The earned value method is the project management standard for cost control during a project. Whether you are a practicing project manager or studying for the PMP exam, you need to know how to calculate earned value.
Fortunately, it involves nothing more than basic high school math. The more difficult part is knowing what each of the variables means and how to apply them.
To start, a progress period is chosen, usually weekly (this works well for small as well as large projects). Earned value calculations are performed at the end of the period.
They fall into three categories, performed in this order:
- Present Status
- Future Forecasting
There are three inputs to the Earned Value method. Each of these variables must be obtained from each task’s actual progress:
- Planned Value (PV): The planned expenditure of funds to the date of analysis. This is taken from the project schedule. For example, if a task is anticipated to last from January 1 to January 10 and today is January 5, PV = 50% of task budget.
- Earned Value (EV): The actual progress of the task to the date of analysis. This is expressed as the percentage of total effort and/or resources expended. It could be measured in units, such as number of fence posts driven or number of holes dug, or number of hours of labor expended. For example, if the same task above is 40% complete, EV = 40% of task budget.
- Actual Cost (AC): The actual expenditure of funds to the date of analysis. This is usually tracked via software or manually with receipts, etc.
These four calculations answer the following two questions:
- How far ahead or behind schedule is the project right now?
- How far above or below budget is the project right now?
The calculations are relatively simple and should not scare anyone away. In order to report on the project’s current progress, there are four variables which tell the project manager about the health of the project.
- Cost Variance. The amount that the project is above or below budget at the point of analysis.
- Cost Performance Index. The relative (percentage) amount that the project is above or below budget, relative to the overall size of the project.
- Schedule Variance. The amount that the project is ahead or behind schedule at the point of analysis.
- Schedule Performance Index. The relative (percentage) amount that the project is ahead or behind schedule relative to the overall size of the project.
Analysis of Results
Calculations are always fun, but what do they mean?
- A positive CV means the project is under budget (positive = good). Negative means over budget. The CPI tells you how much above or below the budget it is, in percentage terms, for example, CPI = 1.25 means the project is 25% below budget.
- A positive SV means the project is ahead of schedule (again, positive = good). Negative means behind schedule. The SPI tells you how much ahead or behind schedule the project is, in percentage terms, for example, SPI = 0.9 means the project is 10% behind schedule.
The above variables tell you where the project is right now (or at the point of analysis), and can be very useful for decision making. But what if you wanted to see where the project was trending? That’s where the following three metrics come in.
- Estimate at Completion (EAC). This is the estimated final cost of the project. There are several ways to calculate this, based on the assumptions that are made.
- If past project performance is expected to continue:
- If past project performance is considered one-time, and future performance will revert back to the planned rate:
- If the cost and schedule performance both factor into the future performance (the previous formulas used only the cost performance):
- When something unexpected has arisen and you need to throw out the original estimate and produce a new one. In this case, start with the AC already spent:
- Estimate to Complete (ETC): This represents the amount left to spend to complete the project. It’s the amount of money that needs to be “in the bank” to complete the project.
- To Complete Performance Index (TCPI): This value tells you how efficient you need to be to complete the project according to the original plan. For example, if you were inefficient at CPI = 0.9 throughout the first quarter of the project, a TCPI = 1.03 means you have to pick it up and be 3% more efficient than the original plan to finish on target.
- In order to finish on the original budget:
- In order to finish on the revised budget if current project performance continues:
These forecasts could be used to update financial metrics such as Net Present Value (NPV), payback period, or Return on Investment (ROI) which were used to justify the project.