earned value management - evm - mccormick pcs · earned value management (evm) technique integrates...

Earned Value Management - EVM

Prepared By: Michael McCormick Page | 1 Updated: 8-2-2017

Earned Value Management (EVM) technique used to track the Progress and Status of a Project & Forecast the likely future performance of the Project.

Earned Value Management (EVM) technique integrates the scope, schedule and cost.

Earned Value Management (EVM) is a project management technique that objectively tracks physical accomplishment of work

More Elaborately:

Earn Value Management (EVM) technique used to track the Progress and Status of a Project & Forecast the likely future performance of the Project.

EVM technique integrates the scope, schedule and cost of a project.

EVM technique answers a lot of questions to the stakeholders in a project related to the performance of the project.

EVM technique can be used to show past performance of the project, current performance of the project and predict the future performance of the project by use of statistical techniques.

Good planning coupled with effective use of the EVM technique will reduce a large amount of issues arising out of schedule and cost overruns.

EVM emerged as a financial analysis specialty in United States Government programs in the 1960s, but it has since become a significant branch of project management.

In the late 1980s and early 1990s, EVM emerged as a project management methodology to be

understood and used by managers and executives, not just EVM specialists and PMI. Today EVM should

become an essential part of every project’s performance tracking.

There are following three basic elements of EVM

Planned Value (PV)

Actual Cost (AC)

Earned Value (EV)

All the three elements are captured on a regular basis as of a reporting date.

Planned Value (PV)

This is also referred to as Budgeted Cost of Work Scheduled (BCWS). Planned Value (PV) or BCWS is the total cost of the work scheduled /Planned as of a reporting date.

This is calculated as:

PV or BCWS = Hourly Rate * Total Hours Planned or Scheduled



NOTE: Hourly Rate is the rate at which effort will be valued.

Actual Cost (AC)

This is also referred to as Actual Cost of Work Performed (ACWP). Actual Cost (AC) or ACWP is the total cost taken to complete the work as of a reporting date.


AC or ACWP = Hourly Rate * Total Hours Spent

Earned Value (EV)

This is also referred to as Budgeted Cost of Work Performed (BCWP). Earned Value (EV) or BCWP is the total cost of the work completed/performed as of a reporting date.


EV or BCWP = Baselined Cost * % Complete Actual BAC * % Complete

All these three elements can be derived from Work Breakdown Structure by associating the costs to each of the tasks. For a big project it will be a tedious task to calculate these elements manually. Scheduling Software like Microsoft Project is used to calculate these three elements.

NOTE: % Completed Planned and % Completed Actual are defined below

% Completed Planned

The percentage of work which was planned to be completed by the Reporting Date. This is calculated using the following formula

% Completed Planned = PV / BAC

% Completed Actual

The percentage of work which was actually completed by the Reporting Date. This is calculated using the following formula

% Completed Actual = AC / EAC

Cost Variance (CV) is very important factor to measure project performance. Cost Variance (CV) indicates how much over or under budget the project is.

Cost Variance can be calculated as using the following formula

Cost Variance (CV) = Earned Value (EV) - Actual Cost (AC)



OR

Cost Variance (CV) = BCWP - ACWP

The formula mentioned above gives the variance in terms of cost which will indicate how less or more cost has been to complete the work as of date.

Positive Cost Variance Indicates the project is under budget

Negative Cost Variance Indicates the project is over budget

Cost Variance %

Cost Variance % indicates how much over or under budget the project is in terms of percentage.

Cost Variance % can be calculated as using the following formula

CV % = Cost Variance (CV) / Earned Value (EV)

OR

CV % = CV / BCWP

The formula mentioned above gives the variance in terms of percentage which will indicate how much less or more money has been used to complete the work as planned in terms of percentage.

Positive Variance % indicates % under Budget.

Negative Variance % indicates % over Budget.

Cost Performance Indicator (CPI)

Cost Performance Indicator is an index showing the efficiency of the utilization of the resources on the project. Cost Performance Indicator can be calculated using the following formula:

CPI = Earned Value (EV) /Actual Cost (AC)

OR

CPI = BCWP / ACWP

The formula mentioned above gives the efficiency of the utilization of the resources allocated to the project.

CPI value above 1 indicates efficiency in utilizing the resources allocated to the project is good.

CPI value below 1 indicates efficiency in utilizing the resources allocated to the project is not good.

The To Complete Performance Index (TCPI)

TCPI is the third forecasting tool mentioned in the PMBOK Guide. This is a relatively new term which was

coined by the PMI to assist project managers in calculating the future cost performance of the project.



Since the concept of TCPI is new and there is not much research available on this topic, it often confuses

many people. The To Complete Performance Index (TCPI) gives you the future cost performance index

that you must follow for the remaining work if you want to complete it within the given budget.

As per the PMBOK Guide, fifth edition:

“TCPI is the calculated cost performance index that is achieved on the remaining work to meet the

specified management goal, such as the BAC or the EAC.”

Put more simply, the To Complete Performance Index (TCPI) is the estimate of the future cost

performance that you may need to complete the project within the approved budget. This budget may be

your initial approved budget (BAC), or a newly calculated budget/estimate at completion (EAC).

You can calculate the TCPI by dividing the remaining work by the remaining funds; i.e.

TCPI = (Remaining Work) / (Remaining Funds) or (BAC – EV)

You can calculate the remaining work by subtracting the earned value from the total budget; i.e. (BAC –

EV). However, there are two cases to determine the remaining funds on hand. In the first case, you

determine the remaining funds when you are under budget and in the second case when you are over

budget.

So, in these cases, the formula to calculate the To Complete Performance Index (TCPI) formula will be

different.

To Complete Cost Performance Indicator (TCPI)

To complete Cost Performance Indicator is an index showing the efficiency at which the resources on the project should be utilized for the remainder of the project. This can be calculated using the following formula:

TCPI using “Budget at Completion” (BAC)

TCPI (BAC) = Work Remaining ( BAC - EV ) / Funds Remaining (BAC - AC)

OR

TCPI using the Project Manager’s “Estimate at Completion” (EAC)

TCPI (EAC) = Work Remaining ( BAC - EV ) / ( EAC - AC)

The formula mentioned above gives the efficiency at which the project team should be utilized for the remainder of the project.

TCPI value above 1 indicates utilization of the project team for the remainder of the project can be stringent.

TCPI value below 1 indicates utilization of the project team for the remainder of the project should be lenient.

Schedule Variance indicates how much ahead or behind schedule the project is.

Schedule Variance can be calculated as using the following formula



Schedule Variance (SV) = Earned Value (EV) - Planned Value (PV)

OR

Schedule Variance (SV) = BCWP - BCWS

The formula mentioned above gives the variance in terms of cost which will indicate how much cost of the work is yet to be completed as per schedule or how much cost of work has been completed over and above the scheduled cost.

Positive Schedule Variance Indicates we are ahead of schedule

Negative Schedule Variance Indicates we are behind of schedule

Schedule Variance %

Schedule Variance % indicates how much ahead or behind schedule the project is in terms of percentage.

Schedule Variance % can be calculated as using the following formula

SV % = Schedule Variance (SV) / Planned Value (PV)

OR

SV % = SV / BCWS

The formula mentioned above gives the variance in terms of percentage which will indicate how much percentage of work is yet to be completed as per schedule or how much percentage of work has been completed over and above the scheduled cost

Positive Variance % indicates % ahead of schedule.

Negative Variance % indicates % behind of schedule.

Schedule Performance Indicator (SPI)

Schedule Performance Indicator is an index showing the efficiency of the time utilized on the project. Schedule Performance Indicator can be calculated using the following formula:

SPI = Earned Value (EV) /Planned Value (PV)

OR

SPI = BCWP / BCWS

The formula mentioned above gives the efficiency of the project team in utilizing the time allocated for the project.

SPI value above 1 indicates project team is very efficient in utilizing the time allocated to the project.

SPI value below 1 indicates project team is less efficient in utilizing the time allocated to the project.

To Complete Schedule Performance Indicator (TSPI)

To Complete Schedule Performance Indicator is an index showing the efficiency at which the remaining time on the project should be utilized. This can be calculated using the following formula:



TSPI = ( Total Budget - EV ) / ( Total Budget - PV )

OR

TSPI = ( Total Budget - BCWP ) / ( Total Budget - BCWS )

The formula mentioned above gives the efficiency at which the project team should utilize the remaining time allocated for the project.

TSPI value below 1 indicates project team can be lenient in utilizing the remaining time allocated to the project.

TSPI value above 1 indicates project team needs to work harder in utilizing the remaining time allocated to the project.

Budget At Completion (BAC)

Budget At Completion (BAC) is the total budget allocated to the project.

Budget At Completion (BAC) is generally plotted over time. Say like periods of reporting (Monthly, Weekly

etc.)

BAC is used to compute the Estimate At Completion (EAC), explained in next section.

BAC is also used to compute the TCPI and TSPI

BAC is calculated using the following formula

BAC = Baselined Effort-hours * Hourly Rate

Estimate To Complete (ETC)

Estimate To Complete (ETC) is the estimated cost required to complete the remainder of the project.

Estimate To Complete (ETC) is calculated and applied when the past estimating assumptions become

invalid and a need for fresh estimates arises.

ETC is used to compute the Estimation at Completion (EAC).

ETC is calculated using the following formula

ETC = EAC-AC

Estimate At Completion (EAC)

Estimate At Completion (EAC) is the estimated cost of the project at the end of the project.

There are 5 Formulas Derived from the Generic EAC Formula based on what conditions you have with

your project:

Formula I – EAC = AC + ETC

Formula II – EAC = AC + (BAC – EV)

Formula III – EAC = AC + (BAC – EV)/CPI

Formula IV – EAC = BAC/CPI

Formula V – EAC = AC + [(BAC – EV)/(CPI * SPI)]

There are 4 formulas listed in the PMBOK Guide 5th Edition. Most of the PMP study guides also list the



same 4 formulas. But, I have listed 5 formulas here. The PMBOK Guide lists Formula II but does not list

Formula III. I have listed both these formulas as Formula II is a special case of Formula III. In fact

Formula IV is also a special case of Formula III. Let us take a close look at all the formulas.

Let me explain each one of them in detail.

Formula I

Formula I is same as our Generic EAC Equation.

EAC = AC + ETC

In the PMBOK Guide and in some other books you will find this formula written as

EAC = AC + Bottom-up ETC

What is “Bottom-up ETC”?

Refer to Scenario IV of my article on Estimate to Complete. The term “Bottom-Up” has no specific

significance in the EAC formula. ETC can be either derived mathematically by using the ETC formulas or

it can be estimated afresh. A fresh ETC can be found by estimating the cost of remaining (unfinished)

work in the Work Breakdown Structure (WBS). You can re-estimate the cost of remaining (unfinished)

work components (work packages and activities) and then total them Upwards in the WBS to determine a

fresh ETC.

Formula II

Refer to my article on Estimate to Complete. By replacing ETC Formula II (project’s past performance

was atypical) in the EAC Equation, the EAC Equation reduces to

EAC = AC + (BAC – EV)

Formula III

Refer to my article on Estimate to Complete. By replacing ETC Formula I (project’s past performance was

typical) in the EAC Equation, the EAC Equation reduces to

EAC = AC + (BAC – EV) / CPI

Note: We can also use Formula III of ETC in the EAC Equation. It will give us another formula which

would be similar to EAC Formula III. However, the resulting formula would use projected future CPI

instead of past CPI.

Formula IV

Let us mathematically solve EAC Formula III.



EAC = AC + (BAC / CPI) – (EV / CPI)

Refer to Basics of Earned Value Analysis. Let us replace CPI in above Equation with (EV/AC). The above



Equation reduces to

EAC = AC + (BAC / CPI) – EV/(EV/AC)

EAC = AC + (BAC / CPI) – AC

EAC = BAC / CPI

Formulas III and IV are, sometimes, also referred to as Independent Estimate at Completion or IEAC.

Variance At Completion (VAC)

Variance At completion (VAC) is the variance on the total budget at the end of the project.

This is the difference between what the project was originally expected (baselined) to cost, versus what it

is now expected to cost.

VAC is calculated using the following formula

VAC = BAC - EAC

% Completed Planned

The percentage of work which was planned to be completed by the Reporting Date. This is calculated using the following formula


% Completed Actual

The percentage of work which was actually completed by the Reporting Date. This is calculated using the following formula




To illustrate the concept of EVM and all the formulas, assume a project that has exactly one task. The

task was baselined at 8 hours, but 11 hours have been spent and the estimate to complete is 1 additional

hour. The task was to have been completed already. Assume an Hourly Rate of $100 per hour. Using this

information:

Hourly Rate = $100

PV or BCWS = Hourly Rate * Total Hours Planned or Scheduled

PV = $800 ($100 * 8 hours)

AC or ACWP = Hourly Rate * Total Hours Spent

AC = $1100 ($100 * 11 hours)

EV or BCWP = Baselined Cost * % Complete Actual

EV = $734 (baseline of $800 * 91.7% complete)

(NOTE % Complete Actual (below) to get the 91.7%)

BAC = Baselined Effort-hours * Hourly Rate

BAC = $800 (8 hours * $100)

EAC = AC + ETC

EAC = $1200 (1100 + 100)

VAC = BAC - EAC

VAC = -$400 ($800 - $1200)


% Complete Planned = 100% ($800 PV / $800 BAC)


% Complete Actual = 91.7% ($1100 AC / $1200 EAC)

SV = Earned Value (EV) - Planned Value (PV)

SV = -$66 ($734 EV - $800 PV)

SPI = Earned Value (EV) /Planned Value (PV)

SPI = 0.91 ($734 EV / $800 PV)

CV = Earned Value (EV) - Actual Cost (AC)

CV = -$366 ($734 EV - $1100 AC) indicating a cost overrun

CPI = Earned Value (EV) /Actual Cost (AC)

CPI = 0.66 ($734 EV / $1100 AC) indicating over budget



TCPI Example

You have a project to be completed in 12 months and the total cost of the project is $100,000 USD. Six

months have passed and $60,000 USD has been spent, but on closer examination you find that only 40%

of the work is completed so far.

Find the To Complete Performance Index (TCPI) for this project.

Example:

Budget at Completion (BAC) = $100,000 USD

Actual Cost (AC) = $60,000 USD

Planned Value (PV) = 50% of $100,000 = $50,000 USD

Earned Value (EV) = 40% of $100,000 = $40,000 USD

Cost Performance Index (CPI) = EV / AC = $40,000 / $60,000 = 0.67

Hence, Cost Performance Index (CPI) = 0.67

Now, Estimate at Completion (EAC) = BAC/CPI = $100,000/0.67 = $149,253.73 USD

Hence, Estimate at Completion (EAC) = $149,253.73 USD

From the calculation, we can see that since the CPI is less than one, you’re over budget. Therefore, to calculate the To Complete Performance Index (TCPI), you will use the formula based on EAC.

TCPI = (BAC–EV)/(EAC–AC) = (100,000–40,000)/(149,253.73–60,000) =60,000/89,253.73 =0.67

TCPI = 0.67

This means that you can continue with a Cost Performance Index of 0.67 to complete the project.

Before I conclude this example, let’s revisit some key points regarding the To Complete Performance Index (TCPI):

Cost Performance Index (CPI) is the past performance of the project; on the other hand TCPI is

the future performance of the project.

If you are under budget, you will calculate the TCPI based on the BAC.

If you are over budget, you will calculate the TCPI based on the EAC.

If the To Complete Performance Index in less than one, you are in a comfortable position.

If the To Complete Performance Index is greater than one, you have to perform with better cost

performance than the past cost performance.

And finally, if the To Complete Performance Index is equal to one, you can continue with the same cost performance.

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