Monitoring project performances through Earned Value Management

How can we foreseeif our project will be completed successfully, on time and cost?

ThroughEarned Value Management we can define and monitor accurately where we are, where we were supposed to be and where we're going. Well beyond the usual tracking tools, EVM gives us back precious information to determine the need for preventive or corrective actions to guarantee that are project will be completed within the defined budget and schedule.

Included in the Project Management Body Of Knowledge (PMBOK) since the very first edition of the Guide in 1987, EVM is basically based on the comparison between the work completed till a particular moment and the initial budget and schedule. From this comparison, we can draw the progress status of the project and foresee future performances. No crystal ball is required: you need only a few magical formulas.

Before the magic, however, we first need to identify three landmarks :

1. Criteria to determine the completion percentage of each project activity – When can we consider the activity X completed at the 25, 50, 75, 100%? For small activities (< 80 hours) usually many colleagues use the criteria “0%=Not started”, “50%=In progress” e “100%=Completed”, while for repetitive activities the percentage of units produced out of the total due could be the reference.
2. Actual Cost, (AC)) – It is the sum of the costs incurred till the moment of the analysis.
3. Budget At Completion (BAC)) – The total budget assigned to the project.

Thanks to this information, we will have everything we need to determine the two fundamental values for EVM:

• Planned Value (PV) – It is the monetary value that the project work should have achieved by the time of the analysis, according to the project schedule. It is the result of: % of the work that we should have completed according to our schedule * the total project budget (BAC). For example, if our project lasts 10 months and the second month has just ended, the PV is 20% * BAC.
• Earned Value (EV) – It is the monetary value of the work that was actually done. It is the results of: % of work completed * BAC

Once these two values are defined, the worst is over. Everything that follows requires the application of simple formulas: calculator in hand, we are ready to acquire the information necessary to understand the health of our project.

Indicator	What you need it for	Formula	How to read the result
SV – Schedule Variance	It indicated the schedule deviation. It is the difference between the Earned Value and the Planned Value.	SV = EV – PV	>0 – Ahead of schedule <0 – Behind schedule 0 – On schedule
SPI – Schedule Performance Index	It shows the general compliance of the project to the original schedule.	SPI = EV/PV	>1 – Ahead of schedule <1 – Behind schedule =1 – On schedule
CV – Cost Variance	It measures the cost deviation. It is the difference between the Earned Value and the Actual Costs.	CV = EV – AC	> 0- Under budget < 0 – Over budget 0 – On budget
CPI – Cost Performance Index	It shows the overall efficiency of the project in terms of costs.	CPI = EV/AC	>1 – Under budget <1 - Over budget =1 – On budget
EAC – Estimate At Completion	Consente di prevedere i costi finali del progetto sulla base delle performance attuali.	BAC/CPI (formula standard)*	Il risultato ci fornisce una previsione del costo finale del progetto
ETC – Estimate To Complete	It predicts how much it's gonna cost to complete the project.	ETC = EAC – AC	The result gives us a forecast of how much it will cost us to complete the rest of the project.
TCPI – To Complete Performance Index	Predicts the likelihood of reaching the total estimated budget (BAC) or the estimate at completion (EAC).	TCPI = (BAC-EV)/(BAC-AC) TCPI = (BAC-EV)/(EAC-AC)	>1 – The project is less likely to be completed with the estimated BAC or EAC <1 – More likely to be completed at the estimated BAC or EAC =1 – The project will be completed as planned.
VAC – Variance At Completion	It provides a projection of the budget surplus or deficit (compared to the initial estimates), based on current performance.	VAC = BAC – EAC	>0 – The total costs will be lower than the BAC <0 – The total costs will be over budget 0 – Aligned with the BAC

* For the EAC, we can use: EAC = AC+ BAC – EV, if we believe the project work will continue at the planned costs; EAC = AC + Cost estimate for the rest of the project (named Bottom-up ETC), if the initial estimates of the project are no longer reliable, or EAC = AC + [(BAC-EV)/(CPI * SPI)], if the CPI and SPI influence the rest of the project.

Example of Earned Value Analysis

Stiamo gestendo un progetto per l’azienda XYZ, che porterà allo sviluppo di un nuovo software. Il progetto durerà 10 mesi ed è stato assegnato un budget pari a 100.000 €. Abbiamo appena concluso il quarto mese di attività e, alla data odierna, abbiamo speso 50.000 € e completato il 30% del lavoro.

We can immediately identify:

• BAC = 100.000
• AC = 50.000
• % of work completed = 30%

Now, let's calculate the fundamental values:

• PV = 40% * 100.000 = 0,4*100.000 = 40.000 [At this moment, the work completed should be worth 40.000 €]
• EV = 30% * 100.000 = 0,3*100.000 = 30.000 [At the moment, the work completed is worth 30.000 €]

Proceeding to calculate the other indicators:

• SV = EV – PV = 30.000 – 40.000 = -10.000 [Negative: we're late]
• SPI = EV/PV = 30.000/40.000 = 0,75 [< 1: the project is 25% late for the original schedule ]
• CV = EV – AC = 30.000 – 50.000 = -20.000 [Negative: we spent more than what we should have ]
• CPI = EV/AC = 30.000/50.000 = 0,6 [< 1: the project is 40% over budget ]
• EAC = Supposing that the CPI will be the same, we use the formula BAC/CPI = 100.000/0,6 = 166.667 [ based on current performance, the project will be completed at a total cost of 166.667 €]
• ETC =EAC – AC = 166.667 – 50.000 = 116.667 [ from now on, we'll spend 116.667 € to complete the project ]
• TCPI = (BAC-EV)/(BAC-AC) = (100.000-30.000)/(100.000-50.000) = 1,4 [>1: it's harder to complete the project at the initially estimated budget.]
• VAC = BAC-EAC = 100.000 – 166.667 = -66.667 [Negative: the project will be closed at a higher cost than the expected one.]

Excel Spreadsheet

I created an Excel file to facilitate the calculation of the indicators necessary for the Earned Value analysis. You can download it for free, in Italian or English, by clicking on the images below.