A beginner’s guide to Earned Value Management
May 21, 2021
This post was originally published on November 15, 2019, and updated most recently on May 25, 2021.
Earned Value Management (or EVM for short) is a technique that’s essentially the gold standard for managing a project’s schedule and budget. In fact, it’s so highly regarded and so effective at scale that the United States government uses it to measure and manage the performance of its programs. So what is it?
What is Earned Value Management?
EVM is a tool that helps us understand project performance in terms of cost and schedule at the same time. It also helps us predict how a project will perform if we carry on as we are.
There are four main components to EVM that help us understand how a project is or could potentially perform.
1. Budget at completion
This represents the budgeted cost of the project. It can be current, as in the approved budget for something performed during a given time period. Or it can be cumulative — i.e., the sum of all budgeted activities scheduled up to a certain date.
2. Budgeted cost of work scheduled (aka Planned Value, or PV for short)
This is the budgeted cost of work your team will perform according to plan. Again, you can view this cumulatively or to your current state.
3. Budgeted cost of work performed (aka Earned Value, or EV for short)
This is the budgeted value of all the tasks that have been completed up until now.
4. Actual cost of work completed
This is a measure of the total amount of actual expenditure of tasks completed to date. As with the others, you can look at it as a cumulative or current figure.
Why is Earned Value Management important?
EVM lets us work out burn rates for cost and performance, which helps us understand how well the project is performing in relation to the original plan.
Looking at all of these different elements also allows us to look at a project that’s not on schedule or budget (either over or under) and see what the performance is for both of those things simultaneously.
When we take these indices and apply them to the rest of the project (or future work), we can more easily forecast how things will run in terms of cost, performance, and scheduling — assuming the burn rate doesn’t fluctuate.
But remember — this is a big assumption, so it’s important to be flexible and aware of how changes will impact these elements.
So to recap, Earned Value Management helps us work out:
- Where have we been?
- Where are we now?
- And, where are we going?
How to do an Earned Value Analysis
Conducting an Earned Value Analysis is a project in itself. And like all good projects, it needs a plan.
At its most basic, you need to include the following:
- Scope (major deliverables, project objectives, project assumptions, project constraints, and a statement of work)
- Work breakdown structure (WBS)
Once you have the foundations of your EVA completed, you need to establish the following three areas:
- Planned Value (what was the budget you planned for?)
- Actual Cost (what has your project cost to date?)
- Earned Value (what has your project earned or accomplished so far?)
You can find this information out by tracking budgets, spend, and schedules. If you use project management software, finding and tracking this information should be relatively easy. If not, speak to accounts, delve into your team’s schedule, and speak to your team members.
Planned Value (PV) is determined by the cost and schedule baseline. Actual Cost (AC) is determined by the real cost incurred. Earned Value (EV) tells you what the project accomplished, earnings-wise.
What’s costing or helping you?
If you came out with a positive number — great job! If you weren’t achieving this conscientiously, here are a few of the factors that could be helping you:
- Finding efficiencies — you managed to find a few ways to make the work easier.
- Work was simpler — there was an error of judgment of the work to begin with.
- Few edits — you did well and hit the mark on the first or second try.
- Fluctuations that reduced cost — over the course of the project, maybe a software you needed got cheaper or you found freelancers with cheaper rates.
- Cost decreases — your overhead costs decreased.
Conversely, if you came out with a negative number, here are a few things that may be holding you back that you can work to fix:
- Work turned out to be more complex — someone misjudged the complexity of the project at the outset.
- Big/many edits — that could because the project wasn’t done correctly or the needs changed during the work.
- Lack of clarity — the parameters weren’t set out well enough at the beginning.
- Scope creep — the project accumulated more features or tasks while working.
- Cost changes — the labor or materials needed turned out to be more expensive than they were when you started.
- Rate increases — the overheard costs went up.
How to work out variances
After the above three values have been established, you can perform what’s known as a ‘variance analysis.’
The aim here is to apply a range to your figures, which helps with planning and budgeting. It’s also useful to show stakeholders so they have a better idea of what to expect as the project progresses.
There are two different types of variance analysis. Those are the cost and the schedule.
This is the difference between the Earned Value and Actual Costs. This is used to help you budget and give stakeholders a better understanding of where you stand on the financial side of things. Here’s the formula for working this out:
Cost variance = Earned value – Actual cost
If you get a 0, then you’re on budget. Anything in the negative means you’re over, and a positive value puts you under budget.
Schedule Variance tells you whether you’re ahead or behind schedule by looking at the monetary value difference between future and past work. It doesn’t show you the impact of this, nor does it help you identify the source of this difference. Instead, it’s there to help you monitor progress and inform your decision-making. Use the following formula to help you work this out:
Schedule variance = Earned value – Planned value
If your answer is 0, then congratulations! You’re on track. If you have a negative answer, you’re behind schedule, and if it’s positive, then you’re ahead of schedule — which is the best possible outcome.
Find out your performance indexes
A performance index shows you the project’s burn rate, aka how fast it’s burning through the budget. It’s useful to know this because it helps you forecast and adjust accordingly.
- Schedule Performance Index helps you measure efficiency. It is the ratio of earned value (EV) to planned value (PV). The formula for this is Earned Value / (divided by) Planned Value. A number higher than 1 means performance is going well. Anything underneath 1 means things aren’t going as well as planned.
- Cost Performance Index helps you measure cost-efficiency. It is the ratio of earned value (EV) to actual costs (AC). The formula for this is Earned Value – Actual Costs. A result greater than 1 indicates good cost-efficiency. Anything underneath shows low cost-efficiency.
How to predict the future (of your project)
Once you have all these values, you can start to forecast. To do this, you need to work out when the project finishes and how much budget you need to complete it.
Look at the Estimate At Completion (or EAC for short) and the Budget at Completion (BAC).
The BAC is the total of every single budget you allocate to the project. Remember, it should always equal the same as the project’s Total Value. If not, your analysis will be inaccurate.
The EAC is the actual cost to date and an estimate for the completion of the remaining work. The goal here is to accurately predict the cost at project completion.
There are several formulas you can use to help you work this out. The following is a popular option:
Budget at completion, divided by the current CPI of the project. (EAC = BAC/CPI)
- Do your EAC and BAC every month or when your project goes through a big change.
- If your project is ongoing, prepare a comprehensive EAC annually, biannually, or quarterly. Whichever works best for you.
Earned Value Management Checklist
- Create a project scope and work breakdown structure. Give each task a WBS number to help with organization.
- Schedule tasks and allocate budgets.
- Establish your objectives to help you measure progress.
- Keep a firm grip on the project’s progress by analyzing costs and variances.
- Perform corrective measures to keep your project on track.
Earned Value Management is a multifaceted technique, and there are several ways you can go about it. To have the biggest chance of success, proper preparation is key. Set some time aside to create a plan, and invest in project management software. Not only does it help you track progress while you’re in the middle of a project. It’s also helpful for collecting schedule and cost information so when the time comes to conduct your EVM analysis, you’ll have everything you need at your fingertips.