Cert Prep: Project Management Professional (PMP)® (2018)

with Sandra Mitchell

Control Costs: Tools and Techniques

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Earned value management is a methodology that combines scope, schedule, and resource
measurements to assess project performance and progress. Using earned value management helps
the team understand whether they are on target for costs or schedule per the project plan. It compares
planned vs. actuals. It uses the cost, scope and schedule baselines to form the performance baseline,
which helps the project management team assess and measure project performance and progress.
Let’s go into more detail about each of the earned value formulas and what each one is used for and how
to remember them. Consider starting to practice a “brain dump sheet,” where you write down all the
formulas and other information you need to remember for the exam. Make sure you practice writing down
each formula name and the actual formula, until it becomes rote memory.
Here are some definitions in earned value management:
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Budget at completion (BAC): The total budget for the project or the sum of all budgets established
for the work to be performed.
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Planned value (PV): The value of the work you plan on completing during a specific period of time in
the project schedule. Or it’s the authorized budget assigned to scheduled work.
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Earned value (EV): The value of work that’s actually been performed or completed. Or it’s a measure
of work performed expressed in terms of the budget authorized for work.
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Actual cost (AC): The actual money spent on the project at a given point in time. Or it’s the realized
cost incurred for the work performed on an activity during a specific time period.

Tip: In order to calculate the earned value formulas, you only need to get values for each of the items
above. Once you have the four values above, you can calculate any of the EV formulas. It’s just a matter of
plugging in the values and solving the formula.
Variances from the approved baseline are measured with the following:
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Schedule variance (SV): The difference between the work you planned to do and what you actually
did (planned vs. actuals) at a specific point in time. It’s a measure of schedule performance expressed
as the difference between the earned value and the planned value. It is the amount by which the
project is ahead or behind the planned delivery date, at a given point in time.
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Cost variance (CV): The difference between the costs you planned to spend and what you actually
spent (planned vs. actuals) at a specific point in time. It’s the amount of budget deficit or surplus at a
given point in time, expressed as the difference between earned value and actual cost.
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Schedule performance index (SPI): Measures the efficiency of the work put into the project at a
specific point in time. It’s a measure of schedule efficiency expressed as a ratio of earned value to
planned value. It measures how well the project team is using its time.

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Cost performance index (CPI): Measures the efficiency of the money spent on the project at a
specific point in time. It’s a measure of cost efficiency of budgeted resources, expressed as a ratio
of earned value to actual cost. It’s considered the most critical EVM metric and measures the cost
efficiency of the work completed.

There are a few values used for forecasting:

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Estimate at completion (EAC): Based on project performance, the cost at the end of the project may
be more or less than what was budgeted (BAC). EAC will tell you the cost estimate based on how the
team is performing now. The expected total cost of completing all work expressed as the sum of the
actual cost to date and the estimate to complete.
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Estimate to completion (ETC): Takes into consideration what you’ve spent to date, then evaluates
team performance, and then provides a cost of how much the remaining work will cost to complete.
The expected cost to finish all the remaining project work.
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Variance at completion (VAC): Calculates the difference between the BAC and what you expect
to spend (EAC). A projection of the amount of budget deficit or surplus, expressed as the difference
between the budget at completion and the estimate at completion.

The final earned value forecast looks at how the project needs to handle cost performance to meet
original goals:
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To-complete performance index (TCPI) Measure of the cost performance that is required to be achieved
with the remaining resources in order to meet a specified management goal, expressed as a ratio of the
cost to finish the outstanding work to the remaining budget.

1These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge,
(PMBOK® Guide) – Fifth Edition, Project Management Institute, Inc., 2013.

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In this table, you’ll see each earned value term, abbreviation, formula, and description.

Term Abbrev Formula Description

Budgeted at BAC The sum of all budgets established The total budget originally
Completion for the work to be performed allocated for this project

Actual Cost AC The realized cost incurred for the The total costs spent during a
work performed on an activity specific period of time
during a specific period of time

Earned Value EV EV=Actual % Complete x BAC The planned value of all the work
completed (earned) to a point in
time

Planned PV PV=Planned % Complete x BAC The value of the work planned to

Value be completed to a point in time

Cost Variance CV CV=EV-AC The difference between the value

of work completed to a point in
time, and the actual costs to the
same point in time

Schedule SV SV=EV-PV The difference between the work

Variance completed to a point in time, and
the work planned to be completed
at the same point in time

Cost CPI CPI=EV/AC <1=bad Measures the cost efficiency of

Performance 1=on track budgeted resources at a specific
Index >1=good point in time

Schedule SPI SPI=EV/PV <1=bad Measures the schedule efficiency

Performance 1=on track at a specific point in time
Index >1=good

Estimate at EAC EAC=BAC/CPIC The expected total cost of

Completion completing all work

Estimate to ETC ETC=EAC-AC The expected cost to finish all the

Completion remaining project work

Variance at VAC VAC=BAC-EAC The estimated difference in cost at

Completion the completion of the project

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 Term Abbrev Formula Description

To-Complete TCPIc TCPIc=(BAC-EV)/(BAC-AC) The efficiency that must be

Performance maintained in order to complete
or
Index on plan
(BAC-EV)/remaining funding

<1 is good is this case because you

have the space to spend more

Next, I’ve provided an example that you can use to practice applying these formulas. The first thing you
want to do is calculate the first four values: BAC, AC, EV, and PV.
Example: You have a project to install 10 hair dryers in a salon. The cost per hair dryer is $2,750 and the
project will last 10 weeks. At week 5, six hair dryers were installed and you’ve spent $15,500.

Budgeted at Completion $27,500

Actual Cost $15,500

Earned Value Actual % Complete x BAC $16,500

Planned Value Planned % Complete x BAC $13,750

Cost Variance EV-AC $1,000

Schedule Variance EV-PV $2,750

Cost Performance Index EV/AC 1.06

Schedule Performance Index EV/PV 1.2

Estimate at Completion EAC=BAC/CPI $25,943.39

Estimate to Completion ETC=EAC-AC $10,443.39

Variance at Completion VAC=BAC-EAC $1,556.61

To-Complete Performance Index (BAC-EV)/(BAC-AC) 0.91666

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BAC: To calculate BAC, just take 10 dryers times the cost per hair dryer ($2,750): 10(2,750)=$27,500.
AC: The next value to get is the AC, which is stated as “you’ve spent $15,500.”
EV: Now let’s calculate EV. You do this by taking Actual % Complete x BAC. To calculate the actual %
complete, take the number of hair dryers installed (6) and divide by the total number of hair dryers to
install (10): 6/10=.60. Then apply the formula: .60 x $27,500=$16,500. This is the value you’ve earned at
this point in the project.
PV: Now let’s calculate PV. You do this by taking Planned % Complete x BAC. To calculate the planned %
complete, take the number of hair dryers that were supposed to be installed by week 5 (5) and divide by
the total number of hair dryers to install (10): 5/10=.50. Then apply the formula: .50 x $27,500=$13,750.
This is the planned value at this point in the project.
Now you have all the values needed to complete the rest of the equations! Let’s move on to the rest of
the formulas.
CV: Calculated by taking EV-AC: 16,500-15,500=$1,000. Notice that this is a positive number. This is
good because you’ve spent less money than what you planned to spend at this point in the project.
SV: Calculated by taking EV-PV: 16,500-13,750=$2,750. Notice that this is a positive number. This is good
because you’ve installed more hair dryers than what you planned at this point in the project.
Tip: For any CV or SV value:

• >$1 is good as you’re getting more value out of your money or time.

• <$1 is bad as you’re getting less value out of your money or time.

• =$1 you’re right on target with costs and time.

CPI: Calculated by taking EV/AC: 16,500/15,500=1.06. This is good. What this means is that for every
$1.00 spent, you are getting $1.06 worth of value. You are getting more for your dollar.
SPI: Calculated by taking EV/PV: 16,500/13,750=1.2. This is good. What this means is that for every 1 hour
worked, you are getting 1.2 hours worth of work done. You are getting more for your time.
Tip: For any CPI or SPI index value:

• >1 is good as you’re getting more value out of your money or time.

• <1 is bad as you’re getting less value out of your money or time.

• =1 you’re right on target with costs and time.

The following formulas are used for forecasting:
EAC: Calculated by BAC/CPI: 27,500/1.06=$25,943.39. This means if the project continues performing, as
it is now, that the total cost of the project at completion will be $25,943.39. This is great news because the
BAC was set at $27,500. The sponsor will pay less than planned for the project.
ETC: Calculated by EAC-AC: 25,943.39-15,500=$10,443.39. What this does is looks at what you’ve
already spent (AC) and what you estimate to spend at completion (EAC) and, subtracts them so you end
up with an amount you’ll spend from now until the end of the project.

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VAC: Calculated by BAC-EAC: 27,500-25,943.39=$1,556.61. This tells you the difference between what
was budgeted (BAC) and what you’ll actually spend on the project (EAC).
TCPI: Calculated by (BAC-EV)/(BAC-AC) (original budget) or (BAC-EV)/(EAC-AC) (current forecast).
(27,500-16,500)/(27,500-15,500)=11,000/12,000=0.91666. This is good. The amount of effort to complete
the project on plan is less than 1. The project team doesn’t have to work as hard to complete the project
per plan. They may even finish early if they choose to.
Tip: This calculation is the exception when it comes to the indices. You want this number to be =/-1
because this measures the amount of effort needed to achieve the schedule or financial goals. Let’s say
the value was 2. This means the project team would have to put in twice the effort to complete the project
on plan.

• >1 is bad.

• <1 is good.

• =1 you’re right on target.

Tip: Here’s a way that might help you remember these four formulas. First, put them in alphabetical order
by pairs: CV, SV, CPI, SPI.

CV=EV-AC

SV=EV-PV

CPI=EV/AC

SPI=EV/PV

• Notice that they each start with EV.

• The first two are minus, minus.

• The second two are divide, divide.

• In alphabetical order, AC (costs) comes before PV (schedule). So it’s AC, PV, AC, PV. When you
practice writing these, do it in order vertically:

Formula 1st step 2nd step 3rd step 4th step 5th step
CV=EV-AC CV EV - AC
SV=EV-PV SV EV - PV
CPI=EV/AC CPI EV / AC
SPI=EV/PV SPI EV / PV

Tip: Also, there’s somewhat of a pattern with these three formulas that might help you remember them
when you practice for your dump sheet. First, put them in alphabetical order.

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EAC=BAC/CPI
ETC=EAC-AC
VAC=BAC-EAC
Next, if you look at them like it’s a tic-tac-toe board, notice how EAC starts in the upper-left corner, then
goes to the middle and then to the bottom-right corner.
Then BAC is on the top and the bottom. Remember to divide, then minus, minus. The last two you just
need to remember, no tricks: CPI and then AC. This helped me; maybe it’ll help you too!

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