What Is Earned Value Management (EVM) System?

This Comprehensive Guide to Earned Value Management (EVM) Explains Benefits, Examples, Indicators, and Metrics for Earned Value Management:

While working in the project management and IT project development team, you will realize that a lot of time is required to measure the project performance and progress.

Three important factors in project management form the project management triangle i.e. scope, time, and cost.

Planning and control have significantly impacted the way the project has evolved. This is the reason for which Earned Value Management (EVM) was introduced as a technique/methodology for the analysis of overall project performance. The principles of EVM includes positive predictors of project performance and success.

In this tutorial, we will see the calculation of the EVM, the factors that influence the project performance with some examples.

What Is Earned Value Management?

Earned Value Management (EVM) is a methodical project management process for measuring project performance and progress. The basic idea is to find discrepancies in projects based on the comparison of work done and work planned.

EVM is used on the project schedule and project cost control. It is a very useful tool in project forecasting. The project baseline is the main part of EVM and is also the starting point for all EVM related activities. It provides the project manager with the opportunity to make some decisions for the future.

It is a very useful tool for project managers to determine whether a project is over or under budget and to determine if the project is on schedule. It is also used to compare the actual work performed to the work that was originally planned for the project at a specific period, and to forecast project performance.

Earned Value Management (EVM):

• Is used on the project cost.
• Is used in project schedule control.
• Offers the possibility to provide forecasts of project performance problems.
• Has the reference point of all related activities, the project baseline.

The main features of any EVM implementation include:

• A project plan, to identify work to be accomplished.
• Evaluation of planned work called Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS)
• The earning metrics to quantify the achievement of work called Earned Value (EV) or Budgeted Cost of Work Performed (BCWP).
• Other features, in case the project is more complex.

Earned Value Management Metrics

We are introducing here the factors/indicators used for performing EVM.

First, we have to think about what we need to know while analyzing project performance.

• We need to know if the project is ahead or behind the schedule?
• We need to know if the project is over budget or is under budget?
• What will be the total cost of the project if the project is ahead of schedule but the costs are higher than expected?
• If the project is behind schedule but the costs are lower?

Refer to the figure below for various project situations in terms of performance.

We will get the answer to all of these questions by performing analysis using EVM.

Initial Metrics

For calculating Earned Value of the project, we need the following key factors (according to PMBOK):

Earned Value Management Chart

[image source ]

EVM Indicators

As we have all the indicators as described in the above table, we can now perform the following calculations:

#1) Schedule Variance (SV): It is the variance between Earned Value and Planned Value. It let us identify how much you are ahead or behind schedule in terms of costs.

SV=EV-PV

If SV < 0 then the project is behind the schedule.
If SV = 0 then the project is on schedule.
If SV > 0 then the project is ahead of the schedule.

#2) Schedule Performance Index (SPI): It is the measurement of progress achieved against progress planned.

SPI=EV/PV

If SPI < 1 then the project is running behind the schedule.
If SPI = 1 then the project is progressing exactly as planned.
If SPI > 1 then the project is progressing well against the schedule.

#3) Cost Variance (CV): It is calculated by subtracting the Actual Cost (AC) from Earned Value (EV). It lets us know whether you are under or over budget.

CV=EV-AC

If CV < 0 then the project is over the budget.
If SV = 0 then the project is on budget.
If SV > 0 then the project is under the budget.

#4) Cost Performance Index (CPI): It is the measurement of the value of work completed against the actual cost.

CPI=EV/AC

If CPI < 1 then the project is over the budget.
If CPI = 1 then the project cost is on budget.
If CPI > 1 then the project is under the budget.

#5) Estimated at Completion (EAC): It is an indicator for forecasting how much the total project will cost.

EAC=BAC/CPI

#6) Estimate to Complete (ETC): It is an estimation of funds required to complete the remaining work in a project. This EVM metric is used for forecasting the budget needed for the remaining project work.

ETC=(BAC-EV)/CPI

EVM Analysis

To perform Earned Value Analysis at one predefined status point, we will have to perform the following steps:

#1) Collect the inputs:

• Budget at Completion (BAC)
• Planned Value (PV)
• Earned Value (EV)
• Actual Cost (AC)

#2) Analyse the schedule status:

• Schedule Variance (SV)
• Schedule Performance Index (SPI)

#3) Analyse the cost status:

• Cost Variance (CV)
• Cost Performance Index (CPI)

#4) Forecasting the project status:

• Estimate to Complete (ETC)
• Estimate at Completion (EAC)

#5) Prepare some reports with the analysis and plans.

In case we want to analyze each task in the project at a certain point in time, we will have to perform the following steps for each task:

• Collect the % complete for each task.
• Collect Planned Value (PV) for each task.
• Calculate Earned Value (EV) for each task.
• Obtain Actual Cost (AC) for each task.
• Perform schedule status for each task.
• Perform cost status for each task.
• Perform forecasting for each task.
• Compile the results and create a global report.

MS Project and MS Excel can be successfully used for calculating and tracking the EVM analysis.

Examples Of EVM Project Management

Example 1:

Let’s consider a very simple example of software project A which is to be completed in one year (12 months) and the total cost is $300,000. The start date of the project is 01 October 2019 and the end date of the project is 30 September 2020.

We will assume that the budget is the same for each month.

Let’s consider that the analysis of the project is performed after 6 months (31 March 2020). The review performed on the project has shown that only 40% of the work has been completed after 6 months and the actual cost is $100,000.

The first step for EVM is to collect the inputs (initial data):

• Budget At Completion,BAC = $300,000.
• Earned Value (EV) = (0.4 * BAC) = $120,000.
• Planned Value (PV) for 6 months is $150,000.
• Actual Cost is $100,000.

Based on the formulas explained in the “Earned Value Management Indicators” section above, we will now calculate the indicators and make the Earned Value Analysis.

Schedule Variance (SV): SV = EV – PV = $120,000 – $150,000 = – $30,000.

The result is negative so the project is behind the schedule. It is also easy to observe that the Earned Value is lower than the Planned Value.

Schedule Performance Index (SPI): SPI = EV/PV = 0.8

SPI = 0.8 means that the project has performed 80% of the work, it was supposed to at this status point. SPI is less than 1 which means that the project is behind the schedule. For every estimated hour of work on the project, the project team is completing only 0.8 hours, which means 48 minutes. Because it is less than 1, the project is running behind the schedule.

Cost Variance (CV): CV = EV – AC = $120,000 – $100,000 = $20,000.

The value of project A at the current state is greater than the money spent on it, which means that the project is under budget.

Cost Performance Index (CPI): CPI = EV/AC = 1.2

The CPI for the analyzed project is greater than 1, so the project is performing well against the budget.

Estimate at Completion (EAC): EAC = BAC/CPI =$250,000

According to this result, based on the existing analysis, if the project will continue under the same conditions, then at the end of the project the budget will be $250,000.

Estimated Completion is an indicator for forecasting how much the total project will cost. So, the total cost will be less than estimated in case the project will go in this direction.

Estimate to Complete (ETC): ETC = (BAC – EV)/ CPI = $150,000

Estimate to Complete (ETC) is a forecast of how much more money we will need to be spent to complete the project. To finalize the project, if the work will continue like this until the first evaluation after 6 months, the total amount of money to finalize the project will be $150,000.

Example 2:

Let’s take another example in which we will analyze the total amount of hours, not money. We will consider the initial inputs in hours (not in dollars). The indicators can be translated into the cost ($) using average cost rates.

We will consider here Project B with a budget of 2000 hours, having defined all the activities and estimated effort (hours).

BAC = 2000 Hours

The schedule for this project B is 12 weeks.  The initial plan is that after 6 weeks, 55% of the work will be completed. This means that 55% of the total activities within the work planned to be completed at the end of week 6 is 1100 hours.

PV = 1100 Hours

After an analysis performed on project B, it was observed that only completed activities are worth 700 hours of the total task’s budget.

EV = 700 Hours and AC is 960 Hours.

First, we will analyze the status of the schedule. We can observe that EV is less than PV, so the project is behind the schedule.

Schedule Variance (SV): SV = EV – PV = 700 Hours –1100 Hours = – 400 Hours.

The result is negative. Thus this project is behind the schedule.

Schedule Performance Index (SPI): SPI = EV/PV = 0.64

SPI = 0.64 which means that the project has performed 64% of the work it was supposed to at this status point. SPI is less than 1 which means that less work has been completed than what was originally planned, so the project team is behind the schedule.

Next step, we will analyze cost status (in terms of hours).

Cost Variance (CV): CV = EV – AC = – 260 Hours.

CV has a negative value so the project is over the budget.

Cost Performance Index (CPI): CPI = EV/AC = 0.73

The CPI for the analyzed project is less than 1, so the project is over the budget.

In the next step, we will see the forecasting:

Estimate at Completion (EAC): EAC = BAC/CPI = 2740 Hours

According to this result, based on the existing analysis, if the project will continue under the same conditions, then for completion 2740 hours are required.

The total cost will be greater than the estimated in case the project will go in this direction.

Estimate to Complete (ETC): ETC = (BAC – EV)/ CPI = 1780 Hours

Estimate to Complete (ETC) is a forecast of how many hours we will need to be spent to complete the project. To finalize the project, if the work will continue like this until the first evaluation after 6 weeks, the total amount of money to finalize the project will be 1780 Hours.

Earned Value Management Benefits

Earned Value Management has various benefits for contractors and clients.

Some of the Contractor benefits are:

• EVM creates a performance framework.
• It can help to provide solid risk management.
• It helps to measure the progress of the project and if we are selecting the stages of the project it can be a very helpful tool.
• It can help with forecasting the completion date and expenses by the end of the project.

Client benefits include:

• Having the progress of the project in near-real-time can help to know the budget needed in the future.

Not only for the whole project, EVM can be used for small parts of the project also.

Frequently Asked Questions For EVM

Q #1) How do you calculate Earned Value Management?

Answer: At one predefined status point, we will have to perform the following steps:

#1) Collect the inputs:

• Budget at Completion (BAC)
• Planned Value (PV)
• Earned Value (EV)
• Actual Cost (AC)

#2) Analyse the schedule status:

• Schedule Variance (SV)
• Schedule Performance Index (SPI)

#3) Analyse the cost status:

• Cost Variance (CV)
• Cost Performance Index (CPI)

#4) Forecasting the project status:

• Estimate to Complete (ETC)
• Estimate at Completion (EAC)

Prepare some reports with the analysis and plans.

Q #2) What is the Earned Value Management system?

Answer: Earned Value Management System means the process, procedures, tools, and templates used by a company to perform earned value management.

Q #3) What is the Earned Value technique?

Answer: Earned Value technique is a procedure to pursue the project progress against the Project Plan. The project performances are measured against the project baseline. Earned value analysis will help project managers to identify deviations of the project from schedule and cost baselines.

Q #4) Why is Earned Value Management important?

Answer: It helps reach greater visibility and control of the project activities. These achievements help to meet the project timelines. It improves project visibility and accountability.

Q #5) Why is Earned Value Management not used?

Answer: Usually it is not used due to a lack of understanding of how important it can be for project risk analysis and forecasting. Earned Value needs time to set up the system and also can generate the necessity of rethinking how performance and success are measured. EVM has a great impact on the company’s ability to costs management.

Q #6) How is Earned Value calculated?

Answer: Earned Value = % of work done x BAC (Budget at Completion).

Q #7) What is the 50/50 rule in project management?

Answer: For the actual cost it is possible to use also the 50/50 rule: 50% credit is acquired when the work is started, and the remaining 50% is acquired after completion of the work.

Q #8) What is Earned Value in PMP?

Answer: It demonstrates how much work was completed during a given period. It is the budget associated with the finished work. It is extracted from actual work completed at a point in the schedule.

Q #9) What does SPI less than 1 mean?

Answer: SPI is less than 1 means that less work has been completed than what was originally planned, so the project team is behind schedule.

Q #10) What is the 100 % rule in project management?

Answer: For the actual cost it is possible to use also the 0/100 rule, no credit is acquired for an element of work until the work is finished.

Conclusion

Earned Value Management can give answers for managing cost risk and project risk. EVM allows the identification of project trouble.

Making a detailed analysis of the key factors affecting the project, at a given point in time during the project development based on EVM can give the possibility to apply corrective actions in the early phase of the project.

An EVM system created based on a clear understanding of the value of EVM will allow project managers to eliminate risks and respect the budget and the schedule for the project.