Earned Value Management (EVM): Elements, Formulas, Benefits

Many think that Earned value management is complicated paperwork and thus a lot of professionals stay away from it. On the other hand, successful project managers become superheroes to break this myth of earned value management (EVM). Earned Value Management has taken an important place in the world of project management and plays a vital role in the career of project management certification aspirants like PMI PMP certifications and PRINCE2 certificate. 

In this article, we will know more about the Basic elements, formulas, benefits, and limitations of this methodology, developed by the United States Department of Defense in the 1960s to track the performance of its programs.

What is Earned Value Management (EVM)?

Let us begin with understanding the phrase: Earned value and Earned value management.

Earned value (EV) represents a quantified value of the work assigned, which is denoted by units such as currency (INR, Euros, Dollars etc.) or hours. Earned Value Management (EVM), in simple terms establishing and managing project goals. Also, it can be explained in detail as a method that can be used to predict and track the project performance, which includes the Triple Constraint – Time, cost, and scope.

You can better understand EVM using one of the most popular applications used by users across the globe, Google Maps: When we type in the destination location, Google Maps tells us the expected time of arrival at the destination. Also, due to delays in traffic, the application tracks and notifies us of the updated time. EVM does the same by tracking and updating the project managers about the progress of their projects against the baseline of scope, time, and cost. It also supports project managers with data to act proactively and for effective decision making.

Earned Value Management Data Sources

In traditional project management, there are two data sources, Budget cost and Actual cost, but it does not indicate other project performance parameters like how much work is completed for the amount spent, how much work is done according to the planned schedule etc. Whereas in Earned value management, there are 3 data sources the Planned value of work, actual value and earned value of the work completed, hence earned value management in project management gives the additional benefit of tracking the project completed to date for the amount spent, also how much money and time required to complete the project.

Also, there are several earned value management software available in the market (MS Project, Oracle Primavera, Wrike etc.) to plan and track the data sources. Below listed are the tools which are EIA – 748 environments compliant (Electronic Industries Alliance, Standard for DoD (U.S Department of Defense) earned value management programs EVMS for Project, Deltek Cobra, ProjStream MaxTeam, DecisionEdge CloudEVM

Basic Elements of Earned Value Management (EVM)

EVM consists of three basic elements: Planned value, Actual Cost and Earned value:

1. Planned Value (PV): As PMBOK® Guide seventh edition defines planned value as the authorized budget assigned to scheduled work. The total budgeted cost of the planned work. At any point in time, PV defined the work that should have been accomplished. PV can be reported for cumulative work to date or for a specific reporting period.

2. Actual Cost (AC): As PMBOK® Guide seventh edition defines actual cost as the cost incurred while performing the activity. Cost for the work performed on an activity during a specific period. This can be reported for cumulative to date or for a specific reporting period (as cash flow or an S-cure).

3. Earned Value (EV): PMBOK® Guide seventh edition defines earned value as the measure of the work performed, expressed in terms of the budget authorized for that work. Earned value can be reported cumulative to date or for a specific reporting period.

Earned Value Management (EVM) Formulas

Let us know key Abbreviations, names, and definitions, along with their formulas. Definitions and formulas are as per PMI - PMBOK® Guide seventh edition.

1. Budget at completion (BAC): Budget at completion as the sum of all budgets established for the work to be performed.

2. Cost Variance (CV): Amount of budget deficit or surplus at a given point in time, expressed as the difference between the earned value and actual cost.

CV = EV – AC

3. Schedule Variance (SV): The amount by which the project is ahead or behind the planned delivery date at a given point in time, expressed as the difference between the earned value and the planned value.

SV = EV – PV

4. Variance at Completion (VAC): Projection of the amount of budget deficit or surplus, expressed as the difference between the budget at completion and the estimate at completion.

VAC = BAC – EAC

5. Cost Performance Index (CPI): Measure of the cost efficiency of budgeted resources expressed as the ratio of earned value to actual cost.

CPI = EV/AC

6. Schedule Performance Index (SPI): Measure of schedule efficiency expressed as the ratio of earned value to planned value.

SPI = EV/PV

7. Estimate at Completion (EAC): Expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete.

a. Assuming CPI as same for rest of the project, EAC = BAC/CPI

b. Assuming future work will be completed as per plan, EAC = AC + BAC – EV

c. Assuming initial plan is no longer valid, EAC= AC + Bottom-up ETC

d. Assuming CPI and SPI influence the rest of the work,
EAC= AC + [(=BAC -EV) / (CPI x SPI)]

8. Estimate to complete (ETC): Expected cost to finish all the remaining project work.

ETC = EAC -AC

9. Estimate to complete (ETC): Expected cost to finish all the remaining project work.

ETC = EAC -AC

10. To complete Performance Index (TCPI): Measure of the cost performance that must be achieved with the remaining resources to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the budget available.

e. The efficiency that must be maintained to complete on plan.

TCPI = (BAC -EV) / (BAC -AC)

• Great than 1.0 = Harder to complete
• Exactly 1.0 = Same to complete
• Less than 1.0 = Easier to complete

f. The efficiency that must be maintained to complete the current EAC.

TCPI = (BAC – EV) / (EAC – AC)

• Great than 1.0 = Harder to complete
• Exactly 1.0 = Same to complete
• Less than 1.0 = Easier to complete

In Agile, Project Earned Value Management techniques can be used considering the baseline at the release level and not at the sprint level. If an activity is not done, it will get carried to the next sprint, and it adds no value. Also, Story points are used as the measure of work planned and work done

Earned value management metrics use traditional metrics, but Agile contexts are different.

a) Planned Value (PV):  PV= % of planned complete x BAC

b) Earned Value (EV): EV= % of actual complete x BAC

c) Budget at Completion: BAC= No. of release items x Cost / backlog items

d) Schedule Variance: SV= EV- PV

“+” = Ahead of schedule

“-ve” = Behind schedule

“0” = On schedule

e) Cost Variance (CV): CV=EV-AC

“+” = Under budget

“-ve” = Over Budget

“0” = On Budget

f) Schedule Performance Index (SPI): SPI= EV/PV

“>1.0” = Ahead of schedule

“< 1.0” = Behind schedule

“1.0” = On schedule

g) Cost Performance Index (CPI): CPI= EV/AC

“>1.0” = Under Budget

“< 1.0” = Over Budget

“1.0” = On Budget

Benefits of Earned Value Management (EVM)

In the last few decades, Earned value management system’s usage for performance management has increased drastically in many countries, which is directly proportional to the increase in project managers who enhance themselves through best Project Manager courses and implement all major concepts.

• EVM is one of the best methods which helps project managers to plan their projects in terms of cost, schedule, and scope realistically.
• Prioritization of the issues, EVM supports and guides the project managers to prioritize and focus on the issues that have high cost and schedule impacts or risks.
• Earned value management brings transparency to project status among the stakeholders, and the project team brings motivation and ownership to ensure their activities are on track and not exceeding the plan.
• This technique helps to anticipate the risk and resolve the issues at an early stage which benefits project progress and business continuity.

Limitations of Earned Value Management (EVM)

Though many industries have adopted the usage of earned value management systems, the heaviest users are from government and defense organizations. Being an excellent tool for tracking the performance of projects, it still has a few limitations built in.

• Project forecasts are always in terms of money (currency), which does not tell you the entire story behind it.
• Earned value management system works in projects where all dates and data are well defined. The time required to coordinate and collect the required data is high.
• When projects are delayed, Schedule variance and schedule performance indicators are not 100% reliable. Here Planned value is taken as the baseline for prediction, but due to unforeseen risks, the project might get delayed during the execution stages.
• EVMS cannot be performed by non-skilled members and requires a skilled or certified person.
• Earned value management system focuses on Scope, Time, and cost, But not on quality.
• If you are into an agile way of working, then EVM is not the perfect method; instead, you can find other ways of measuring performance.

Conclusion

This article covers a snapshot of Earned value management, which is a vast and wonderful subject to become an expert in project management. Great project managers come from great places – great places are the ones where the bank of knowledge is built. Though there are a few limitations with the Earned value management system, we have more benefits that can be focused upon and reap the benefit out of it. Learning is never ending process; hence to get an in-depth understanding, we recommend researching and educating yourself through various platforms like KnowledgeHut certification courses for Project Management.