What Is Earned Value

Management? And How to Make It

Work on Your Project

Project planning and management are important tools used by professionals of

every stripe to help their companies reach the goals they’ve set. But even the best
laid plans can go astray, and sometimes project performance doesn’t quite match
the budget or schedule you’ve set.

By using an earned value management (EVM) system as part of your overall

project management plan, however, you can not only track ongoing project
performance and the actual costs of your total project, but of each task within it.
Even better, when it’s properly applied, earned value management gives you real-
time visibility and insight into your projects. Running the numbers can provide
early warnings when things are about to take a costly turn, and allow you to take

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corrective action before the entire project collapses or generates excess cost,
waste, or delays.

How Earned Value Management Works

At its simplest, earned value management is a basic set of calculations you can
use as a control system in tracking two variables—cost and time—to monitor two
statuses critical to every project: budget and scheduling.

Compare this to traditional methods of tracking progress, and you’ll quickly see
why taking both project scheduling and budget into account is better than simply
relying on either.

For example, if a project is scheduled to take five months, and the project
manager’s only looking at elapsed time as a project completion metric, they might
consider the project to be 20% complete after a month has passed, even if only
10% of the work required has been completed. Without a clear understanding of
current project status and where it’s heading, disaster awaits.

EVM addresses this by formalizing processes and assigning value to every task, to
be assigned only once that task is completed. EVM standards used by the United
States Department of Defense (DOD) and set by the National Defense Industrial
Association (NDIA) have been codified since 1998 under the American National
Standard Institute Electronic Industries Association 748 Standard, also known as
the ANSI/EIA 748 standard.

A common approach is to break the total project into tasks that each receive a
value expressed as a percentage, with all the tasks and subtasks adding up to
100%.

If your project is, for example, updating the procurement department’s computers
and software, you might break it out like this:

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 70% Primary Hardware Replacement
20% Software and Licensing Updates
10% Peripherals

Each completed task is added to the total earned value (EV) as it’s completed. So,
going back to our five-month timeframe, if you’ve managed to replace both
hardware and peripherals by the end of month four, you’ve completed 80% of the
work, producing earned value of 80% in 80% of the time allotted.

The percentages used to establish earned value are based on each task’s
percentage of the total project budget, or budget at completion (BAC). If, for
example, you have a project with only one task, and the budget for that task is
$7500, then the project’s BAC is also $7500.

Alternatively, if you had three tasks (like in our computer upgrade scenario), the
breakdown might look more like this:

70% Primary Hardware Replacement ($70,000)

20% Software and Licensing Updates ($20,000)
10% Peripherals ($10,000)

Total BAC: $100,000

Of course, the EV formulas alone aren’t quite enough to help you transform your
project management. They’re best executed within an earned value management
system (EVM system), which is a well-developed, focused application of the
formulas and their analyses to monitor and optimize your project as it happens,
ensuring optimal performance and lowest total cost in real time.

After all, hindsight may be 20/20, but knowing what went wrong is never quite as
satisfying, or profitable, as stopping it from happening altogether.

Once you understand what you’re looking for and how to measure progress,

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 you’ll be ready to perform the actual calculations that determine specific
components of earned value—and manage your projects accordingly.

Earned Value Management Glossary

In order to successfully manage earned value as part of your project planning, you
need to be familiar with the terminology used.

Planned Value (PV): The total budgeted costs for the project. PV is also known
as budgeted cost of work scheduled (BCWS) and is expressed as the portion of the
planned spend at any given point in the project.

Actual Costs (AC): The amount actually spent to complete tasks within the
project. Also known as actual cost of work performed (ACWP).

Earned Value (EV): Also called budgeted cost of work performed (BCWP), EV is
measured by multiplying the percentage of work completed by the total project
budget.

Earned Value Management System (EVMS): The framework of calculations

and analysis used to monitor, maintain, and improve project performance and
budget adherence in real time.

Performance Measurement Baseline: The benchmarks for approved budget,

performance, and scope set during project planning and monitored and
maintained by EVMS.

Work Package (WP): A task, or set of tasks, within a project.

Work Breakdown Structure (WBS): A method of organizing and prioritizing

tasks within a project in order to ensure the project completes all deliverables
within the required budget.

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Critical Earned Value Calculations
Once you understand what you’re looking for and how to measure progress, you’ll
be ready to perform the actual calculations that determine specific components of
earned value—and manage your projects accordingly.

Let’s take a look at the four essential calculations involved:

Cost Variance (CV): A measurement of the difference between earned value and
the actual amount spent at any given point in the project. A negative CV value
indicates a task is over budget, a CV of zero indicates a task that’s on budget, and
a positive CV indicates a task that’s under budget.

Expressed as EV – AC = CV

Schedule Variance (SV): A measurement of the difference between earned

value and planned value. If the SV value is negative, a task is behind schedule. If
the SV is zero, the task is on schedule, and if the SV value is positive, the task is
ahead of schedule.

Expressed as EV – PV = SV

Cost Performance Index (CPI): A ratio illustrating actual earned value as

compared to actual spend. A CPI value of one or lower, accompanied by a
negative CV, indicates the project’s cost performance is below what was planned.

Expressed as EV ÷ AC = CPI

Schedule Performance Index (SPI): A ratio illustrating actual earned value as

compared to planned work completed. If the SPI value is greater than one and
accompanied by a positive SV, then the project is exceeding its scheduled
performance.

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Expressed as EV ÷ PV = SPI

It’s important to note that these equations require analysis beyond crunching the
numbers. For example, a project could have several tasks ahead of schedule, but
over budget. Or the SPI for a given project could indicate more work has been
completed than planned, but all of the work completed so far is made up of non-
critical tasks that won’t necessarily carry the project to the finish line.

Project managers can use these calculations as the foundation for more complex
ones that reveal deeper insights into why (for example) a project is ahead of
schedule but over budget. This process is known as earned value analysis, or EVA.

These advanced equations include:

Estimate at Completion (EAC): An extrapolation of the final total budget

(either project budgets or task budgets) will be, provided everything else
proceeds as initially planned.

Expressed in different ways depending on the factors involved.

If, for example, the project is experiencing an ongoing variance that will most
likely continue (e.g., supply chain disruption due to political conflict, disease,
etc.): BAC ÷ CPI = EAC

On the other hand, if the project is experiencing a one-time variance (e.g., a

weather event, unexpected equipment failure, etc.) and performance levels are
expected to return to normal: AC + (BAC – EV) = EAC

Finally, to take another example, if the budget was incorrectly estimated at the
beginning of the project: AC + ETC = EAC

Let’s say the peripheral replacement task of our computer update project
experiences a cost overrun of $2500 in month four of the five-month schedule.
The actual percentage of work completed is only 60% instead of the expected 80%

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in month four. This creates a CV of less than one, due to a one-time event such as
supply chain disruption caused by severe weather. Fortunately for the project,
that event can only affect performance and cost once.

An overrun of $2500 at month four, when the project should be 80% complete
(and therefore the peripheral task should have an EV of $8,000 based on ⅘ x
$10,000), but an actual EV of only $6,000 would result in an AC of $8,500.

So, to calculate the task EAC, you’d use

$8,500 + ($10,000 – $6000) = EAC

$12,500 = EAC

Assuming no other delays or changes, the estimated actual cost of the peripheral
replacement portion of this project will be $12,500.

Estimate to Completion (ETC): A calculation of how much money is required,

from the point of calculation, to finish the project as planned. This formula is very
useful if project scope or assumptions have been modified from their originals,
and a new estimate is required to determine remaining work and new costs.

Expressed in one of two ways:

If the project will most likely continue to perform as it has up to this point: EAC –
AC = ETC

If the parameters have changed significantly, a new estimate is required and ETC
is equal to the new estimate determined by the changes made.

Variance at Completion (VAC): Allows project managers to forecast cost

variance at the end of the project. It is based on EAC.

Expressed as: BAC – EAC = VAC.

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A negative VAC indicates the amount of money required to finish the project as
planned.

A positive VAC indicates the surplus funds available after completing the project
as planned.

To continue our peripheral replacement example:

$10,000 – $12,500 = -$2,500

You’ll need $2,500 more than originally planned to complete the peripheral
replacement.

To Complete Performance Index (TCPI): The CPI required to complete the

project on budget and as planned. It can help project managers identify how
much extra efficiency will be needed to make up for negative variances.

Expressed in one of two ways:

If the project must meet its original budget: (BAC – EV) ÷ (BAC – AC) = TCPI

If the project budget can be modified to accommodate negative variances: (BAC –

EV) ÷ (EAC – AC) = TCPI

If our project team doesn’t have access to additional funds, they need to find a
way to makeup the negative cost variance by improving efficiency.

(BAC – EV) ÷ (BAC – AC) = TCPI

($10,000 – $6,000) ÷ ($10,000 – $8,500) = TCPI

2.6 = TCPI

In order to catch up and meet their budget and performance goals at the end of
month five, the peripheral replacement task will need to more than double its

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current efficiencies (260%).

Putting Earned Value Management to

Work on Your Project
Mastering EVM formulae is important, of course, but no matter what calculations
you use, the goals remain the same: setting cost, performance, and scope goals
for a project (and each of its tasks), and then making sure you meet them as
closely as you can. And in reaching those goals, having a roadmap and real-time
monitoring in place will help you go the distance much more effectively than
winging it.

If you’re focused on baking EVM into your project management, start with a
checklist of project essentials that will make it easier to track and manage tasks,
costs, and overall project performance.

1. Project Needs Analysis: Clearly and completely define the problem to be

addressed.
2. Work Breakdown Structures: The “how” to the “what” of project needs
analysis.
3. Change Management: Plans within the overall project management plan
for addressing both recognized and unrecognized changes, and develop
contingencies as required.
4. Task and Project Scope and Performance Benchmarks: At this stage,
a project estimate is prepared, with detailed granulation of work packages
within the WBS. Matching schedule and estimates to the WBS ensures full
integration between schedule and budget.
5. Project Schedule and Budget Benchmarks: Establish milestones for
both, guided by quality control and frequent review by the project
manager(s).

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 6. Contingency Planning (Budget and Schedule): Develop
complementary schemes to ensure task and project completion, with an
emphasis on minimal disruption or additional cost.
7. Ongoing Contingency Management: Monitor and extrapolate schedule
and cost contingency values in real time to ensure sufficient resources are
in place.
8. Actual Cost Calculations: Calculate AC using not only cost system data,
but estimated values from outstanding invoices (accruals).
9. Accurate EVM Reporting: EVM is only as effective as the techniques
used to monitor performance, budget, and scope. EVM works best when
reported progress is expressed quantitatively; peripherals installed, total
offices completed, etc.
10. Management Buy-in and Engagement: It’s essential to educate and
engage management and the C-Suite to trust the EVM process and focus
on the importance of accuracy and completeness in gaining useful
insights and improving decision making.
11. Plan to Succeed by Investing in the Right Software: A cloud-based,
versatile solution like Planergy helps ensure total data transparency, easy
contingency management for all your processes and workflows, and deep
analytics powered by artificial intelligence to ensure your earned value
management system is complete, accurate, and accessible.

Make Sure Every Project Reaches the

Finish Line
Effective project management takes more than a knack for maths. But by
mastering EVM formulae, developing a strong project plan that supports value
creation and monitoring, and using powerful software tools, you can set, adjust,
and, most importantly, achieve all your project management goals while keeping
costs low and performance high.

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