How to Calculate Earned Value in Project Management
How to Calculate Earned Value in Project Management
Earned Value Management (EVM) is a project management technique for objectively measuring project performance and progress, it can combine measurements of scope, schedule, and cost in a single integrated system.
Implementing Earned Value Management (EVM) in your projects can bring several benefits, it offers clarity, control, and enhanced communication capabilities, all of which are critical for successful project delivery in the ever-evolving, but mainly it responds the most important questions to your Sponsor and Stakeholder.
What is Earned Value?
Earned Value assesses and tracks the progress of work done in a project relative to the planned schedule and budget. It provides a straightforward method to determine whether your project is lagging in terms of time or exceeding its financial constraints.
EVM provides a clear and quantifiable measure of project performance by integrating cost, time, and scope, the comprehensive view helps identify problems early, allowing for timely corrective actions.
Improved Cost Management
You can more effectively manage your project's budget by tracking and calculating the Budgeted Cost of Work Performed (BCWP) against the Actual Cost of Work Performed (ACWP).
EVM allows you to identify cost variances early in the project lifecycle, reducing the risk of budget overruns.
What is the Effective Schedule Management
EVM offers insights into schedule performance by comparing the work planned with the work accomplished assisting in predicting project delays and providing an opportunity to take corrective measures to stay on track.
How to Objective Progress Assessment
The methodology offers an objective method to measure and report project progress, which is particularly useful in complex IT projects where subjective measures of progress can be misleading.
Enhanced Forecasting and Decision Making
With EVM, you can forecast future performance based on current trends. The predictive capability enables more informed decision-making, allowing for proactive management of potential risks and issues.
Improving Stakeholder Communication
The clear, quantified data provided by EVM can improve communication with stakeholders. Presenting tangible evidence of project status can build stakeholder confidence and make it easier to justify decisions or the need for changes.
EVM promotes accountability as team members understand that their performance directly impacts the project's cost and schedule metrics, it fosters a more responsible approach to work.
Standardization and Consistency
EVM provides a standardized method for project performance measurement. Consistency is beneficial when managing multiple projects or comparing performance across projects within your organization.
Many government contracts and industries require EVM as a standard practice. It use can ensure compliance with these requirements and enhance your organization’s credibility.
Earned Value Calculation
Before calculating EV, you need to have a detailed project plan.
The plan should include a Work Breakdown Structure (WBS), which breaks down the project into smaller, manageable components.
1. Calculate Schedule Variance (SV)
It measures the difference between the work that was planned to be completed by a certain date and the work that has been completed by that date, in detail:
Definition of Schedule Variance (SV):
- SV is a quantitative indicator of how much ahead or behind schedule a project is at any given time.
- It is calculated as the difference between Earned Value (EV) and Planned Value (PV).
Calculation of Schedule Variance
the formula is: SV = EV - PV
.EV (Earned Value) is the budget assigned to the work actually completed up to the reporting date.
.PV (Planned Value) is the budget assigned to the work that was scheduled to be completed up to the reporting date.
Interpreting Schedule Variance
- A positive SV indicates that the project is ahead of schedule.
- A negative SV suggests that the project is behind schedule.
- An SV of zero means the project is exactly on schedule.
2. Calculate Cost Variance (CV)
Cost Variance (CV) is a fundamental metric in Earned Value Management (EVM), a project management technique. It is used to assess the financial performance of a project by comparing the budgeted cost of work performed with the actual cost incurred for that work. Here's a closer look at Cost Variance:
Definition of Cost Variance (CV)
- CV is an indicator of how much over or under budget a project is at a specific point in time.
- It measures the financial efficiency of the project's progress.
Calculation of Cost Variance
- CV = EV - AC
- Where:
- EV (Earned Value) is the value of the work actually completed up to the reporting date, measured in terms of the budget.
- AC (Actual Cost) is the total cost incurred for the work completed up to the reporting date.
Interpreting Cost Variance
- A positive CV indicates that the project is under budget.
- A negative CV suggests that the project is over budget.
- A CV of zero means the project is exactly on budget.
3. Schedule Performance Index (SPI)
The Schedule Performance Index (SPI) provides a ratio of the work performed to the work planned, it indicates how closely the project is adhering to its planned schedule.
Calculation of Schedule Performance Index
- SPI = EV / PV
Where:
- EV (Earned Value) represents the budgeted value of the work actually completed up to a certain date.
- PV (Planned Value) is the budgeted value of the work that was supposed to be completed by that date.
Interpreting Schedule Performance Index
- An SPI value of 1 indicates that the project is on schedule.
- An SPI greater than 1 suggests that the project is ahead of schedule.
- An SPI less than 1 means the project is behind schedule.
Schedule Performance Index (SPI) is especially beneficial in complex environments where multiple tasks and variables intersect, by calculating SPI for individual tasks, you gain a granular view of which specific areas are lagging.
The level of detail is crucial for pinpointing problems and implementing targeted corrective actions, for example, if two tasks are behind schedule, their SPIs (less than 1) will clearly show this delay.
When you aggregate the SPI values across all tasks, you get a comprehensive view of the overall project's schedule performance.
The broader perspective can reveal that, despite delays in certain areas, other parts of the project may be progressing well enough to keep the overall project ahead of schedule.
Understanding the Overall Impact
The contrast between task-level and project-level SPI allows you to understand the relative impact of each task's delay, in a scenario, although two tasks are behind, their delay might not be critical enough to derail the overall project timeline, as indicated by an overall SPI greater than 1.
The dual-level analysis informs more strategic decision-making, understanding that the overall project is ahead of schedule despite delays in certain tasks can influence how you allocate resources and prioritize work.
It allows for a more balanced approach to managing delays, focusing on critical path tasks that might have a greater impact on the completion date.
Communicating with Stakeholders
The analysis provides a solid foundation for communicating with stakeholders explaining that while certain tasks are behind, the overall project is still on track, managing expectations and maintaining confidence among project stakeholders.
4. Cost Performance Index (CPI)
CPI is a vital tool in Earned Value Management (EVM) for assessing the cost efficiency of a project's progress. Let's elaborate for example:
- CPI = EV / AC, where EV is the Earned Value and AC is the Actual Cost.
It measures the value of work completed against the actual cost incurred for that work.
A CPI over 1.00 signifies that the project is under budget, while a CPI under 1.00 indicates overspending.
CPI = 50,000 / 70,000 = 0.86, it clearly indicates that the project is currently overspending.
Forecasting Using CPI
- The formula for Estimate at Completion (EAC) is EAC = Budget / CPI.
- In your example, with a total project budget of $150,000 and a current CPI of 0.90, the EAC would be $150,000 / 0.90 = $166.666.
The forecast suggests that, based on current spending trends, the project is likely to exceed the budget by $16,666.
Strategic Actions Based on CPI Analysis
Knowing this information early in the project lifecycle is crucial allowing proactive measures to either reduce costs or seek additional funding also helps in adjusting project strategies, renegotiating contracts, or re-evaluating project scope to align with budget constraints.
Communicating Financial Status
CPI provides a clear, quantitative measure to communicate the financial status of the project to stakeholders, the transparency is vital for maintaining trust and managing expectations.
Integrating CPI into your project monitoring processes allows for a more nuanced understanding of the project's financial health. It aids in making informed decisions about cost control and resource allocation, ensuring that projects remain financially viable and aligned with organizational goals. Knowing the potential financial outcome in advance equips you to steer the project more effectively towards its successful completion within the financial constraints.