Earned Value Management (EVM)

evm

Earned value management or EVM is a common topic in PMP and also easy if properly understood. The questions on EVM are pretty straight forward, if you understand which data pertains to the specific value and which formula to apply. EVM is used majorly to asses the project performance with respect to schedule and cost. This in turn helps the PM to make corrections and minimize any deviations from the baselines.

The EMV data values are –

  1. Planned Value (PV) –  Is the cost of the work that you had planned to complete. It is also known as the budgeted cost of work scheduled (BCWS)
  2. Earned Value (EV) – Cost of the activities that you have actually completed. It is also known as  the Budgeted cost of work performed (BCWP)
  3. Actual Cost (AC) – The actual cost that was spent by the team in performing the work. Also known as Actual cost of work performed (ACWP)
  4. Budget at Completion (BAC) – is the actual project budget, i.e. the sum of all the activity costs + the contingency reserve

During the course of a project the PM would measure the above values for the project and analyse the performance based on SV, CV, SPI and CPI.

EMV Data 0

Lets try and understand each of the above terms with an example –

Example: We had planned for a part of project work to be completed 100% as of today and the planned cost was $500 (this will be my PV), but the team reports back saying that they were only able to complete 80% of the planned work (this is my EV = 0.80 * 500 = $400). Now in doing this 80% it could be that instead of 5 people originally planned, there were 6 people working (say there was some issue that came up so had to increase resources). Now the actual cost that would be billed would be more than that was planned. Say the cost billed to project is $600, which will be the AC.

SV and SPI:

In the above example the difference between EV and PV will determine how far ahead or behind we are with respect to the project work being done i.e. the schedule of the project. So this constitutes the SV (Schedule variance) for the project.

SV = EV – PV = 400 – 500 = -100.

NOTE:

If SV is negative, then the project is behind schedule (i.e. achieved less than what was planned)

If SV is zero, the project is on schedule (yay!!)

If SV is positive, then the project is ahead of schedule (i.e. achieved more than what was planned)

The same when expressed as a ratio gives the schedule performance index (SPI)

SPI = EV/PV = 400/500 = 0.8

NOTE:

If SPI < 1, this indicates that the project is behind schedule (i.e. achieved less than what was planned)

If SPI = 1, the project is on schedule (yay!!)

If SPI > 1, this indicates that the project is ahead of schedule (i.e. achieved more than what was planned)

For our example the SPI < 1, and this also indicates that the project is behind schedule, as we determined from the SV calculations too.

CV and CPI:

In the above example if you see the difference between the EV and AC, it will determine how much we should ideally have spent as per the work done versus the actual cost that was billed in the project i.e. the cost variance of the project.

CV = EV – AC = 400 – 600 = -200 (over budget by $200)

NOTE:

If CV is negative then the project is over budget (i.e. achieved less than what was spent)

If CV is zero the project is on budget (yay!!)

If CV is positive then the project is under budget (i.e. achieved more than what was spent)

The same when expressed as a ratio gives the cost performance index (CPI)

CPI = EV/AC = 400/600 = 0.67

NOTE:

If CPI < 1, this indicates that the project is over budget (i.e. achieved less than what was spent)

If CPI = 1, the project is on budget (yay!!)

If CPI > 1, this indicates that the project is under budget (i.e. achieved more than what was spent)

For our example the CPI < 1, and this indicates that the project is over budget, as we determined from the CV calculations too. You can expect questions in the exam on similar lines and asking you about the project performing as per the values given.

One important thing to note is that there could be variance in schedule and cost during the course of the project as indicated below:

EMV Data 1

When a project is closed successfully then SV = 0 and SPI =1 (you could still have cost variance depending on how much was actually billed). SV = 0 and SPI =1, because the project will have earned (or worked on) the complete planned value for it to be completed successfully as below:

EMV Data 2

That’s for a successful project.

Now what would the values look like if the project was abruptly stopped or cancelled or put on hold mid way? This would mean that the project work won’t be completed as planned and you would end up having a schedule variance at that point (i.e. in this scenario, SV won’t be zero and SPI won’t be 1). 

In the exam look out for scenarios which might indicate early closure/cancellation of the project, this would indicate that there could be schedule variance even though you are performing the closing activities.

E.g. you are performing closing activities for the following projects, what do the numbers indicate →

  1. Project A: SV = 0 and CV = -100, this indicates that the project was closed successfully and came under budget
  2. Project B: SV = 0.8 and CV = -100, this indicates that the project was cancelled and at that point the project was running behind schedule but under budget.

Will be adding Forecasting to this blog in due course..


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