Earned Value Management (EVM)

Overview

Earned Value Management (EVM) is a methodology used to measure project performance against project baselines. It integrates the scope baseline, cost baseline, and schedule baseline to form the performance baseline, aiding the project management team in assessing and measuring project progress and performance.

Important Terms in EVM

• Planned Value (PV): Authorized budget assigned to scheduled work.
• Earned Value (EV): Work performed in terms of budget authorized for that work.
• Actual Cost (AC): Actual cost incurred for work performed.
• Budget at Completion (BAC): Budgeted amount for total work.
• Estimate at Completion (EAC): Expected total cost for the project at completion.
• Estimate to Complete (ETC): Expected cost to finish all remaining project work.
• Variance at Completion (VAC): Projected budget surplus or deficit at the end of the project.

Key Formulae in EVM

1. Cost Variance (CV):

   • Formula: EV - AC
   • Interpretation: Negative results indicate over budget; positive results indicate under budget.

2. Schedule Variance (SV):

   • Formula: EV - PV
   • Interpretation: Negative results indicate behind schedule; positive results indicate ahead of schedule.

3. Cost Performance Index (CPI):

   • Formula: EV / AC
   • Interpretation: Indicates the value of work being achieved for each dollar spent.

4. Schedule Performance Index (SPI):

   • Formula: EV / PV
   • Interpretation: Indicates the rate at which the project is progressing against the planned schedule.

5. Estimate at Completion (EAC):

   • Formulas:
     • BAC / CPI: Work performed at current CPI.
     • AC + (BAC - EV): Remainder of project at budgeted rate.
     • AC + (BAC - EV) / (CPI * SPI): Considering both CPI and SPI.
     • AC + ETC: Reevaluation based on forecasted ETC.

6. Estimate to Complete (ETC):

   • Formula: EAC - AC
   • Interpretation: Indicates the expected cost required to complete the remainder of the project.

7. Variance at Completion (VAC):

   • Formula: BAC - EAC
   • Interpretation: Indicates the projected budget surplus or deficit at project end.

8. To Complete Performance Index (TCPI):

   • Formulas:
     • (BAC - EV) / (BAC - AC): Needed rate to complete within planned budget.
     • (BAC - EV) / (EAC - AC): Needed rate to complete within specified value (EAC).

Example Calculation

• Project Scenario: A software project with four sequential phases, each taking one month and costing $10,000.
• Status: At the end of the third month.

Calculations

1. Planned Value (PV):

   • PV = $10,000 (Month 1) + $10,000 (Month 2) + $10,000 (Month 3) = $30,000

2. Earned Value (EV):

   • Work completed: $10,000 (Month 1) + $10,000 (Month 2) + $5,000 (50% of Month 3)
   • EV = $25,000

3. Actual Cost (AC):

   • Costs: $10,000 (Month 1) + $12,000 (Month 2) + $9,000 (Month 3)
   • AC = $31,000

4. Cost Variance (CV):

   • CV = EV - AC = $25,000 - $31,000 = -$6,000
   • Over budget by $6,000

5. Schedule Variance (SV):

   • SV = EV - PV = $25,000 - $30,000 = -$5,000
   • Behind schedule by $5,000

6. Cost Performance Index (CPI):

   • CPI = EV / AC = $25,000 / $31,000 ≈ 0.80
   • 80 cents value for every dollar spent

7. Schedule Performance Index (SPI):

   • SPI = EV / PV = $25,000 / $30,000 ≈ 0.83
   • Project progressing at 83% of planned rate

8. Estimate at Completion (EAC):

   • EAC = BAC / CPI = $40,000 / 0.80 = $50,000

Conclusion

EVM provides critical insights by comparing planned baselines to actual progress and performance, helping project managers forecast and adjust accordingly. This can involve monitoring budget utilization, schedule adherence, and future project cost predictions.