What Is Earned Value Management?

  • May 26, 2022
  • by Lorea Lastiri
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earned value management

Managing projects is a huge responsibility that can be exciting and challenging but can be scary. The project’s progress may progress on time with the allotted budget. But is it really going as you planned?

Utilizing Earned Value Management (EVM) may seem threatening with its terminologies, but it is simpler than you think. 

Additionally, it is a management technique that is more than 50 years old that helped both government agencies and private sectors. 

So, it is worth knowing about Earned Value Management for your current and future projects. Tag along as we explore Earned Value Management, its core concepts, and benefits. 

Let’s dive in!

What is Earned Value Management?

Earned Value Management (EVM) is a project management methodology that measures project performance by integrating the project’s schedule, costs, and scope. It provides a basis for assessing the work progress against a baseline plan and identifies possible risks and problems. It also enables project forecasting and helps project managers adjust accordingly. 

Earned value management uses software, tools, templates, and processes called Earned Value Management Systems (EVMS). The earned value management system provides a more accurate assessment of the project’s status. It also quantifies the volume of work completion, which can help improve the measurement of schedule progress. 

Earned value management system lets the project manager answer these three questions that relate to the project:

  • Where were we?

  • Where are we now?

  • Where are we going?

Meanwhile, earned value analysis (EVA) is a tool for earned value management. A quantitative method lets the project manager evaluate project performance and progress by measuring the work performed beyond the basic schedule and cost reports review. The value analysis depends on the key measure called the project’s key measure called the earned value.

However, earned value analysis is only up to the calculation part. 

Since earned value management is a project management function, it uses the data produced by the earned value analysis for forecasting, trends analysis, and effective decision-making. The data sources from the analysis are gathered from the planned budget, the actual value of work finished, and the earned value of the work completed.

What is Earned Value Management used for?

The earned value management was developed to track large projects with a bigger budget to avoid going over, under, and underdelivering tasks. Basically, it is used for a project’s cost and schedule control and project forecasting

Initially, the concept of EVM grew from the Department of Defense’s policy known as Cost/Schedule Control Systems/Criteria (C/SCSC or CS2) in 1967. It was used to manage their defense programs in the 1960s better. In the 1990s, the American National Standard Institute (ANSI) and the Electronic Association (EIA) made these into 32 guidelines for the earned value management system, which resulted in ANSI/EIA 748 standard. 

Cost control refers to monitoring project status to update the project costs and managing the changes to the cost baseline. It helps recognize the deviations from the planned schedule and take preventive and corrective actions. 

Meanwhile, schedule control is monitoring project activities to update the project progress and managing changes to the schedule to achieve the plan. It helps project managers understand how the project is progressing. 

Both techniques are used to identify and minimize possible risks. 

Integrating cost and schedule control can provide you with information on whether you are on, under, or over the budget. The project manager can utilize the combined data to forecast future schedules and cash flow management performance. 

👉 Check also our list of 12 Best Free Tools for Project Manager

What are the core concepts of Earned Value Management?

It is essential to know the basic concepts of earned value management to understand the terminologies you will encounter fully. Each of these concepts is important in the improvement of project performance.

1. Planned Value

Planned value (PV) is the approved budget for the work scheduled to be done as determined by the cost and schedule baseline. Planned value also varies on the scope of work and the point where you are at in the schedule. 

planned value

Also known as the budgeted cost for work scheduled (BCWS), planned value can be viewed in two ways: cumulative and current. 

Cumulative PV is the total added budget allocated for the work scheduled to be performed to date. On the other hand, the current PV is the allocated budget for the work expected during a given period. 

2. Actual Costs

Actual cost, also known as the actual cost of work performed (ACWP), refers to the cost incurred for performing a job on a project. 

Tracking the project’s actual costs can be easy using good cost management software. You must include the hidden costs, such as software licenses, material, and overheads, in computing the actual cost (AC). 

Similar to the planned value, AC can be cumulative and current. Cumulative AC is the total actual costs for work performed to date. Meanwhile, current AC is the total costs spent on work done during a given period, which can be days, weeks, or months. 

3. Earned Value

Earned value (EV) is the approved budget for the work accomplished by a set date. It quantifies the worth of the work performed to date, which tells you what the project has completed so far. 

Earned value is the budgeted cost of work performed (BCWP). It can be cumulative or current, depending on how one wants to present it.

A cumulative EV is the total budget for the work accomplished to date, while a current EV is the total budget for the work performed in a given period. 

earned value

Source

4. Variance Analysis

Calculating the planned value, actual cost, and earned value is one step of variance calculation and analysis. As the PMBOK of the Project Management Institute stated, variance analysis is the quantifiable departure, divergence, or deviation from the expected value. In other words, it determines how far we are from the project baseline through schedule and cost variance. 

Schedule Variance

Schedule variance (SV) measures the difference between the work accomplished and the work planned to be achieved. It shows whether the project is on time as scheduled or not. 

The formula for schedule variance is project earned value minus the planned value (SV = EV – PV). 

If the schedule variance is negative, the project is behind schedule. Otherwise, a positive schedule variance signified that the project was ahead of schedule. A zero schedule variance means that the project is precisely on schedule. 

Since we want to understand the schedule from the perspective of costs, we need to know the scope of work planned and completed to arrive at the said costs.  

Cost Variance

Cost variance (CV) shows if the project is within the budget or not by measuring the difference between the amount budgeted for planned work and the actual amount spent for the work accomplished. 

The cost variance formula is earned value minus actual cost (CV = EV – AC). A negative cost variance means that the project is over budget, while a positive cost variance means it is under budget. However, if the result is zero, it signifies that the project is exactly on budget. 

5. Performance Indexes

Aside from variance, we can look at and analyze project performance through indexes. There are two performance examinations available to the project manager: Schedule Performance Index and Cost Performance Index. 

Schedule Performance Index

Schedule Performance Index (SPI) measures the schedule or time efficiency of a project. It is the ratio between the approved budget for work performed to the approved budget for work scheduled. 

The formula for the schedule performance index is equal to earned value divided by the planned value (SPI = EV/PV). An SPI that is greater than or equal to one shows a favorable condition, and the project is ahead of schedule. If the value is less than one indicates an unfavorable condition and that your project is behind your schedule. 

Cost Performance Index

Cost Performance Index (CPI) is the ratio between the approved budget for work accomplished and the actual budget spent. It measures the project’s cost efficiency, which can be used for estimating the cost of the remaining work. 

The formula for the cost performance index is equal to the earned value divided by the actual costs (CPI = EV/AC). A CPI that is greater than or equal to one signifies a favorable condition and that the project is over budget. On the other hand, a CPI that is less than one means that the project is under budget. 

earned value key parameters

Source

Benefits of Earned Value Management

Earned value management is a powerful program management technique that has benefits. These are:

1. Minimizes risk

The cost and schedule variances in EVM can help detect and identify at the early stage the risks and issues that occur or may occur during the duration of the project. Detecting these risks and problems earlier can help project managers intervene quickly and ahead of time, which leads to minimizing risks and higher success. 

👉 Read also: Positive vs Negative Risk in Project Management

2. Improves project visibility

Earned value management gives stakeholders a complete view of the project’s timelines and costs for more visibility. The complete view is attainable because unknown factors have been transformed into quantifiable factors in earn value management systems. A breakdown list also shows people involved and tasks assigned to each person. 

With EVM, there is always transparency. 

3. Improved accountability

Since there is a work breakdown structure and organization breakdown structure in earned value management, there is improved accountability for each person who is part of the project. 

Work breakdown structure (WBS) is a graphical presentation that presents deliverables to a unit of work. These units of work are then assigned, authorized, scheduled, and measured during production. 

Meanwhile, an organization breakdown structure (OBS) is an organization chart that shows the people, team, and departments involved in the project. It also presents their hierarchy and their roles and responsibilities for the project. 

Knowing how the team is moving through EVM, the people will know their progress and be accountable for the work assigned to them. 

4. Better profitability analysis

Earned value management gives a reliable data source that makes the crafting of reports easier and consequently provides more time for analysis. 

financial report

The profitability is analysis easier because earned value management gives a comprehensive report and data on the organization, planning, schedule, budgeting, and accounting for actual costs in a project. 

👉 Read also our article about Net Income and profitability

5. Performance tracking

Earned value management tracks not only the project performance against performance measurement baseline, but also the workforce performance involved in a project. 

Both earned value management systems and analysis can follow how the project is going at the moment by consolidating the project scope, budget, and schedule. 

Meanwhile, the work breakdown structure and organization breakdown structure can assist in tracking the performance of a person, team, or department. 

With earned value management, some indicators show how one is progressing in their work by presenting the whether the project is on budget and schedule, the work accomplished, and the work needed to be done. 

6. Accurate forecasting

One of the benefits of earned value management is it provides accurate forecasting. A comprehensive study on earned value management by Flemming and Koppelman showed that when a project is 20% complete, you can use your current project performance to predict the product’s future using a plus or minus deviation. 

forecasting

The earned value analysis provides information to the project managers a powerful tool to identify and quantify cost and schedule issues. They can use the data to follow and benchmark the current status against the project’s well-defined plan. They can also create a framework based on the data to make well-informed decisions. 

With the benefits of earned value management, EVM became part of federal project risk management in 2005. It is also now a mandatory requirement of the US government and helped private sectors from different industries. Additionally, the Office of Management and Budget promotes EVM as the preferred performance-based management system in managing software projects. 

👉 Check also our article about forecasting best practices

EVM examples

We will present examples to understand further earned value management. 

1. A year-long project has a total budget of $200,000. It has been going on for six months already with a budgeted amount of $100,000 to date. The actual cost through this six-month milestone is $90,000. 

Below is the summary of the data:

Planned Value (PV)

$100,000

Actual Cost (AC)

$90,000

Earned Value (EV)

$200,000*50% = $100,000

Schedule Variance (SV = EV-PV)

$0

Schedule Performance Index (SPI = EV/PV)

1

Cost Variance (CV = EV-AC)

$10,000

Cost Performance Index (CPI = EV/AC)

1.11

The table shows that schedule variance is $0, and the schedule performance index is a positive 1. The numbers mean that the project is right on time as scheduled. 

The cost variance is $10,000, while the cost performance index is 1.11. This signifies that the project is going on in a favorable condition. The project is under the budget, and if this goes on, the total cost for the project may be less than the original budget.

2. A 10-month project has an allocated budget of $500,000. The total budget is assumed to be spent each month equally. After three months, the project manager found that a total of $200,000 was consumed, and only 10% of the work was finished.

Here is the summary of the data:

Planned Value (PV)

$150,000

Actual Cost (AC)

$200,000

Earned Value (EV)

$500,000*10% = $50,000

Schedule Variance (SV = EV-PV)

-$100,000

SV% = (SV/PV) * 100

-66.6%

Schedule Performance Index (SPI = EV/PV)

0.33

Cost Variance (CV = EV-AC)

-$150,000

CV% = (CV/EV)*100

300%

Cost Performance Index (CPI = EV/AC)

0.25

The schedule variance is -$100,000, and the schedule performance index is 0.33. This indicates that we are -66.6% behind schedule.

Meanwhile, the cost variance is -$150,000, and the cost performance index is 0.25. This means that we are 300% over the planned budget. If this continues, the original budget may not be sufficient. The management should increase the budget. 

Conclusion

Earned value management is a great project management technique applicable to either small or large projects. Utilizing this technique can increase your effectiveness and efficiency as a project manager. It can also improve your relationship background because of the comprehensiveness and transparency of this management methodology. 

One notable thing about earned value management is that it is time-phased and tracks project and workforce performance. If you are a project manager, tracking software will lessen your workload.

TimeCamp is a good partner for your project management. This time tracking software efficiently and accurately track workers’ time and productivity. It also gives you reports to help you manage each worker’s tasks and the project in general. 

What’s more, is that TimeCamp has a free version that is packed with useful features. It also allows many users with unlimited client projects. So, it is a very cost-effective tracker for you. 

Sign up TimeCamp now!  

Lorea Lastiri

Lorea is a freelance SEO writer and has spent the last five years researching and writing about time management, productivity, and SaaS. She's an avid traveler, skier, and surfer; when not in the office, you can find her riding waves or exploring the alps.

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