## Earned Value Measurements

Earned value measurements are divided roughly between history and forecast. The history measures by and large involve variances. Variances are computed by adding and subtracting one variable from another:

\$Variance = \$Expectation of performance - \$Actual performance

Forecasts require performance indexes. Indexes are ratios of one variable divided by another of like dimension. Indexes are historical; numerator and denominator both come from past performance. These indexes, which are dimensionless, are used as a factor to amplify or discount remaining future performance. Forecasts are computed by multiplying performance remaining by a historical performance factor that amplifies or discounts remaining performance based on performance to date:

\$Forecast = \$Performance remaining * Historical performance factor

Historical performance = Value obtained/Value expectation factor

It is evident from the components of variance and forecast that three measures are needed to construct an earned value system of performance evaluation:

■ Planned value (PV): The dollar value planned and assigned to the work or the deliverable in the WBS. PV is the expectation project sponsors have for the value embodied in the project. PV is a quantity on the left side, or sponsor's side, of the project balance sheet. PV assignments are made by decomposing the overall project dollar value, in other words the budget, into dollar values of the lowest work package. PV assignments are made before work begins; the aggregate of the PV assignments makes up the dollar value of the performance measurement baseline (PMB) that is, in turn, the budget for the project. The PMB is on the right side of the project balance sheet and should reconcile with the PV on the sponsor's side. If there is a mismatch, the difference is made up in risk.

S (All PV \$assignments) = Project manager's \$budget for the project \$Value of the project = S (All PV assignments) + \$Risk

■ Actual cost (AC): The cost of performance to accomplish the work or provide the deliverable on the WBS. AC should reconcile with the expenses reported on the project P&L. Now is where our discussion of depreciation, fixed and variable, and direct and indirect costs comes into play. In the category of "Accounting Considerations" in the ANSI/EIA 748 standard, criteria 16-19 (of 32 criteria) address handling direct and indirect costs. Generally, the criteria can be interpreted as requiring direct costs to be identified at the work package level, with indirect costs allocated appropriately. Such guidance can be applied two ways: either the work package manager tracks indirect costs or the project manager tracks indirect costs at the project level. The important idea for the cost account and work package managers is to have a consistent approach that can be used to systematically align with the project P&L.

■ Earned value (EV): A measure of the project value actually obtained by the work package effort. EV could be more than, equal to, or less than the PV for the work package for the period being measured. Of course, the same could be said for the AC: AC could be more than, equal to, or less than the PV.

The acronyms PV, AC, and EV are new with the ANSI/EIA 748 standard. The old acronyms that they replace, along with other comparisons between the old and new standards, are given in Table 6-3.

 ANSI/EIA 748 Standard DoD C/SCSC Standard Description Planned Value, PV Budgeted Cost of Work Scheduled, BCWS The time-phased budget for the project that is allocated to the cost accounts on the WBS. Earned Value, EV Budgeted Cost of Work Performed, BCWP The dollar value of the work accomplished in each cost account in the evaluation period, whether the work is scheduled for that period or not. The dollar value of the work is found in the PV for the cost account. Actual Cost, AC Actual Cost of Work Performed, ACWP The dollar value paid for the work accomplished in each cost account in the evaluation period, whether the work is scheduled for that period or not. The dollar value of the payment is independent of the dollar value of the work as set in the PV for the cost account. Cost Performance Index, CPI An index of efficiency relating how much is paid for a unit of value. Optimally, \$1 is paid for \$1 of value earned, CPI = 1.
 Schedule Performance Index, SPI Schedule Performance Index, SPI An index of efficiency relating how much value that is scheduled to be accomplished really is accomplished. Optimally, \$1 of scheduled value is earned in the period scheduled for that \$1, SPI = 1. Cost Variance Cost Variance A historical measure to indicate whether the actual cost paid for an accomplishment exceeds, equals, or does not exceed the value of the accomplishment. Variance = EV - AC. Schedule Variance Schedule Variance A historical measure to indicate whether value is being accomplished on time. This variance can also be thought of as a "value variance." Variance = EV - PV. 