Earned Value Primer: The Basics of EVM

What’s the best way to monitor and report on the performance of your projects? And how can you predict their future performance? The answer is Earned Value Analysis (EVA), and the process of working with Earned Value as your performance management tool is called Earned Value Management (EVM).

For many project managers, EVM looms large as a source of trepidation and fear. This is doubtless because there are graphs and formulas, which remind us of high-school math. But a little careful thought will show that these graphs and formulas are easy to grasp, and make a lot of sense.

So, in this feature guide, we’ll give you a handy primer to get you fully up to speed on Earned Value and EVM.

We have a lot to cover. In outline, here’s what you’ll learn in this guide:

• Why do we Need Earned Value? Or, what’s wrong with measuring schedule and budget separately?
• What is Earned Value Management? We’ll define ‘Earned Value’ and some of the other measures we use in EVM, and take a passing glance at the history of EVM.
• Measuring Performance with Earned Value. EVM offers us a number of performance measures to which we can apply our professional judgment in assessing their impact.
• Forecasting with Earned Value. We can’t know what the future holds. But we can make some assumptions that lead to a consistent prediction that flows from them.
• Carrying out Earned Value Management. What are the practical steps for setting up your EVM system, and then measuring performance to get the data you’ll need?
• What’s Wrong with Earned Value? What? You expect an answer here? read the article!
• A Summary of Earned Value Analysis Formulas. As you’d expect.

Why do We Need Earned Value?

The beating heart of the delivery stage is the monitor and control cycle. So, for delivery to work well, we need to be able to:

• Measure status
• Assess issues
• Design interventions
• Communicate status for accountability and decison-making

Earned Value Management provides us with a way to do this. It lets us;

• Measure progress against plan and hence understand the status of your project
• Assess and communicate performance with a set of standard performance measures
• Estimate time and cost to complete work, against your plan

You can only manage and control what you can measure, so measurement tools are always at a premium. And reporting progress may have a value, but better still is your ability to predict the future from trends. These are the tools that EVM Offers you.

Schedule or Cost Performance?
How about Schedule and Cost Performance?

It is pretty straightforward to measure schedule performance…

And it’s equally straightforward to measure budget performance…

But, what if you are late and under budget?
Is that good, or bad?

If you could express budget and schedule performance in one language, you could combine the two. And that is exactly what Earned Value Analysis does.

It uses an ‘S’ curve for the percentage complete. It looks at how well you have spent your budget on efficiently producing value. The value of the work you have completed to date, based on your original budget, is the Earned Value.

What is Earned Value Management?

Earned Value Management (or EVM) is one of the most important techniques for formal project management. It will equip you to monitor and forecast robustly. So, if you aspire to lead a substantial project, you’ll need to know when and how to deploy this powerful toolset.

Let’s start with a short video that answers the question, what is Earned Value Management?

What is Earned Value?

Earned Value is the value of the work you have actually completed at the present time, based on your original budget.

So, an alternative name for the Earned Value (EV) is the ‘Budgeted Cost of Work Performed’ or BCWP.

Compare it with the Actual Cost of Work Performed. This is usually just referred to as the Actual Cost (AC).

A simple measure of the Earned Value assumes that we build out value in proportion to the amount of work completed. This gives us the formula:

Earned Value = BAC x Percentage Completed

BAC = Budget at Completion: the budgeted cost of the completed project.

The Key Earned Value Management Measures

With BAC, Earned Value and Actual Cost, we have three of the four key EVM measures. The third is the Planned Value (PV).

Planned Value is the budget cost of the work you planned to have finished at the current time. So, it is also known as the Budgeted Cost of Work Scheduled (BCWS).

So, there are four key parameters in EVM, that you can measure:

1. Planned Value (PV) is the Budgeted Cost of Work Scheduled (BCWS)
2. Earned Value (EV) is the Budgeted Cost of Work Performed (BCWP)
3. Actual Cost (AC) is the Actual Cost of Work Performed (ACWP)
4. Budgeted Cost of your project is the Budget at Completion (BAC)

A Potted History of EVM

Before we move on, some readers may like to know a little of the history of Earned Value Management. If that doesn’t interest you, skip over this section.

• Early Twentieth Century: Frank and Lillian Gilbreth introduce the concept of ‘Earned Time’.
• Early 1960s: US Department of Defense (DoD) introduces PERT/COST methodology. It is seen as clumsy and over-burdensome.
• 1967: DoD updates PERT/COST to the Cost/Schedule Control Systems Criteria (C/SCSC). Catchy name!
• 1979: David Burstein publishes an article on EVM in ‘Public Works Magazine’.
• 1980s-90s: EVM use grows. It starts to become mandatory in US defense procurement.
• Mid 1990s: EVM widely adopted by US Departments of Defense and Energy, and by NASA.
• The American National Standards Institution (ANSI) creates a standard for EVM (EAI 784-A).
• PMI (the Project Management Institute) includes EVM in the first edition (and all subsequent editions) of its Project Management Body of Knowledge (PMBOK Guide).
• The UK’s Association for Project Management (APM) does likewise.

Measuring Performance with Earned Value

There are four standard performance measures in EVM:

1. Cost Variance: CV = EV – AC
2. Cost Performance Index: CPI = EV/AC
3. Schedule Variance: SV = EV – PV
4. Schedule Performance Index: SPI = EV/PV

Variances from Plan

You can see what the Schedule Variance and Cost Variance look like on a chart…

Note that the Schedule Variance is expressed in units of money – it might perhaps be better labeled ‘schedule-related cost variance‘. The true time slippage is shown as the Time Variance (TV) and we’ll return to this near the end of the article.

Performance Indices

The performance indices express the variances as ratios. These allow them to be compared from one project to another. But it’s useful to take a couple of examples, to better understand them.

Cost Performance

A CPI of less than one, or a negative CV, indicates your project is under-performing against you plan on cost. That’s a bad thing. A CPI of greater than one, or a positive CV, indicates your project is performing better than you planned on cost. Hurrah!

A CPI value of 0.85 means that, for every dollar you have spent on the project to date, the project has only delivered US$0.85 in Earned Value.

Schedule Performance

A SPI greater than one, or a positive SV, indicates you have accomplished more work than you had planned. But this is important: an SPI of more than one 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.

A SPI value of 1.15 means that for every dollar of work the you had planned to deliver at the current point in time, you have actually delivered US$1.15 worth of work.

RAG or Traffic Light Reporting

At the start of your project, it is wise to set levels of either performance index or variation, at which alarm bells will ring. A good approach is a traffic light system where:

• Green represents everything is within a narrow margin of your plan.
• Amber represents a significant level of concern that merits review and active management.
• Red represents a serious concern that requires reporting upwards and a substantial intervention.

For example…

With a RAG status for each performance index, you can highlight quicky the need for action, and also report efficiently to your steering group.

Forecasting with Earned Value Analysis

Earned Value Analysis forecasts are designed to make cost estimates, rather than time estimates. The principal measure is the Estimate at Completion (EAC). This compares directly to the Budget at Completion (BAC).

Therefore:

Forecast Cost Variance at Completion (VAC) = BAC – EAC

A positive result (>0) suggests you anticipate completing under budget (hurrah!). A result less than zero anticipates a cost over-run.

So, crucially, how do we calculate our Estimate at Completion?

Estimate at Completion (EAC)

There are different ways to calculate your EAC. Which you choose will depend upon the assumption you choose to make, about how your project will proceed from now on.

Here’s a summary, before we look at the details:

There are five common approaches:

1. Optimistic Approach: Reversion to Plan

This approach assumes that from now on., you will continue according to your original plan. How likely is that? If you already have a substantial underperformance, this could represent a serious or willful decision to ignore that fact. So, before you use this approach, ask: ‘what evidence do we have that things will change?’

The formula for this is:

EAC = AC + (BAC – EV)

We start from the ctual cost, and then add on the remaining budgetted cost, having delivered the Earned Value.

2. Simple Approach: Continue as Before

I love simplicity. And this approach assumes that you will continue to deliver the same level of cost performance as you have to date. It’s easy to calculate.

EAC = BAC / CPI

We factor the original budget cost by the cost performance to date.

3. Hybrid Approach

This approach applies the factoring by the CPI to the outstanding work, and adds in the Actual cost of the work performed.

EAC = AC + [(BAC – EV) / CPI]

4. Pessimistic Approach: Worst of Both Worlds

This approach factors in both the CPI and the SPI. It typically produces a more pessimistic (conservative) estimate. I like it!

EAC = BAC / (CPI x SPI)

This is like the ‘simple approach’ formula, but factors the BAC down twice – by each of the two indices.

5. Super-Hybrid Approach: Most Sophisticated

But, sophistication doesn’t always give a better answer. It’s a variant on the pessimistic approach above, but gives a slightly different answer. Beware the precision trap: precise is not the same as accurate. I’m not sure I’d use this one, but it’s as well to know it.

EAC = AC + [(BAC – EV) / (CPI x SPI)]

This formula banks the cost performance to date (AC) and applies the factoring only to the remaining work.

Which one is correct?

I think I can do no better than quote the PMBOK Guide on this point…

Each of these approaches can be correct for any given project and will provide the project management team with an ‘early warning’ signal if the EAC forecasts are not within acceptable tolerances.

The PMI Project Management Body of Knowledge (PMBOK Guide) 6th edition

The PMBOK describes approaches 1, 2, and 5. So, if you are studying for your CAPM or PMP exam, you will need to know these formulas.

Estimate to Complete

Your Estmate to Complete (ETC) is a measure of the cost you now expect to spend, in completing the project. It is your EAC less the amount you have already spent:

ETC = EAC – AC

To-Complete Performance Index

The To-Complete Performance Index (TCPI) is not a forecast, but a performance index. but we needed to understand the forecasts, before looking at this. Perhaps unsurprisingly, there are two ways of calculating this, depending on whether you want to base it on your BAC or (to my preference) your EAC.

TCPI (BAC) = (BAC – EV) / (BAC – AC)

TCPI (EAC) = (BAC – EV) / (EAC – AC)

This is the ratio of the value remaining (BAC-EV) to the cost remaining based on either your budget (BAC-AC) or your estimate at completion (EAC-AC).

Carrying Out Earned Value Management

It’s easy to get caught up in the math. But there’s a practical side to setting up and delivering Earned Value Management. Let’s take a look at the basics you’ll need for your primer.

Setting-up Your Earned Value Management

Fundamentally, setting up EVM is a five-step process:

1. Establish your Project Scope.
2. Create your Work Breakdown Structure (WBS).
3. Identify dependencies and estimate durations to create your project schedule.
4. Allocate a budget to each activity or Work Package in your WBS. Do this by estimating the costs of people, materials, assets, and overheads.
5. Build your EVA spreadsheet, combining the budget and schedule data with spaces for monitoring and cells that calculate the indices, variances, and forecasts you will need. I’d use conditional formatting to help highlight the RAG status of forecasts and indices.

Measuring Progress

The challenge with measurement is to build a process that is consistent with the scale of expenditure and the risks inherent in your project. You’ll also want to consider:

• size of work packages
• procurement contract terms
• payment timing
• milestones and gateways

You are looking to balance easy of measurement with accuracy, and to find a solution that all your key stakeholders can accept as the basis for future project dcision-making and evaluation.

Examples of approaches you can take include basing your measurement on:

• delivery of products
• quantities installed
• achievement of milestones
• contract check-points reached
• percentage completion

Examples of Percentage Completion

What’s Wrong with Earned Value?

There’s nothing wrong with EVM. But, the nature of Earned Value Management is that it assumes that cost performance is what you most care about. This is so much so that it expresses schedule performance in cost units.

But, what if you want to measure schedule performance in terms of… Let’s say: time?

Introducing Earned Schedule

We don’t have space to go into this in detail, but logic dictates that if we can focus on cost, we could also focus on time. And that’s how Earned Schedule works. The illustration below shows how the Earned Schedule is the time it should have taken to deliver the work performed.

A Summary of Earned Value Analysis Formulas

Everyone loves a good summary table. So here is ours…

What’s Your Experience of Earned Value Management?

We’d love to hear about your experiences of and questions about Earned Value management. Please do write in the comments below and we’ll respond to every contribution.