Earned Value Management

What is Earned Value Management?

Earned Value Management (EVM) or Earned Value Analysis (EVA) is a project management technique used to measure project performance and progress in an objective manner. It integrates scope, schedule, and cost to assess how much work has been completed compared to the planned work and budget. EVM helps identify variances from the project plan by comparing the actual cost and work done against the planned budget and schedule.

By analyzing these metrics, EVM helps project managers assess performance, forecast future trends, and take corrective actions when necessary.

Time as Money

EVM effectively expresses time as money by translating project schedule progress into monetary terms. This is done by measuring the value of work completed (in terms of cost) against the planned timeline, which allows project managers to quantify schedule performance financially.

Let’s understand the “time as money” concept better with the help of a case study first.

Case Study

A project is planned to take 10 days to complete and cost \$1,000 to complete. After 5 days, only 40% of the work is actually completed at a cost of \$450.

Question: What can we say about the health of the project after Day 5 based on this information - is it ahead or behind schedule, and above or below budget? This is exactly what the three EVM metrics - PV, EV, and AC - help us determine.

Solution: What percentage of work was planned to be completed in 5 days? It is 50% because the entire work package was planned to be completed in 10 days. So, in 5 days, 50% or half of the work was planned to be completed.

What percentage of work was actually completed after 5 days? It is 40%, as stated above.

So without any special formula or metrics, is the project on schedule or behind schedule? It is clearly behind schedule as only 40% of the work was completed against the planned 50% work after 5 days.

Is the work done so far above or below the budgeted cost? Let’s dive into the cost aspect now.

The budget for 10 days of work is \$1,000. So, what is the budget for 5 days of work? It is half of that amount i.e. \$500.

So what have we done here? We have assigned a monetary value to time (time as money). Using the same approach, we can assign a monetary value for each day’s of work as described in the table below.

While at the beginning of the project, the project team had planned to accomplish 50% of work in 5 days, they actually accomplished only 40% of the work in 5 days.

What is the monetary value of the 40% work that has been accomplished? It is \$400 as per the table above.

And finally, how much money did they actually spend on the project after 5 days? It is \$450, as stated in the problem statement itself.

Based on this, is the project below budget or above budget after 5 days?

This is where it gets a bit tricky. The initial thought might be that the team planned to spend \$500 in 5 days, but actually spent only \$450, so the project is below budget. But that will not be the right answer.

When determining whether the project is below or above the budget, the team needs to compare the money actually spent with the worth of work actually accomplished.

How much work work did they accomplish? It is 40%. What is the worth of that work? It is \$400, as per the table above.

How much money did they actually spend? It is \$450, as stated in the question.

What does this tell about the project? The team spent \$450 to accomplish only \$400 worth of work. They still have \$600 worth of work to be accomplished and are left with only \$550 (of the total \$1,000 budget). So, without applying any formula, is the project below or above budget after 5 days?

The project is above budget after 5 days.

Without using any formula or metric, we have performed a health check on the project and determined that the project is both behind schedule and above budget.

In the next section, we will evaluate this case study with the help of key EVM metrics.

Key EVM Metrics

In this section, we will cover the three key metrics in EVM. If we can grasp these three metrics, we will have understood 50% of EVM. The good news is that we have already covered most of it in the previous section.

Planned Value (PV)

Planned Value (PV) is the estimated (monetary) value of the work planned to be accomplished at a given point in time.

At the beginning of the project, how much work did the team plan to accomplish in 5 days? It was 50%. What was the worth of work of that work? It was \$500. This \$500 is our Planned Value (PV).

Earned Value (EV)

Earned Value (EV) is the estimated (monetary) value of the work accomplished.

After 5 days, how much work did they actually accomplish? It is 40%. What is the worth of that work? It is \$400. This \$400 is our Earned Value (EV).

Actual Cost (AC)

Actual Cost (AC) is the actual cost incurred for the work accomplished.

After 5 days, how much did the team actually spend on the project? They spent \$450. This \$450 is our Actual Cost (AC).

So there we have it - our three EVM metrics! Let’s cover one more metric, which we will use in a later section.

Budget At Completion (BAC)

Budget At Completion (BAC) is the budget for all the work on the project. It is also the total planned value for the project.

In simple terms, it’s the total budget for the project. In our example above, BAC is $1,000.

In the next two sections, we’ll apply these 3 EVM metrics to quantify how much behind schedule and above budget we are on the project.

Schedule Performance Metrics

Let’s understand the two fundamental EVM metrics related to schedule performance.

Schedule Variance (SV)

Schedule Variance (SV) is a measure of schedule performance on a project. It is the difference between the earned value (EV) and the planned value (PV).

$$\text{SV} = \text{EV - PV}$$

What does SV tell us?

If SV is negative, project is behind schedule.
If SV is zero, project is on schedule.
If SV is positive, project is ahead of schedule.

Let’s apply this formula to our previous example to calculate the SV. $$\text{EV} = $400$$ $$\text{PV} = $500$$ $$\text{SV} = $400 - $500 = -$100$$

Since SV is negative, the project is behind schedule. We arrived at the same conclusion in the previous section without using any formula.

But what does SV of -\$100 tell us? It tells us that the project has accomplished \$100 less worth of work than was planned.

Schedule Performance Index (SPI)

Schedule Performance Index (SPI) is a measure of schedule efficiency on a project. It is the ratio of earned value (EV) to planned value (PV).

$$\text{SPI} = \frac{EV}{PV}$$

What does SPI tell us?

If SPI is less than 1, project is behind schedule.
If SPI is equal to 1, project is on schedule.
If SPI is more than 1, project is ahead of schedule.

Let’s apply this formula to our example to calculate the SPI. $$\text{EV} = $400$$ $$\text{PV} = $500$$ $$\text{SPI} = \frac{$400}{$500} = 0.8$$

What does SPI of 0.8 tell us? It tells us that:

• Since SPI is less than 1, the project is behind schedule. We arrived at the same conclusion above.
• The project is progressing slower than planned.
• The project has accomplished only 0.8, or 80% of its planned work. In other words, schedule efficiency is 80%.
• The project is 20% behind schedule.

In the previous section, we concluded that the project was behind schedule, but we didn’t know how much behind schedule it was. In this section, SV and SPI, which are measures of schedule performance, have helped us quantify how much behind schedule the project is.

In the next section, we will extend this approach to quantify the cost performance on the project.

Cost Performance Metrics

Let’s understand the two fundamental EVM metrics related to cost performance.

Cost Variance (CV)

Cost Variance (CV) is a measure of cost performance on a project. It is the difference between earned value (EV) and actual cost (AC).

$$\text{CV} = \text{EV - AC}$$

What does CV tell us?

If CV is negative, project is above budget.
If CV is zero, project is right on budget.
If CV is positive, project is below budget.

Let’s apply this formula to our previous example to calculate the CV. $$\text{EV} = $400$$ $$\text{AC} = $450$$ $$\text{CV} = $400 - $450 = -$50$$

Since CV is negative, the project is above budget. We arrived at the same conclusion in the earlier section without using any formula.

But what does CV of -\$50 tell us? It tells us that the project is \$50 above budget.

Cost Performance Index (CPI)

Cost Performance Index (CPI) is a measure of cost efficiency on a project. It is the ratio of earned value (EV) to actual costs (AC).

$$\text{CPI} = \frac{EV}{AC}$$

What does CPI tell us?

If CPI is less than 1, project is over budget.
If CPI is equal to 1, project is right on budget.
If CPI is more than 1, project is below budget.

Let’s apply this formula to our example to calculate the SPI. $$\text{EV} = $400$$ $$\text{AC} = $450$$ $$\text{CPI} = \frac{$400}{$450} = 0.89$$

Since CPI is less than 1, the project is above budget. We arrived at the same conclusion above.

What does CPI of 0.89 tell us? It tells us that:

• The project is earning only \$0.89 value for every \$1.00 spent.
• Costs are higher than planned, and the project is less efficient in using its budget.
• The project is only achieving 89% value for the amount spent. In other words, cost efficiency is 89%.
• The project is 11% over budget.

In the earlier section, we concluded that the project was above schedule, but we didn’t know how much above budget it was. In this section, CV and CPI, which are measures of cost performance, have helped us quantify how much above budget the project is.

Forecasting Metrics

EVM provides three metrics to forecast project performance. This section is more advanced than the previous sections as there are many different scenarios to forecast the performance. But we’ll try to make it as simple as possible. Let’s start with the definitions first.

Estimate To Complete (ETC)

Estimate To Complete (ETC) is the estimated cost to complete all the “remaining work” on a project, an activity, or a WBS component.

There is no formula to calculate ETC. It is estimated by the project team.

Estimate At Completion (EAC)

Estimate At Completion (EAC) is the estimated total cost of a project, an activity, or a WBS component, when all the work is completed. This is calculated by adding the cost incurred till date, which is the Actual Cost (AC), and the Estimate to Complete (ETC) of the remaining work.

$$\text{EAC} = \text{AC + ETC}$$

Four Scenarios to Calculate ETC

There are four scenarios or possibilities to consider in order to calculate ETC and EAC.

1. Original estimate is fundamentally flawed

If the project team realizes that their original estimate is fundamentally flawed, they need to reestimate the remaining work on the project.

In the example, let’s say the team has this realization and reestimates the remaining 60% work on the project, and based on their new estimates it would require additional \$800 to complete the remaining work on the project.

In this case, the ETC is \$800 as this is the cost to complete the “remaining work” on the project.

$$\text{ETC} = $800$$ $$\text{EAC} = \text{AC + ETC} = $450 + $800 = $1,250$$

This mean that after 5 days, the project is estimated to cost an additional \$800 to complete the remaining work, and the total estimated cost at completion (EAC) is \$1,250.

2. Remaining work to be performed at the original budgeted rate (atypical)

In this scenario, the project team determines that an atypical or one-off event caused the variation in project performance. The original estimates are still good and no reestimation is needed. For example, bad weather caused the delay but the weather forecast for the remaining duration is good and the project team expects to complete the remainder of the project at the estimated rate.

So, what is the ETC of the remaining work on the project as per the original budgeted rate? It is the difference between the Budget at Completion (BAC) and the Earned Value (EV). The project was estimated to cost \$1000 of which \$400 of work is done. So the value of the remaining work is:

$$\text{ETC} = \text{BAC - EV} = $1000 - $400 = $600$$

Let’s calculate the EAC.

$$\text{EAC} = \text{AC + ETC} = $450 + $600 = $1,050$$

This mean that after 5 days, the project is estimated to cost an additional \$600 to complete the remaining work, and the total estimated cost at completion (EAC) is \$1,050.

3. Remaining work to be performed at the current CPI (typical)

In this scenario, the project team determines that the current cost performance will continue in the future. The original cost estimate is no longer valid and the current cost performance is projected to continue in the future.

To calculate the ETC, we need adjust the original value of work remaining as per the current cost performance. This can be done by dividing the original value of work remaining by the Cost Performance Index (CPI).

$$\text{Original value of work remaining} = \text{BAC - EV}$$ $$\text{CPI} = 0.89$$

The new value of work remaining, ETC is:

$$\text{ETC} = \frac{BAC - EV}{CPI} = \frac{$1000 - $400}{0.89} = $675$$

Note that 0.89 is an approximation of \$400 / \$450. If we use exact number, we get exactly \$675 as the result.

$$\text{EAC} = \text{AC + ETC} = $450 + $675 = $1,125$$

This mean that after 5 days, the project is estimated to cost an additional \$675 to complete the remaining work, and the total estimated cost (EAC) is \$1,125.

4. Project needs to meet a deadline

This is a special case where the project needs to meet its original deadline, which is 10 days in the example. If the project is already delayed, what can the project team do to catch-up and still meet the original deadline? One option is to add additional resources (manpower, equipment, etc.) to expedite the remaining work.

Compared to scenario 3, this scenario is expected to cost more because in this case, not only do we need to adjust for cost performance, but also for the schedule performance in order to meet the deadline.

In this case, we need adjust the original value of work remaining by dividing it with both the Schedule Performance Index and the Cost Performance Index (CPI).

$$\text{ETC} = \frac{BAC - EV}{SPI * CPI} = \frac{$1000 - $400}{0.8 * 0.89} = $844$$ $$\text{EAC} = \text{AC + ETC} = $450 + $844 = $1,294$$

This mean that after 5 days, the project is estimated to cost an additional \$844 to complete the remaining work, and the total estimated cost (EAC) is \$1,294. As expected, the EAC in this scenario is more than that in scenario 3.

To-Complete Performance Index (TCPI)

To-Complete Performance Index (TCPI) is the cost performance that must be achieved on the remaining work to meet a BAC (or EAC) target. It is the ratio of “remaining work” to the “funds remaining”.

Let’s understand this concept with an analogy first. Let’s say you need to drive from point A to point B. The two points are 1000 kms apart. If you drive at 100 kmph, it will take you 10 hours to complete the journey. For the first 400 kms, you drove at 90 kmph, which is less than the 100 kmph that you planned to go at. Now if you were to still complete the journey in the same 10 hours, what speed would you have to drive at for the rest of the journey? It is very likely going to be higher than 100 kmph in order to catch up for the lost time.

TCPI is basically the equivalent of the speed at which you need to go at for the rest of the project in order to meet the budget target (BAC or EAC). There are two formulas to calculate TCPI.

TCPI based on BAC

If the project team were to still complete the project within the original \$1,000 budget, what is the cost performance that they need to achieve for the remainder of the project? For this we calculate the value of the remaining work, and then divide it with the funds remaining. $$\text{Value of work remaining} = \text{BAC - EV} = $1000 - $400 = $600$$ $$\text{Funds remaining} = \text{BAC - AC} = $1000 - $450 = $550$$ $$\text{TCPI} = \frac{\text{Value of work remaining}}{\text{Funds remaining}} = \frac{BAC - EV}{BAC - AC} = \frac{$1000 - $400}{$1000 - $450} = 1.09$$

This means that the project needs to achieve a CPI of 1.09, much higher than the current CPI of 0.89, for the remainder of the project in order to meet the original budget.

TCPI based on EAC

If the original estimates are fundamentally flawed (scenario 1 above), then we recalculate ETC and EAC. In case of reestimation, the funds remaining become (EAC - AC) instead of (BAC - AC). $$\text{Value of work remaining} = \text{BAC - EV} = $1000 - $400 = $600$$ $$\text{Funds remaining} = \text{EAC - AC} = $1250 - $450 = $800$$ $$\text{TCPI} = \frac{\text{Value of work remaining}}{\text{Funds remaining}} = \frac{BAC - EV}{EAC - AC} = \frac{$1000 - $400}{$1250 - $450} = 0.75$$

This means that the project needs to achieve a CPI of 0.75 for the remainder of the project in order to meet the new budget target.

Here’s an interpretation of the TCPI value:

If TCPI is less than 1, project is easier to complete.
If TCPI is equal to 1, project is same as before.
If TCPI is more than 1, project is harder to complete.

Limitations of EVM

1. Mental block: Time is expressed as money, not as time, making it challenging for some stakeholders to interpret.
2. At the end of the project, SV is always 0 and SPI is always 1 even if the project finishes behind schedule.
3. EVM does not account for project quality or customer satisfaction, focusing solely on cost and schedule performance.
4. Successful EVM implementation requires a well-defined project scope, Work Breakdown Structure (WBS), and project schedule.
5. EVM can be difficult to implement in dynamic environments, such as Agile projects, where requirements and scope may frequently change.
6. Benefits are proportional to the size/complexity of the project.

Exercises

Let’s look at some sample PMP Exam Questions on EVM to reinforce the understanding and prepare for PMP certification.

PMP Sample Question 1

A project manager is compiling the Work Performance Information for their project. The project team had planned to accomplish \$25,000 worth of work till date. They have actually spent \$20,000 till date, and has accomplished \$18,000 worth of work. What is the CPI of the project?

• A. 0.8
• B. 0.9
• C. 1.11
• D. 1.25

Solution:

The Planned Value (PV) is \$25,000, the Earned Value (EV) is \$18,000, and the Actual Cost (AC) is \$20,000.

$$\text{CPI} = \frac{EV}{AC} = \frac{$18,000}{$20,000} = 0.9$$

So, the correct answer is B. 0.9.

PMP Sample Question 2

A highway construction project has been underway for more than 6 months. At the last monthly review meeting, the project SPI was reported as 1.03 and CPI as 0.81. The sponsor has expressed concern over the progress. Why is the sponsor concerned?

• A. The project is over budget.
• B. The project is behind schedule.
• C. The project is behind schedule and over budget.
• D. The project has underestimated the work.

Solution:

CPI of less than 1 indicates that the project is over budget, and more than 1 indicates that the project is under budget. Similarly, SPI of less than 1 indicates that the project is behind schedule, and more than 1 indicates that the project is ahead of schedule. In this case, the project is significantly over budget, but slightly ahead of schedule.

There could be several reasons for the project to be over budget and there isn’t enough information to say that the project team has underestimated the work.

So, the correct answer is A. The project is over budget.

PMP Sample Question 3

This section is coming soon.

PMP Sample Question 4

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PMP Sample Question 5

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The following presentation describes EVM concepts with a more elaborate example.