Earned Value Management (EVM) is a project management technique that provides insights into a project’s performance by integrating cost, schedule, and work accomplished. It helps project managers measure the value of work performed and compare it to the planned value and the actual costs incurred. To effectively utilize EVM and ace the Project Management Professional (PMP) exam, it’s essential to understand the key earned value formulas. In this article, we will explore the important earned value formulas you need to know for the PMP exam and how earned value management can assist you in monitoring project performance and making data-driven decisions.
What is Earned Value Management?
Earned Value Management is a project management technique that provides objective data on project performance. It allows project managers to measure the value of work accomplished against the planned value and actual costs. By analyzing these values, project managers can assess project progress, identify potential problems, and take corrective actions to keep the project on track.
Earned Value Formulas You Need To Know for the PMP Exam
Here are the important earned value formulas you should be familiar with for the PMP exam:
- Planned Value (PV): Also known as Budgeted Cost of Work Scheduled (BCWS), PV represents the authorized budget for the planned work to be accomplished.
- Actual Cost (AC): Also referred to as Actual Cost of Work Performed (ACWP), AC represents the total cost incurred in accomplishing the work during a specific period.
- Earned Value (EV): Also called Budgeted Cost of Work Performed (BCWP), EV represents the value of work actually accomplished.
- Cost Variance (CV): CV measures the cost performance by comparing the earned value to the actual cost. CV = EV – AC.
- Schedule Variance (SV): SV measures the schedule performance by comparing the earned value to the planned value. SV = EV – PV.
- Cost Performance Index (CPI): CPI indicates the cost efficiency by dividing the earned value by the actual cost. CPI = EV / AC.
- Schedule Performance Index (SPI): SPI indicates the schedule efficiency by dividing the earned value by the planned value. SPI = EV / PV.
- Estimate at Completion (EAC): EAC predicts the total cost of the project based on the current performance. It can be calculated using different formulas depending on the project situation.
- Variance at Completion (VAC): VAC estimates the cost variance at the end of the project. VAC = BAC – EAC.
How Earned Value Management Helps Project Managers
Earned Value Management provides several benefits to project managers:
- Performance Measurement: EVM provides objective metrics to assess project performance, enabling project managers to identify if the project is ahead or behind schedule and if it is within the allocated budget.
- Early Warning System: By comparing the planned value, earned value, and actual costs, project managers can identify potential issues early on and take proactive measures to mitigate risks and keep the project on track.
- Accurate Forecasting: Using earned value formulas, project managers can forecast the final project cost and schedule based on the current project performance. This helps in making informed decisions and managing stakeholder expectations.
- Data-Driven Decision Making: EVM provides project managers with accurate and reliable data to make informed decisions regarding project scope, schedule, and budget.
- Performance Analysis: By analyzing cost variance, schedule variance, cost performance index, and schedule performance index, project managers can gain insights into project efficiency and identify areas for improvement.
Understanding Earned Value Management
So what exactly is earned value management? Earned value management measures the performance of a project throughout its progress. This project management strategy helps to ensure that the project stays on budget, under the deadline, and meeting the levels of quality required by shareholders.
Earned value management measures a project’s progress and performance based on the three angles of the project management triangle: costs, scope, and time. It combines all of these measurements to simplify the project performance report and ensure that things can continue to run smoothly.
This combination of measurements is referred to as earned value analysis, an essential element to Project Cost Management. Earned value analysis allows you to compare your project’s progress to your original plan and see how far you may have deviated. The results of this analysis will inform your measurement of your current project performance processes. If your project is far removed from your plan, for instance, you may need to use new project management strategies and processes.
Many of the questions in the PMP exam come back to earned value analysis, so if you want to pass the exam and earn your certificate, you need to understand earned value analysis. When you understand earned value analysis, you stand a strong chance of passing the exam and getting your certificate.
As a project manager, your main role is, well, managing a project. Often, that means fielding questions from senior management, customers, and shareholders. They want to know how the project is going, especially in terms of cost. Project managers can present graphs that show a comparison between the planned budget and the actual costs. But that doesn’t tell the whole story.
What if the costs have risen because the team found a need to perform more work than they previously expected? What if the project is behind schedule as a way of saving costs? Or, on the other hand, they incurred more costs in order to ensure a project was ready by the deadline? All of these elements must be accounted for to truly present an accurate picture of the project’s progress.
In order to truly represent the project’s performance and progress, you have to utilize a number of different project management tools. One of the most important tools to use, however, is earned value analysis.
How Earned Value Analysis Plays Into Earned Value Formula
As we stated above, earned value analysis is all about looking at the scope, schedule, and cost of a project against the projected expectations in the project plan. Through an earned value formula, you then determine the performance in terms of currency: how much is the project costing the shareholders, compared to how much it was expected to cost? Earned value formulas can help to determine this number and make the results of that earned value analysis clearer.
Why Is Earned Value Management (EVM) Important?
EVM is an effective project management technique for measuring a project’s performance in terms of budget and schedule, taking into account the scope of the project. It informs performance reviews and updates to shareholders and senior management.
Earned value management should paint a clear picture to someone not working on the project in terms of the progress of the project. The point of EVM is to answer these three questions:
- How has the project been going?
- Where is the project now?
- Where is the project going next?
Essentially, EVM helps to review and readjust plans for the project based on past and current performance. Findings are based on three different project data sources:
- Planned Value (PV): the budget for the project
- Actual Value (AC): the actual cost of the project
- Earned Value (EV): the value of the work completed
Earned value is found through a combination of planned value and actual value. It subtracts actual cost from the planned value in order to determine the value of the project. It also takes into account the scope of the project. It takes these findings to provide a projection for future performance, as well as reassessing the budget and deadlines for the project.
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Earned Value Management is a valuable technique for project managers to monitor project performance, assess variances, and make data-driven decisions. Understanding the essential earned value formulas is crucial for success in the PMP exam and for effective project management. By utilizing these formulas, project managers can gain insights into cost and schedule performance, forecast project outcomes, and take corrective actions to keep projects on track. Incorporate earned value management into your project management toolkit to enhance project control and increase the chances of project success.
Earned value management can be a complex thing, which is why there are so many formulas to study before you take the PMP exam. Here, we’ve provided a full list of all PMP earned value formulas, as well as scenarios that can help you solve those formulas so you’ll be ready for the exam. When you need further help preparing for the PMP exam, we recommend taking an online PMP exam prep course — whether self-paced or with a live virtual instructor. Have your 35 education hours already and just want to practice exam questions, sign-up for a quality exam simulator.