtract your AC from your EV, so:
CV = EV − AC
In our example, our AC was $30,000, and our EV was $15,000:
15,000 − 30,000 = −15,000
A negative CV value means that we’re over budget. To give us an idea of how large of an issue it might be, let’s calculate the percentage by which we’re over our budget. To do that, we will divide our CV by our EV, then multiply it by 100.
CV/EV × 100 = CV%
Or, with our numbers:
−15,000/15,000 × 100 = −100
That means we’re over our budget by 100%. That looks like a problem, but it’s not the whole story. As we’re about to get into, we’re not ahead of schedule in our example. If we had made more progress than expected, however, that might explain why we have spent more money than planned so far.
SV is the difference between where you are schedule-wise and where you had planned to be. In our example, we’ve been working on our project for three months. To find our SV, we’re going to subtract our PV at the three-month mark from our EV at the same time, so:
SV = EV − PV
Or, with our numbers:
15,000 − 25,000 = −10,000
That’s another negative number, which means we’re behind schedule. We already knew that based on our desired completion percentage versus the progress we have actually made, but now we can use that value to calculate the percent by which we’re behind schedule. To do that:
SV/PV × 100 = %SV
Or, in our example:
−10,000/15,000 × 100 = −66.66
We’re just over 65% behind schedule. Combined with how over budget we are, we could be in trouble. Fortunately, we’ve been using EVM to track these numbers, and now we have the remaining time frame to catch up and, if possible, cut costs.
Earned Value Management Performance Indexes
While variances are a useful way to understand your project, there’s more we can do with performance indexes. We’re going to look at the cost and schedule performance indexes. These indexes will tell you how you’re performing in relation to your goals rather than just the difference between your actual and expected project performance.
Cost performance index (CPI)
The cost performance index tells you about your project performance relative to its cost. To calculate CPI, you’re going to divide your EV by your AC, or:
CPI = EV/AC
In our example, that becomes:
15,000/30,000 = 0.5
A CPI of less than one means we’re over budget. A CPI of more than one would indicate that we are under budget.
Schedule performance index (SPI)
The schedule performance index tells you how your project performance relative to the time you budgeted for it. To calculate SPI, you’re going to divide your EV by your PV, or:
SPI = EV/PV
With the numbers we’ve been using, that becomes:
15,000/25,000 = 0.6
A result of less than one means we’re behind schedule, while more than one would indicate that we have completed work more quickly than expected and are ahead of schedule.
Common EVM Errors
While EVM is a helpful tool, some misconceptions about it may slow you down when you’re first getting started. Keep in mind that:
- EVM does not prevent issues from arising within your project budget or schedule.
- It does not explain why problems occur.
- Cost variance and schedule variance aren’t always indicators of poor project performance.
- It may be necessary to redefine your project scope.
- Software programs can only do what you ask them to.
When implemented correctly, an earned value management system can help identify issues before they become critical. With practice and a deeper understanding of the concepts involved, you can further hone your skills as a project manager and improve overall project performance.
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