A big part of a project manager’s job is to monitor and control the project’s progress to ensure that it’s on goal for budget, time, and quality. There are different ways to analyze the health of a project, but one way is through earned value management and the earned value formula. This formula allows project managers to compare the actual results of the project to expectations and to see what needs to be improved. So how does earned value management work?
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.
Earned Value Formulas
As we’ve discussed, there are three aspects to earned value analysis: the planned value of a project, the actual cost, and finally the earned value.
Let’s consider an actual situation: you are the manager of a project with a goal to install new onboarding software onto 1000 computers, and you have two business weeks to do so. Your budget is $200,000. At the end of day 5, 510 computers have the new onboarding software and the project has cost $100,500. This will need to be reported to your senior management in terms of planned cost, actual cost, and earned value. But how do you break that down?
By using these earned value formulas:
Earned Value Formula #1 – Budget at Completion (BAC)
Your BAC is the total budget that you set out for the project from start to finish. Though this budget might change depending on the progress of the project, the BAC is the original budget within the project plan. This is the budget given to senior management and shareholders at the beginning of the project. In the case of our hypothetical scenario, the BAC is $200,000.
Earned Value Formula #2 – Planned Value (PV)
Planned Value, or Budgeted Cost of Work Scheduled (BCWS) is the cost budgeted for the work the project to be completed. This may sound similar to BAC, but PV breaks the project up into percentages. It determines the amount of the estimated budget allocated for a portion of the work.The formula to find PV is:
BAC x Planned % Complete
Planned % Complete is the percentage of the total project left to complete. For instance, by the end of the 5th day, the project should be 50% completed. $200,000 x .5 = $100,000. Thus your PV is $100,000.
Earned Value Formula #3 – Actual Cost (AC)
Actual Cost (AC) is the actual cost that you have spent on the project up to this point. It is also sometimes known as the Actual Cost of Work Performed (ACWP). There’s no math involved in this, just a review of your receipts so far. In our example above, the AC = $100,500.
EV Formula #4 – Earned Value (EV)
Earned Value (EV), or Budgeted Cost of Work Performed (BCWP), is the percentage of the budget spent on the work performed so far. How much work have you been able to accomplish with the budget you have been given? This is not about the AC, but rather the BAC held up against the work performed so far. EV is found by multiplying the BAC with the percentage of the project completed to date. Follow this formula:
EV = Actual % Complete x Budget at completion (BAC)
Actual%Complete is the actual amount of the project completed so far versus the total amount of the project so far. So far, 55.1% of the project has been completed. So the figure is:
55.1% x $200,000 = $110,200.
As you can see, your AC is greater than your PV, but that doesn’t tell the whole picture. Your EV shows that you are actually ahead of your planned schedule and working under your original budget — by quite a bit. Project managers often face situations like this, where the answer as to whether they are above or behind is more complex than yes or no. To figure this out the full picture, you will need these other earned value formulas.
Earned Value Formula #5 – Schedule Performance Index (SPI)
To figure out if you are ahead of or behind schedule, you need to figure out the Schedule Performance Index (SPI). You can do so by dividing your EV with your PV. The formula here is:
Or, in terms of our hypothetical scenario, SPI = $110,200/$100,000 = 1.10
And that’s a good sign! If your SPI is greater than 1, then your EV has exceeded your PV, putting you ahead of schedule. Either you’ve done more work than you planned or you’ve spent less than you planned. In the case of this project, the answer is both.
If your SPI is less than 1, you are behind schedule. You’ve worked less than the expected amount for the project. In every PMP case, you want an SPI greater than 1 and you want to avoid an SPI that is less than 1.
Earned Value Formula #6 – Schedule Variance (SV)
Schedule Variance (SV) determines exactly what the difference is between the original, planned budget and what you’ve actually earned so far. In the case of our hypothetical above, you’ve saved money and the SV formula will reflect that. To figure out SV, you subtract PV from EV:
SV = EV-PV
In this case, SV = $110,200 – $100,000 = $10,200
Keep in mind that the measurement for any of these equations should always be in dollars or relevant currency. Here, you want the variance to be positive, as this informs you that you are ahead of schedule. If the balance is negative, you’re running behind.
Earned Value Formula #7 – Cost Performance Index (CPI)
Cost Performance Index (CPI) measures your progress with your budget — whether you are over or under budget. To figure out CPI, you will need to divide AC from EV.
CPI = EV/AC
Going back to our scenario, the formula is: $110,200/100,500 = 1.10
This functions the same way as SPI. You want the number to be 1 or greater. The fact that our number is 1.10 means that the project is slightly under budget — always a good thing in the eyes of the shareholders.
Earned Value Formula #8 – Cost Variance (CV)
Similar to SV, Cost Variance (CV) is all about the difference between your planned budget and your earnings so far. This can be figured out by subtracting EV from AC.
In our case, the equation is CV = $110,200 – $100,500 = 700.
If your CV is 0, you are right on budget. If it’s greater than 1, you are within budget, saving up money for any potential hiccups that might arise down the road. This is an ideal position for project managers, and it’s something that shareholders love to see.
If your CV is less than 0, on the other hand, you have gone over your budget, also known as “blowing your budget.” This is bad news for shareholders. It tells them that the value of the project is not meeting the investment they put into it.
The goal is for your CV to be as far above 1 as possible. The CV represents the dollar value that shareholders earn from a particular project. At 1, they aren’t losing anything, but they aren’t gaining much, either. If it’s 700, on the other hand, that’s quite a profit.
The final formulas are all about forecasting. Forecasting allows you to use the above formulas like earned value to come up with a clear idea of the project’s performance at completion. What will it take for you to come in under budget and on schedule? This is what you can figure out with forecasting.
EV Formula #9 – Estimate at Completion (EAC)
Looking ahead towards the end of the project, EAC estimates how much the total project should come at this point. This is a chance to look at your original budget and reassess based on the progress of the project so far.
Let’s play with a new hypothetical. Let’s say you were launching a new marketing platform for startup businesses. Your budget was $50,000 and the project was meant to take 6 months. You are now 50% finished with the project in the second week of the 4th month. Your AC so far is $25,500. That puts your CPI at 0.98 and your SPI at 0.86. As you can see, you’re both slightly over budget and slightly behind schedule.
There are a few ways to approach getting back on track:
Flawed Original Estimate
This EAC formula figures out a new estimate by calculating the actual cost so far and adding a new estimate for the remainder of the work.
EAC = AC +Revise ETC
ETC is the amount of money you’ll need to complete the remainder of the project. However, this can be difficult to find if your original estimate was flawed. For that reason, you’ll need to revise your ETC. Ask the team to go through each activity of the project and determine the cost at an activity level. From there, add up a new estimate to complete the project. Add the actual cost and you’ll have a new EAC.
Maybe the staff you are using to build the cloud-based platform is more expensive than you originally expected. This is a typical variance to a project, and it probably won’t change before the end of the project. In this case, you use a different formula to figure out EAC. For the above situation, the formula you would use is:
EAC = BAC/CPI
The BAC for this project was originally $50,000, and the CPI is at 0.98.
EAC = $50,000/0.98 = $51,020.
Sometimes unforeseen circumstances may arise in the midst of a project. Perhaps there was a power outage and you lost some of your work while building the cloud platform. This is considered an atypical variance. It is not likely to happen again, and the project can continue on as normal.
The formula to calculate the new estimate in this case is:
EAC = AC + (BAC – EV)
So in our scenario, the BAC is $50,000 and EV is $25,000. The AC was $25,500. To figure out the EAC in the case of atypical variance, plug in the numbers and solve:
EAC = $25,500 + ($50,000 – $25,000 = $25,000) = $50,500.
Typical of Future Variance
The typical of future variance is somewhere between the two. Let’s say that as you start to hire a team for the project, a peak season begins for developers, leaving fewer developers that have open availability. The cost to hire developers and their availability may be different than you typically expected.
This variance will occur or recur for the duration of peak season, which may last for the entirety of the project. Because of this, you will need to adjust your estimate appropriately. The EAC formula for this kind of variance is:
EAC= AC+ (BAC-EV)/ (CPI x SPI)
We know from the above equation that AC + (BAC – EV) = $25,500. That takes out half of the formula. Now it’s a matter of multiplying CPI by SPI. Our CPI is 0.98 while our SPI is 0.86. To plug in the numbers:
EAC =$25,500 + ($50,000 – $25,000)/(0.98 x 0.86) =$25,500 + $29,663 = 55,163.
Earned Value Formula #10 – Estimate to Complete (ETC)
EAC determines a revised budget for the project as a whole. What matters most, however — assuming you’ve already spent some of that money so far, is how much more money to spend before the end of the project. Estimate to Complete, or ETC, comes by removing AC from EAC.
In the event that your original budget was simply flawed, the best way to find ETC is by going through your project at an activity level and refiguring the ETC from scratch. We demonstrated this above while discussing EAC.
Let’s go back to the typical variance situation: the staff building the cloud-based platform is more expensive than originally anticipated. This will carry on throughout the entirety of the project, so it’s best to take that into account for the remainder of your estimate.
In this case, ETC = $51,020 (EAC for typical variance) – $25,500 (AC) = $25,520.
This is the situation in which a power outage delayed production and lost some of the work that had been done on building the cloud-based platform. As it is not likely to happen again, the fluctuation with your budget should be much lower.
Here, your ETC= $50,500 (EAC for atypical variance) – $25,500 = $25,000.
EV Formula #11 –Variance at Completion (VAC)
VAC will tell you how far over or under budget you will be at the end of the project. Although no one likes to be over budget, calculating your VAC will at least keep you informed and may even help you to find ways to get back on budget if possible. You can find this by subtracting BAC from EAC.
VAC = EAC – BAC
Let’s look at the typical variation situation. In that case, your EAC is $51,020. Your BAC, remember, was $50,000.
VAC = $51,020 – $50,000 = $1,020.
In this case, you have spent more than expected on your project. If your VAC is positive, the number is the amount that the project cost shareholders beyond what it was worth. If your VAC is negative, the number is the amount you saved on the project, or the number the shareholders earned. Thus it’s always best to have a negative VAC.
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Earned Value Formula #12 –To Complete Performance Index (TCPI)
Finally, there’s the To Complete Performance Index, or TCPI. This gives you a number for the performance level that has to be achieved or maintained in order to complete the project under the original budget. Is your project on target? You’ll find out by figuring out the TCPI
The TCPI formula first figures out the work left over on the project and divides it by the remaining money. The formula is:
TCPI = (BAC – EV)/(BAC – AC)
BAC – EV calculates the amount of work left to be completed. BAC – AC = the amount of budget left over.
In our case above, TCPI = ($50,000 – $25,000)/($50,000 – $25,500) = 1.02
However, this is only in cases in which you need to stay within the original budget. What if you need to stick to a revised, newly approved budget? In those cases, instead of subtracting AC from BAC, you will subtract it from EAC. That formula looks like:
TCPI = (BAC-EV)/ (EAC-AC)
So let’s figure out the formula with EAC – AC, if EAC assumes typical variance:
TCPI = ($50,000 – $25,000)/($51,020 – $25,500) = .97
You want your TCPI to be less than 1 in this case. If your TCPI is greater than 1, you will have a difficult time completing the project under budget. If it is less than 1, however, you’re more likely to finish on time and under budget.
8 Tips To Help Remember Earned Value Formulas
- EV always comes first when figuring out CV, CPI, SV, or SPI
- Variance formulas are always either EV – AC or PV
- If the formula is a ratio or index formula, the solution is EV divided by AC or PV
- Formulas relating to schedule always use PV
- Formulas relating to budget use AC
- When interpreting variances, the result you want is always a positive number
- In the case of CPI or SPI, the result you want should be GREATER than 1
- In the case of TCPI, the result you want should be LESS than 1
In Conclusion: Earned Value Management & Formulas
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.