Earned Value Management for Managers and Executives
Projects are the very heart of business. They drive new product development, and make our existing products better and our processes more efficient. Without projects, we would be stuck in a time-loop of constantly repeating days. Unfortunately, most managers and executives really don’t know how healthy their projects are until they end successfully, or rise up, out of control, spilling their doom and gloom over the entire organization.
Platitudes like, "moving along", "things are going great", and the oldie but goodie, "we are a little behind, but we expect to catch up" are commonly heard from the mouths of project managers. It is impossible to understand the health of a project when you get meaningless, qualitative answers such as these. Earned Value Management is an easy, yet often misunderstood, method for getting concrete, quantitative indicators for the health of your projects.
Anytime you hear an advertisement for a financial product, such as a mutual fund or stock, you will hear a disclaimer saying that past performance does not guarantee future performance. A few years ago you might not have paid much attention to it. However, the recent free-fall in the financial markets that wiped out many of our 401k plans has made that disclaimer all too real to most investors and market watchers.
Unfortunately, until quantum physicists figure out how to travel through time, looking back is really all we have to judge the future. So, it is important to use tools and techniques that give us the best possible chance to successfully predict the future. Earned Value Management is one such technique.
While the academic discipline of Earned Value Management is extremely complex and dives deep into math and statistics, Earned Value starts with just a simple formula, and exploiting it for your projects requires adding just a few more, even more simple, formulas. Still, most project managers don’t use it and tend to believe it is either complicated or unnecessary. Neither of these beliefs is true. Anyone that understands basic math can calculate EVM.
What is Earned Value and how is it calculated?
The heart of EVM is a series of simple formulas that start with Earned Value. But, before we dig into EV and its offshoots, consider this scenario:
Suppose you are responsible for a project with a budget of $100,000. The project schedule tells you that the project should take five weeks to complete. After two weeks (40% of the schedule) you are told the project has used 60% of its budget. What is the status of the project?
- Over budget
- Ahead of schedule
- Both, over budget and ahead of schedule
- There is no way to tell
Did you take time to think, or did you skip the responses and jump right to here? Did you pick an answer? Did you select the last response? If so, did you select it because you knew it was correct and you understand why, or did you just see through my simplistic question?
If you realized that how much time and money you have spent are irrelevant unless you know what has actually been accomplished, then you are half-way down the trail to understanding EVM. If you still don’t get it, go back and read the question again and consider this: what if all the facts were kept the same but all of the deliverables were completely finished. Wouldn’t that mean you came in under budget and ahead of schedule? But what if the team had only completed 30% of all of the deliverables? Wouldn’t you be behind schedule and over budget?
The point is that how much of the budget and schedule you have used is meaningless unless you take into account what has actually been accomplished—your percent complete.
The earned value for a task is simply the budgeted amount multiplied by the percent complete. For example, if you have a task whose budget is $2,000 and it is 60% complete then your EV for that task is $1,200. To calculate the EV for a project, simply add up all the task EV figures.
Now you have a value, Earned Value, that can be directly compared to your Actual Costs in a meaningful way. Suppose we continue with the example and compare your $1,200 in EV to an Actual Cost figure of $1,000. Would we be over budget or under budget? You would be under because the project has earned a value of $1,200, but it only cost $1,000 to get it. Conversely, if the Actual Cost figure was $2,000, the project would be over budget by $800.
The other value that is needed is the project Planned Value. PV is the amount budgeted to spend to date. To calculate PV, multiply the hours that were scheduled to have been completed for each task, by the task rate. If a task is assigned to more than one person, you will have to do this calculation for each person on the task.
You now have everything you need: Planned Value (PV), Actual Costs (AC) which are the actual time and expenses that have hit the project, and the Earned Value (EV) for each task, which is the Planned Value (PV) times Percent Complete. You also know that the project’s total EV is the sum of all project task EVs.
Using Earned Value to measure project progress in a quantitative way
Now that you know how to find PV and AC, and calculate EV, you are ready to start calculating the Performance Index values, CPI and SPI, both of which give you a quick way to look at any project and understand its health, even if you don’t know its budget or schedule.
The first index we will look at is the CPI, or Cost Performance Index. The CPI compares the Earned Value (EV) to the Actual Costs (AC) spent to date. It does this by dividing the EV by the AC to come up with a number that should be close to 1.
Why should the number be close to one? Because a value of exactly one means your Earned Value (what you have earned) and your Actual Costs are identical. Good news. So, anything over 1 means your Earned Value is greater than your cost, so you have earned more than you spent and you have a cost under-run. A CPI less than 1 means you have spent more than the value you have received, so you have an over-run.
You can think of the result in terms of either dollars or a percent—whichever makes more sense to you. If you think of CPI as a dollars, you might say you have earned X dollars for every dollar invested. i.e., a CPI of 1.2 means you have earned $1.20 for every dollar spent.
If you prefer to think of it in terms of percentages, you might think of a CPI of 1.2 as meaning you got back 120% of what you put in.
Another index you should consider using is the Schedule Performance Index, or SPI.
This index works just like the CPI, but it compares the Earned Value to the Planned Value through the equation EV/PV.
In this case an SPI of greater than one means you are ahead of schedule and an SPI less than one would indicate you are behind schedule.
To recap, an index greater than 1 is generally good (below budget/ahead of schedule), and an index less than one is generally bad (over budget/behind schedule.) All it takes is a glance at two numbers and you know the overall health of your budget and schedule.0
So far I have been using dollars as an example when calculating and using Earned Value because most managers seem to prefer seeing things in monetary terms. However, Earned Value can also be calculated using time, such as hours. Using hours tends to favor the schedule formulas because they aren’t affected by rate differences. On the other hand, calculating EV using dollars does take rate differences into consideration. Usually, you can pick one, hours or dollars, and stick with it, but you might want to calculate it both ways just to be sure. Especially, if you have people moving onto tasks that don’t have the same rate as what was used to estimate the task. Just remember to use the same units for PV and AC as you used for EV.
Now we will take it to the next level and talk about variances—when percentages won’t do and you must have the actual numbers.
Variances—when you need an answer in dollars
The final group of EVM formulas we will discuss are the variances—Schedule Variance (SV) and Cost Variance (CV). Variances are expressed in the same units that were used to calculate the Earned Value—usually hours or dollars. This allows you to get a better idea of the magnitude of the number. For example, you might have two projects that both have CPI’s of 0.8. The first is a ten-thousand dollar project the second has a budget of ten-million dollars. If the projects and their cost overruns continue, the first project will be $2,500 over budget and the second will be $2.5 million over budget. That money will have to come from somewhere, and finding $2,500 is a lot easier than finding $2.5 million.
So, while the indices make it easy to see the project health quickly, and compare multiple projects to each other, they do nothing to give any indication of how far off the project is in actual hours or dollars.
The formula for Schedule Variance is similar to the Schedule Performance Index formula but, instead of being EV/PV, it is EV-PV. It shows the difference between Earned Value and Planned Value in units.
And, fortunately for us mentally challenged project managers, Cost Variance follows the exact same pattern; it is EV-AC instead of EV/AC.
Earned Value in a nutshell
Below are all the formulas and values needed to implement basic Earned Value Management.
Budget at Completion (BAC)
The project budget; the baseline amount the project is expected to cost. This value is not a forecast, and is not changed throughout the project, except with a change control document.
Actual Cost (AC)
The Actual Cost is just what it sounds like, sum of all timesheets and outside costs to date for the project.
Planned Percent Complete
The Planned Percent Complete represents how much of the project should have been completed by a given date, according to the project schedule. If 400 hours were scheduled to have been completed on a 1000 hour project, then the PPC would be 40%.
PPC=Scheduled Hours / Total Hours
Planned Value (PV)
The Planned Value is value that the project schedule says should have been earned by a given point in time. It is the part of the authorized budget that was scheduled to be spent to date.
Task Earned Value (TEV)
The Task Earned Value is used to calculate the project Earned Value when it is difficult to calculate the overall percent complete for a project. If you are using a tool, such as Microsoft Project, that can calculate the total project percent complete automatically, then the Task Earned Value doesn’t need to be calculated. The project Earned Value would be the BAC times the calculated percent complete. If the total project percent complete is not known, use the following formula to calculate each task’s Earned Value.
The Earned Value is the sum of all of the Task Earned Values, or the project budget (BAC) times the project percent complete.
Schedule Performance Index (SPI)
Schedule Performance Index is the measure of progress achieved compared to progress planned on a project. The SPI is useful in comparing projects to each other.
Cost Performance Index (CPI)
The Cost Performance Index is the measure of the value of work completed compared to the actual cost of the progress made so far on the project. Like the SPI, the CPI is useful in comparing projects to each other.
Schedule Variance (SV)
The Schedule Variance is a measure of schedule performance on a project in the units that were used to calculate EV and PV—usually hours or dollars.
Cost Variance (CV)
Cost Variance is a measure of cost performance on a project in dollars. NOTE: EV can be calculated using either hours or dollars. When calculating Cost Variance, be sure to use an EV that was calculated using dollars.
Earned Value Management is a huge discipline worthy of continued doctoral research. However, the most basic EVM concepts are easy to understand and extremely valuable in managing your projects. Earned Value can be calculated as often as you have time and expense data—which is often weekly; and the investment in time and effort to calculate it is well worth it.0
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Jennifer Greene. Head First Pmp: A Brain-Friendly Guide to Passing the Project Management Professional Exam. 2009
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Rita Mulcahy, PMP. PMP Exam Prep, Seventh Edition: Rita's Course in a Book for Passing the PMP Exam. 2011
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