{"id":2858,"date":"2021-07-08T15:06:44","date_gmt":"2021-07-08T07:06:44","guid":{"rendered":"https:\/\/blog.spotodumps.com\/?p=2858"},"modified":"2021-07-08T15:06:44","modified_gmt":"2021-07-08T07:06:44","slug":"how-is-earned-value-calculated-in-project-management","status":"publish","type":"post","link":"https:\/\/blog.spotodumps.com\/index.php\/2021\/07\/08\/how-is-earned-value-calculated-in-project-management\/","title":{"rendered":"How is Earned Value Calculated in Project Management?"},"content":{"rendered":"

Earned value management is a critical part of the Project Cost Management subject area and a crucial part of the PMP\u00ae certification exam<\/a><\/strong><\/em>. Earned value management contains some terms and formulas that candidates undergoing PMP certification training must comprehend and remember to pass the exam.<\/p>\n

We will explore these critical terms and formulas for calculating earned value in this article.<\/p>\n

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How Is Earned Value Defined?<\/h2>\n

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\u2014including code development, documentation, and other functions\u2014return value to the project.<\/p>\n

Earned Value Management’s History<\/h2>\n

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.<\/p>\n

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.<\/p>\n

In 1987, the first version of the PMBOK\u00ae 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.<\/p>\n

Related Read:<\/strong> PMBOK 7: Last Update on PMBOK Guide 7th Edition<\/a><\/p>\n

Understanding Earned Value Management<\/h2>\n

The EVM fundamental principle is independent of the size or complexity of the project. However, depending on the conditions, EVM implementations can differ significantly.<\/p>\n

1. Defining the work is the first stage.<\/strong> 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\u00ae Chapter 3 and Rita Mulcahy’s PMP\u00ae Exam Prep 7th Edition Chapter 5).<\/p>\n

2. The second stage is to assign a value to each action, referred to as the planned value (PV).<\/strong> 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\u00ae Guide & Rita Mulcahy’s PMP\u00ae Exam Prep 7th Edition).<\/p>\n

3. The third stage is to define the activity’s “earning rules.”<\/strong> 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\u00ae Exam Prep 7th Edition).<\/p>\n

4. The final stage is to carry out the project as planned and to track progress.<\/strong> When actions begin or end, EV is accrued under the earning rule.<\/p>\n

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.<\/p>\n

Related read:<\/strong> What Is the Best Way to Manage Your Time During the PMP\u00ae Examination?<\/a><\/p>\n

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Formulas for Earned Value<\/h2>\n

Budget at Completion (BAC)<\/h3>\n

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.<\/p>\n

Planned Value (PV), or Budgeted Cost of the Work Scheduled (BCWS)<\/h3>\n

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.<\/p>\n