Posted: June 29th, 2022

Earned Value Management Explained

Earned Value Management Explained

Earned Value Management (EVM) helps project managers to measure project performance. It is a systematic project management process used to find variances in projects based on the comparison of worked performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting. The project baseline is an essential component of EVM and serves as a reference point for all EVM related activities. EVM provides quantitative data for project decision making.

A baseline in project management is a clearly defined starting point for your project plan. It is a fixed reference point to measure and compare your project’s progress against. This allows you to assess the performance of your project over time.

For example, let’s say your project is on target to finish in six weeks. Is that good or bad? If your schedule baseline has a four-week completion, you can tell that there is a problem, and your team may need to make adjustments to speed up your progress. A project baseline typically has three components: schedule, cost, and scope

Common abbreviations

EV = earned value
AC = actual cost
PV = Planned value
BAC= Budget at Completion
VAC = Variance at Completion
EAC= Estimate at Completion
ETC = Estimate to complete

EVM Measures

EVM consists of the following primary and derived data elements. Each data point value is based on the time or date an EVM measure is performed on the project.

Primary Data Points
• Budget At Completion (BAC)
Total cost of the project

• Budgeted Cost for Work Scheduled (BCWS) / Planned Value (PV)
The amount expressed in Pounds (or hours) of work to be performed as per the schedule plan
PV = BAC * % of planned work.

• Budgeted Cost for Work Performed (BCWP) / Earned Value (EV)
The amount expressed in Pounds (or hours) on the actual worked performed
EV = BAC * % of Actual work

• Actual Cost of Work Performed (ACWP) / Actual Cost (AC)
The sum of all costs (in Pounds) actually accrued for a task to date

Cost Forecasting:
• Estimate At Completion (EAC)
The expected TOTAL cost required to finish complete work
EAC = BAC / CPI
o = AC + ETC

• Estimate to complete (ETC)
The expected cost required to finish all the REMAINING work: below ETC is made the subject of the formula to find EAC above
ETC = EAC – AC

Reminder
EV = earned value
AC = actual cost
PV = Planned value
BAC= Budget at Completion
VAC = Variance at Completion
EAC= Estimate at Completion)
ETC = Estimate to complete

Variances:
• Cost Variances (CV)
How much under or over budget
CV = EV-AC
NEGATIVE is over budget, POSITIVE is under budget

• Schedule Variances (SV)
How much ahead or behind schedule
SV = EV-PV
NEGATIVE is behind schedule, POSITIVE is ahead of schedule

• Variance At Completion (VAC)
Variance of TOTAL cost of the work and expected cost
VAC = BAC – EAC

Performance Indices:
• Cost Performance Index
CPI = EV / AC
Over (< 1) or under (> 1) budget

• Schedule Performance Index
SPI = EV / PV
Ahead (> 1) or behind (< 1) schedule

To Complete Performance Index (TCPI) is a forecasting technique of Project Management (PM). It is the cost efficiency required to complete a project within a defined budget.
TCPI = [BAC-EV]
[EAC-AC]

TCPI Definitions
It is a measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget. (PMBOK Guide)

Difference Between CPI And TCPI

Both CPI and TCPI provide a measure of Project’s cost efficiency. However there are basic differences between these two figures.
Cost Performance Index (CPI) is defined as ratio of EV and AC (EV / AC). It is project’s current cost efficiency on the Control Date.

The project CPI could be any one of the following:
• CPI < 1 – it means that value earned value is less than the money spent. Project is over budget.
• CPI = 1 – it means that value earned value is equal to the money spent. Project is going as per the budget.
• CPI > 1 – it means that value earned value is more than the money spent. Project is under budget.

CPI is a measure of current cost efficiency of the project. If CPI ≥ 1, then the project is (most probably) doing well. On the other hand, if CPI < 1 then the project is likely to be in trouble. In the latter case, the project team needs to take a corrective action(s) to bring the future costs in-line with the budget. This can be done by increasing the future cost efficiency.

As discussed earlier, TCPI is the estimated future cost efficiency.
CPI = (monetary value of completed work)/(expenditure till control date)
TCPI = (monetary value of remaining work)/(remaining funds)

The main differences between CPI & TCPI….

• CPI represents project’s current cost efficiency, whereas TCPI estimates project’s future cost efficiency.
• CPI is actual efficiency of the completed project work, whereas TCPI is estimated forecast of efficiency of the remaining project work.

A. You are managing a software project with an initial budget estimate of 2 million dollars. During your interim cost and schedule performance analysis, you figured out that:

 You should have spent $500,000 based on your initial plans and 1,000 man/days of schedule activities

 You spent $600,000 and completed 1,100 man/days of schedule activities which should have cost $450,000 based on your initial plans.

 You re-estimated the budget for the remaining work to be done as $1,500,000.

Calculate the following:
• BAC (Budget at Completion) = 2 million dollars
• PV (Planned Value) = $500,000 for cost related EVM calculations, PV=1,000 man/days for schedule related EVM calculations
• AC (Actual Cost) = $600,000
• EV (Earned Value) = 1,100 man/days for schedule related EVM calculations, EV = $450,000 for cost related EVM calculations.
• ETC (Estimate to Complete) = $1.5 million dollars

a. What is the Cost performance index (CPI ) and schedule performance index (SPI) of the project respectively?

• CPI = EV/AC = $450,000/$600,000 = 0.75
• SPI = EV/PV = 1,100/1,000 = 1.10
(4 marks)
b. What is the Cost variance (CV) and schedule variance ( SV) of the project respectively?
• CV = EV – AC = $450,000 – $600,000 = -$150,000
• SV = EV – PV = 1,100 man/days – 1,000 man/days = 100 man/days
(4 marks)
c. What is the Variance at Completion?
VAC (Variance at Completion) = BAC – EAC
= 2 million dollars – EAC

We know that EAC (Estimate at Completion) = AC + ETC
= $600,000 + $1,500,000
= $2,100,000

Therefore VAC = $2,000,000 – $2,100,000 = -$100,000
(4 marks)
d. What is the TCPI based on your new Estimate at Completion value?
TCPI based on EAC is calculated as below:
TCPI = [BAC-EV] / [EAC-AC]
= [$2,000,000-$450,000] / [$2,100,000-$600,000]
TCPI (based on EAC) = 1.03
(2 marks)
e. What is the status of your project?
Project is ahead of schedule, over budget, and it is harder to complete the project on new EAC
(2 marks)
We can calculate
CPI = EV / AC = 450,000 / 600000 =
Over (< 1) or under (> 1) budget

Students’ Problem:
Eg. A Company has initial budget estimate of 3 million dollars. During your interim cost and schedule performance analysis, it was realized:

 You should have spent $600,000 based on your initial plans and 2,000 man/days of schedule activities

 You spent $700,000 and completed 2,100 man/days of schedule activities which should have cost $550,000 based on your initial plans.

 You re-estimated the budget for the remaining work to be done as $2,500,000.

Therefore:
• BAC (Budget at Completion) = 3 million dollars
• PV (Planned Value) = $600,000 for cost related EVM calculations, at PV=2,000 man/days for schedule related EVM calculations
• AC (Actual Cost) = $700,000
• EV (Earned Value) = 2,100 man/days for schedule related EVM calculations, EV = $550,000 for cost related EVM calculations.
ETC (Estimate to Complete) = $2.5 million dollars

Find the following:
a. What is the CPI and SPI of the project respectively?
f. What is the CV and SV of the project respectively?
g. What is the Variance at Completion?
h. What is the TCPI based on your new Estimate at Completion value?
i. What is the status of your project?

Reference
Dwivedi U., (2015). Earned Value Management Explained. Retrieved from
https://www.projectsmart.co.uk/earned-value-management-explained.php

Malik P., (2020). How To Use To Complete Performance Index (TCPI) Formulas In PMP? Retrieved from https://www.pmbypm.com/tcpi-to-complete-performance-index/

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