This article originally appeared on July 6, 2012.
Earned Value Management (EVM) is a technique that measures project performance against the project baseline. The earned value calculations are studied and memorized by all project managers seeking Project Management Professional (PMP) certification. However, their use in practice is inconsistent. EVM is considered by Insight to be one of the “critical few” best practice areas for monitoring project performance from both a cost and schedule perspective.
It’s common to think about projects with binary thinking:
- Ahead of schedule vs. behind schedule
- Over budget vs. under budget
Both project performance factors have a direct impact on the total project cost. What will be the total cost of my project if I'm ahead of schedule but my costs are higher than expected? If I'm behind schedule but my costs are lower? EVM provides great information to help with these questions.
Calculating earned value
Software packages such as Microsoft Project can perform earned value calculations automatically, and they’re simple calculations that can quickly be performed manually as needed. Earned value calculations require the following:
- Planned Value (PV) = the budgeted amount through the current reporting period
- Actual Cost (AC) = actual costs to date
- Earned Value (EV) = total project budget multiplied by the % of project completion
With these readily available numbers, we're ready to do some calculations.
- Schedule Performance Index (SPI) calculation: SPI = EV/PV
SPI measures progress achieved against progress planned. An SPI value <1.0 indicates less work was completed than was planned. SPI >1.0 indicates more work was completed than was planned.
- Cost Performance Index (CPI) calculation: CPI = EV/AC
CPI measures the value of work completed against the actual cost. A CPI value <1.0 indicates costs were higher than budgeted. CPI >1.0 indicates costs were less than budgeted.
For both SPI and CPI, >1 is good, and <1 is bad. Note that if you’re in a hurry, for both cost and schedule, you can subtract instead of dividing to get the variance. Schedule variance = EV-PV, and cost variance = EV–AC. Subtracting can quickly be done in your head, and for these cases, >0 is good, and <0 is bad. But unlike SPI and CPI, variance cannot be effectively compared across projects or over time, where the budget for a project may have changed, because they’re relative to the size of the project.
- Estimated at Completion (EAC) calculation: EAC = (Total Project Budget)/CPI
EAC is a forecast of how much the total project will cost.
Let’s take a look at an example. Assume we’re halfway through a year-long project that has a total budget of $100,000. The amount budgeted through this six-month mark is $55,000. The actual cost through this six-month mark is $45,000.
So, in summary:
- Planned Value (PV) = $55,000
- Actual Cost (AC) = $45,000
- Earned Value (EV) = ($100,000 * 0.5) = $50,000
- Schedule Variance (SV) = EV–PV = $50,000-$55,000 = -$5,000 (bad because <0)
- Schedule Performance Index (SPI) = EV/PV = $50,000/$55,000 = 0.91 (bad because <1)
- Cost Variance (CV) = EV–AC = $50,000-$45,000 = $5,000 (good because >0)
- Cost Performance Index (CPI) = EV/AC = $50,000/$45,000 = 1.11 (good because >1)
- Estimated at Completion (EAC) = (Total Project Budget)/CPI = $100,000/1.11 = $90,000
Because SV is negative and SPI is <1, the project is considered behind schedule. We’re 50% of the way through the project but have planned for 55% of the costs to be used. There will have to be some catch-up in the second half of the project.
Because CV is positive and CPI is >1, the project is considered to be under budget. We’re 50% of the way through the project, but our costs so far are only 45% of our budget. If the project continues at this pace, then the total cost of the project (EAC) will be only $90,000, as opposed to our original budget of $100,000.
Pitfalls to watch out for
- Take care not to rely solely on earned value — it represents a single objective data point. Earned value can change quickly, and actual costs and project progress rarely occur as budgeted. However, earned value does serve as an excellent early-warning system, and looking at earned value trends can provide very useful data. It’s most common to report earned value monthly, but this could be more frequent for a shorter project.
- Customer satisfaction and quality aren’t captured within earned value calculations. While earned value is helpful for measuring project performance relative to schedule and budget, it doesn’t guarantee project success.
- It’s important to make sure all actual costs are included in your calculations — especially when using software such as Microsoft Project, something could be overlooked (particularly indirect labor and non-labor costs).
- If you’re reporting earned value calculations, make sure the recipients know what the numbers mean and how they’re used. I recommend presenting them in non-project management terms to project sponsors and other key stakeholders. This is much easier than training stakeholders on “project management speak” (whether they want it or not).
These earned value calculations can help a project manager identify problems early and be more proactive as opposed to “after the fact” and reactive. EV metrics are defined in a standard manner, and the data is available to be reported regularly across the project portfolio. If you’ve never calculated earned value on your project or if it's been a while, try it out. You might be surprised by what you find.