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:
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:
Earned Value Management provides us with a way to do this. It lets us;
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.
It is pretty straightforward to measure schedule performance…
And it’s equally straightforward to measure budget performance…
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.
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?
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 CompletedBAC = Budget at Completion: the budgeted cost of the completed project.
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:
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.
There are four standard performance measures in EVM:
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.
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.
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
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.
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||>0.95||<5% of BAC||>0.95||<5% of CT|
|Amber||0.80 – 0.95||5% – 10% of BAC||0.80 – 0.95||5% – 10% of CT|
|Red||<0.80||>10% of BAC||<0.80||>10% of CT|
With a RAG status for each performance index, you can highlight
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).
Forecast Cost Variance at Completion (VAC) = BAC – EACA positive result (>0) suggests you anticipate completing under budget (hurrah!). A
resultless than zero anticipates a cost over-run.
So, crucially, how do we calculate our Estimate at Completion?
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:
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
ctualcost, and then add on the remaining budgettedcost, having delivered the Earned Value.
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 / CPIWe factor the original budget cost by the cost performance to date.
This approach applies the factoring by the CPI to the outstanding
EAC = AC + [(BAC – EV) / CPI]
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.
But, sophistication doesn’t always give a better answer. It’s a variant on the pessimistic approach
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.
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.
ETC = EAC – AC
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).
It’s easy to get caught up in
Fundamentally, setting up EVM is a five-step process:
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:
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
Eaxamples of approaches you can take include basing your measurement on:
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?
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.
Everyone loves a good summary table. So here is ours…
Particularly if you are studying for your PMP exam, we recommend:
The PMP Exam Formula Study Guide, by PM PrepCast founder and friend of OnlinePMCourses, Cornelius Fichtner, PMP.
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.
Dr Mike Clayton is one of the most successful and in-demand project management trainers in the UK. He is author of 14 best-selling books, including four about project management. He is also a prolific blogger and contributor to ProjectManager.com and Project, the journal of the Association for Project Management. Between 1990 and 2002, Mike was a successful project manager, leading large project teams and delivering complex projects. In 2016, Mike launched OnlinePMCourses.
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