Earned value management is a critical part of the Project Cost Management subject area and a crucial part of the PMP® certification exam. Earned value management contains some terms and formulas that candidates undergoing PMP certification training must comprehend and remember to pass the exam.
We will explore these critical terms and formulas for calculating earned value in this article.
How Is Earned Value Defined?
Consider the concept of earned value in terms of debits and credits. In a double-entry accounting system, each debit to one account is balanced by a credit to another. Earned value is a concept that is comparable to this one. When you spend a $1 on labor for your project, you’re putting a dollar’s worth of value back into it. As a result, all project activities—including code development, documentation, and other functions—return value to the project.
Earned Value Management’s History
EVM began as a financial analysis specialist in 1960s US Government programs but has grown to be a substantial part of project management and cost engineering since then. Early EVM research showed that adopting an objective technique such as EVM has an enormous impact on planning domains (remember: planning is iterative!) and control. Additionally, the adoption of EVM enables a practical examination of the overall project’s performance. The use and popularity of EVM have increased dramatically, prompting people to rely heavily on it through time 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’s A-12 Avenger II program due to performance deficiencies discovered by EVM.
In 1987, the first version of the PMBOK® Guide featured an overview of EVM, which was enhanced in future editions. The construction sector was a pioneer in commercializing EVM. EVM’s integration with project management practice accelerated in the 1990s.
Related Read: PMBOK 7: Last Update on PMBOK Guide 7th Edition
Understanding Earned Value Management
The EVM fundamental principle is independent of the size or complexity of the project. However, depending on the conditions, EVM implementations can differ significantly.
1. Defining the work is the first stage. This is often accomplished through a WBS or work breakdown structure, a hierarchical structure for organizing operations. A work breakdown structure (WBS) is a top-down strategy that breaks down project deliverables into manageable actions. (See PMBOK® Chapter 3 and Rita Mulcahy’s PMP® Exam Prep 7th Edition Chapter 5).
2. The second stage is to assign a value to each action, referred to as the planned value (PV). This value can be expressed in currency units or labor hours and is included in the project’s overall budget allocation for that delivery. (See the chapters on Time and Cost Management in the PMBOK® Guide & Rita Mulcahy’s PMP® Exam Prep 7th Edition).
3. The third stage is to define the activity’s “earning rules.” This simply refers to the method by which each activity’s progress is tracked. Some specific rules are 0/100, which signifies that no credit is available for initiating the action and that 100 percent credit is applied upon completion. Other rules such as 50/50, 25/75, and 20/80 are used depending on the intricacy and significance of the activity. (See Chapter 7 of Rita Mulcahy’s PMP® Exam Prep 7th Edition).
4. The final stage is to carry out the project as planned and to track progress. When actions begin or end, EV is accrued under the earning rule.
From now on, earned value Management is used to analyze project performance, compute schedule and cost variances, and determine where the project stands about earlier estimates for this point in time.
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Formulas for Earned Value
Budget at Completion (BAC)
The BAC is the total of all set budgets for the task to be completed. It displays the budgeted cost of the project at the outset. There is no single formula. The BAC is calculated by examining the project’s overall budgeted cost.
Planned Value (PV), or Budgeted Cost of the Work Scheduled (BCWS)
The planned value is the budgeted amount allotted to the scheduled task, excluding management reserves. It specifies the amount of work that should have been performed at a given point in time following a plan. It is calculated by calculating the amount of scheduled work done at a specific moment in time.
- PV = Planned % complete * BAC
Earned Value (EV), or Budgeted Cost of the Work Performed (BCWP)
The earned value management shows the amount of work accomplished during a specific period. It is the budget associated with completed authorized work. It is calculated by determining the amount of work performed at a particular point in the schedule.
- Actual % complete * BAC
Actual Cost (AC), also referred to as the Actual Cost of Work Performed (ACWP)
The actual cost is the amount paid for work completed on an activity during a specified period. It denotes the amount of money spent over a specified period.
- The total cost for the specified period.
Cost Variance (CV)
The cost variance is the difference between what was anticipated and what was spent. It is defined as the discrepancy between earned and real value.
- CV = EV – AC
Schedule Variance (SV)
Schedule variance refers to the discrepancy between where we expected to be on the timetable and where we are. It is defined as the discrepancy between earned and planned values.
- SV = EV – PV
Cost Performance Index (CPI)
The Cost Performance Index measures the rate at which a project’s performance meets cost expectations over a specified period. It’s calculated as a percentage of the earned value versus the actual cost.
- CPI = EV / AC
Schedule Performance Index (SPI)
The Schedule Performance Index measures how closely a project’s performance meets schedule expectations up to a given point in time. It is stated in terms of the ratio of earned to planned value.
- SPI = EV / PV
Estimate at Completion (EAC)
Estimate at completion is the anticipated total cost of all work. It estimates the overall cost at completion depending on the project’s progress up to that point.
- EAC = BAC / CPI – If the CPI is predicted to remain constant during the project, this formula can be used to determine the EAC.
- EAC = AC + BAC – EV — If future work is completed at a predetermined rate, this formula can be used to compute the EAC.
- EAC = AC + Bottom-Up ETC – When the initial plan is no longer viable, this formula can be used to calculate the EAC.
- EAC = AC + (BAC – EV ) / (CPI * SPI ) – If both the CPI and SPI affect the remaining work, this formula can be used to calculate the EAC.
Estimate To Complete (ETC)
The estimate to complete represents the anticipated cost of completing all remaining work. It forecasts the additional expenditure on the project based on prior performance.
- ETC = EAC – AC — Assuming that the work is continuing according to plan, this formula can be used to determine the cost of finishing the remaining permitted work.
Variance at Completion (VAC)
Variance at completion is the forecasted amount of the budget shortfall or surplus. It is calculated as the difference between the budgeted amount and the estimated amount upon completion.
- VAC = BAC – EAC
To Complete Performance Index (TCPI)
To complete performance index denotes the level of performance required to accomplish financial or scheduling objectives. It is expressed as a ratio of the cost of completing unfinished work to the available budget.
- TCPI = BAC – EV / BAC – AC – The efficiency required to perform the task on time.
- TCPI = BAC – EV / EAC – AC – The efficiency at which the present EAC must be completed.
It’s reasonable to say that earned value management is a critical topic to consider if you’re pursuing project management certification. SPOTO offers numerous project management courses, including PMP certification training, if you’re looking for online PMP training courses. These courses are designed to prepare you to pass the PMP exam on your first attempt. You’ll receive online project management training from instructors with a minimum of ten years of industry experience.