Earned Value Management

Earned Value Management Executive Summary

Earned Value - PM-ProLearnEarned Value Management (also called Earned Value Analysis) is a methodology that combines the measurements from Scope, Schedule, and Resource Management (resources cost money and affect the schedule) to form a Performance Measurement Baseline.  You will use this baseline to measure project performance.  Earned Value Management can be applied to any project from any industry.  The key concept at play here is that all money spent will generate some value in the project.  Earned Value Management (EVM) allows you to determine any variances between the planned and actual value on the project for scope, schedule, and resources, all of which have an associated cost.

  • Process Groups involved:
    • Monitoring and Controlling
  • Earned Value Management Formulas
    • Planned Variables
      • Budget at Completion (BAC)
      • Planned Value (PV)
    • Actual Variables
      • Earned Variables (EV)
      • Actual Cost (AC)
      • Schedule Variance (SV)
      • Schedule Performance Index (SPI)
      • Cost Variance (CV)
      • Cost Performance Index (CPI)
    • Forecast Variables
      • Estimate at Completion (EAC)
      • Variance at Completion (VAC)
      • Estimate to Complete (ETC)
    • Critical concepts

EVM or EVA are the terms associated for the use of several formulas and calculations that are used for monitoring, controlling, and forecasting cost and schedule performance.  There are several EVM formulas that are needed.  You should understand how to use them, what they can tell you about the project and its performance, be able to interpret their results, and how they relate to each other.  Once you have the formulas memorized, you must understand basic algebra and algebraic operations to solve for any unknown variables.

The Project Management Body of Knowledge (PMBOK®) lays these formulas out on Table 7-1 (Page 267).  The table in the PMBOK also tells you the Lexicon Definition of the formula, how to use the formula, and how to interpret the results of the algebraic operations in each formula (where needed).  Some EVM calculation areas will allow for more than one formula depending on the results needed.  No, this doesn’t mean that you get to choose the one that shows the project in the best light…  Multiple forecast variable formulas are available to show forecasted results based upon expectations of the project environment; i.e. will project cost performance remain the same or if both the schedule and cost will impact the remainder of the project equally.  Another time forecast formulas will change are if initial estimates are no longer valid.

There are four different types of variable formulas in EVM.

The first is planned variable formulas.  These tell us what the Project Manager has determined SHOULD occur.

  • Budget at Completion (BAC): The original expected cost for the entire project based upon the sum of all planned work
    • Formula: BAC = Sum all budgets for work within the project
  • Planned Value (PV): The work that should have been completed at any point in time, based upon the data date or project completion.
    • Formula: PV = BAC x Planned % Complete

The second type of variable formulas is actual variables.  These tell us what is ACTUALLY occurring on the project.

  • Earned Value (EV): The work actually completed at any given time.
    • Formula: EV = BAC x Actual % Complete
  • Actual Cost (AC): The amount of money actually spent to achieve the current EV.
    • Formula: AC = Sum of all costs for the project
  • Schedule Variance (SV): The difference between the work planned to be completed at a certain point in time versus the actual work completed by that time; i.e. how far ahead of or behind schedule are we?
    • Formula: SV = EV – PV
  • Schedule Performance Index: A measure of schedule efficiency expressed as a ratio. A value of 1 is on schedule.  Values above 1 are ahead of schedule.  Values below 1 are behind schedule.
    • Formula: SPI = EV/PV
  • Cost Variance (CV): The difference between the cost planned on the project at a certain point in time versus the actual costs of the project; i.e. how much under or over budget are we?
    • Formula: CV = EV – AC
  • Cost Performance Index: A measure of cost efficiency expressed as a ration. A value of 1 is on budget. Values above 1 are under budget/planned cost.  Values under 1 are over budget/planned cost.
    • Formula: CPI = EV/AC

The third type of variable formula is the forecast variables.  These tell us what is EXPECTED to occur in the future.

  • Estimate at Completion (EAC): The new expected total cost for the project based upon its performance thus far. There are four formulas that can be used here.  The formula and its purpose are listed below.
    • Formula 1: EAC = BAC/CPI. This is the most often used and is used if the CPI is expected to remain the same for the rest of the project.
    • Formula 2: EAC = AC + BAC – EV. This is used when future work will be accomplished at the planned rate (the schedule will remain the same).
    • Formula 3: EAC = AC + Bottom-up Estimate. This is used when the initial plan is no longer valid
    • Formula 4: EAC = AC + [(BAC – EV)/(CPI + SPI)]. This is used if both the SPI and the CPI will remain the same.
  • Variance at Completion (VAC): The variation between the original expected cost (BAC) and the new expected cost of the project (EAC).
    • Formula: VAC = BAC – EAC
  • Estimate to Complete (ETC): The expected cost for all remaining work; i.e. how much more money will we need to spend? There are two formulas that can be used here.  The formula and its purpose are listed below.
    • Formula 1: ETC = EAC – AC. This is used when the work is proceeding as planned.
    • Formula 2: ETC = Re-estimate.  This is used if the original plan is no longer valid.

The fourth and final type of variable formula is target variables.  This tells us what NEEDS TO HAPPEN on the project to meet a goal.

  • To Complete Performance Index (TCPI): The measurement of the cost performance that must be achieved with the resources provided to meet a management goal set for the project. This measure of cost efficiency will also be expressed as a ration. Values above 1 are harder to achieve.  Values under 1 are easier to achieve. There are two formulas that can be used here.  The formula and its purpose are listed below.
    • Formula 1: TCPI = (BAC – EV)/(BAC – AC). Used to determine how efficient you must be to achieve the original BAC.
    • Formula 2: TCPI = (BAC – EV)/(EAC – AC). Used to determine how efficient you must be to achieve the current EAC.

Many people are very nervous about the EVM portion of the PMP® examination.  This is understandable since there are so many formulas to memorize and there are scenarios that may change when you will need to use certain formulas instead of others.  This takes practice.  It also takes a good Study Plan and Brain Dump.  PM-ProLearn has created a simple way to “map out” the formulas and how they interact that can make sure you are successful on your exam.  After finishing this article, take a look at the EVM Map for purchase that PM-ProLearn offers (registered students of PM-ProLearn receive this EVM Formula Map as a part of their curriculum).

Earned Value Management Frequently Asked Questions

question-symbol-2804296Q: How many questions for Earned Value Management will I receive on my exam?

A: That can’t be determined.  Since EVM is associated with Cost Management, Schedule Management, and Resource Management, EVM or EVA can be evaluated as a portion of any of those Knowledge Areas.  You can determine the percentage of questions you will receive overall for the Monitoring and Controlling processes, but not the type and quantity of each type of questions you can expect.

What to Memorize in Earned Value Management

Earlier in the article, I mentioned the reason that Earned Value Management is discussed so heavily by PMI®.  You need to understand how to use Earned Value Analysis for your projects.  This means memorization of the formulas, what they can tell you about the project and its performance, the ability to interpret their results, and how the formulas relate to each other.  You can do this in many ways, but I suggest only two ways here.

  • Memorize Table 7-1 in the PMBOK
  • Allow PM-ProLearn to help you using the EVM Formula Map

Memorize - Study

Earned Value Management Critical Reasoning & Testing Skills

IMG_1611Q: You are the Project Manager of a project to upgrade the Accounting Department’s Receipt Tracking System with a budget of $20,000.  You have spent $17,000 thus far and you are 75% complete and behind schedule by 9 days.  You have requested more funding but it was not approved.  What should your To-Complete Performance Index be to complete the project within the approved budget?

  1. 1.667
  2. 0.882
  3. 0.625
  4. 0.521

EXPLANATION: This question asks you to determine the To Complete Performance Index on the project in terms of the “approved budget.”  This tells you they are wanting the TCPI for the Budget at Completion (you know BAC because the question didn’t mention a new budget calculation).  There are two formulas for TCPI; one for estimating efficiency for the BAC, and one for estimating efficiency for the EAC.  We will use the first one for BAC.

TCPI = (BAC – EV)/(BAC – AC)

Now we just need to plug in the known variables to calculate the targeted performance.  Form the question, we can pull out an plug in the following numbers:

  • BAC = $20,000
  • EV = $15,000 (BAC x actual % complete -OR- 20,000 x .75 )
  • AC = $17,000

Let’s replace those in the formula…

TCPI = (BAC – EV)/(BAC – AC)

TCPI = ($20,000 – $15,000)/($20,000 – $17,000)

TCPI = $5000/$3000

TCPI = 1.667 (Answer A)

Closing Summary

Earned Value Management (or Earned Value Analysis) is an integral part of success on the PMP exam and in real-world projects.  This periodic “check-in” on project performance allows you to determine the state of the project in terms of Cost Management and Schedule Management seen as monetary values.  This area could be tested on the exam in Cost Management, Schedule Management, or Resource Management Knowledge Areas and is a big aspect of the Monitoring and Controlling Process Group.  You should not attempt to tackle this on your own.  Let the experts at PM-ProLearn help you along the way and give you the tools to succeed (such as the EVM Formula Map.  Our methods have helped scores of PMP candidates achieve success on the PMP exam!

PM-ProLearn Logo

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s