Earned Value Management: Framework and Application, Explained

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Earned Value Management: Framework and Application

Project Management · Chapter 9: Project Monitoring, Control, and Performance ManagementSection 9.5 · lesson 59 of 7314 min · free with a free account

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In this lesson

Combine planned work, earned work and actual cost to judge project health.

  • Define planned value, earned value, actual cost and budget at completion at a status date
  • Calculate cost and schedule variances and the CPI and SPI indices
  • Forecast EAC, ETC and VAC while naming the assumption behind each method
  • Use the to-complete performance index to judge whether finishing on budget is credible

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Transcript

Everything said in the video, section by section (1,597 words). Read along, or search it.

Opening Question

Spending on Plan for 30 Exam Rooms

Willowbrook is fitting out 30 exam rooms across its clinics, budgeted at 30 cost units a room: 900 in all. The figures are made up. By the end of period 5, the plan calls for 12 rooms finished. The spending report shows 360 spent, exactly the 360 planned. The operations manager reads that as on plan. Is it? Spending alone can't say, and this lesson shows why.

Core Idea

Pricing Completed Work at Its Budget

Comparing only money spent with money planned can't tell thrift from delay. Spending below plan comes from savings, and equally from work not done. Earned value management puts three things in one unit, money: the work planned by a date, the work actually completed, and the money actually spent. The key step is pricing completed work at its budgeted cost, not at what it really cost. Every figure is taken at a status date, the end of a reporting period.

Definitions

PV, EV, AC and BAC Explained

Four quantities. Planned value, PV, is the budgeted cost of the work the baseline schedules by the status date. Say a project's budget is 1,000, and 40% of the work is planned by period 5. Then PV is 400. Earned value, EV, is the budgeted cost of the work actually completed. If the finished work was budgeted at 300, EV is 300, whatever was really paid for it. Actual cost, AC, is the cost actually incurred for that work. Say 375. And budget at completion, BAC, is the total approved budget, 1,000 here. It changes only through the change process. So: work worth 400 should be done. Work worth 300 is done. And 375 has been spent.

Variances

Cost and Schedule Variance in Money

A variance is a gap in money. Cost variance, CV, is earned value minus actual cost. Positive means the work cost less than its budget; negative, more. Here, 300 - 375 = -75. The work done cost 75 units more than its budget. Schedule variance, SV, is earned value minus planned value. Positive is ahead; negative is behind. 300 - 400 = -100. That's not 100 days late. It means work budgeted at 100 units, planned by now, isn't done. Both formulas start with EV, so a negative sign is always bad news.

Performance Indices

Reading CPI and SPI Against 1.0

An index is a ratio, read against 1.0. The cost performance index, CPI, is earned value over actual cost: budgeted work earned per unit spent. 300 / 375 = 0.80. Each unit spent has earned 0.80 of budgeted work. Above 1.0 is better than budget; below is worse. The schedule performance index, SPI, is earned value over planned value. 300 / 400 = 0.75: three quarters of the planned work is done. Why both a variance and an index? Two projects each have a cost variance of -75. One has EV 300 and AC 375: CPI 0.80, a serious overrun. The other has EV 7,500 and AC 7,575: CPI 0.99. Same amount, very different condition. So report both.

Quick Check

Under Budget but Behind Schedule

Quick check, on a new project. The budget at completion is 1,200. At the status date, planned value is 600, earned value is 540, and actual cost is 450. What are the CPI and SPI? Pause and predict. CPI is 540 / 450 = 1.20: better than budget. SPI is 540 / 600 = 0.90: behind schedule. So this project is under budget on the work done, but behind on the work planned. Option B divides the wrong way, and C swaps the two.

Forecast Methods

Estimate at Completion and Its Assumptions

Variances and indices describe the past. A forecast estimates the future. The estimate at completion, EAC, forecasts the total cost when all the work is done. The most taught formula is BAC over CPI. 1,000 / 0.80 = 1,250. Its assumption must be stated every time: current cost performance continues. If the overrun was a one-off that won't recur, use EAC = AC + (BAC - EV): spent so far, plus the remaining work at its budget. 375 + 700 = 1,075. A bottom-up method has the people doing the remaining work estimate it afresh, when the original estimates are discredited. Others blend the two indices. Each method embeds a belief about the future, so a forecast report should name its method and its assumption.

Money Still Needed

Estimate to Complete and Variance at Completion

The estimate to complete, ETC, is the money still needed: EAC minus AC. 1,250 - 375 = 875. Check it: the remaining work is budgeted at 1,000 - 300 = 700, and 700 / 0.80 = 875. Under the one-off method, ETC is just 700. ETC is what a sponsor needs, to arrange funds. The variance at completion, VAC, is BAC minus EAC: 1,000 - 1,250 = -250, a forecast overrun of 25% of the budget. Under the one-off method, VAC is -75, exactly the cost variance to date. VAC signals whether a decision on scope, funding or tolerance is needed.

Required Efficiency

The To-Complete Performance Index

Now reverse the question. What efficiency must the remaining work achieve to finish exactly on budget? That's the to-complete performance index, TCPI. It's the budgeted cost of the work remaining, divided by the money remaining: BAC minus EV, over BAC minus AC. That's 1,000 - 300, over 1,000 - 375: 700 / 625 = 1.12. The project must earn 1.12 for every unit spent from now on. It has achieved 0.80, so it needs 1.40 times its rate so far: 40% better. There's no universal limit for too high. Compare the required index with the achieved one, and ask what has changed. With AC at 700, TCPI would be 700 / 300 = 2.33, which is rarely credible. When AC reaches BAC, the index is undefined. The budget is gone, and the question becomes how much more money, and who approves it.

Visual Summary

The Whole Example on One Chart

Here's the whole example on one chart. Planned value rises in an S-curve, to BAC at the planned finish, period 12. Earned value and actual cost stop at the status date, period 5, because nothing beyond it has happened yet. The gap from earned value up to planned value is schedule variance, 100. The gap up to actual cost is cost variance, 75. And the forecast, EAC 1,250, sits 250 above BAC. Notice that actual cost, 375, sits below planned value, 400. A spending report would show a 25-unit underspend, and suggest good health, when the work done is worth only 300.

Limitations

Four Limits of Earned Value Figures

Earned value is only as sound as its inputs. First, it relies on honest progress measurement. Credit work too early, or record costs late, and both indices look healthier than the project is. The arithmetic detects neither. Second, it doesn't measure quality. Completed work earns its full value, even if it must be redone. Rework shows up only later, as a falling CPI. Third, it can't see the critical path. SPI adds up work across all activities, so non-critical work can raise it while the activities that set the finish date stand still. Fourth, SPI drifts late in a project. At the planned finish, PV equals BAC. With EV at 900, SPI is 0.90. Finish three periods late, and SPI becomes 1,000 / 1,000 = 1.00. One view says SPI is still useful, read with care beside critical path analysis. Another says schedule variance belongs in time units, which keep their meaning. No side is taken here.

Debate

Weighing the Burden of Earned Value

Is earned value worth the effort? Supporters say it's the one approach that combines scope, schedule and cost in a single set of figures, gives early warning, and forces an explicit baseline and progress rule. Critics say the measurement burden is heavy where work is hard to divide, the indices can mislead, and for small projects a milestone report says as much for less. Whether projects using it do better is an empirical question; no result is stated here. How much weight a calculated figure should carry against judgment is about values. No side is taken.

Quick Check

TCPI for a Clinic Signage Project

Quick check. A clinic signage project has a budget at completion of 500. Earned value is 200, and actual cost is 350, so its CPI so far is 0.57. What TCPI does it need to finish on budget: 0.86, 1.50, or 2.00? Pause and predict. 2.00. Work remaining is 500 - 200 = 300. Money remaining is 500 - 350 = 150. 300 / 150 = 2.00. That's three and a half times the efficiency achieved so far, so finishing on 500 is not credible. 0.86 divides by the 350 already spent, instead of the 150 left.

Case Resolved

Nine Rooms Done Against Twelve Planned

Back to the 30 exam rooms. Only 9 are finished. EV = 9 x 30 = 270. PV = 12 x 30 = 360. AC = 360. CV = 270 - 360 = -90, and SV = -90 too. CPI and SPI are both 270 / 360 = 0.75. They're equal only because spending happened to match the plan. So spending says on plan, while earned value says 25% behind, and a third over on cost. Crews were paid in full while three rooms waited for equipment and inspections. If 0.75 continues: EAC = 900 / 0.75 = 1,200, ETC 840, VAC -300. If the delays are over: EAC = 360 + 630 = 990, ETC 630, VAC -90. TCPI is 630 / 540 = 1.17, against 0.75 achieved. Priya reports a range, 990 to 1,200, with each assumption named: less comfortable, but it doesn't hide the downside.

Key Takeaways

Earned Value Formulas at a Glance

To recap. PV is work planned, EV is work done at budget, and AC is what it really cost, all at a status date. CV is EV minus AC, and SV is EV minus PV. Negative is unfavorable. CPI is EV over AC, and SPI is EV over PV, read against 1.0. EAC, ETC and VAC forecast the finish. Always name the assumption, and check TCPI against what's been achieved.

About Project Management at UPI Study

Project Management (Business 230) is a self-paced online course of 73 video lessons in 12 chapters, from starting and defining a project to planning, budgets, scheduling tools, proposals, contracts, execution, monitoring, closure, teams and certification. It carries a NCCRS credit recommendation for 3 semester credits.

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Why students take Project Management with UPI Study

How projects are planned, run and closedProject Management teaches how to deliver work on time and on budget: scope, schedules, the critical path, budgets and earned value, risk, contracts, monitoring and closing a project, and leading the team. It is a common course in business, management and engineering degrees.
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Universities that work with NCCRS

Project Management carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

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FAQ

Questions students ask us

About Earned Value Management: Framework and Application

What is the difference between planned value and earned value?
Planned value is the budgeted cost of the work the baseline schedules by the status date, while earned value is the budgeted cost of the work actually completed. If a 1,000-unit project planned 40% of its work by period 5, PV is 400. If the finished work was budgeted at 300, EV is 300, because earned value prices completed work at its budget, not at what it really cost.
How do you calculate CPI and SPI in earned value management?
CPI equals earned value divided by actual cost, and SPI equals earned value divided by planned value. With EV 300, AC 375 and PV 400, CPI is 0.80 and SPI is 0.75. Values above 1.0 are favorable and values below 1.0 are unfavorable. Reporting indices beside variances matters, because the same cost variance can be minor on a large project and serious on a small one.
Which formula should be used for estimate at completion?
BAC divided by CPI is the most taught formula, and it assumes current cost performance continues. If an overrun was a one-off, use EAC = AC + (BAC - EV) instead. With BAC 1,000, CPI 0.80, AC 375 and EV 300, the two methods give 1,250 and 1,075. A bottom-up re-estimate suits cases where the original estimates are discredited. A forecast report should name its method and assumption.
Why can SPI be misleading near the end of a project?
SPI drifts toward 1.0 late in a project because planned value stops growing once it reaches the budget at completion. A late project eventually earns its full budget, so SPI reaches 1.00 even if it finished several periods late. SPI also adds up work across all activities, so progress on non-critical work can hide a stalled critical path. Read it beside critical path analysis.

About the Project Management course

How many college credits is Project Management?
Project Management (Business 230) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
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