Earned Value \((EV)\) is a popular approach in project management that helps assess a project’s development, effectiveness, and financial management. It combines details about the project’s goals, schedule, and expenses to give a complete picture of how well the project is performing. With this method, project managers can compare the expected progress and cost to the real progress and cost, and predict how the project will perform in the future. With Earned Value Management \((EVM)\), project managers can evaluate how the project’s planned progress and expenses measure up against its real progress and costs, as well as predict the project’s future performance.
There are several key performance indicators (KPIs) that enable project managers to assess a project’s progress in terms of schedule adherence and budgetary efficiency. These KPIs utilize three primary components: Planned Value \((PV)\), Earned Value \((EV)\), and the Actual Cost \((AC)\).
In addition to these components, the Budget at Completion \((BAC)\) plays an essential role as a reference point for evaluating the project’s financial performance and progress. \(BAC\) is the total planned cost of a project, and it serves as a baseline against which the actual performance can be compared.
Intuitively, these KPIs help project managers to understand how the project is progressing compared to the initial plan by examining the relationship between the planned work \((PV)\), the actual work completed \((EV)\), the costs incurred \((AC)\), and the total approved budget \((BAC)\). By monitoring these metrics, project managers can make informed decisions to keep the project on track and ensure it meets its goals within the allocated time and budget.
\(PV\), sometimes called the Budgeted Cost of Work Scheduled (BCWS), shows the expected cost of the work that should have been finished by a certain date. It helps project managers know how much of the project’s budget should have been used up to that point.
\[\begin{align*} PV =\text{% of project completed (planned)} × BAC \end{align*}\]
\(EV\), also known as the Budgeted Cost of Work Performed (BCWP), is the real value of the work done up to a particular date. It’s calculated by taking the percentage of work finished and multiplying it by the total planned budget for that work.
\[\begin{align*} EV =\text{% of project completed (actual)} × BAC \end{align*}\]
\(AC\), or the Actual Cost of Work Performed (ACWP), is the true cost of the work done by a certain date. It covers all project-related expenses, like labor, materials, equipment, and overhead costs.
\[\begin{align*} AC = \text{Sum of all actual project expenses up to the measurement point} \end{align*}\]
With these components, we can find the following values:
Schedule Variance \((SV)\): This is a numeric value that represents the difference between the actual work completed \((EV)\) and the planned work \((PV)\). This tells us if the project is ahead or behind schedule. A positive value means it’s ahead of schedule, while a negative value means it’s behind schedule. A value of 0 indicates the project is exactly on schedule.
\[\begin{align*} SV = EV - PV \end{align*}\]
\[\begin{align*} SV < 0 = \text{Behind schedule} \\ SV = 0 = \text{On schedule} \\ SV > 0 = \text{Ahead of schedule} \end{align*}\]
Schedule Performance Index \((SPI)\): This is a ratio that indicates how efficiently a project is using its time. It compares the work accomplished \((EV)\) to the work that was planned to be completed by a certain point in time \((PV)\). This shows how efficient the project’s timing is. If the value is greater than 1, it’s ahead of schedule. If it’s less than 1, it’s behind schedule. A value of 1 means the project is on schedule.
\[\begin{align*} SPI = EV / PV \end{align*}\]
\[\begin{align*} SPI < 1 = \text{Behind schedule} \\ SPI = 1 = \text{On schedule} \\ SPI > 1 = \text{Ahead of schedule} \end{align*}\]
Note: To summarize, SPI is a ratio that indicates the efficiency of the project’s time usage, while SV is a numeric value that represents the difference between the actual work completed and the planned work. Both metrics help project managers understand how well the project is progressing compared to the initial plan and make necessary adjustments to keep the project on track.
Cost Variance \((CV)\): This is a measure that represents the difference between the value of work actually accomplished \((EV)\) and the actual cost spent to achieve that work \((AC)\).This indicates if the project is under or over budget. A positive value means it’s under budget, while a negative value means it’s over budget. A value of 0 suggests that the project is exactly on budget.
\[\begin{align*} CV = EV - AC \end{align*}\]
\[\begin{align*} CV < 0 = \text{Over budget} \\ CV = 0 = \text{On budget} \\ CV > 0 = \text{Under budget} \end{align*}\]
Cost Performance Index \((CPI)\): This is a ratio that indicates how efficiently a project is using its budget. It compares the value of work accomplished \((EV)\) to the actual cost spent to achieve that work \((AC)\). This measures how well the project is doing in terms of costs. If the value is greater than 1, it’s under budget. If it’s less than 1, it’s over budget. A value of 1 means that the project’s actual costs are aligning perfectly with the \(EV\).
\[\begin{align*} CPI = EV / AC \end{align*}\]
\[\begin{align*} CPI < 1 = \text{Over budget} \\ CPI = 1 = \text{On budget} \\ CPI > 1 = \text{Under budget} \end{align*}\]
Note: To summarize, CPI is a ratio that indicates the efficiency of the project’s budget usage, while CV is a numeric value that represents the difference between the actual work completed and the cost spent. Both metrics help project managers understand how well the project is progressing compared to the initial budget and make necessary adjustments to keep the project on track.
Estimate at Completion \((EAC)\): Used to forecast the total cost of a project when it is completed. It takes into account the actual costs incurred up to a specific point in time and combines them with an estimate of the remaining costs to complete the project. \(EAC\) helps project managers monitor project progress, identify potential issues, and control costs effectively. There are several different methods for calculating \(EAC\), each with its own set of assumptions about the future performance of the project.
\[\begin{align*} EAC = AC + (BAC - EV) \end{align*}\]
Note: This method assumes that the future cost performance will be similar to the original plan, and any cost variance up to this point is considered atypical. It’s a simple method that adds the actual costs incurred \((AC)\) to the remaining budget.
\[\begin{align*} EAC = BAC / CPI \end{align*}\]
Note: This method assumes that the future cost performance will be consistent with the past cost performance (as represented by the \(CPI\)). It calculates the adjusted budget based on the current \(CPI\).
\[\begin{align*} EAC = AC + (BAC - EV) / (CPI * SPI) \end{align*}\]
Note: This method takes into account both cost and schedule performance. It assumes that the future performance will be influenced by both the past cost performance \((CPI)\) and the past schedule performance \((SPI)\). This method is particularly useful when both cost and schedule variances are significant and are expected to impact future performance.
Each way of predicting the final cost of a project has its own advantages and disadvantages. The best method to use depends on the unique situation and what is expected to happen in the future. It is crucial for those in charge of a project to know these methods and pick the one that works best for their project. This helps them keep costs under control and achieve the desired results.
Estimate to Completion \((ETC)\): Represents the estimated cost required to finish the remaining work of a project. \(ETC\) helps project managers monitor progress, allocate resources effectively, and manage the project budget. Remember that \(ETC\) is an estimate and can change as the project progresses. Regularly updating and monitoring \(ETC\) can help project managers make informed decisions, adjust plans, and allocate resources effectively to ensure a successful project outcome.
\[\begin{align*} ETC = EAC - AC \end{align*}\]
Variance at Completion \((VAC)\): Determines the difference between the original budget and the estimated final cost of a project. It shows whether the project is expected to be under budget, over budget, or right on target when it’s completed. \(VAC\) helps project managers identify potential cost issues, allowing them to take corrective actions if needed. If the \(VAC\) is negative, it indicates that the project is expected to be over budget when completed. If the \(VAC\) is zero, it means that the project is expected to be completed exactly on budget. If the \(VAC\) is positive, it suggests that the project is expected to be under budget when completed.
\[\begin{align*} VAC = BAC - EAC \end{align*}\]
\[\begin{align*} VAC < 0 = \text{Over budget} \\ VAC = 0 = \text{On budget} \\ VAC > 0 = \text{Under budget} \end{align*}\]
To Complete Performance Index \((TCPI)\): Helps you understand the level of efficiency required to complete the remaining work within the project’s budget. It provides an indication of how well the project team needs to perform to stay on budget for the rest of the project, considering the project’s progress and costs so far. There are two main formulas for \(TCPI\) in project management, depending on whether you want to calculate the efficiency required to complete the remaining work within the original budget \((BAC)\) or a revised budget, often referred to as the Estimate at Completion \((EAC)\).
\[\begin{align*} TCPI = (BAC - EV) / (BAC - AC) \end{align*}\]
Note: This formula calculates the efficiency required to complete the remaining work within the original budget.
\[\begin{align*} TCPI = (BAC - EV) / (EAC - AC) \end{align*}\]
Note: This formula calculates the efficiency required to complete the remaining work within the revised budget.
The choice of formula depends on the project’s circumstances and whether the original budget is still considered achievable or if a revised budget is more appropriate.
\(EV\) is a crucial technique in project management that allows for a comprehensive assessment of a project’s progress, efficiency, and financial management by integrating information on project goals, timelines, and expenditures. This method enables project managers to compare the planned progress and costs with the actual progress and costs, as well as forecast future project performance.
By consistently monitoring these metrics through \(EVM\), project managers can identify potential issues early, implement necessary adjustments, and make informed decisions to keep the project on track and within budget. This proactive approach helps maintain control over the project’s development and financial performance, ensuring a successful outcome.