How to Calculate Earned Value in Project Management
There are so many project management tools and techniques designed to help project managers manage projects successfully from start to finish. These tools and techniques make your job significantly easier and less cumbersome daily provided you are fully aware of how to use them effectively and when and where to apply them.
One of such tools is the earned value analysis in project management. Many projects take a lot of time to accomplish. If you have spent so much time trying to find out if the value of your project is worth all the resources you are putting in to complete it, these project management metrics are super useful for such calculations.
In this article, you will learn how to calculate and track earned value in project management.
Let’s get started.
What is Earned Value in Project Management?
Earned value is a measure of the number of tasks accomplished during the project process. You can also call earned value the budgeted cost of tasks completed.
This project management metric encompasses the routine cost and schedule report reviews. The earned value of a project can be measured concerning the progress made.
A project's earned value is calculated extensively by the use of the Earned Value Analysis (EVA). The EVA method is utilized by the project manager and involves the thorough measurement of the project progress.
Upon the successful measurement of the project progress, a predictive cost and schedule detail plan is then arrived at for the project. This enables the project manager to have a predictive idea of the likely performance of the cost and schedule, which is a direct measurement of the project's progress against its original plans and objectives.
Earned value in project management empowers the project manager with the ability to predict the future outcome of the project process if all the necessary conditions remain unchanged.
Earned Value Management Requirements and Features
Implementing a proper earned value analysis requires adhering to a rigorous requirement schedule to be able to adequately and correctly measure the project’s progress.
A good and efficient plan is necessary for an accurate earned value analysis. Without a thorough and well-defined plan, your project process would lack a sense of direction and would head in any direction, which most times is a milestone away from the initial project goals and objectives.
Your project plan is the first block to an efficient foundation of a solid Earned Value management process and needs to be utilized alongside your well-drawn-up scope statement. Failing to plan is planning to fail and the earned value management practice is no exception.
2. Accurate Scope Description
The narrative of your project scope should be adequately defined and should include key project elements such as project deliverables, objectives, budget as well as any assumptions to be made during the project process.
Your scope description should also contain a well-structured work statement that would guide the conduct of project stakeholders and spur a sense of understanding.
An accurate scope description is very important. This would be referred to at later stages of the project process for clarity and a sense of direction.
3. Work Breakdown Structure (WBS)
This is an essential requirement for earned value management that fosters a sense of understanding among project stakeholders.
The work breakdown structure (WBS) is a deliverable-dependent structure that utilizes the use of a hierarchy mechanism of tasks assigned and to project stakeholders in delivering the project’s goals, objectives, and key deliverables.
WBS is also an efficient organizing mechanism of the project scope statement as each level details a vivid description of the project process.
How to Calculate Earned Value (with Examples)
The introduction and proper application of earned value analysis to your project process come as a big boost to your project. You can calculate your project earned value by multiplying the completion rate of each task of your project in percentage by its planned value.
For an accurate earned value analysis, these vital parameters need to be calculated and imputed correctly.
1. Schedule Variance (SV)
This is calculated as SV = EV – PV, where SV is the Schedule Variance, EV is the Earned Value, and PV is the Planned Value. A positive value indicates the right schedule while a negative value indicates the behind schedule. When schedule variance is 0, the project is on schedule.
For example, a project has an earned value of $2,500 and a planned value of $2,450.
SV = EV – PV
SV = $2,500 – $2,450
SV = $50
What this implies is that the project is on the right schedule.
2. Cost Variance (CV)
Cost variance is calculated as CV = EV – AC, where CV is the Cost Variance, EV is the Earned Value, and AC is the Actual Cost. A positive value indicates the right budgetary constraint while a negative value indicates a bloated budget. When the cost variance is 0, the project is on budget.
For example, a project has an earned value of $3,000 and an actual cost of $3,500
CV = EV – AC
CV = $3,000 – $3,500
CV = -$500
What this implies is that the project has a bloated budget.
3. Schedule Performance Index (SPI)
SPI translates into an actual numerical value that can be easily comparable along the project process. You can obtain the Schedule Performance Index (SPI) by directly comparing your actual schedule with your original project plan.
This parameter helps to point out issues that arise from the calculated value but is inadequate for showing the likely impact issues would have on the project process.
The Schedule Performance Index formula is SPI = EV/PV, where EV is the Earned Value and PV is the Planned Value. For SPI values calculated greater than 1, this implies that your project process is ahead of schedule, but for values less than 1, this implies your project process is behind schedule.
For example, a project process has an earned value of 1 and a planned value of 2. The SPI is calculated as ½ = 0.5. Since the SPI is less than 1, this implies that the project process is behind schedule.
A project process has an earned value of 2 and a planned value of 1. The SPI is calculated as 2/1 = 2. Since the SPI is more than 1, this implies that the project is ahead of schedule.
With the use of your earned value, you have a more thorough understanding of the overall impact of tasks on the overall project process. Adequate calculations are made and appropriate schedules are arrived at for your SPI either as individual tasks or the whole project process.
This is crucial as there might be an occurrence of tasks being behind schedule but with no direct impact on the overall project schedule.
4. Cost Performance Index (CPI)
This parameter is an efficient tool aimed at predicting the project completion cost. By dividing your total budget against your calculated CPI for your project, you arrive at your expected cost on completion.
EAC = Budget/CPI, where EAC is Estimated Cost on Completion, and CPI is Cost Performance Index. Your CPI is calculated as CPI = EV/AC, where CPI is the Cost Performance Index, EV is the Earned Value, and AC is the Actual Cost of your project process.
If your calculated CPI is greater than 1, then your project is within the budget constraint but if CPI is less than 1, then you have a bloated budget.
For example, for a particular project, the Earned Value is 600 while the Actual Cost is 1000 for a budget of $10,000. The CPI is then calculated to be: CPI = 600/1000 = 0.6. This implies that the project is being overspent on.
The EAC calculation is EAC = $10,000/0.6 = $16,666.67. This implies that your budget is likely to be bloated by $6666.67 and you need to cut the significant cost to meet the allocated budget constraint.
How To Track Earned Value During a Project
You can adequately track the earned value of a project with the use of graphical representations. There are several project management software that makes measuring your project progress and performing earned value management (EVM) easy.
The earned value is calculated by multiplying the completion rate of each task of your project in percentage by its planned value. This then allows you to plot graphs that show key earned value parameters such as Planned Value (PV) and Actual Cost (AC) which are key in determining the project’s earned value.
Your graphical plot is your budget cost against time. This graph is an efficient earned value tracker as the visible line shows the progress the project has made towards meeting its schedule against the constraint of available budgetary allocation.
The earned value management method, unlike other project progress trackers, also details a clear understanding of the level of tasks accomplished at any given time during the project. EVM measures the performance of the project against the overall project time and budgetary allocation.
Your project progress is measured through the use of the earned value management technique in collaboration with other key determining factors such as milestones, the value of work, and level of effort. It can be effectively tracked by efficiently measuring the project cost, schedule, and completion rate in percent.