Earned value management guide

The most difficult part of running a project is preventing it from deviating too far from its planned course. This is where earned value management (EVM) comes in.

Earned value management (EVM) is an invaluable performance management methodology that enables project managers to: 

• Understand how their project is doing,
• Forecast future performance, and
• Make informed decisions when altering the project.

In this guide, you will learn:

• The basic concepts of EVM,
• How to implement EVM in your project, and
• Important EVM formulas and how to apply them.

What is earned value management (EVM)?

Earned value management (EVM) is a performance management methodology. It uses project scope, schedule, and cost measurement data to:

• Gauge and track project performance,
• Predict how the project will behave in the future based on past trends, and
• Make informed decisions and course corrections when necessary. 

The method used to collect the objective performance data used in EVM is called earned value analysis (EVA).

Basic concepts of earned value management (EVM)

Earned value management can get really confusing really quickly if you’re not intimately familiar with all the terminology associated with it. 

To help clear things up for you, we’ll now go over the core concepts of EVM that will allow you to understand the EVM formulas and confidently perform earned value analysis.

Budget at completion (BAC)

Although its name seems overly complicated, budget at completion (BAC) is the simplest EVM concept on this list — it represents the total authorized budget for the whole project.

Planned value (PV)

Planned value (PV) is also known as the budgeted cost for work scheduled (BCWS).

PV is the amount of money you are planning to spend on your project over a set period of time.

The value of PV changes depending on which portion of the project you’re looking at. 

Planned value (PV) example

Suppose you need to paint your living room. The project is meant to last 4 days and your total budget (BAC) is $20 per wall, so $80, assuming that the room has 4 walls.

This means that:

• The planned value (PV) for the work to be done on the first day of the project is $20,
• PV for the first 2 days of the project is $40,
• PV for the first 3 days of the project is $60, and
• PV for all 4 days of the project is $80 (PV = BAC).

Actual cost (AC)

Actual cost (AC) is also known as the actual cost of work performed (ACWP), and it refers to the actual amount of money that was spent up to a certain point in time.

While the concept itself is straightforward, projects often have many hidden costs that project managers forget to include when calculating AC — which can then skew the results of the analysis. 

So, make sure to double-check your total expenditures before performing EVA. 

Earned value (EV)

Earned value (EV) is also known as the budgeted cost for work performed (BCWP).

EV represents the monetary value of the work performed up to a certain point in time.

At first glance, it might seem like EV and PV are the same thing. In a perfect world, where projects always go exactly according to plan, this would be true. But, the reality is often much different. 

Earned value (EV) example

Let’s take a look at the same example as before — you need to paint your living room in 4 days for $20 per wall, or $80 total.

Now, suppose your plan was to have the painter paint 1 wall a day for $20 per day. You already gave them the first $20, but you realized you didn’t have enough plastic sheets to cover all the furniture, so you spent an additional $15 on more plastic sheets. This made your total actual cost for day 1 $35. 

At the end of day 1, the painter finished the first wall and half of the second wall.

Since the PV for the first day was $20, the actual cost you paid was $35, and they’ve finished painting 1+0.5 walls, the value they’ve earned with their hard work (EV) on the first day is $20 + $20/2 = $30.

This means that the painter has finished more work than originally planned, but you’ve spent more money than planned. 

So far, your project is ahead of schedule and over budget.

Cost variance (CV)

Cost variance (CV) is used to determine exactly how much over or under budget the project is. Therefore, it measures the difference (variance) between the earned value and the actual costs using the following formula:

CV = EV – AC

If the value you get from the formula is:

• Below 0 — you are over budget,
• Exactly 0 — you are on budget, 
• Greater than 0 — you are under budget. 

Cost variance (CV) example

In our example, the earned value (EV) by the end of day 1 was $30, while the actual cost amounted to $35 due to the cost of plastic sheets.

Since we have both values we need to calculate the cost variance, we can now apply the CV formula to our example.

The negative result lets us know that our project is currently $5 over budget.

Cost performance index (CPI)

The cost performance index (CPI) does exactly the same thing as the cost variance — calculates how much over or under budget the project is. But, instead of the difference in dollars, it is used to determine the difference in percentages.

That said, the formula also uses the same components, but instead of subtracting, we divide.

CPI = EV / AC

If the value you get from the formula is:

• Below 1 — you are over budget,
• Exactly 1 — you are on budget, 
• Greater than 1 — you are under budget. 

Cost performance index (CPI) example

Using the same values we applied to get the cost variance, we can now learn what the project’s cost performance index (CPI) is.

This result tells us two things:

• That we are over budget since the result is less than 1, and
• That for every dollar spent on the project so far we have gained $0.86 in value.

Schedule variance (SV)

Schedule variance (SV) determines how much the project has deviated from the planned schedule. Therefore, the formula measures the difference between the earned value and the planned value.

SV = EV – PV

If the value you get from the formula is:

• Below 0 — you are behind schedule,
• Exactly 0 — you are on schedule, 
• Greater than 0 — you are ahead of schedule. 

Schedule variance (SV) example

Since the value of the work done on the first day (EV) is $30 and the amount of money we had planned to spend that same day (PV) was $20, we can now calculate the schedule variance (SV) at the end of day 1.

A value greater than 0 tells us that this project is currently ahead of schedule.

Schedule performance index (SPI)

The schedule performance index is used to determine the same project deviation from the planned schedule as the schedule variance, but calculated in percentages.

SPI = EV / PV

If the value you get from the formula is:

• Below 1 — you are behind schedule,
• Exactly 1 — you are on schedule, 
• Greater than 1 — you are ahead of schedule. 

Schedule performance index (SPI) example

Using the same values from our schedule variance (SV) formula, we can calculate the schedule performance index (SPI).

Since the value of SPI is 1.5 (greater than 1), we can infer that the project is ahead of schedule.

Making predictions with EVM

The concepts and formulas covered above are the basic EVM formulas.

In this section, we’ll cover the 4 concepts with slightly more advanced formulas, used to forecast how the project will behave in the future:

• Estimate to complete (ETC),
• Estimate at completion (EAC),
• Variance at completion (VAC), and
• To-complete performance index (TCPI).

Estimate at completion (EAC)

Estimate at completion (EAC) is the estimate of how much the project will cost in total at the moment it is completed, based on the data collected so far. 

After all the variances are calculated, the EAC will likely differ from the original total budget approved for the project (BAC).

There are several ways to calculate the EAC. Different formulas are used depending on the project’s circumstances.

EAC = AC + ETC

We use the first formula to calculate the EAC only when the original EAC is based on flawed data or the circumstances of the project have changed. In these cases, the EAC = AC+ETC formula provides you with a new and accurate estimate at completion.

EAC = AC + BAC – EV

We use the second formula when the original project budget (BAC) has remained the same throughout the project and any variances that might have occurred were the result of a one-time event that isn’t likely to repeat.

EAC = BAC / CPI

We use the third formula to calculate the EAC when there have been no changes to the cost performance index (CPI) by the end of the project. 

EAC = AC + (BAC – EV) / (CPI * SPI)

We use the final formula when the project hasn’t been going according to plan, and both the cost and schedule performance indices are showing unfavorable results.

Estimate at completion (EAC) example

In our example, the project is over budget at the end of day 1. So far, there have been no changes to the total budget for the project, and the only deviation that has happened is not expected to happen again (since we now have enough plastic sheets to cover all the furniture). 

Therefore, we can conclude that the correct formula to use to calculate how much our project will cost by the end (EAC) is the second formula.

The result tells us that, if things continue as they are now, the total cost of the paint job by the end of day 4 will be $85.

Estimate to complete (ETC)

Estimate to complete (ETC) shows how much more money is expected to be spent by the end of the project based on previous data. In other words, it’s the estimate of the remaining cost needed to complete the project.

ETC = EAC – AC

Estimate to complete (ETC) example

Since we have previously calculated the value of EAC, we can proceed to calculate how much more money we are expected to spend by the end of the project (ETC).

Variance at completion (VAC)

Variance at completion (VAC) is the expected budget deficit or surplus at the end of the project — the difference between how much we had planned to spend on the project and how much we now expect it will actually cost because of the changes that have happened so far.

A negative VAC value indicates that the project is expected to go over budget and a positive value indicates an expected positive outcome.

The VAC is calculated using the following formula:

VAC = BAC – EAC

Variance at completion (VAC) example

Having completed all the previous steps, calculating the deviation from the original budget (VAC) is easy.

The negative VAC value indicates that the project is expected to be in a $5 deficit by the end of day 4.

To-complete performance index (TCPI)

To-complete performance index (TCPI) determines the amount of work that needs to be completed per unit of cost in order to finish the project within budget.

TCPI is calculated by dividing all the remaining work with all of the remaining project funds.

The second formula is used if we want to calculate a potential “what if” scenario — how much work would need to be spent per unit of cost if we wanted to complete the project within a potential remaining budget.

Earned value management (EVM) formulas

EVM can appear overwhelming, especially for someone learning about it for the first time. So, we’ve prepared a quick overview of all the concepts and formulas we’ve covered so far.

Name	Use	Formula
Budget at Completion (BAC)	Total project budget.	None
Planned Value (PV)/ Budgeted Cost for Work Scheduled (BCWS)	How much money you had planned to spend by now.	None
Earned Value (EV)/ Budgeted Cost for Work Performed (BCWP)	The amount of work that has been completed up to a certain point, measured in a unit of currency.	None
Actual Cost (AC)/ Actual Cost of Work Performed (ACWP)	How much money was actually spent by now.	None
Cost Variance (CV)	Difference between EV and AC.	CV = EV – AC
Cost Performance Index (CPI)	Ratio between EV and AC.	CV = EV / AC
Schedule Variance (SV)	Difference between EV and PV.	SV = EV – PV
Schedule Performance Index (SPI)	Ratio between EV and PV.	SPI = EV / PV
Estimate to Complete (ETC)	Total amount of money needed to complete the remaining work.	ETC = EAC – AC
Estimate at Completion (EAC)	Total cost of the project based on data up to now.	EAC = AC + ETC;EAC = AC + BAC – EV;EAC = BAC / CPI;EAC = AC + (BAC – EV) / (CPI * SPI)
Variance at Completion (VAC)	Difference between the total budget from the beginning of the project and the latest estimate of how much the total project will cost.	VAC = BAC – EAC
To-Complete Performance Index (TCPI)	The amount of work per dollar that needs to be completed in order to reach project goals within budget and schedule.	TCPI = (BAC – EV) / (BAC – AC)

What is an earned value management system (EVMS)?

Earned Value Management is implemented in an organization by using an earned value management system (EVMS). 

The Standard for Earned Value Management defines the EVMS as “a set of principles, methods, processes, practices, and tools for managing project performance.”

The EVMS is based on the 32 guidelines established by the universally accepted EIA-748 Standard for earned value management systems. 

The 32 guidelines are divided into 5 categories.

Category #1: Organization

The first 5 guidelines within this category require us to organize the project scope by creating 3 important documents.

• Work Breakdown Structure (WBS) — The WBS separates the work into smaller elements and allows them to be planned, scheduled, and budgeted separately.
• Organization Breakdown Structure (OBS) — The OBS specifies the people responsible for the items within the WBS, along with their hierarchy, roles, and responsibilities.
• Responsibility Assignment Matrix (RAM) — The RAM combines the WBS and the OBS to create control accounts — a cross-section of the two documents that determines who is responsible for which of the tasks.

Category #2: Planning, scheduling, and budgeting

This category covers guidelines 6–15. Their objective is to help you define your project baselines against which progress will be measured later on when performing the earned value analysis.

The Work Breakdown Structure and the Critical Path Method are two good ways to start defining your schedule baseline because they show task dependencies and the order in which they should be performed. 

Next, you can set project deadlines and milestones, and determine your time-phased cost baseline by working through your WBS and assigning budgets to each individual element. This is also where you should define the methods for measuring progress that will later determine how earned value will be measured.

Once this is done, you can calculate the total budgeted work, also known as the performance measurement baseline (PMB), and set management reserves.

Creating project baselines is a complicated and time-consuming process. It’s easy to get lost in the process, miscalculate, or lose information. This is why project management software is so helpful for tracking and organizing information.

Using project management tools like Plaky, you can: 

• Create project roadmaps,
• Track progress and expenditures,
• Break down projects into smaller tasks and arrange them in order of importance,
• Assign people to tasks and delegate responsibilities, etc.

Plaky is also fully customizable, allowing you to 

• Track deadlines and costs for each project area, 
• Create different tags for organizing costs, and 
• Create columns for tracking each EVM parameter.

And, if you don’t want to waste your time creating boards from scratch, you can check out Plaky project templates, and take your pick.

Category #3: Accounting considerations

The third category covers guidelines 16–21 that determine how actual costs will be calculated.

Keeping track of all your ACs can be tricky since actual payments can be made weeks or even months before or after you gain the value for those costs. Additionally, smaller costs can get lost along the way. 

This is why you should set up systems that will help you track your actual expenditure for each work package within the WBS.

Tracking your expenses is best done with the help of project management tools that help you keep a systematic account of all your spending for each task performed.

Category #4: Analysis and management report

The fourth category defines guidelines 22–27.

In simple terms, these guidelines determine

• How actual costs (AC), planned value (PV), and earned value (EV) will be calculated, 
• What the variance thresholds will be, 
• How the data will be reported to stakeholders, and
• How corrective action will be performed.

Category #5: Revisions and data maintenance.

As the name of this category suggests, the final five guidelines focus on revisions. 

This includes change and risk management, but also guidelines on when it’s alright to revise the baselines and how to go about doing it when necessary.

Benefits of earned value management (EVM)

Earned value management is one of the most powerful tools in project management that can prevent the project from falling off track.

Some of the core benefits of EVM include the following:

• EVM integrates schedule, cost, and technical elements to accurately measure project performance.
• EVM allows project managers to detect potential problems earlier and act on them before they take over the project.
• EVM helps with recognizing trends and predicting future performance based on those trends with relative accuracy.
• EVM enables more accurate reporting to stakeholders and understanding of where and why issues are happening.
• EVM improves accountability.
• EVM reduces project risk.

Limitations of earned value management (EVM)

Despite its many benefits, earned value management is not a magic tool that’s meant to miraculously cure all project management issues.

Here are some of the limitations of EVM.

• EVM doesn’t work without accurate data — If you want to make use of earned value management, you have to be meticulous about collecting and checking all your data. This is particularly true for your actual cost — a single mistake can render your EVA useless.
• EVM doesn’t take quality into account — Since EVM deals in pure data, it’s very good at answering the question ”how much?”. But, even a project that is under budget and ahead of schedule is considered unsuccessful if it results in a bad-quality product or a product the customers aren’t satisfied with.
• EVM doesn’t fit all project types — EVM can be implemented in a wide variety of projects, but it’s best suited for Waterfall projects, such as construction, engineering, or manufacturing projects. While it’s not impossible to make good use of EVM in Agile projects, it can be significantly more challenging.

Conclusion: EVM is a powerful tool for accurate performance management

Earned value management is a powerful technique for assessing current and forecasting future project performance.

While EVM is not a one-size-fits-all solution to preventing project failure, it certainly offers valuable metrics and insights into the underlying issues of the project. 

References

• Project Management Institute. (2019). The Standard for Earned Value Management. Project Management Institute, Inc. https://www.goodreads.com/book/show/45899516-the-standard-for-earned-value-management
• National Defense Industrial Association (NDIA). (2018, August 28). Earned Value Management Systems EIA-248-D Intent Guide. https://www.ndia.org/-/media/sites/ndia/divisions/ipmd/division-guides-and-resources/ndia_ipmd_intent_guide_ver_d_aug282018.ashx