Earned Value Management

Though the term Earned Value has gained popularity in the recent past, it has
been used by the US Department of Defense (DoD) since 1960. Since then, it has
been a standard method to method the performance of projects in DoD.
Earned value is a measure of progress and performance. It helps project managers
answer the questions during the course of the project like how much work is
completed, how much time is left for the completion, how much money is left for
completing the remaining activities of the project, how much money should have
been spent in completing the tasks, etc.
Earned Value Management is based on the principle of paying the fair market value
for goods and services as they are delivered and accepted. It enables the funding
and/or sponsoring agency to pay only for what it has received and meets the
specifications and contractual terms and conditions.
Benefits of EVMS
Clear definition of work prior to beginning the work
Helps the line managers credibly request appropriate resources
Provides the basis for the realistic plan against which to measure
performance
Objective measurement of work accomplishment
Helps in developing the realistic plan
9 If the task can be accomplished within scope, budget and
schedule, confidence in a successful outcome is increased
9 If the task cannot be accomplished within scope, budget and
schedule, the problem can be defined and resolved at a time
when the resolution will be inexpensive
Assist program and functional management to identify areas requiring
additional management attention
Reduces propensity of the customer/boss to add work without adding budget
Ties budget directly to work
Requires all work transfers to include associated budget
Requires all budget transfers to include associated work
Fosters management decisions within a framework of reality rather than latent
unease
Let us take an example to understand how earned value helps project managers.
Suppose conceptual design is going to take 200 work-hours, program specification
writing 300 hours, coding 600 hours, documentation 100 hours, user manual 400
hours and debugging 500 hours. Suppose conceptual design and specification
writing are done and therefore, 500 hours of value has been earned. For the in-
process activities, we need to decide how we will earn the value. We should also
assume that one quarter done with the coding and 10% with the documentation.
We could then claim 150 hours for the coding and 10 hours for the documentation.
The total earnings are then 660 hours. So, how complete is the project? Using

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Earned Value methodology, we can determine that the project is 31.4% complete
(660 earned hours divided by 2100 hours of total project budget). Earned Value
has allowed us to combine the progress of vastly different work efforts.
DEFINITION OF BASIC TERMS
There are three basic terms used in Earned Value Analysis. They are
Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV): It
represents the budgets of the activities that are planned or scheduled to be
completed. It provides the answer for the question such as how much did we plan
to spend till date (The date of analysis) or how much work should have been
completed till date.
Budgeted Cost of Work Performed (BCWP) or Earned Value (EV): It
represents the planned or schedule cost of the activities that are completed. In
other words, it represents It is the cost originally budgeted to accomplish the work
that has been completed till date. It answers the question how much work has
actually been completed?. The distinction between the BCWS and the BCWP is
that the former represents the budget of the activities that were planed to be
completed and the latter represents the budget of the activities that actually were
completed.
Actual Cost of Work Performed (ACWP) or Actual Cost (AC): It is the actual
cost to accomplish all the work completed till date. It answers the question how
much have we actually spent?. It is usually determined from the organizations
accounting system, or can often be approximated by multiplying the number of
people by the number of hours or days or weeks worked.
Parameters to Measure Performance
Schedule Variance (SV): It shows the variation in time period to accomplish the
tasks till the date of analysis. Or, in other words, it shows whether the time taken
to accomplish the tasks is as per the plan or less than or more than the planned
time.
Schedule Variance (SV) = Earned value - Planned value

If it is 0, the project is right on schedule. If it is negative, the project is behind

schedule. If it is positive, the project is ahead of schedule.
Schedule variance in percentage term
SV (Earned value - Planned value)
Schedule variance (%) =
Planned value
Schedule Performance Index (SPI):
Earned value
SPI =
Planned value
If it is 1, the project is right on schedule. If it is less than 1, the project is behind
schedule. If it is greater than 1, the project is ahead of schedule.
Cost Variance (CV): It shows the variation in cost in performing the tasks from
the plan.
Cost Variance (CV) = Earned value - Actual cost

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If it is 0, the project is right on budget. If it is negative, the project is over budget
or spendings have been more than the planned. If it is positive, the project is
under budget the most desirable situation, or the tasks have been completed in
less than planned costs.
Cost variance in percentage:
Cost vaiance (EV - AC)
Cost variance(%) =
Earned value
Cost Performance Index (CPI):
Earned value (EV)
CPI =
Actual cost (AC)

If it is 1, the project is right on budget. If it is less than 1, the project is over

budget. If it is greater than 1, the project is under budget.
Example
Light Speed Inc. manufactures Integrated Circuits (ICs). The machine to
manufacture ICs can be used for five hours in a day. Every hour six batches can be
processed on the machine. 50 ICs can be manufactured in a batch. From the past
experience, the company has estimated that each IC would cost $2. At the end of
the day, following observations were made:
Total number of IC manufactured: 1200
Total cost incurred in manufacturing 1200 ICs: $550 per hour.
Perform the earned value analysis.
Answer:
Total number of ICs manufactured in a day = 5650 = 1500
Budgeted cost for 1500 ICs or PV = $3000
Actual Cost (AC) = 5505 = $2750
Earned value (WV) = 12002 = $2400
Therefore,
Schedule variance (SV) = EV PV = 2400 3000 = -600 (Behind
schedule)
Schedule Performance Index (SPI) = EV/PV = 2400/3000 = 0.8
It shows that the project is running at 80% of the planned schedule.
Cost variance (CV) = EV AC = 2400 2750 = -350 (Cost overrun)
Cost Performance Index (CPI) = EV/AC = 2400/2750 = 0.87
It shows that the project is overbudget by 13%.
Use of EVA to Forecast
Till now, we have discussed and analyzed how the project is faring at a given point
of time. But then the question arises if the project is behind schedule and cost is
overrun, can we do something to bring the project on track i.e. can it be finished
within desired time and budget though we are behind? There are five additional
terms used in forecasting.

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 BAC - Budget At Completion = Total Original Budgeted Cost
This is the same as BCWS at completion
EAC - Estimate At Completion = The estimate of the amount of money that will
be spent on the project. This is based on project managers judgment. It can
be calculated in the following manner:
BAC
If no variance from the BAC has occurred, EAC =
CPI
If the original estimates were flawed, new estimates are developed for the
remaining work. In this case
EAC = AC + ETC
If the project manager feels that the current variation will not continue in the
remaining part of the project (for example, because of teething troubles in the
project, the project has been delayed).
EAC = AC + BAC EV
If the past performance of the project is an indication of the future performance,
BAC EV
EAC = AC +
CPI
VAC - Variance At Completion = Forecast of final cost variance
VAC = BAC - EAC
To-Complete Performance Index (TCPI)
The To-Complete performance index is an indication of how we must perform for
the remaining duration of the project to meet the desired cost goal.
BAC - EV Work remaining
TCPI = =
EAC - AC Fund remaining

TCPI is used to determine what cost performance factor will be needed to complete
all the remaining work according to a financial goal set by management.
A Case Study
Zen Star Inc manufactures toys. As the number of players in the industry has
increased in the recent past, the company wants to maintain its competitive
position. As a result, the company is taking up a new ambitious project of
developing a Robot, which listens few instructions and the prominent feature is
that if you tell him to fly, it will fly to a limited distance. The project is starting on
October 2004. The tasks with their predecessors, planned duration and number of
people required are given in table below.
ID WBS element Predecessors Time Number of
(months) persons allocated
1 Electrical Start 4 6
design
2 Assemble 2 4 3
boards
3 Test boards 2 2 2
4 Software Start 4 1

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 design
5 Programming 4 2 2
6 Software 5 2 2
testing
7 Robot body Start 4 2
design
8 Robot 1 2 2
construction
9 Final assembly 3, 6, 8 2 2

It is assumed that only the people cost is charged to the project. And the cost of
each person for a month is $10,000.
Suppose that at the end of eight months, the project is reviewed and the following
information is gathered:
ID Efforts Time Number of % of work
incurred remaining persons for completed
(man month) outstanding work
1 30 0 0 100
2 9 1 3 75
3 0 2 2 0
4 4 0 0 100
5 8 1 2 Budget
$40,000 and
$20,000 o/s
6 0 4 2 0
7 6 1 2 75
8 0 2 2 0
9 0 2 2 0
Calculate the planned value, actual cost and earned value at the end of eight
months. Also calculate the cost variance, schedule variance, cost performance
index, schedule performance index, estimate at completion, percent of work
completed, percent of work scheduled, percent of budget spent, variance at
completion and to-complete performance index.
Answer:
Budget at completion (BAC) = [(24+12+4+4+4+4+8+4+4)10,000] =
$680,000
Budget Actual Outstanding
Activities Time Number Total Efforts to Time Number of Total work
(months) of man Date (man persons remaining
persons months months)
1 4 6 24 30 0 0 0
2 4 3 12 9 1 3 3
3 2 2 4 0 2 2 4

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 4 4 1 4 4 0 0 0
5 2 2 4 8 1 2 2
6 2 2 4 0 4 2 8
7 4 2 8 6 1 2 2
8 2 2 4 0 2 2 4
9 2 2 4 0 2 2 4
Total 68 57 27

Actual cost of work performed (ACWP) =

[(30+9+0+4+8+0+6+0+0)10,000] = $570,000

ID Percent complete Budgeted man Earned value

months or efforts
1 100 24 2410,000 = $240,000
2 75 12 0.751210,000 =
$90,000
3 0 4 0
4 100 4 410,000 = $40,000
5 Budget $40,000 and 4 0.8*410,000 =
$20,000 o/s $32,000
6 0 4 0
7 75 8 0.75810,000 =
$60,000
8 0 4 0
9 0 4 0

*Number of man-month invested = 8 and the number of man-month outstanding

=2
Therefore, total man-month to complete the activities = 8+2 = 10
Percent complete = 8/10 = 0.8 or 80 percent
Earned value (From the table above) =
240,000+90,000+40,000+32,000+60,000 = $462,000
Gantt Chart
WBS
Elements/Months 1 2 3 4 5 6 7 8 9 10 11 12
1 Electrical design
2 Assemble boards
3 Test boards
4 Software design
5 Programming
6 Software testing
7 Robot body design
8 Robot construction
9 Final assembly
From the Gantt chart, it is clear that by the end of eighth month, work packages 1,
2, 4, 5, 6 and 7 should have been completed as per the plan.

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Therefore,
Planned value (PV) = [(24+12+4+4+4+8)10,000] = $560,000
Cost variance = EV AC = $462,000 - $570,000 = $108,000
It indicates that cost overrun on the project is $108,000.
Schedule variance = EV PV = $462,000 - $560,000 = $98,000
Project is behind schedule equivalent to the efforts of $98,000.
EV
Cost performance index (CPI) = = 462000/570000 = 0.8105
AC
It indicates that for every dollar spending, the output of $0.81 is received.
EV
Schedule performance index (SPI) = = 462000/560000 = 0.825
PV
It indicates that for every dollar of schedule effort spending, schedule progress of
$0.825 is achieved.
BAC
Estimate At Completion (EAC) = = $680,000/0.8105 = $838,988
CPI
EV
Percent of work completed = = 462000/680000 = 0.68 or 68%
BAC
PV
Percent of work scheduled = = 560000/680000 = 0.8235 or 82.35%
BAC
AC
Percent of budget spent = = 570000/680000 = 0.84 or 84%
BAC
BAC - EV 680,000 - 462,000
To-Complete Performance Index (TCPI) = = = 0.81
EAC - AC 838,988 - 570,000
or 81%

Variance At completion (VAC) = EAC BAC = 838,988 680,000 = $158,988

It indicates that if the project performance continues in the same manner, there
will be cost overrun of $158,988.

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