According to the Project Management Institute’s Practice Standard for Earned Value Management Second Edition, Earned Value Management (EVM) is a “Management methodology for integrating scope, schedule, and resources; for objectively measuring project performance and progress; and for forecasting project outcome.”
Wow … that’s a mouth full!
So what is Earned Value Management really? In layman’s terms?
For starters, it’s an overarching term used to describe 32 guidelines that defines a set of requirements that a contractor must meet in order to take on certain Government projects. These 32 guidelines are described in the ANSI EIA 748 standards.
In simple terms, it’s a tool used by Project Managers and Project Management Offices to measure the performance of a project by comparing the baseline or anticipated costs against the performance and actual costs of the project. EVM can be used to find issues with the cost and/or schedule of a project and it can be used to help estimate what the costs and schedules will look like going forward based on historical data.
Earned Value really got its start in the 1960’s by the Government and became a very important part of the United States Air Force in 1966. Back then Earned Value was called Cost/Schedule Planning Control Specifications or C/SPCS. In 1967 the Department of Defense (DoD) put into place a 35-criteria approach that they called the Cost/Schedule Control Systems Criteria or C/SCSC but was considered a financial control tool and was often ignored by Project Managers. It wasn’t until the late 1980’s and early 1990’s that Earned Value Management (EVM) emerged as a Project Management Methodology. Between 1995 and 1998 the EVM criteria was reduced to 32 from 35 and with the adoption of the ANSI EIA 748-A standards Earned Value became part of the industry.
Three Key Dimensions of Earned Value Management
EVM consists primarily of three dimensions including Planned Value (PV), Earned Value (EV), and Actual Costs (AC).
- Planned Value (PV): The authorized budget that has been assigned to scheduled work at a given point in time. This budget can be allocated by phase or over the life of the project and it describes in dollars the physical work that will be accomplished. The PV for the entire project or task is called the Budget At Complete (BAC).
- Earned Value (EV): This is a measure of work performed expressed in terms of the budget that has been authorized for that work. The EV cannot exceed the PV that has been authorized and generally the EV is derived by multiplying a percentage of the work performed by the BAC. This value becomes the basis for our Earned Value metrics that will be described later.
- Actual Costs (AC): AC is the realized costs that are incurred for the work performed and this costs corresponds to what was planned in the PV and measured in the EV. In a perfect world, the AC will equal the PV when the task or project is complete, but there is no real upper limit to what can be spent to achieve what EV has measured.
For the purposes of this article I will continue to refer to these dimensions as PV, EV, and AC as referenced above, but you should know there alternative terminology to describe these values. PV is also referred to as Budgeted Costs of Work Scheduled (BCWS), EV is also referred to Budgeted Costs of Work Performed (BCWP), and AC is also referred to as Actual Costs of Work Performed (ACWP).
Discrete Earned Value Measurement Methods
When it comes to measuring the Earned Value dimension, it’s very important to have objective ways of measuring the performance of the Work Packages (WP). There are a variety of Discrete Measurement Methods which include the following:
- 0% on Start / 100% on Finish: Good for WPs with very short durations
- Other X% on start / Y% on Finish: Good for slightly longer durations that span multiple reporting periods
- Units Complete: Good for longer WPs where multiples of a product are being produced
- Milestones: Good for longer WPs with unequal milestones
- Apportioned Effort: Good for work not easily measured but is proportional to a measureable effort
- Level of Effort (LOE): Does not distinguish cost variance from schedule variance, good for supporting efforts where charges are incurred despite the amount of work performed
I’m not going to spend time explaining these in detail because this is intended to be an introduction. But the takeaway is that we cannot just arbitrarily assign a percentage complete. In order to accurately track performance there must be objective measurements established up front for every work package.
Other Dimensions of Earned Value Management
There are a couple more dimensions of Earned Value Management that are important to note but not necessarily required to move forward with this article.
- Estimate to Complete (ETC): An estimate of the costs from the current period forward on the project.
- Estimate at Complete (EAC): Describes what we expect the total project to cost and it is a combination of AC to the current period and the Estimate to Complete (ETC) from the current period forward.
- Budget at Complete (BAC): We’ve already discussed this one, but the BAC describes the total amount budgeted for the project.
Fundamental Earned Value Metrics
Now that we understand the three primary dimensions of Earned Value Management, we can now move on to describe how the basic index and variance calculations. Understand there are a number of calculations but for the purpose of this introduction, I’m going to describe the Cost/Schedule Variance, and Cost/Schedule Performance Index calculations and what they mean.
Schedule Variance (SV) is a measurement of how the schedule is performing and it’s the difference between EV and PV. SV is used to determine if we are on-time, ahead, or behind the planned delivery date at a given point in time. We calculate it as follows: SV = EV – PV.
Cost Variance (CV) is provides us with the amount of a budget deficit or surplus at a given point in time and it’s the difference between EV and AC. This measurement indicates a relationship between the physical performance and the costs incurred to reach that level of performance. We calculate it as follows: CV = EV – AC.
Cost/Schedule Performance Indexes
Schedule Performance Index (SPI) gives us a measurement of the schedule efficiency and is expressed as a ratio of EV to PV. The purpose of the SPI is to let identify how efficiently the project team is using its time. An SPI less than 1.00 indicates less work was completed than was planned and our team is not performing efficiently. We calculate it as follows: SPI = EV / PV
Cost Performance Index (CPI) is similar to the SPI but it measures the cost efficiency of the budgeted resources and is expresses as a ratio of EV to AC. A CPI less than 1.00 indicates a cost overrun for the work that has been completed. We calculate it as follows: CPI = EV / AC.
Reading the Earned Value metrics and understanding what it means is a whole separate topic. But in simple terms any one metric won’t give you much information, you really need to look at all the metrics in order to understand the big picture. Earned Value is a valuable tool but it does take some practice to really get to know the methodology. If you are interested in EVM I recommend doing some more research into the subject but hopefully I’ve been able to at least give you a good foundation of understanding.