Earned Value Management

You can accomplish performance measurement analysis using a technique called earned value measurement (EVM). Simply stated, EVM compares what you've received or produced to what you've spent.

The EVM continuously monitors the planned value, earned value, and actual costs expended to produce the work of the project (I'll cover the definition of these terms shortly). When variances that result in cost changes are discovered (including schedule variances and cost variances), those changes are managed using the project change control system. The primary function of this analysis technique is to determine and document the cause of the variance, to determine the impact of the variance, and to determine whether a corrective action should be implemented as a result. We'll walk through various examples of how to determine these variances later in this section.

EVM looks at schedule, cost, and scope project measurements together and compares them to the actual work completed to date. It is the most often used performance measurement method. EVM is performed on the work packages and the control accounts of the WBS. To perform the EVM calculations, you need to first gather the three measurements mentioned earlier: the planned value (PV), actual cost (AC), and earned value (EV).

If you do any research on your own regarding these values, you might come across acronyms that are different from what you see here. I've included their alternate names and acronyms at the end of each description. They are also noted in the glossary of the PMBOK® Guide. I recommend you memorize planned value (PV), actual cost (AC), and earned value (EV) and make certain you understand the meaning of each before progressing.

Let's take a look at some definitions of these key measurements before diving into the actual calculations:

Planned value The planned value (PV) is the cost of work that has been authorized and budgeted for a schedule activity or WBS component during a given time period or phase. These budgets are established during the Planning processes. PV is also called budgeted cost of work scheduled (BCWS).

Exam Spotlight

Remember to read exam questions carefully. PV might mean present value (as I talked about in Chapter 2) or planned value, as defined here.

Actual cost Actual cost (AC) is the cost of completing the work component in a given time period. Actual costs might include direct and indirect costs but must correspond to what was budgeted for the activity. If the budgeted amount did not include indirect costs, do not include them here. Later you'll see how to compare this to PV to come up with variance calculation results. AC is also called actual cost of work performed (ACWP).

Earned value Earned value (EV) is the value of the work completed to date as it compares to the budgeted amount (PV) assigned to the work component. EV is typically expressed as a percentage of the work completed compared to the budget. For example, if our budgeted amount is $1,000 and we have completed 30 percent of the work so far, our EV is $300. Therefore, EV cannot exceed the PV budget for the activity. EV is also called budgeted cost of work performed (BCWP).

Exam spotlight

PV, AC, and EV are really easy to mix up. In their simplest forms, here's what each means:

■ PV: The approved budget assigned to work to be completed during a given time period

■ AC: Money that's actually been expended during a given time period for completed work

■ EV: The value of the work completed to date compared to the budget

According to the earlier definition, EV is the sum of the cumulative budgeted costs for completed work for all activities that have been accomplished as of the measurement date. For example, if your total budget is $1,000 and 50 percent of the work has been completed as of the measurement date, your EV would equal $500. You can plot all the PV, AC, and EV measurements graphically to show the variances between them. If there are no variances in the measurements, all the lines on the graph remain the same, which means the project is progressing as planned. Figure 11.1 shows an example that plots these three measurements.

figure 11.1 Earned value

Dollars

Measurement Date

Jan 1

Apr 1

Jul 1

Jan 1

Apr 1

Jul 1

Oct 1

All of these measurements include a cost component. Costs are displayed in an S curve because spending is minimal in the beginning of the project, picks up steam toward the middle, and then tapers off at the end of the project. This means your earned value measurements will also take on the S curve shape.

Now you can calculate whether the project is progressing as planned or if variances exist in the approved baseline by using a variety of formulas discussed in the following sections. Use Figure 11.1 as your example for the formulas that follow. The Figure 11.1 totals are as follows: PV = 400, EV = 375, AC = 325.

Cost Variance

Cost variance is one of the most popular variances that project managers use, and it tells you whether your costs are higher than budgeted (with a resulting negative number) or lower than budgeted (with a resulting positive number). It measures the actual performance to date or during the period against what's been spent. The cost variance (CV) is calculated as follows:

Let's calculate the CV using the numbers from Figure 11.1: 375 - 325 = 50

The CV is positive, which means you're spending less than what you planned for the work that you have completed as of July 1 (which Figure 11.1 shows because AC is less than EV).

If you come up with a negative number as the answer to this formula, it means that costs are higher than what you had planned for the work that was completed as of July 1 and these costs are often not recoverable.

Schedule Variance

Schedule variance, another popular variance, tells you whether the schedule is ahead or behind what was planned for this period. This formula is most helpful when you've used the critical path methodology to build the project schedule. The schedule variance (SV) is calculated as follows:

Let's plug in the numbers:

The resulting schedule variance is negative, which means you are behind schedule, or behind where you planned to be as of July 1.

Together, the CV and SV are known as efficiency indicators for the project and can be used to compare performance of all the projects in a portfolio.

Performance Indexes

Cost and schedule performance indexes are primarily used to calculate performance efficiencies, and they're often used to help predict future project performance.

The cost performance index (CPI) measures the value of the work completed against actual cost. It is the most critical of all the EVM measurements according to the PMBOK®

Guide because it tells you the cost efficiency for the work completed to date, or at the completion of the project. If CPI is greater than 1, your spending less than anticipated. If CPI is less than 1, you are spending more than anticipated for the work completed.

The schedule performance index (SPI) measures the progress to date against the progress that was planned. This formula should be used in conjunction with an analysis of the critical path activities to determine if the project will finish ahead or behind schedule. If SPI is greater than 1, you are ahead of schedule. If SPI is less than 1, you are behind schedule. The cost performance index (CPI) is calculated this way:

Let's plug in the numbers and see where you stand:

This means cost performance is better than expected. You get an A+ on this assignment!

Cumulative CPI is a commonly used calculation to predict project costs at the completion of the project. It also represents the cumulative CPI of the project at the point the measurement is taken. First you need to sum the earned value calculations taken to date, or cumulative EV, and the actual costs to date, or cumulative AC. The formula looks just like the CPI formula only it uses the cumulative sums as follows:

Cumulative CPI = cumulative EV / cumulative AC

The difference between this and the CPI formula earlier is that the CPI formula is used for a single work period whereas the cumulative CPI is calculated using the sum of all the costs of every work component for the project. Additionally, you might also use cumulative CPI to calculate the total cost of a work component such as a deliverable, for example. Let's say you have a deliverable that has five work packages. You would total the EV and AC at the measurement date for all five work packages to determine the cost performance index for the deliverable.

The schedule performance index (SPI) is calculated this way:

Again, let's see where you stand with this example: 375 / 400 = .94

Uh-oh, not so good. Schedule performance is not what you expected. Let's not grade this one.

Cumulative SPI predicts schedule performance at the completion of the project. Like cumulative CPI, it also represents the cumulative SPI of the project at the point the measurement is taken. The formula is as follows:

Cumulative SPI = cumulative EV / cumulative PV

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