Are you looking into earned value management and already starting to feel daunted by the amount of calculations and numbers involved?
Don’t worry: we’re here to help with this easy-to-follow introduction to earned value formulas!
In this article, we’ll review some of the common terminology you’ll come across when working with project controls, especially from an earned value environment perspective. We will also provide the formulas you need to calculate your data and make informed decisions.
The good news is that we will start with a couple of terms that come up repeatedly and don’t even require calculations.
Actual cost (abbreviated as AC) is simply the total amount spent on the project so far. You can get this number from your finance analyst, budget spreadsheet, or report.
What it tells you: How much you have spent so far.
Budget at Completion (BAC)
Budget at completion (BAC) is exactly what it sounds like: the budget forecast. Again, this data is available through existing financial reports. It’s probably a mixture of actual spending to date plus the forecast for what is still left to spend. If not, use the number that was given to you at the start of the project which is your budget allocation for the whole project.
What it tells you: How much the project will cost overall.
The BAC is the same as the Planned Value for the whole project. Planned Value (PV) also has another, more descriptive name: Budgeted Cost of Work Scheduled (BCWS). You can see that the BCWS for the whole project is the same as the BAC. As a result, we normally use PV when we’re talking about a phase or work package, and the PV is the cost to deliver that phase or work package.
BAC is useful for the next calculation, which is the Budgeted Cost of Work Performed (BCWP)… also known as Earned Value (EV).
Earned Value (EV)
BCWP is a more descriptive way of thinking about earned value. And it’s really easy to work out.
Formula: EV = BAC x % complete
You might be working out EV per phase, work package, or for the project overall, so use the correct percent complete figure that matches what you want to review. The result is a monetary figure that represents the value delivered to date.
What it tells you: How much money has been spent to get to where you are today on the project.
Cost Variance (CV)
Now we know the earned value and the actual cost, we can work out the variance between the two. You may be doing this already as it’s a helpful measure to tell you how far away you are from your original cost plans.
Formula: CV = EV-AC
Ideally, the answer would be zero because that would mean you are spending in line with the budget exactly. In reality, that is unlikely to be the case, simply because costs change, or are incurred at a different time. If the CV is positive, that shows you are under budget. If the CV is negative, you have spent more than you expected to at this point in the project.
On its own, the number doesn’t tell you very much. The narrative behind the number will help explain the ‘why’ for the variance. Then you and your stakeholders can decide what to do as a result.
What it tells you: Whether you are under or over budget and by how much.
Cost Performance Index (CPI)
Something else you can do with EV and AC is to work out the index for cost performance. This is a different way of looking at the numbers, and instead of a financial value, the calculation gives you a ratio. You can use that to track performance over time: run the numbers every month and see how performance changes.
Formula: CPI = EV/AC
The answer will be a number or a fraction. Generally, you’re looking for the answer to be as close to 1 as possible, as that shows the actual performance is on track with what was forecast. A number higher than 1 represents more being completed than expected at this point in the project. A number less than 1 tells you that the project is over budget and has delivered less than expected for the money spent to date.
What it tells you: Whether more or less value has been achieved for the money spent in comparison to what was planned.
CPI is useful because it helps put a number on efficiency. If the CPI is less than you would like it to be, perhaps the team is not working as efficiently as they could. What would need to change to hit your target CPI? If you don’t get the project back to a reasonable CPI, it could end up spending more money than planned to deliver the same amount of work – and stakeholders tend to not like that!
Now we’ve looked at some cost performance measures, let’s look at a few more specifically aimed at managing schedule performance.
Schedule Variance (SV)
Schedule Variance works the same way as CV: it shows you how far off track you are from the original schedule plan. The interesting thing is that it’s represented in money terms, not days.
Formula: SV = EV – PV
If you are part-way through a work package, you’ll want to use a portion of the whole work package PV to be more accurate. Multiply the budget for the activity by the percent complete to get the PV for the amount of work completed so far.
What it tells you: Whether the project is behind schedule (a negative answer), ahead of schedule (a positive answer), or perfectly on track (the answer will be zero).
Schedule Performance Index (SPI)
Just like CPI, SPI is a ratio that you can track over time. It works in the same way. An answer higher than 1 is what you’ll get if the project has delivered more than expected in the time taken. An answer lower than 1 shows that you are running behind: less value is delivered than expected for the amount of time invested so far. If the answer is 1, either you are perfectly on track or there is something wrong with your calculations!
Formula: SPI = EV/PV
What it tells you: Whether more or less value has been delivered for the time taken, in comparison to the original plan.
You can work out SPI for the current month, a particular set of activities, or the project overall.
How to Use These Measures
All the measures above are backward-looking metrics. They tell you about project performance based on what you have done. They are supposed to help you spot early performance problems and track trends, and they are useful for adjusting upcoming budgets and timelines to reflect how the project is actually performing.
For example, if your SPI is 0.8, the work is going more slowly than planned. There might be a good reason for that, but it could also tell you that your estimates were overambitious. Could it be time to increase all future task timelines and give yourself a more realistic target date for delivery?
Formulas and calculations provide useful, fact-based decision-making information, but add to that the narrative and insights that you bring as a project manager. Share the information with your sponsor and stakeholders, as that can give them increased confidence that the work is happening efficiently and effectively – or if it isn’t, access their support in getting things back on track.
When you understand what each formula can give you and how you can interpret and act on that data, you can make better choices about how to manage the project. Project control is easier when you have trend information and the ability to spot early deviations in performance. Earned value metrics are helpful in enabling the team to do that, and even if you don’t have a complete EV system in place, thinking about project performance in this way gives you more tools for decision-making.