Monday, August 07, 2017

PMP Protein: Earned Value Management – Basics

By Sathish Babu, PMP



Earned Value Management (EVM) is one of the most important concepts that you need to understand for the PMP® exam and you may expect a good amount of questions from this topic. This technique helps you to think about your project the way your sponsor thinks about it.

Benefits of EVM:
Have you ever wondered if there would be a best practice to help you figure out how your project is progressing and better way to control costs rather than rely on hope, guesses, general estimation or approximate percentage complete? 

  • How valuable will it be, if you know the answer for the following on your project:
  • Are we behind or ahead of schedule?
  • Are we currently under or over budget?
  • When is the project likely to be completed?
  • What is the remaining work likely to cost?
  • How much will we be under or over budget at the end?
These are the benefits of EVM and it has been used as one of the tools and techniques in the “control costs” process under the “project cost management” knowledge area.


Why To Conduct EVM?
Listed below are few key points.
  • Helps to figure out how much of your project’s value has been delivered to the customer so far.
  • Helps to know that how you are doing compared to how you thought you would do.
  • Helps to control the performance measurement baseline (Scope baseline, Schedule baseline and Cost baseline).
  • Helps predict future performance based on trends.
  • Provides accurate and timely data for effective decision making.
  • Helps to find changes you need to make on a project. It may also result in change requests.

Advantages of EVM:
Listed below are few key advantages of EVM.
  • Preventing scope creep.
  • Improving communication and visibility with stakeholders.
  • Reducing risk.
  • Profitability analysis.
  • Project forecasting.
  • Better accountability.
  • Performance tracking.
Terms to know for EVM calculation:
First, we need to understand the following. 

1) Baseline is a snapshot of the planned budget, schedule and finalized scope for a project. You compare your actual performance against the baseline so you always know how you are doing versus what you planned.

2) Budget at Completion (BAC) is just your project budget. Once you finalized and estimated cost for all activities and resources, you will get the total project budget. This is shown below. (reference sources - “I Want To Be A PMP” book and PMBOK® Guide 5th Edition.)


Project Budget Components

3) Planned Value (PV) is also referred to as Budgeted Cost of Work Scheduled (BCWS) defines the physical, scheduled or planned work that should have been completed.

Formula for PV = BAC x Planned % complete

4) Earned Value (EV) is also referred to as Budgeted Cost of Work Performed (BCWP) all about how much your project actually earned. When you calculate EV, you are showing your sponsor how much value that investment has earned.

Formula for EV = BAC x Actual % complete

5) Actual Cost (AC) is also referred to as Actual Cost of Work Performed (ACWP) all about the costs actually incurred for the work completed by the specified date.

6) Schedule Variance (SV) is about the difference between PV and EV, to tell whether the project work is ahead of, on or behind schedule.

Formula for SV = EV – PV

We can interpret SV as below.
  • If the variance is positive, your project is ahead of schedule.
  • If the variance is negative, your project is behind schedule.
  • If the variance is zero, your project is on schedule.

7) Cost Variance (CV) is about the difference between EV and AC, to tell whether the project work is under, on or over budget.

Formula for CV = EV - AC

We can interpret CV as below.
  • If the variance is positive, your project is under budget.
  • If the variance is negative, your project is over budget.
  • If the variance is zero, your project is on budget.

8) Schedule Performance Index (SPI) is about the ratio between EV and PV, to reflect whether the project work is ahead of, on or behind schedule in relative terms.

Formula for SPI = EV/PV

We can interpret SPI as below.
  • If the ratio is greater than 1, your project is ahead of schedule.
  • If the ratio is less than 1, your project is behind schedule.
  • If the ratio is equal to 1, your project is on schedule.

9) Cost Performance Index (CPI) is about the ratio between EV and AC, to reflect whether the project work is under / on / over budget in relative terms.

Formula for CPI = EV/AC

We can interpret SPI as below.
  • If the ratio is greater than 1, your project is under budget.
  • If the ratio is less than 1, your project is over budget.
  • If the ratio is equal to 1, your project is on budget.

How to Calculate Earned Value:
The best way to understand EVM example is to solve one example. So, let’s take one simple example to understand it.

A project has a budget of $1,000,000 and schedule for 10 months. It is assumed that the total budget will be spent equally each month until the 10th month is reached. After 4 months, the project manager finds that only 10% of the work is finished and a total of $200,000 spent.


These values are important to identify whether you’re on, ahead of, or behind schedule and on, under, or over budget. But just comparing your actual expenditures with your budget can’t tell you whether you’re on, under, or over budget. This is where variances and performance index comes in.

How to Calculate Variances and Performance Indices:
Let’s take the same problem to calculate further.

To arrive at the correct answers for EVM questions, all you need to do in the PMP Exam is to,
  • Read the question carefully.
  • Select the correct formula to apply.
  • Calculate the answer (this is often the easiest part! You can get most answers without the use of calculators).
In common practices, EVM will also involve plotting the values on a graph in order to help stakeholders concerned to visualize the progress and the health of the project. This is shown below.


Now we have identified the actual status of a project and how it is progressing. We will discuss more about future performance and forecasting calculation for a project in my next article.

References: 
1. “7.4 Control Costs” from PMBOK Guide 5th Edition.
2. “Chapter – 8: Project Cost Management” from Book “I Want To Be A PMP” by Satya Narayan Dash.
3. “Chapter - 7. Cost Management” from Head First PMP 3rd Edition.

Written by Sathish Babu:
Sathish Babu is working for Kodiak Networks as a Project Manager and having 11+ years of experience in Product, Project Management and Service Delivery in Telecom domain.

Part 2 of EVM Series:

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