Earn Value Management – PMP Concept, Formula, Examples


Earn Value Management (EVM)

Project managers always aim to be in control of challenging projects that tend to either exceed assigned resources or take longer than expected. Project managers turn to certain project management techniques to find the best ways to deal with difficult projects. Earned value management is one of them and, in particular, it is a technique that help project managers to deal with various setbacks in project management.

Earn value management (EVM) offers three discrete values for those who fully realize how to use it. The primary benefit is the aptitude to forecast projects accomplishment or catastrophe early enough in the project to implement fruitful correctives schedules. The second value is approving simplified progress coverage.

This value is a bit debatable because people who do not fully comprehend earned value believe it obscures progress reporting. The third, which has been lost to the earned value community completely, is the reason earned value was formed in the first place. This is the capability to forecast cash flow obligations. This article explores each of these values in detail to know how the benefits are realized. In particular, it looks at EVM systems, formulas, and calculators. Some earned value management examples and benefits are discussed as well.

Earned Value Management System in Project Management

Earned Value Management (EVM) is a project management technique that assimilates agenda, expenses, scope to gauge project functioning, and advancement in an impartial way. Grounded on strategic and authentic principles, EVM foresees the impending and aids project managers to alter consequently.

In ventures, the project manager has the power over the progress, to intricate the degree and to accomplish the earned value. The project team members are obligated to implement the progress. Only if we gauge the progress, we can cope with the project. EVM offers an initial caution of the performance glitches and aids teams to concentrate on project growth. It safeguards that the project ranges do not sneak and typically helps to please the investors.

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Initially, we have to evaluate where we are in the scheme; at a certain stint point, we shall estimate how much cash has been disbursed and what has been reached. Afterwards, we compare that with a strategy and suggest suitable procedures: disincentives schedules, variations, problem resolutions. Outcomes from EVM permit the project manager and his group to spot initial performance divergences, keep a trail on the project scope and offer the shareholders statistics about the project advancement.

Earned Value Management Formula

Earned value management is a technique used to estimate and observe the level of work accomplished on a project against strategy. The earned value calculations are computed and learned by all project managers pursuing Project Management Professional (PMP) certification. EVM is considered as one of the critical knowledge areas for supervising project performance from both a budget and agenda viewpoint. EVM provides information to help with the common two-fold thinking: ahead of plan or behind the plan and over financial plan or under the financial plan. Here are the basic formulas that guide Earned Value calculations:

  • Planned Value (PV) = the budgeted amount through the contemporary reporting date.
  • Actual Cost (AC)      = Concrete expenditure for the work to date.
  • Earned Value (EV)   = Absolute project budget multiplied by the % of project accomplishment.

Schedule Performance Index (SPI) calculation:

  • SPI      = EV/PV

SPI measures the progress attained against progress planned. An SPI value <1.0 shows less work was done than was planned. SPI value >1.0 shows more work was done than was planned.

Cost Performance Index (CPI) calculation:



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  • CPI = EV/AC

CPI measures the degree of work completed against the real cost. A CPI value of <1.0 shows costs were higher than the account. But when the CPI is >1.0, it indicates costs were less than account.

Budget at Completion (BAC) calculation. Also known as the project budget, it is the total amount of money initially planned to spend on the project. Estimated at completion (EAC) is a prediction of the total cost of the project. The following formula is used to calculate EAC.

  • EAC = Total Project budget /CPI

A project manager uses the Estimate to Complete (ETC) formula to know how much cash must be disbursed from a specific time to completion. Here is the formula for determining ETC.

  • ETC = EAC-AC

Occasionally the project conventions have changed and a new evaluation needs to be formed instead of using old performance metrics. The Variance at Completion (VAC) formula informs the project manager of the predicted cost variance after the project. It is the extrapolation of the recent project status, using the EAC technique preferred. So, VAC is calculated as follows: VAC =BAC – EAC

If VAC is negative, you need as much money as indicated by that figure in order to complete the project. But if VAC is positive, you will complete the project with that much surplus.

To Complete Performance Index (TCPI) formula is as follows:

  • TCPI   = (BAC- EV)/ (BAC-AC) – use this formula if the project needs to finish within BAC.
  • TCPI   = (BAC- EV)/ (EAC- AC) – use this formula if the project needs to finish within the new EAC.

This formula informs the project manager what Cost Performance Index (CPI) would be needed to complete the project on budget. It gives a hint of how much efficacy needs to be found in the remnants of the project to make up for earlier negative variances.

Earned Value Management Examples

Example 1

Assume you are halfway through a two-year-long project that has an absolute budget of $100,000. The amount budgeted through the one-year mark is $55,000. The actual cost through the one-year mark is $45,000. Work out:

PV       = $55,000

AC      = $45,000

EV       = $100,000 x 0.5= $ 50,000

SV       = EV- PV= $50,000- $55,000= -$5,000 (negative cause <0)

SPI      = EV/PV= $50,000/$55,000= 0.91 (negative cause<1)

CV      = EV-AC= $50,000- $45,000= $5,000 (positive cause>0)

CPI     = EV/AC= $50,000/$45,000= 1.11 (positive cause >1)

EAC    = Total project budget/CPI= $100,000/1.11= $90,000

Because SV is negative and SPI is < the project is considered behind schedule. You are 50% of the way over the project but have planned for 55% of the costs to be expended. There will have to be some catch up in the second half of the project.

Because CV is positive and CPI is >1, the project is considered to be under budget. You are 50% of the way over the project, but your costs so far are only 45% of your budget. If the project continues at this speed, then the total cost of the project EAC will be only $90,000 as opposed to your initial budget of $100,000.

Example 2

Concerning Variance at Completion, let’s say the BAC is $10,000 and EAC is $11,000.

VAC = BAC – EAC

So, $10,000 – $11,000 = -$1,000

This means a project manager will require an additional $1,000 to finish the project.

Earned Value Management Calculator

The earned value management calculator includes formulas supporting EVM, a project management technique for gauging project performance and schedule progress. This method is adopted by the Project Management Institute PMI as an assimilated and unbiased method for enterprise and developments projects.

For easier and faster computation of EVM, here are two calculators you can consider:

Benefits of Earned Value Management

Earned value management offers several benefits to project managers. Here are some of the gains of using EVM:

  • EVM helps project managers in making accurate project planning, which will transpire when they spend a significant amount of time determining a realistic budget and accurate time frame. Adding EVM to the process of project planning involves defining the project starting point, including agenda, budget, and scope. Project managers can use the starting point as a reference point to assess project performance over time.
  • EVM offers a clear depiction of where your project stands against where it should have been as planned. Hence, EVM offers actionable intuitions that assist project managers decide if the original plan was accurate and perform proactively. For project managers to trail project performance in real-time, they must have ample discernibility across the enterprise.
  • EVM is influential in enabling managers to track performance metrics on tough management tools. It assimilates schedules and budget into the scheme and using them to deliver actionable intuitions on information and analytics. Thus, EVM helps measure progress at every phase and momentous.
  • Determination of the EVM allows project managers to make alteration ahead of time to avert the project deviant from the initial plan. It also helps you evade the recurrence of the same glitches that hinder progress. EVM helps recognize difficulties as they emerge. Moreover, it enables project managers to be proactive in taking the initial steps to address a problem before it escalates.
  • Performance indexes like SPI and CPI help to show if your project is within the budget and planned timeline. During portfolio breakdown, this precision aids investors to evaluate which projects have a higher probability of being prosperous.
  • As a part of EVM, teams are required to trail their time and account for their progress against the reference line. This inspires top most performers to keep up with their outstanding performance. It also helps to inspires those that are lagging behind in picking up the pace and match their colleagues’ productivity.

Earned Value Management in Agile

Agile EVM is trivial and easy to use a version of the traditional Earned Value Management method which offer the advantages of traditional Earned Value for the scrum. Agile EVM needs a nominal set of input parameters: the real cost of a project, a projected product excess, a proclamation plan that delivers statistics on the number of reiterations in the statement and the presumed speed.

All estimations can be in hours, team-days, story-points or any other constant evaluation of size. The critical aspect is that it must be an arithmetical estimation of some kind. One of the problems when using EVM in Agile is that you have to compute an upfront quantification of the project range, something that some Agilists might be unwilling to define as they do not want to quantify a scope further than the first sprints in the scrum.

Among the advantages of Agile EVM is the aptitude to use the method on simple Agile projects under a short duration as well as on clambered Agile project. Earned Value and Planned Value calculations for individual groups can be joined for a brief overall depiction of the performance of the program against the strategy. The Agile EVM metrics are articulated the same way that traditional EVM metrics are articulated. So, a roll-up across hybrid programs that is a mix of traditional and Agile teams is also probable.

Agile methods do not describe how to achieve and trail costs to gauge probable return on investment statistics. Thus, the reiteration burn-down and burn-up plans as used in Scrum do not offer at a glance project cost statistic. Agile metrics neither offer estimations of cost after the proclamation nor cost metrics to funding the corporate when they deliberate making verdict like changing obligations in a proclamation. Agile EVM does offer this information and is hence an exceptional leeway to the information delivered by burndown charts.

Conclusion

This article offers great insights to project managers and other people that use earned value management. With this knowledge, they can understand further, improve, and measure the contemporary level of EVM exercise and its use baseline. Earned value management is applied in project management because it helps to diminish the risk of undertaking projects. EVM is used to respond to the necessity to achieve cost risk. EVM permits primary recognition of project hitches, allows the initial enactment of corrective action to diminish cost risk and allows senior management to look into the impending of the project to resolve whether they need to cut their losses sooner rather than later. An EVM system calculated with a complete understanding of the value of EVM would inevitably answer upper management’s cost and subsidy enquiries and permit project managers to take corrective actions at the initial probable moment.

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