Demystifying Earned Value Management (EVM)

Earned value management (EVM) is a method to assess project performance. This is pretty simple
once you get a hang of it. First, spend some time trying to understand the following terms.

EVM develops and monitors the first three key dimensions (EV, AC and PV) for each work package
and control account.

EVM terms to know

 EV – Earned Value. This is the actual value of work performed on any given activity (or WBS
component) at any given point in time. This is expressed in terms of approved budget for that
activity. Earned value is also referred to as Budgeted Cost of Work Performed (BCWP).
 AC – Actual Cost. This is the actual amount of budget spent in carrying out the work on any
given activity (or WBS component) at any given point in time. This is sometimes referred to
as Actual Cost of Work Performed (ACWP).
 PV – Planned Value. This is the authorized budget allocated for the given activity (or WBS
component). This is allocated over the entire duration of phase or project. This is sometimes
referred to as Budgeted Cost of Work Scheduled (BCWS).

On a time-cost graph these are typically an S-curve (refer to the image later in this lesson)
 PMB – Total Planned Value is sometime referred to as Performance Measurement
Baseline. PMB is the time-phased budget plan for accomplishing work, against which contract
performance is measured. Note that this does NOT contain management reserve.
 ES – Earned Schedule. An alternate way to measure schedule variance.
 SV – Schedule Variance. It is the difference between how much of schedule for an activity
(or WBS component) is actually utilized versus how much of schedule should have been utilized,
at any given point in time.
 CV – Cost Variance. It is the difference between how much of budget for an activity (or WBS
component) is actually utilized versus how much of budget should have been utilized, at any
given point in time.
 SPI – Schedule Performance Index. It is a indication of schedule progress achieved on the
project as compared to the progress planned, at any given point in time. Ideal value for a project
is >= 1.0, which indicates that the project is ahead of schedule or on schedule.
 CPI – Cost Performance Index. It is a indication of value of work completed as compared to
actual cost (or progress) made on the project, at any given point in time. Ideal value for a project
is >= 1.0, which indicates that the project’s expenditure is within the budget or just on it.
 BAC – Budget At Completion. This is the total planned value for ALL activities (or WBS
components) over the entire project. In other words, this is the planned amount you will end up
spending on project work when the project ends. We say ‘planned’ because BAC is calculated
during planning period, which is much ahead of project completion time.
In reference to PMB, at the end of the project PMB terminates at BAC (refer to the image below).

 EAC – Estimate At Completion. This is calculated at a given point in time based on how

much of work on an activity (or WBS component) is complete. This is a measure of expected cost
of activity (or WBS component) when it finally completes. EAC can be different from BAC as you
will see a bit later.
 ETC – Estimate To Complete. It is the expected cost required to complete remaining work
on an activity (or WBS component).
 TCPI – To-Complete Performance Index. It is the cost performance to be achieved on
remaining work to complete project goal such as completing project on schedule. 
 TAB – Total Allocated Budget. Also known as Total project funds. This is the sum of all
activity-level budget on the project – performance management baseline (PMB) + management
reserve.
Planned Value (PV)
This is sometimes also called as Budgeted Cost of Work Scheduled (BCWS). This is the budget
allocated for an activity, WBS component, or control account and can be expressed as the amount for
a certain period, or cumulative amount to date. The figure of PV represents work authorized and the
budget authorized for that work.

Planned value is calculated by multiplying percentage of work planned to have completed and the
Budget At Completion.

PV = Planned % Complete x BAC

Earned Value (EV)

This is at times called as Budgeted Cost of Work Performed (BCWP). This is the value of work
completed at any given point in time, expressed as value of budget assigned for the work. Again, this
is expressed for an activity, WBS component, or control account. Can be expressed as a value for
certain time period, or cumulative amount to date.

Earned value is calculated by multiplying percentage of actual work completed and the Budget At
Completion.

EV = Actual % Complete x BAC

Actual Cost (AC)

This is sometimes called as Actual Cost of Work Performed (ACWP). Quite simply, this is the actual
cost of work done at any point in time. Can be expressed as the value for certain time period, or
cumulative amount to date. There is no formula for this. This figure should come from cost accounts
maintained for the project, can be derived from control accounts.

The variance is calculated using the above 3 metrics.

Schedule Variance (SV)

Schedule variance indicates the extent to which an activity is ahead (or behind) as compared to its
estimated time. SV can be calculated for an activity, WBS component or control account. When done
for all activities on a project, this metric tells us whether the project is ahead (or behind), and if so by
how much (hours, person-days – based on unit of measure used).

Schedule Variance = Earned Value – Planned Value

SV = EV – PV

If you discover a negative schedule variance, you need to think of possibilities of shortening duration
of few other tasks. Schedule compression techniques (discussed as part of Develop Schedule
process) will be useful.
Schedule Variance using Earned Schedule
This is an alternate way to measure schedule variance. ES is the Earned Schedule, and AT is the
actual time.

Thus, SV = ES – AT

This means that if earned schedule is more than the actual time spent to do the work at a given point
in time, then the project is ahead of schedule.

Cost Variance (CV)

Cost variance tells you how are you doing on cost front against the budget allocated for project. If you
have spent more than authorized budget for an activity, this metric will tell you that. This can be
calculated for a period of time, or at the end of project.

Cost Variance = Earned Value – Actual Cost

CV = EV – AC

If you are calculating CV for the end of project, it will be the difference between Budget At Completion
and actual amount spent on project till then.

If there is a negative cost variance then that amount is gone; it cannot be recovered. So you can only
plan for corrective action by which you can save money on other tasks (if such a plan is possible).

Variance as Percentages
You can express cost variance and schedule variance in percentages, and here is how –

Cost variance percent = Cost Variance / Earned Value

CV% = CV/EV
Schedule variance percent= Schedule Variance / Planned Value
SV% = SV/PV
If they are zero then it indicates that performance is on target. And, a positive value indicates good
performance, while a negative value indicates poor performance.
The image below shows cost and schedule variance at any given point in time. All above concepts are
summarized here.

Figure: Earned Value Management

Schedule Performance Index (SPI)

The next step is to convert these into efficiency indicators. There are two – for schedule it is Schedule
Performance Index (SPI) and for cost it is Cost Performance Index (CPI).

Schedule Performance Index is an indication of schedule progress achieved against schedule

planned for the project.

SPI = EV/PV
As you can see if planned value is less than earned value of the project, SPI will be > 1.
Hence if SPI >= 1, the project is ahead of schedule. This is a good thing!
Here’s an example –

John’s home construction project went into third quarter and his team completed bare bone structure
of first two floors and in terms of value this comes to $75,000. He had plans to complete even the
exteriors by this time which would have realized a value of $100,000. How is he doing on schedule?
Answer:
SPI = EV/PV;
This would be, 75,000/100,000 = 0.75
This is less than 1.0, which means that John is lagging in his schedule.
His schedule variance is EV – PV;
75,000-100,000=-25,000. He is falling short on producing $25,000 worth of work.
Using the Earned Schedule way,
Schedule performance index = Earned schedule / Actual time
SPI = ES/AT

Cost Performance Index (CPI)

Cost Performance Index is an indication of value of the work completed against actual cost spent
towards completing this work.

CPI = EV/AC
As you can see if actual cost is less than earned value of the project, CPI will be > 1.
Hence if CPI >= 1, the project is well within the budget (or ‘cost underrun’). Again, this is a good thing!
An example –

From planning time to construction John had to pay 20% more for wood and steel due to price rise.
He ends up spending $110,000 in total into his third quarter. What do his cost numbers look like?
CPI = EV/AC;
This would be 75,000/110,000=0.6818
This is below the ideal number 1.0, this means John is falling short of budget too.
Cost Variance = EV – AC;
75,000-110,000=-35,000. John is falling short of $35,000 on budget.
It is time he goes to sponsor with EAC and ETC figures and asks for more budget.
If your project has CPI and SPI both >= 1.0, that project is ahead of schedule and has utilized less
than authorized budget, and is in good hands!

Earned Schedule Detailed

Earned Schedule is a better measurement of schedule progress and schedule variance. Intuitively this
shows the values in time periods unlike earlier EVM measurement of schedule numbers, which are
shown in cost figures.
How to Control Costs on the Project?
To control costs on the project the PM has to monitor expenditures, prepare cost forecasts, compare
realized costs against the cost baseline and manage changes to it using Change control process.
Control costs is a project management activity where actual cost of work performed is measured. It
is then compared against the allocated budget for the work to understand whether team has spent
more, or less than the budget.
In case team has spent more than the budget, then the project manager calculates forecasts to
understand how much more budget would be required to complete the work within schedule.
In case the budget needs to be increased, project manager goes to the sponsor making a case for
additional budget.

Any resultant changes to cost baseline are managed using Perform Integrated Change Control
process.
Controlling project costs involves a two-step process –

1. Calculate variance against baseline

2. Plan corrective or preventive actions

Earned Value Management (EVM) calculation method helps you with #1 above.

One of the jobs of the project manager to control costs is to influence factors that lead to cost
increase. This may involve negotiating with stakeholders to omit certain irrelevant work, for instance.
Or negotiating with suppliers to reduce quotes. This may even involve working with procurement
specialist to create contractual terms that de-risk cost escalation.

Apart from these the project manager has to monitor closely the expenditure with respect to cost
baseline, against work progress. In other words, if work is being done within defined schedule then
the risk of cost escalation is reduced.

If quality of the deliverables are maintained then external cost of quality can be avoided.
All this will naturally mean that control costs is not a one-time process to execute. Neither it is an
activity done in isolation. This is a regular, almost day-to-day activity for the project manager to keep
an eye on preventive measures that keeps the costs under control.

Acronyms
It would be useful at this stage to just understand important acronyms used in order to see how
project cost is controlled.

 EV – Earned Value. Also referred to as Budgeted Cost of Work Performed (BCWP).
 ES – Earned Schedule
 AC – Actual Cost. Also referred to as Actual Cost of Work Performed (ACWP).
 PV – Planned Value
 PMB – Total PV is sometime referred to as Performance Measurement Baseline.
 SV – Schedule Variance
 CV – Cost Variance
 SPI – Schedule Performance Index
 CPI – Cost Performance Index
 BAC – Budget At Completion
 EAC – Estimate At Completion
 ETC – Estimate To Complete
 TCPI – To-Complete Performance Index
 TAB – Total Allocated Budget
Exam tip: Understand the alternate acronyms used in the list above. Exam questions may refer to
any of them. For instance, instead of Actual Cost, the question may refer to Actual Cost of Work
Performed or just ACWP.
What do you need to control project costs?
You need to refer to Cost management plan, and the Cost baseline – which is the yardstick to
compare actual cost measurements against, so we know the variance and do something to fix it.
Project funding requirements is about figuring out amount and frequency of time at which budgeted
money should be released. This would depend on projected expenditure plan, which is made based
on when certain resources come into play during project execution.

For instance, for a new e-commerce product you may need an exhaustive security audit when version
1.0 of the product is released. You will need a funding release around this time.

Then you will need to know the state of project. Information such as which activities (or WBS
components) have been taken up, how many are completed, how many are delayed, what is the cost
incurred on the work performed, so on.

If your organization has certain cost control related policies, procedures, tools, reporting methods so
on, you need to know them as well.

How do you control costs?

The project manager sort of works as a gate keeper – keep unwanted changes, unapproved changes
from getting into deliverables. Avoid scope creep and gold plating.
She also needs to work as a ticket checker – to make sure only required work is done, processes are
followed, and quality of deliverables is maintained.
She also needs to work as tour conductor – to ensure all the stakeholders are happy with the project,
and the project achieves its stated objectives within given constraints.
Here are few tools, techniques, and practices that will help her do just that.

Get help from experts. Just because the project manager is in charge of the project, it does not
mean that she needs to know the subject matter and do all the work herself. What are experts for,
right? They can help with one or more of the following.
Analyzing data.

Well, only then we know how things are going and what to do to fix those things that are broken,
right?

Some of the data analysis techniques are Earned value analysis, Alternatives analysis, Variance
analysis, Trend analysis, Reserve analysis and so on.

Earned Value Management (EVM)

This is the most common methodology used to check project progress. It integrates project schedule,
cost and scope and gives pretty good indication of project’s state against integrated baseline.

Forecasting
Forecasting is a means of identifying efforts required to meet project objectives based on the trend
shown by project progress so far.
Estimate at Completion (EAC)
Ideally this should be same as Budget at Completion (BAC), which is calculated first during initial
planning exercise. However, practically EAC will be different from BAC.

Since this assumes cost figures, EAC is also called Cost Estimate at Completion (CEAC).

How do you decide whether Budget at Completion is still valid for the project?
A good indication is if the value of CPIs you calculate for successive periods of time start getting
farther below 1.0. It is better to calculate EAC the moment you get a CPI < 1.0, to know what it takes
to complete the project work. In simpler words, if the project is over budget you need to calculate
EAC.
EAC can be calculated manually based on project management team’s knowledge of how project has
progressed, using bottom-up ETC.

Estimate at Completion = Actual Cost + Bottom-up Estimate To Complete

EAC = AC + Bottom-up ETC
The downside of bottom-up ETC calculation is that it is best done by people who are actually doing
the project work. Which means that team should stop their work and involve in this calculation
exercise. This upsets momentum of their work and if they are already working under hard-pressed
schedule this will further aggravate the situation.

There are few ways to calculate Estimate at Completion based on the data you already know.

Case 1: You know that remaining work will be performed at the planned rate (or ‘budgeted rate’)
This means that your project has carried out the work as per the schedule and cost planned for
activities, and will continue at the same rate.

EAC = AC + (BAC – EV)

Case 2: You feel that future work will continue at the present Cost Performance Index (CPI)
EAC = BAC/CPI
Case 3: You are reasonably confident that future work can be conducted at the present cost and
schedule indicators 
EAC = AC + { [BAC – EV] / [CPI x SPI] }
Let us understand these with few examples:

Example 1:
John’s house construction project entered fourth quarter, his actual money spent is at $150,000, and
earned value is $153,000. For this much work he had planned approximately $155,000. During initial
planning period his total project budget was $300,000. What will be his Estimate at Completion?
Answer:  $297,000
This is how it is calculated –
John’s SPI = EV/PV; 153,000/155,000 = 0.9871
CPI = EV/AC; 153,000/150,000 = 1.02
Both indicators are hovering around 1.0, which means John is ahead of schedule and good on
budget. He is reasonably confident of maintaining same rate going forward.
EAC = AC + (BAC – EV);
150,000 + (300,000 – 153,000) = $297,000
Note: you just need the last formula to calculate the answer. SPI and CPI are calculated just for cost
and schedule health check.
SPI, CPI and other EVM formulae are explained in the next lesson, you may want to go through them
before proceeding here.
Example 2:
John’s house construction project now entered fifth quarter, and he found his CPI that was
consistently around 1.0, this time at a much better 1.03. During initial planning period his total project
budget was found to be at $300,000. What will be his Estimate at Completion?
Answer:  $291,262
John is quite happy to discover that his project is scheduled to complete within the initial Budget at
Completion!
This is how it is calculated –
EAC = BAC / CPI;
EAC = 300,000/1.03 =  $291,262

Example 3:
John’s house project entered sixth quarter now and his earned value has come to $225,000, while his
actual spending is at $220,588. During initial planning period his total project budget was at $300,000.
Now his CPI is working out to 1.02 and SPI at 0.95, what will be his Estimate at Completion?
Answer:  $297,987
John is proving to be a competent project manager. He is close to completing the project and his EAC
is still within initial BAC! He sure is happy to get his bonus once project is over!
This is how it is calculated –
EAC = AC + { [BAC – EV] / [CPI x SPI] };
EAC = 220,588 + { [300,000 – 225,000] / [1.02 x 0.95] } = $297,987
Estimate to Complete (ETC)
ETC is the estimate of work required to complete remaining activities on the project.
When EAC is known ETC is calculated as,
ETC = EAC – AC
This is because estimate to complete work is the difference between estimate at completion and
actual cost of work performed.

Now, if we are confident that future performance will go as per original plan, then ETC is calculated
as,

ETC = BAC – EV
Variance at Completion (VAC)
Based on the above, if you want to calculate variance at completion, you simply deduce EAC from
BAC!

VAC = BAC – EAC

If this variance is negative it means that at the end of project expenditure will overshoot initial budget.

To-Complete Performance Index

The Budget at Completion (BAC) is planned initially and then the Estimate at Completion (EAC) is
calculated during execution phase (when it is clear that BAC cannot be achieved). These are two
cost-related goals a project must hit (remember that EAC replaces BAC). And to achieve this goal
there is To-Complete Performance Index (TCPI). TCPI is the CPI you need to achieve in order to
complete remaining work within the remaining authorized budget.
Put simply, To-Completer Performance Index is calculated by dividing Remaining Work by
Remaining Budget.
TCPI = Remaining Work / Remaining Budget
Remember!
Unlike the CPI, higher the value for TCPI more budget control mechanisms are to be applied. These
are two opposites.
Remaining Work is calculated by deducting project value earned so far from calculated Budget at
completion. This would be (BAC – EV).

Remaining Budget is calculated by deducting actual cost spent so far on the product from the Budget
at completion. This would be (BAC – AC) or (EAC – AC) – as the case may be. This makes two
distinct cases to calculate TCPI.

Case 1: If you find that project is under budget then you will use Budget at Completion –
 TCPI = (BAC – EV) / (BAC – AC)
 Case 2: If the project is over budget, you need to calculate Estimate at Completion (remember that
EAC should be approved through change control process) and use the following formula for TCPI –
 TCPI = (BAC – EV) / (EAC – AC)
Consider an example –
John’s  house construction project enters final phase and his CPI is < 1 (project is over budget).
Project has spent thus far $260,000 and earned value achieved is about $255,000. Total project
budget was planned to be $300,000. What is the TCPI to ensure that project completes within the
Budget At Completion?
Answer:  1.1
TCPI = remaining work/remaining budget;
TCPI = (BAC – EV) / (BAC  – AC);
(300,000 – 255,000) / (300,000 – 260,000) = 1.1
PMIS (Project Management Information System) helps a great deal in automating many of these
calculations. This is useful especially in large scale projects.

What do you produce when you control costs?

You will calculate values and metrics such as PV, EV, AC, SI, SPI, CI, CPI, TCPI, EAC, ETC – these
are documented and shared with appropriate stakeholders.

Cost Forecasts – EAC (Estimate At Completion) calculated either manually (using bottom-up
approach) or using formulas is the forecast. These are shared with the stakeholders.
EAC becomes a formal figure only when change control board authorizes it. Authorization is given
after project manager or project management team takes EAC as a change request through
Integrated Change Control process and formalizes it.
Change requests – whenever some work is monitored it is bound to produce change requests as
deviations are discovered. EAC, among others, can be the single most prominent change request in
this process.
As we refer the plans and documents to control costs we may discover few issues with them, or the
change requests that we raise may necessitate changes to those plans and project documents. And
hence updating them would be a natural outcome of this process.

Summary
Control costs is one of those few project management activities that must be executed throughout the
project execution phase. If you are doing it for the first time, you may find it a bit tedious. However, the
advantage you get is the early warnings of whether the project is slipping. This may help you save
cost, effort, customer escalation, or may even save the day. You may find it almost a necessity to run
EVM calculations and TCPI every Monday (or whatever frequency you decide on) for your peace of
mind.