10.5. Earned Value Analysis

Earned value analysis (EVA) is a monitoring and controlling process that compares project progress to the project baseline (original plan). EVA measures the performance of a project in terms of cost and schedule. It can tell the project team if a project is:

• Behind Schedule
• Ahead of Schedule
• Under Budget
• Over Budget

EVA provides hard numbers for making these judgements and can be used to forecast where a project will end up in terms of time and cost. As a result, EVA helps the project manager clearly communicate project progress to all stakeholders and can focus the attention of the project team on any changes needed for the project to be completed on time and on budget. Most project management information systems (PMIS), can calculate earned value metrics if a baseline is properly set and the earned value inputs are provided. Project managers who do not conduct an earned value analysis run the risk of misinterpreting or miscommunicating the meaning of the project information that is collected during the execution phase.

Before attempting the calculations involved in an earned value analysis of a project, it is important to understand the three basic inputs for EVA calculations. The three basic inputs are Planned Value (PV), Actual Costs (AC), and Earned Value (EV).

Planned Value (PV)

Planned Value—Refers to the expected cost that will be spent on the project over its lifetime.  For each activity, there is a total Planned Value (cost). More importantly, the amount that was going to be spent on each activity over time is also known.

Consider the information presented on Project Breakdown in Table 10.1. The amount that the project team thinks an activity will cost is called the planned value for that activity.

Actual Costs (AC)

The Actual Costs—this refers to the completed work—is the easiest of the inputs to understand. AC refers to any given activity cost at specific time. Actual costs don’t reflect what was planned to be spent, but rather what was spent. This information is obtained from the accounting department and the data is based on invoices, paychecks and receipts related to the activity. While the project manager may have been planning to spend $78 on Activity 1 by the end of period one, the accounting department may inform him or her that the actual cost (AC) at the end of period one for Activity 1 is $50!!

However, the project manager still doesn’t know if spending $50 on Activity 1 by the end of period one is good or bad, since he or she doesn’t yet know how much work has been performed on Activity 1. The next basic input, earned value, will tell the project manager what percentage of the activity is completed and they will then know how well the project is progressing.

Earned Value (EV)

Earned Value—refers to the cost of work completed on an activity which can be found by multiplying the percentage of completed work for a given activity by the planned value for the same activity.

One thing to watch out for is that the calculation of EV is not time-dependent; it uses the total PV for an activity, not the value for PV at a certain point in time as found on a time-phased budget. For example, if Activity 1 is 100% complete at the end of period one, then EV = $50 × 100%, or EV = $50 On the other hand, if no progress has been made on this activity (0% complete), then $50 × 0%, or EV = $0.00

Cost Variance (CV)

CV is the first of two basic variances that can be calculated once EV, PV and AC have been determined for an activity or project. CV is simply the Earned Value minus the Actual Costs.

If CV is negative, that means that the project work is costing more than planned. If CV is positive, then the project work is costing less than planned. CV can be calculated for each activity, for segments of a project (for example a deliverable or sub-deliverable) or for the entire project. Watch the video: Calculating and Understanding Cost Variance for an explanation of how to calculate and interpret CV.

Schedule Variance (SV)

SV is the second of two basic variances that can be calculated once EV, PV, and AC have been determined for an activity or project. SV is simply the Earned Value minus the Planned Value.

If SV is negative, that means that less work has been performed than what was planned. If SV is positive, then more work has been done than planned.

Like CV, SV can be calculated for each activity, for segments of a project (for example a deliverable or sub-deliverable) or for the entire project. Watch the video: Calculating and Understanding Schedule Variance for an explanation of how to calculate and interpret SV.

Cost Performance Index (CPI)

While CV provides a dollar amount that reflects how much over or under the project is at a particular point in time, The Cost Performance Index (CPI) provides an indicator of the overall cost performance to date and a good idea of how the project work is trending with regard to cost performance. CPI is calculated as follows:

• A CPI that is < 1 means that the cost of completing the work is higher than planned.
• A CPI that is = 1 means that the cost of completing the work is right on plan.
• A CPI that is > 1 means that the cost of completing the work is less than planned.

Watch the video: Cost Performance Index (CPI) for a basic walk-through of CPI calculations and the interpretation of the results.

Schedule Performance Index (SPI)

While SV provided a dollar amount that reflected well the project is doing at turning dollars into completed activities on schedule, Schedule Performance Index (SPI) provides an indicator of the overall schedule performance to date.  Remember that there are some limitations on using money to measure time. Those limitations apply to SPI as well. To know whether a project is really behind or ahead of schedule, a project manager will also look at the planned start and finish dates, milestones, etc.

SPI is calculated as follows:

• An SPI that is < 1 means that the project is behind schedule.
• An SPI that is = 1 means that the project is on schedule.
• An SPI that is > 1 means that the project is ahead of schedule.

Watch the video: Schedule Performance Index (SPI) for a basic introduction to SPI calculations and the interpretation of the results.

“Section 1: Earned Value Inputs” from Project Management Fundamentals by J Scott Christianson is licensed under a Attribution-NonCommercial-ShareAlike 4.0 International, except where otherwise noted.