Earned value management is an important topic for the PMP® certification exam and an essential part of the Project Cost Management knowledge area. There are several terms and formulas in earned value management that PMP certification candidates must understand and memorize in order to pass the exam.
In this article, we will look at some key terms and formulas that are useful for calculating earned value.
What Exactly Is Earned Value?
Consider the concept of debits and credits to better understand the earned value. In a double-entry accounting system, every debit to one account is matched by a credit to another. This concept is to earned value. When you spend a dollar on labor for your project, you are “reinvesting” a dollar’s worth of value into it. As a result, all project tasks, including code development, documentation, and other functions, generate value for your project.
Earned Value Management in the Past
EVM first appeared as a financial analysis specialty in US government programs in the 1960s, but it has since evolved into a significant branch of project management and cost engineering. Early EVM research revealed that the use of an objective technique such as EVM has a significant impact on the areas of planning (remember: planning is iterative!) and control. The application of EVM also allows for a useful analysis of overall project performance. EVM’s use and popularity have grown significantly, prompting many to rely on it extensively over the years and in a variety of projects.
The significance of EVM is demonstrated by the fact that, in 1991, Secretary of Defense Dick Cheney canceled the Navy A-12 Avenger II Program due to performance issues detected by EVM.
The first edition of the PMBOK® Guide in 1987 included an overview of EVM, which was expanded in subsequent editions. The construction industry was a pioneer in commercializing EVM. In the 1990s, the integration of EVM with project management practice accelerated.
Recognizing Earned Value Management
The EVM foundation principle is independent of project size or complexity. However, depending on the circumstances, EVM implementations can vary significantly.
The first step is to define the scope of the project. This is usually accomplished through the use of a WBS, or work breakdown structure, which is a hierarchical arrangement of activities. A work breakdown structure (WBS) is a top-down approach for breaking down project deliverables into activities that can be controlled and measured. (See PMBOK® Chapter 3 and Rita Mulcahy’s PMP® Exam Prep 7th Edition Chapter 5).
The second step is to assign a value to each activity, which is known as planned value (PV). This value, which can be in currency or labor hours, is part of the project’s total budget allocation for that specific deliverable. (See the Time & Cost Management chapters in the PMBOK® guide and the PMP® Exam Prep 7th Edition by Rita Mulcahy.)
The third step is to establish “earning rules” for each activity. This simply refers to how each activity’s progress is measured. Some common rules are 0/100, which means that no credit is available for beginning the activity and that 100 percent credit is applied when the activity is completed. Other rules that are used depending on the complexity and significance of the activity are 50/50, 25/75, and 20/80. (See Chapter 7 of Rita Mulcahy’s PMP® Exam Prep 7th Edition.)
The final step is to carry out the project as planned and track progress. When activities begin or end, EV is accumulated in accordance with the earning rule.
Earned value Management is now used to analyze project performance, calculate schedule and cost variances, and show where the project stands in comparison to the estimates calculated earlier for this point in time.
Formulas for Earned Value
Completion Budget (BAC)
The BAC is the total of all budgets established for the work to be done. It denotes how much the project was initially budgeted to cost. There is no single formula. The BAC is calculated by taking a look at the total budgeted cost of the project.
Planned Value (PV), or the Budgeted Cost of the Scheduled Work (BCWS)
The authorized budget assigned to the scheduled work is the planned value, which does not include the management reserve. It denotes how much work should have been completed at a given point in time if a plan had been followed. It is calculated by calculating the amount of planned work completed at a given point in time.
PV = Planned Percentage of Completion * BAC Earned Value (EV), or Budgeted Cost of Work Performed (BCWP)
Earned value management shows how much work was completed in a given time period. It is the budget associated with the completed authorized work. It is calculated by calculating the amount of actual work completed at a given point in time.
* BAC * BAC * BAC * BAC * BAC * BAC *
Actual Cost (AC), also known as the Actual Cost of Work Performed (ACWP)
The realized cost incurred for work performed on an activity during a specific time period is referred to as the actual cost. It denotes the amount of money spent over a specific time period.
The total cost for the specified time period.
Cost Variability (CV)
The difference between what we expected to spend and what we actually spent is referred to as cost variance. It is calculated as the difference between earned value and actual cost.
EV – AC Schedule Variance = CV (SV)
The difference between where we planned to be in the schedule and where we are in the schedule is referred to as schedule variance. It is defined as the difference between the earned and planned values.
PV Cost Performance Index + EV = SV (CPI)
The Cost Performance Index is the rate at which project performance meets cost expectations over a given time period. It is expressed as a percentage of the earned value divided by the actual cost.
EV / AC = CPI
Index of Schedule Performance (SPI)
The Schedule Performance Index measures the rate at which project performance meets schedule expectations up to a given point in time. It is calculated as a ratio of earned to planned value.
SPI = EV / PV Completion Estimate (EAC)
The estimated total cost of completing all work is referred to as the estimate at completion. It estimates the total cost of completion based on project performance up to a certain point in time.
EAC = BAC / CPI – If the CPI is expected to remain constant throughout the project, the EAC can be calculated using this formula.
EAC = AC + BAC – If the future work is completed at the expected rate, the EAC can be calculated using this formula.
AC + Bottom-Up = EAC ETC – If the initial plan is no longer valid, this formula can be used to calculate the EAC.
EAC = AC + (BAC – EV) / (CPI * SPI) – If both the CPI and the SPI influence the remaining work, this formula can be used to calculate the EAC.
Estimated Time to Finish (ETC)
The estimate to complete is the estimated cost of completing all remaining work. Based on past performance, it forecasts how much more money will be spent on the project.
ETC = EAC – AC – Assuming that the work is proceeding as planned, this formula can be used to calculate the cost of completing the remaining authorized work.
Variation in Completion (VAC)
The variance at completion is the projected amount of the budget deficit or surplus. It is expressed as the difference between the budget and the estimate at completion.
BAC – EAC = VAC
To Finish the Performance Index (TCPI)
The total performance index describes the performance that must be achieved in order to meet financial or schedule targets. It is expressed as a ratio of the cost to complete the outstanding work to the available budget.
TCPI = BAC – EV / BAC – AC – The efficiency that must be maintained in order to complete the project on time.
TCPI = BAC – EV / EAC – AC – The efficiency required to finish the current EAC.
Conclusion
If you’re working on your project management certification, it’s safe to say that earned value management is an important topic to consider. If you’re looking for an online PMP course, SPOTO Learning offers several project management courses, including PMP certification training designed to help you pass the PMP exam on your first try. Project management training will be provided online by faculty with at least ten years of industry experience.
